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Return attribution and sector recommendations for May 2020
admin | May 1, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Investors should remain in a more defensive posture given concerns that the global economic fallout of COVID-19 outbreak will continue well into the second half of 2020, with limited prospect for relief in near-term volatility. The compounded stress on energy/commodity markets is making it extremely difficult to time fluctuations in valuation among commodity credits, which further supports a call overweighting more defensive segments within the Index. The long-term valuation proposition in higher rated, less cyclical credits is compelling enough to forego more aggressive strategies that remain susceptible to day-to-day swings in volatility.
Sector recommendations are unchanged for the month (Exhibit 1).
Exhibit 1. APS Sector Recommendations for May 2020
Note: The table provides a summary of how APS expects sectors within the IG Index to perform for the next several months, on an Excess Return basis (total return net of commensurate UST return). These weightings serve as a proxy for how portfolio managers should position their holdings relative to the broad IG corporate bond market. Source: Amherst Pierpont, Bloomberg/Barclays US Corp Index
April behaved mostly as a one direction recovery in credit, with the Index tightening more than 60 bp to close the month at just over +200. The rally generated a tremendous monthly Excess Return of +4.84%, with a Total return of +5.24%, as comparable Treasuries still rallied modestly throughout April.
Energy (+9.59% excess return) was the biggest winner in IG credit, as the late month recovery in oil prices fueled a 126 bp aggregate tightening in Energy credit for April. Utilities (+8.16%) were also among best performers, with spreads rallying 78 bp on a net basis. Also among the biggest gainers for the month was Insurance (+5.94%), which undoubtedly benefited from the sharp recovery in the stock market and the appetite for longer duration paper. The remainder of the Index performed in a relatively consistent mid-3-to-4% range for excess returns. REITs (+3.18%) was not surprisingly among the worst performers for the month, as concerns about the longer-term implications for commercial real estate weigh heavy over a number of subsectors, such as Retail and Office. Finance Companies (+3.18%) had the single worst performance, as GE dragged down the overall performance, and a reluctant recovery in Aircraft Finance credits offset the sharp rebound in business development credits – some of the hardest hit in the selloff. Banking (+3.32%) was also among the weaker performances in the Index, as the sector reported 1Q20 results and took sizable provisions against future losses in their loan books.
The new issue calendar was perhaps the most noteworthy story in IG credit, as issuers brought a massive >$300 billion haul for the month on the heels of the Fed’s announcement of the corporate credit facilities (both primary and secondary) in late March. Volume more than tripled the total for April of last year, and pushed the YTD gains to almost +90% versus the same period in 2019 YTD. Even High Yield volume was up +37% over the prior year, after effectively taking off the entire month of March. The monthly total included mega launches from T-Mobile ($19 billion) and Boeing ($25 billion) with badly needed capital raise on the final day of the month.
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