Outlook 2024: Scaling a wall in high yield credit - Jupiter Asset Management (2024)

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Adam Darling discusses the yields on offer in high yield credit, why some companies may struggle with debt funding costs and the implications of an upcoming maturity ``wall.’’

Outlook 2024: Scaling a wall in high yield credit - Jupiter Asset Management (3)

Adam Darling

Investment Manager, Fixed Income

Learn more about the author

I see increasing volatility in financial markets in coming months as the world becomes increasingly recessionary. Many companies are going to face tougher trading and financing conditions. Defaults are going to rise.

So you might expect me to be pessimistic about the outlook for high yield credit. I am not at all. I see good opportunities because yields are high on a historic basis. That means that investors are being adequately compensated for the risk they take. If you are an active investment manager who is cognizant of these risks and able to use careful credit analysis to avoid highly stressed parts of the market, there is potential for attractive returns, in my view.

Global high yield market

Yield to maturity in perspective
Global high yield market: historical yield to maturity and coupon, last 10 years

Outlook 2024: Scaling a wall in high yield credit - Jupiter Asset Management (4)

Source: Bloomberg. Global HY Index: ICE BoFA Global high Yield Constrained Index, as at 31.10.23.

There is a looming 2025-26 debt maturity “wall,’’ which will be a big feature of the market in 2024, however. Many companies that have debt maturing are going to struggle. If they refinance it will be at higher rates — in some cases significantly higher.
The chart above shows the significant gap between the average coupon and the average yield to maturity that a company would face refinancing in the current market. Some companies may struggle with a combination of higher funding costs and deteriorating performance as the economy weakens and profitability softens. It may require internal self-help actions such as cutting capex and dividends, or an external boost from asset disposals or equity injection. Investors must anticipate how refinancing risks will play out — we are already seeing companies today that are restructuring to address maturities due as late as 2027. I would expect companies that over levered their balance sheets when rates were low to face difficulty, distress and, in some cases, default. For high yield investors, this makes credit selection even more important.

Maturity wall

Prevailing yields pose a challenge for 2024/25

Global high yield market: maturity wall

Outlook 2024: Scaling a wall in high yield credit - Jupiter Asset Management (5)

Source: Bloomberg. Global HY Index: ICE BoFA Global high Yield Constrained Index, as at 31.10.23.

Credit spreads in high yield were relatively tight in 2023, suggesting investors were possibly complacent about the impact of central bank rate hikes, preferring to buy into the “soft landing” narrative that has been prevalent for most of the year. That’s starting to change. Spreads in CCC bonds have begun to blow out, and that indicates the market is finally starting to worry about those companies which seem to face insurmountable refinancing problems.
I am extremely cautious about owning consumer discretionary and industrial companies given where we are in the economic cycle. I also am bearish on telecoms companies as telecoms tends to be an over-levered sector with limited growth potential and heavy capex requirements.
Although our macro perspective is cautious, we are happy to go long on risk that we think is cheaply priced. We also think it prudent to focus on liquidity within a high yield portfolio; it makes sense to have defensive ballast in the form of higher cash levels because the market hasn’t bottomed yet.
Commentators talk about the “high yield market,” but for active investors the market is a melting pot of thousands of businesses with individual strengths and weaknesses. With careful credit selection, it’s now possible to own a portfolio of high yield bonds that offer double-digit yields and adequately price the risk of a deteriorating macro environment. Yield is always the safety cushion in fixed income, and the higher yields that we now see in areas of the high yield bond market offer the potential for strong future returns as well as cushioning against the volatility we may see in 2024.
Robust credit analysis will be crucial. It will be important to look at individual companies, analysing closely how they can perform in what may be a tricky 12-18 months for the global economy. Weaker businesses with too much short-term debt may go to the wall. Yet, yields are now at a point where I believe you can make good risk-adjusted returns. Our approach, as always, is to be “active, pragmatic and risk aware.’’ Realistic, but not pessimistic.

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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circ*mstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.

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Outlook 2024: Scaling a wall in high yield credit - Jupiter Asset Management (2024)

FAQs

What is the outlook for high yield bonds in 2024? ›

Looking at the asset class's historical performance leads us to believe that high yield is poised to produce a positive return in 2024, albeit not as robust as that experienced in 2023. We believe that the economy is not rolling over and that a recession is likely to be at least six months away.

What is the purpose of Jupiter asset management? ›

We exist to help our clients achieve their long-term investment objectives. From our origins in 1985, Jupiter now offers a range of actively managed strategies available to UK and international clients including equities, fixed income, multi-asset and alternatives.

Is it a good time to buy bonds 2024? ›

Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.

Are high yield bonds a good investment in 2024? ›

High-yield bonds have fared better amid a generally 'risk-on' market. However, it is possible to see these roles reversing in the remainder of 2024, as default rates rise, hitting high yield, and interest rates start to come down, favouring investment grade.

What is the share price forecast for Jupiter Fund Management? ›

Share price forecast in GBX

The 12 analysts offering 12 month price targets for Jupiter Fund Management PLC have a median target of 87.50, with a high estimate of 101.00 and a low estimate of 75.00. The median estimate represents a -1.80% decrease from the last price of 89.10.

Is Jupiter Asset Management a hedge fund? ›

The firm launched its first hedge fund in 2000 and has been managing them since.

How big is Jupiter asset management? ›

Today, Jupiter offers a range of actively managed strategies to clients around the world including equities, fixed income, multi-asset and alternatives. Jupiter is a constituent member of the FTSE 250 Index and has assets under management of £52.2bn /$66.5bn /€60.3bn as at 31st December 2023.

How will bonds perform in 2024? ›

Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.

What bonds to invest in 2024? ›

  • Vanguard High-Yield Corporate Fund Investor Shares. Yield. ...
  • T. ...
  • PGIM High Yield Fund – Class A. ...
  • Fidelity Capital & Income Fund. ...
  • American Century High Income Fund Investor Class. ...
  • Osterweis Strategic Income Fund. ...
  • American Funds American High-Income Trust Class A. ...
  • BrandywineGLOBAL – High Yield Fund Class A.
Mar 15, 2024

What is the credit market outlook for 2024? ›

In 2024 we remain positive on the credit market, anticipating strong total returns and continued demand from yield and duration buyers. Investors are looking to add high-quality duration and to move away from short-maturity investment solutions, made less attractive by major central banks' expected interest rate cuts.

What is the outlook for global high yield bonds? ›

Global high-yield spreads over duration-equivalent government bonds are trading tight to their historical medians as of this writing. Based on past observations, we anticipate low-single-digit excess returns on a three-year forward view.

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