La Française AM: Opportunities in the HY market

La Française AM: Opportunities in the HY market

December 29, 2023

High Yield
Obligaties (03)

By Akram Gharbi, Head of High Yield Investment, La Française AM

With the strong tightening of spreads at the end of the year, opportunities on the market are becoming increasingly rare. There are still some specific opportunities with European and US issuers in the services, healthcare and TMT sectors and on bank debt. Bank debt continues to offer a premium vs corporate debt. We stay away from emerging markets, because the valuation is not attractive compared to the US HY market. The yield curve in Europe is still inverted or even flat. On the other hand, the yield curve is more interesting in the US (steep) and there remain some opportunities on durations of 5 to 7 years on high quality issuers.

Outlook for HY in 2024

We are neutral on HY spreads and rather positive on duration. The level of spreads seems relatively “tight” to us regarding the macroeconomic outlook. On the other hand, the fall of risk-free rates may continue with global “disinflation” and with the end of monetary policy tightening by central banks (FED, ECB, BOE).

We expect default rates to rise in Europe compared to 2023 levels and remain relatively stable in the US. Overall, we do not anticipate a massive increase in default rates, because the financial situation of companies (leverage, liquidity) remains rather good compared to previous cycles.

Overall, given the current level of carry, our expectations in terms of spreads, risk-free interest rates and defaults, we anticipate a positive performance for the global HY market in 2024, between +5 to 7%. Historically, based on the last 6 monetary cycles in the US (since 1995), the performance of the HY market has systematically been positive when the FED has put an end to monetary policy tightening.

The HY market will also benefit from favorable technical factors such as rising stars, particularly in the US. Technical factors are however less favorable in Europe, because the net supply will be higher. Additionally, the ECB will begin to reduce its balance sheet (end of the PEPP from mid-2024).

Influencing factors

The major risk to our outlook for 2024 is geopolitical, given the number of upcoming elections: Tawain, India & Mexico in the first semester and then Europe and the US in the second half of the year. With the upcoming US presidential election, there is the looming threat of a comeback of Trump, in which case, the impact on spreads would be greater on emerging and European markets than on credit markets in the US.

The 2nd risk factor is linked to the economic situation with a more of a slowdown than expected in Europe and in emerging countries (China).

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