SLI’s MacDonald: Searching for value amid volatility

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Standard Life Investments has warned investors in global credit markets can expect another year of volatility, adding the risk of recession is lower than markets have priced in.

In a Global Outlook statement this month, head of credit at the group, Craig MacDonald says while last year’s dispersion in regional performance and investment grade debt provided “selective opportunities for savvy investors”, this year has started weaker, with far more correlation of asset classes.

He points to tighter bank lending standards in emerging markets, nascent signs of tightening in the US, and looser lending policy across Europe.

MacDonald says corporate leverage is high in the investment grade sector but remains lower than during the 1990s once the energy and commodity sectors are stripped out.

He says: “In US investment grade, good-quality issuers now look cheap and while we are avoiding some of the smaller regional US banks with overexposure to commodities, it is a different story for the large banks such as JP Morgan, which have strong balance sheets with low book exposure to commodities.”

Another cause for concern is emerging markets, he says, although Russian corporate credit performed strongly last year, despite the country’s myriad problems.

Chinese credit also performed well, particularly in property, suggesting the opportunities exist alongside the risks in EM.

He says: “The upshot is that we expect another year of volatility in credit markets, and believe the risk of recession is lower than the market is pricing in. This is an environment of selective opportunities. In high yield during 2015, our funds benefited from a reduced exposure to the most risky CCC-rated debt, but it is still too early to reverse this position despite the wider yields on offer.”