Standard Life Investments

Through the Lens

Global credit - looking through the interest rate noise

  • Global credit markets have experienced a volatile few months
  • Investors continue to question the impact on credit of future rate rises
  • As an asset class, credit displays sound fundamentals and offers opportunities

Credit markets recently experienced a period of elevated volatility when a sudden, sharp rise in government bond yields, allied to concerns over Greece and record new issuance, pushed credit spreads wider. Meanwhile, investors continue to study the words of central bankers for evidence of when the first interest rate hikes for more than half a decade will arrive. Against such a backdrop, many investors have grown increasingly concerned as to the prospects for credit markets going forward.

Despite the apparent doom and gloom, we see the current situation as a buying opportunity. With rate rises likely to be gradual and based on consistently improving economic data, the recent market correction in global credit means that valuations now have more room to absorb any negative effects from rising yields. In addition, a rate rise as a result of an economy returning to full speed should not be viewed as an inherent negative for credit; an improved economy will feed-through into corporate valuations and earnings, and further decreases the likelihood of defaults. Furthermore, rate rises have long been anticipated and broadly priced in by the market.

As an asset class, credit continues to display solid fundamentals. Many corporates have de-levered significantly since the financial crisis and are not putting themselves at risk with excessive M&A activity. While there has been a surge of M&A-inspired new issuance in the US market recently, we believe this will tail off in the coming months. As a result, corporate credit profiles continue to look sound.

For stock pickers, the recent sell off has created opportunities to take advantage of issuer underperformance where the re-pricing has been particularly acute and in issuers where we have existing positive conviction. In addition, we have seen a number of divergences emerge at a market and sector level, with US dollar credit spreads significantly wider than their euro peers, and metals & miners markedly underperforming other sectors. As always, by focusing on stock selection and applying our rigorous bottom-up credit analysis, we can take advantage of dislocations to exploit the areas of value that exist in credit markets at present.