Multi-Asset Credit Strategy Monthly Comment - June 2023

RAM Multi Asset Credit Strategy

Credit spreads closed the month tighter amid speculation that the global monetary tightening cycle is reaching its conclusion. Even though the global economy is not currently displaying broad-based economic imbalances, in our baseline scenario, falling inflation and slowing growth will continue to play out in 2023. We expect inflation to stay on its downward trend through 2024, abetted by lower commodity prices (and related base effects), further normalisation of global supply chain disruptions and, later, the impact from slower demand. It is likely that central banks are currently at – or close to – peak rates, and we expect rates will remain around these levels for at least the remainder of this year. Absent any unexpected market stresses, we do not expect any developed market central banks to cut policy rates this year.

The mid-Q2 reporting season reaffirmed that credit fundamentals remain resilient, despite an uncertain macroeconomic environment. While the demand and pricing picture varies, the easing of cost pressures appears to be a central theme. However, despite fundamentals being resilient in aggregate, we note that dispersion is rising. Therefore, we continue to highlight the need to pay particular attention to idiosyncratic stories or credits heavily dependent on capital markets, especially as the 2025 maturity wall looms and will have to be addressed at significantly higher rates.
During the month, the strategy posted a positive performance with all asset classes posting a positive performance. The portfolio continues to be cautiously positioned as we maintain a portion of our P&L hedged to mitigate against potential volatility. The portfolio managers kept elevated levels of liquidity allowing flexibility in case of a spike of volatility.
Despite the uncertainty on global growth that still lies ahead, valuation looks compelling, with spreads at reasonable levels compared to historical averages and fundamentals remaining solid across sectors. Valuations remains very compelling in some credit asset classes and selected themes are still interesting, particularly in Europe. We maintain our preference for bigger, stronger banks, which have a lower risk of entering into stress events and could be systemically important. We selected defensive BB rated credits and BBB CLO tranches, yielding 8-9%, as we consider them an extremely attractive opportunity in the current market context. During June, there were very few new issues to consider as some high quality names did come to the primary market offering nice premiums versus secondary. The portfolio managers conducted relative value switches from a bottom-up perspective.

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