PETALING JAYA: After an extraordinary year, 2021 looks set to see the return of some semblance of normalcy, as the positive signs on vaccines for Covid-19 become reality, according to Schroders’ report, Outlook 2021: Global Credit.
Its fixed income specialist, James Molony, said central bank support and the potential for improvement in growth and company fundamentals, on the back of vaccines, will give a firm base for credit in the coming year.
“This would be welcome for corporate bonds, with continued policy support, search for income and pockets of attractive valuation giving a broadly positive outlook overall,” he said in a report.
Vaccine deployment and approval aside, he noted that the outcome of the US election has removed uncertainty.
Entering 2021 with corporate debt at record levels, as companies raised huge sums through bond markets this year to ensure they could get through the crisis, Molony said there are indications that this has peaked as corporate cash levels have increased, and balance sheets could start to improve.
“Some companies will have overreached, however, and it will be important for credit investors to differentiate in 2021,” he said.
Moving ahead, the search for yield will likely remain a theme, with a substantial proportion of global bonds either zero or negative yielding.
The specialist noted that credit yields have fallen significantly since March (yields and prices move inversely), in some cases entirely retracing the negative moves seen in the crisis.
In all corners of the market, he pointed out that there are still pockets of values and security selection opportunities due to differentiation in company and sector valuations.
“Sectors most affected by Covid have potential to further recover. High yield and emerging markets broadly look appealing, but require a judicious approach.”
Despite the positive picture for 2021, the asset management firm cautioned that uncertainties remain, with a number of countries still in lockdown, a fragile recovery, unemployment markedly above pre-Covid levels and low inflation.
Against this backdrop, it is likely that central banks will continue policy support.
In the coming year, the US Federal Reserve is expected to increase its balance sheet, mainly through purchases of Treasury bonds and other financial securities, to the tune of US$2 trillion (RM8.1 trillion). This figure is lower than in 2020, but more than double that seen in any year prior to that.
Schroders anticipates the expectation is that gradual normalisation in the economy and societies will result in moderately higher government yields over the course of the year, but policy measures should limit any upward moves. This will be broadly supportive for corporate bonds.
As interest rates and yields have been driven even lower in 2020, many of the usual income generating options offer either negligible or zero income, or even negative yield.
Therefore, the firm surmised that corporate bonds should remain in demand, as inflows into investment grade credit since March have been highly consistent.
Schroders’ global credit portfolio manager, Rick Rezek, highlighted that the search for yield will push investors out along the risk spectrum, as it has in previous years, and this will benefit investment grade corporate bonds.
The firm’s head of US credit strategies, Martha Metcalf, added that high yield has the potential to deliver good returns in 2021 from present valuation levels and the variation and dispersion in valuations means there are opportunities to generate returns through security selection.
She highlighted that should the vaccines enable a normalisation in growth and company revenues, but it will be very important to remain selective and focused on company analysis.
“In the meantime, many issuers have bolstered their liquidity and are positioned to navigate this challenging environment.”
Similarly, Schroders head of Asian and EM credit Angus Hui observed that Asian corporate earnings have shown some recovery from the trough in the first half. “There is divergence, however, with investment grade companies generally doing better than high yield. Security selection will be key.”
