- Fixed Income Portfolio Manager
- Funds
- Capabilities
- Insights
- Sustainability
- About Us
- My Account
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
In 2022, investors faced a very different market backdrop to that experienced during much of the previous decade. In an effort to rein in significant inflationary pressure, central banks implemented an enormous shift in monetary policy, moving from net buyers to net sellers of assets. Amid the resulting spike in interest-rate volatility, European investment-grade yields reached levels not seen for more than 10 years.
In our view, this new market regime creates potentially compelling opportunities for active credit managers through a combined focus on security selection and, increasingly, sustainability.
While economic growth slowed globally in 2022, Europe has been at the epicentre given the Russia/Ukraine war and the ensuing energy crisis. Option-adjusted spreads on European investment-grade credit, as measured by the Bloomberg Barclays Euro Aggregate Corporate Index, now rank in the 90th percentile relative to history (Figure 1), while the yield to worst for the Index moved from close to zero at the start of 2022 to more than 4% as of the end of the year. In our view, the risks relating to the Russia/Ukraine war and the energy crisis have largely been factored into market pricing, and some higher-quality issuers now trade at very favourable prices.
We believe ESG factors can have a significant impact on long-term company performance, particularly as the dispersion among investment-grade issuers increases. Growing ESG-related risks in areas such as climate change or supply-chain issues together with quickly evolving European regulations create further impetus for well-performing companies to progress their sustainability practices. This accelerating momentum has only increased the importance of identifying likely ESG “winners” and “losers”. In practice, we think careful consideration of ESG factors is now on a par with fundamental credit analysis in identifying risks and opportunities at both a sector and company level.
In parallel, we think engaging with companies to promote positive change is essential to effectively incorporate ESG criteria into the investment process. In our opinion, this is particularly important in the context of climate risk given the likely material impact on company fundamentals of high carbon emissions and climate transition risks.
By actively engaging with high-carbon-emitting companies, investors can get a much better handle on companies’ willingness and ability to transition towards more sustainable activities. Robust dialogue and the sharing of insights can encourage companies to accelerate their plans. In turn, this can help investors decarbonise their portfolios and contribute to progress within the wider investment universe.
This new, more volatile market regime has reaffirmed our fundamental belief that credit is a cyclical asset class and that understanding macro and political risk is crucial for anticipating changes in the economic cycle. In our view, such a lens is particularly important in the European credit market given the varying political regimes across the region. The continued removal of accommodative policy by central banks will accentuate those idiosyncratic risks at a time when companies are increasingly exhibiting late-cycle behaviour. We think that such an environment calls for an active approach that combines top-down macro insights with bottom-up, fundamental research that spans a broad range of perspectives, notably regional expertise and ESG research.
This year, we expect the growing importance of ESG factors and the rising dispersion in corporate fundamentals to create attractive opportunities in the European investment-grade market for investors who can pair credible ESG processes with top-down insights and bottom-up credit research.
Experts
Win by losing? The surprising truth about long-term active management
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Related Insights
EM equities: Can they prove the doubters wrong?
Multi-Asset Strategist Adam Berger offers six reasons that EM equity performance could be much more compelling in the decade ahead, from attractive valuations to economic tailwinds to mean reversion in the US dollar.
How do bond investors approach the new volatile regime?
Wellington fixed income experts provide an analysis on how to navigate short-term volatility and reposition portfolios for the structural changes occurring in fixed income markets. Watch the replay here.
4 reasons why European investors may benefit from going global
Bonds are looking increasingly attractive, but a new, more volatile, normal means investors with a home bias may wish to revisit portfolios. An inconsistent policy landscape and lower hedging costs are just some of the reasons why European investors in particular may benefit from going global.
Win by losing? The surprising truth about long-term active management
Research shows that even the best managers have had to bounce back from periods of underperformance. For asset owners who've invested time and effort to find these managers, the data argues for cultivating a long-term mindset.
The allocator’s perspective: three key decisions on EM equities
How can investors best access opportunities within an improving outlook for emerging market equities? Natasha Brook-Walters, co-head of iStrat, shares three key decision points for allocators.
Annual message from our CEO: Forward thinking
After a year of profound economic and market change, CEO Jean Hynes discusses the path forward, including the role of alternatives and sustainability, the firm's investments in talent, and the importance of stability and innovation.
Harnessing the power of engagement in stewardship investing
Equity Portfolio Manager Yolanda Courtines explores why company engagement is a key component of successful stewardship investing.
Have we reached the end of a tech era?
Thematic Strategist Trevor Noren explores how active management and a global lens could provide tech investors with essential edges moving forward.
Multi-Asset High Income Fund
Portfolio Manager Peter Wilke outlines how the Wellington Multi-Asset High Income Fund seeks to achieve consistent high income and minimise downside risk.
Pivot points: Five portfolio positioning ideas for the new market regime
Multi-Asset Strategist Adam Berger looks at five ways in which the world may be very different in the coming decade and how they could influence the next wave of investment winners.
The allocator’s landscape: Three areas of attention for 2023
Natasha Brook-Walters, Co-Head of Investment Strategy, discusses downside mitigation given the shifting equity/bond correlation, the impact of cyclical and macro volatility, and opportunities to position for long-term change.
URL References
Related Insights