A “once-in-a-decade” corporate bond rally could see the asset class deliver double digit returns in 2020, Alex Pelteshki, fixed income manager at Kames Capital, says.
Fears over the economic damage inflicted on firms by the coronavirus led to a large-scale sell-off of corporate debt earlier this year.
But corporate bonds have staged a strong comeback in recent weeks, buoyed by a spate of central bank rate cuts to ward off the damaging effects of Covid-19.
Pelteshki believes that central bank actions, combined with their current fixation with maintaining stability in credit markets, could sustain the current bond rally to the end of the year and beyond.
He says: “We have no doubt that this will be the year of corporate credit – a once-in-a-generation opportunity – and we expect further gains well into the end of the year – and possibly longer,” he says.
“The initial snap back in bond prices was fuelled by oversold valuations as well as a remarkable policy response that we felt eclipsed that of the 2009 global financial crisis.
“Since then, central banks have aggressively targeted stability in the credit markets in order to maintain liquidity to the corporate sector. But this time they are also throwing a lifeline to weak borrowers with little to no access to credit markets.
“That is a real change of tack for central bankers and, we believe, could be enough to propel a brand-new credit cycle that will bring along medium-to-long-term positive tailwinds for the asset class as a whole.
“At present there is a mix of opportunities across EU, UK and US that could reasonably lend themselves to potentially double digit returns by year end.”
In particular, he believes there are plenty of opportunities for cyclicals and what is perceived to be “riskier” debt. And while there is still opportunity in A-rated debt, that opportunity is far less interesting than it was a few weeks ago, he argues.
However, while he has been heartened by the determination with which policymakers and central bankers have tackled the coronavirus crisis, Pelteshki would like to see the current crisis act as a catalyst for further economic integration of the European Union, which he says would be “transformational”.
The issue of jointly issued European Union debt has divided member states throughout the coronacrisis and the finer details of a proposed €750 billion bail-out package are still being thrashed out.
Pelteshki says: “What we like about the current developments is the resolve with which the crisis has been tackled globally by policymakers and central bankers alike.
“The cherry on the cake would be if we see this crisis act as a catalyst for a deeper restructuring of the European Union, leading to a more financially cohesive bloc. That would be transformational for risk premiums.”
This crisis has also led to a global shift in the balance of power between creditors and equity holders for the first time this decade, he adds.
Pelteshki says: “After years of unprecedented debt-fuelled dividend payouts and share buybacks, the tables have now turned.
“Corporate treasurers are keenly focused to raise as much liquidity as possible to insure their business operations should the markets seize up again while also cutting returns to shareholders partially or completely.”