A survey of fixed-income managers found they now favor high-yield credit over investment-grade as appetite for risk improved despite the rising infection rate of COVID-19.
The survey of 64 bond and currency managers conducted by Russell Investments WHEN — a financial services group with $300 billion in AUM — found that 20% of respondents chose investment-grade credit from among 10 options as the most attractive asset class for risk-adjusted returns, down from 40% in the survey for the third quarter. The main beneficiaries were emerging-market and high-yield credit which climbed 10 percentage points to 15% and 8 percentage points to 23%, respectively.
"While a second wave of COVID-19 infections and the speed of global economic recovery remain top concerns for the fourth quarter, fixed-income managers seem to be less worried about the depth of the global recession," Adam Smears, senior director of fixed-income investment research at Russell Investments, wrote in the report.
Half of respondents expect the global economy to recoup the loss of GDP endured as a result of COVID-19 by 2021-end, while 48% do not expect a return to pre-pandemic levels of economic activity before the end of 2022.
Some 52% of managers believe that U.S. high-yield bonds will deliver the best risk-adjusted return in the next 12 months, while energy, retail and healthcare are noted as sectors where credit risk is mispriced.
The outlook for high-yield corporates has improved markedly, with 45% of respondents anticipating an improvement in fundamentals as opposed to 100% predicting a deterioration in the previous survey.
The concern of defaults has also been dampened, with 67% expecting default rates to range from 5% to 8% in the next 12 months, down from 50% predicting a default rate of 8%-10%.
Investment-grade credit spreads are expected to tighten further in the next 12 months, although at 67% that was down slightly from 73% in the third quarter survey. Some 54% expect tighter spreads in leveraged credit, down from 70% in the previous quarter's survey.
US loses favor
The improved risk sentiment has also seen regional preferences change, with the number preferring the U.S. for risk-adjusted returns slipping from 71% to 48%. Of the other regions Asia was next highest at 20%, ahead of Latin America at 15% and Europe at 13%.
The prospect of a rebound in inflation is not yet a concern with 63% anticipating the U.S. rate will remain between 1.5% and 2% over the next 12 months and 53% expecting the Federal Reserve will achieve its 2% target over the next decade.
The majority of respondents predict a weaker U.S. dollar, with 80% of fund managers expecting the Chinese yuan will strengthen against the dollar in the next 12 months while 73% anticipate the euro will trade in the $1.21-$1.30 range. The euro was trading just below $1.19 as of 11:50 a.m. ET.