Partner Insight: Will lower quality credit keep performing?

Investors will need to be more selective than ever

Gareth Jones
clock • 1 min read
Fraser Lundie CFA, Head of Fixed Income, Public Markets, Federated Hermes
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Fraser Lundie CFA, Head of Fixed Income, Public Markets, Federated Hermes

Whilst harbouring the ability to foster change on a large scale, the credit sector is also made up of ‘dirtier' and more carbon-intensive businesses.

This is particularly true at the lower end of the market in the high yield space, which has a significant exposure to high polluting cyclical and industrial areas of the economy. Even investment grade has more than its fair share of heavy industry sectors such as energy, automobiles, and steel and cement, for example.

Defensive exposures in these sectors are where fixed income investors are today seeking yield. For Federated Hermes, positioning in these larger, higher quality companies that issue liquid bonds is of paramount importance as they are better positioned to weather market conditions that typically follow the slower economic growth seen to date.

‘Remarkable performance'

"It is quite remarkable that lower quality credit has performed as well as it has - CCC-rated credit in the US is up circa 12%," explains Fraser Lundie, Head of Fixed Income, Public Markets at Federated Hermes. "But with tighter credit conditions and growth concerns growing more prominent in China, we see this likely to start causing stresses to appear in lower-quality parts of the credit markets, and so we believe that trend is now over.

"We are likely to see the shift from inflation concerns to growth concerns take over. It is no surprise we are therefore attaching ourselves to higher quality companies; defensive businesses that have the robust balance sheets and earning profiles."

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