Credit in the cyclicals sector is poised for a renaissance amid growing optimism of a vaccine-led economic rebound next year, a new Brandywine Global note argues.
Brian Kloss, Brandywine Global portfolio manager, said any potential corporate regulatory blowback from the incoming Joe Biden regime in the US would be countered by massive monetary and fiscal stimuli underpinning renewed economic activity in a vaccinated world.
Kloss said all risk assets, and global credit in particular, would feel a “major tailwind” as foreign investors continued to fuel demand for corporate bonds.
Since the global financial crisis, defensive sectors have outperformed cyclical companies in both investment grade and high-yield credit, according to Brandywine Global analysis, reversing a six-year trend starting in 2003 after the world recovered from the previous market crash in 2000.
“Our focus now is on the economic cycle as basic industries, capital goods, energy, and other cyclical sectors in both developed and emerging markets are still trading at spreads wide to historical levels,” Kloss said.
“We favour those industries that have a more cyclical tilt, like autos and mining, which should see marked improvement as the economy rebounds from the lockdowns.”
Currently, Brandywine Global is plumbing the middle ground between high-quality bonds (where spreads are already squeezed) and the lower end of the market, which is still vulnerable to risk if economic recovery stalls.
“However, if the global economy picks up steam, we would anticipate moving farther down the quality spectrum,” Kloss said.
The global fixed income manager, now part of the Franklin Templeton stable after it bought previous owner Legg Mason earlier this year, also favours European high-yield and a mix of energy companies, betting on a “more normalised demand profile” in oil markets next year.
While inflation risk remains under observation, he said “we do not envision a significant back-up in yields in the near term”.
Nonetheless, Brandywine Global has been easing back on duration in some sectors, rotating to securities that offer:
- a shorter maturity;
- an option-adjusted spread that will compensate or cushion an investor for a back-up in the risk-free rate;
- cyclical exposure;
- commodity exposure;
- non-US assets; and,
- lower-quality assets
The firm manages over $800 million sourced from NZ investors including about $280 million in a portfolio investment entity vehicle.