Sharing our convictions

As regular readers of this blog will know, TwentyFour has adopted ESG integration throughout its investment process for all strategies, and launched its first sustainable fund offering in January 2020. In doing so, we have engaged in some fascinating debates with clients and peers about the growing impact of ESG objectives on the fund management industry, and on fixed income markets in particular. Here are a few of our predictions for the years ahead.

In the past few weeks CLOs have become the focus of much attention, both from market participants and the media, especially following the negative rating actions that agencies have taken on the underlying loans as well as CLO tranches.

A few weeks ago Bank of America Merrill Lynch’s CEO, Brian Moynihan, said that loan losses were not coming through as thick or as fast as he would normally expect for a recession, in particular a recession of this magnitude.

There have been two topics concerning the yield curve in the press over the last few days, which we think merit closer attention. As regular readers will know, the US yield curve in particular is closely followed by market participants and can dictate a lot of what happens in fixed income markets globally.

European ABS primary markets re-opened late last week with the pricing of the first publicly syndicated deal since recent events took hold of global financial markets. Long-standing issuer BMW priced a 1.6-year AAA German Auto ABS deal at three-month Euribor +40bp, having increased the size of the deal to €700m and finishing around 1.7x oversubscribed.

Markets opened today to the news that German Chancellor, Angela Merkel, and French President, Emmanuel Macron, had reached an agreement to support the launch of a €500bn support package to aid the European Union’s recovery from the coronavirus outbreak, which has devastated large parts of the continent.

Like a pendulum, once equity markets swing one way, they will swing back. Investors can manage market swings by actively allocating to international equities using 3 timeless tactics: diversification, exposure to a unique opportunity set of strong businesses, and buying at attractive valuations.

As COVID-19 has cast a shadow over company profitability and solvability, the US Federal Reserve has embarked on credit spread management. This has benefitted equities more than corporate bonds so far.

The United Nations declared May 16 as the International Day of Light because it marks the anniversary of the first successful use of laser technology in 1960. But it was actually Albert Einstein who came up with the original concept and the scientific basis behind this technology.

Thursday saw the reopening of the bond market for bank Additional Tier 1 (AT1) debt, more colloquially known as ‘Coco’ bonds.

Crude oil has been rallying on early signs of a demand recovery, less-than-expected demand losses and easing stock builds. While short-dated oil prices are likely to remain highly volatile, longer-dated oil offers significant upside potential as markets are expected to be undersupplied in 2021.

A lot has been made of the recent recovery in equity markets, especially in the US, given the obvious underlying weaknesses in the economy. It is quite clear to us the economic fundamentals do not justify such high valuations in risk assets, but despite being a serious consideration in our assessment, there is often much more to valuations than just fundamentals.