Credit view: Brexit, central banks and market expectations

12/07/2016

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Video summary
In this video, Stephen Thariyan, Global Head of Credit, analyses recent moves in credit markets, particularly post Brexit, exploring the resulting impact and opportunities. 
 
 
Q2 overview
Corporate bond markets completed a u-turn in Q2, as sentiment improved on central bank actions and a rebound in the price of oil (the predominant cause of the sell-off in Q1). The reversal in sentiment led to strong total returns from the credit markets, which since the beginning of the year have delivered returns of around 4% in Europe, 7% in the US and the UK, and 9-10% in high yield.
 
 
Brexit impact
The impact of the vote by the UK to leave the European Union (Brexit) has been dramatic in the markets, given that it was unexpected. The first order effect hit sterling very hard, the UK equity markets, particularly banks, and also government yield curves, on concerns for growth and expectations of central bank actions. The second order effects were unusual and interesting with credit markets rallying, equity markets quietening down while government bonds continued to rally.
 
 
Value opportunity?
However, as well as creating more concerns, Brexit offers opportunities. While investors worry about growth, government bonds and whether they should invest in risky assets, overall the opportunity probably lies in relative value. With little yield available from government bonds and expectations of central bank actions, current spread levels suggest a great deal of value in the credit asset class across both geography and rating.
 
 
Central bank action
Meanwhile, the European Central Bank (ECB)’s corporate bond purchasing programme (CSPP), has been effective in that bonds have been rallying, with investors looking to own bonds that could be purchased by the ECB. However, in an already somewhat illiquid asset class, this has helped exacerbate the liquidity issues within credit.
 
The Bank of England and the ECB have been swift in dealing with Brexit, addressing any liquidity issues by reassuring markets that they stand ready to help going forward. This is not surprising as they have been on the front foot for the past seven or eight years, altering the dynamics of who is buying what, when, where and why. This is likely to continue, and is probably being re-emphasised by Brexit.
 
 
Outlook
The outlook for the markets remains interesting and unusual, not least because Brexit has added to the multitude of pre-existing concerns. While there is clearly relative value present in spread products across ratings and regions, Brexit is likely to add to the bumps in the road ahead. It only takes one particular concern about a security or an asset class, a movement in the price of oil (as we saw in January and February), or political tensions, for example, to have a dramatic adverse impact on the markets.
 
Right now there is value out there. Corporate bonds are going through different credit cycles depending on geography and there are plenty of places to be positioned in. Value versus government bonds is also present. We are now seeing some signs of increased liquidity with active buying and selling of corporate bonds, however, we await the third and fourth order effects of Brexit and the opportunities they present.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Euro High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Total Return Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • Callable debt securities (securities whose issuers have the right to pay off the security’s principal before the maturity date), such as ABS or MBS, can be impacted from prepayment or extension of maturity. The value of your investment may fall as a result.

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Brexit: investment impact

Henderson's investment teams have been providing their views in the months leading up to the referendum. They now provide 'Brexit reactions' outlining how they believe the vote to 'leave' will impact their asset classes and portfolios.





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