A possible alternative.

The credit segment seems like a possible alternative in these circumstances. But distinctions need to be made between the various components within this market. Certain investors may have considered the high-yield credit segment to be the most obvious choice in these conditions, but the recent public health crisis and subsequent >20% drop in market value in Europe's high-yield credit segment in March - April 2020 showed how important it is to properly gauge the impact of opting for such an investment.

Let us consider Investment Grade issuers. Their credit spreads associated with negative risk-free rates have forced investors to take up positions on long maturities. The bonds issued by such companies currently deliver an average yield of 0.67% for a maturity of 5.85 years (source Bloomberg Barclays Pan European Aggregate Corporate index). Interest-rate risk is therefore considerable as is the credit risk horizon, which leaves little room for error at these yield levels.

So investors must be highly selective when choosing the appropriate risks to take in order to achieve reasonable returns. Shrewd selection of fundamental risk among bond issuers is beneficial for risk control: the average gearing of US companies increased by an average of 50% in 2020 as earnings collapsed as a result of the public health crisis.

An in-depth credit analysis will also detect any market inefficiencies that may exist, however rare.

A high degree of flexibility is required to achieve this, for instance to invest in areas of the market that are less commonly traded. Certain out-of-the-money convertible bonds, for instance, offer more attractive yields than their simple bond equivalents but are often smaller and not rated. It is also important that investors diversify their geomix, look beyond a segmented approach to the credit markets and participate if there is value to be obtained from industrial subordinated bonds with embedded options. Last of all, it seems more sensible to not invest one's entire portfolio if the investment opportunities available do not appear attractive enough for a reasonable risk / reward trade-off.

This last point is also crucial to factor in when operating in markets with liquidity issues.

To conclude, there are opportunities to be found in the credit markets but they must be selected carefully and it would be appropriate to apply differentiated weighting as part of a conviction-based approach to investment.

A fundamental and flexible approach offers investors an opportunity to invest in balanced profiles and apply traditional investment tools to build resilient and transparent portfolios.