Investors should expect higher dispersion in credit markets, regardless of whether the quarter ahead is marked by an intensified sell-off or green shoots of recovery, Ninety One says.
The asset manager said the latest investment review from its developed market credit team said the macroeconomic backdrop had impacted bond market volatility for the quarter - noting that while investors saw strong credit markets in July and the first half of August, reflecting a bear-market rally, this shifted completely in the second half of August and into September.
Ninety One multi-asset credit co-portfolio manager Darpan Harar said: "A blanket sell-off left active fixed income investors in vulnerable positions, and we believe that return dispersion between different credit asset classes will increase meaningfully."
The investment management firm said, relative to historical levels, investment-grade (IG) has underperformed high yield (HY), where credit spreads remain narrower than they were in 2018 and June 2022.
But it said the quarter saw a high degree of dislocation in the investment grade market, while floating rate coupon loans continued their streak of outperformance versus most other asset classes.
And it said positive performance was very much skewed to July and August, with returns reversing in September as broader macroeconomic conditions deteriorated.
Despite this, Ninety One said, following the categoric repricing of credit risk, almost all credit asset classes had become attractively valued to varying degrees.
However, it said when putting that value into context, analysis found that both higher quality and more liquid segments of the market appear the most attractive for investment, given recent market dislocation and the prevailing macroeconomic backdrop.
Cheapness of valuations vs. long-term averages- credit markets (Z scores)
Ninety One multi-asset credit co-portfolio manager Tim Schwarz added: "If spreads rally tighter, quality assets are most likely to bounce, especially since quality segments appear to be oversold relative to lower-rated parts of the market.
"Given how quickly market valuations are evolving, we believe an unconstrained, dynamic approach is required to capitalise on not only the dislocations that currently exist within credit markets, but also the likely dispersion that will rear its head as the cycle matures."
