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'); // This final block of code is responsible for dispatching the 'ksys-app-embed-added' event, which will in turn load up the passive attestation. const passiveElement = document.querySelector('[data-ksys-app-template-id="ksys-app-attestation"][data-input-mode="passive"]'); if (passiveElement) { const eventName = 'ksys-app-embed-added'; window.ksysTriggerEvent(eventName, passiveElement); } }, 300); });});jQuery(function($) { $('.jp-prev-default a').on("click",function(event) { event.preventDefault(); });});// Hide Attestation backend domains// Determine if the current domain is internalconst isInternalDomain = /qmsxpletkp-(dev|stg|prd)\./g.test(location.hostname)// Added event listener for elementor/popup/show event to load passive attestation// Trigger ksys-app-embed-added for the passive attestation element// Note, jQuery is used because a native event listener will not work https://github.com/elementor/elementor/issues/10690jQuery(document).on('elementor/popup/show', (event, id, instance) => { console.log(event, id, instance); const passiveAttestation1 = document.querySelector( '[data-ksys-app-template-id="ksys-app-attestation"][id="#attestation-passive-container"]' ); // Attest passively if enabled and this isn't an internal domain if (passiveAttestation1 && !isInternalDomain) { window.ksysTriggerEvent('ksys-app-embed-added', passiveAttestation1); }});const hideAttestation = jQuery('#attestation-passive-container').attr('hide-attestation');if (hideAttestation === 'true' || isInternalDomain) { attestation.parentNode.removeChild(attestation);}
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.’’
Adam Darling
Investment Manager, Fixed Income
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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
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
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.
Outlook 2024: A pivotal year?
Periods of transition often raise interesting questions, and this year investors are faced with plenty as they look ahead to what 2024 may bring. Will Western central banks finally start cutting interest rates? Will geopolitical tensions calm or further escalate? And what might a fraught US Presidential election mean for the world?
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Outlook 2024 Articles
Outlook 2024: Japan’s radical restructuring
Outlook 2024: Japan’s radical restructuring
Dan Carter looks ahead to what 2024 may bring for investors in Japan, including continuing corporate reform and potentially a new Prime Minister.
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Read time - 12 min.
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22.12.2023
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Outlook 2024: India’s booming as voters back pro-growth Modi
Outlook 2024: India’s booming as voters back pro-growth Modi
Avinash Vazirani expects India’s economy to build on its strengths in 2024, which should bode well for investors. Will Modi secure a third term as Prime Minister?
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Read time - 6 min.
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18.12.2023
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Emerging Markets Outlook – set to shine
Emerging Markets Outlook – set to shine
Nick Payne examines how global emerging markets have performed in 2023 and looks at the opportunities ahead in the new year.
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Read time - 5 min.
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08.12.2023
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Outlook 2024: Why quality matters in European equities
Outlook 2024: Why quality matters in European equities
Mark Nichols and Mark Heslop discuss investing in quality growth companies in Europe and how these companies are better able to manage macroeconomic challenges.
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Read time - 6 min.
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08.12.2023
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Outlook 2024: investing sustainably for the decades ahead
Outlook 2024: investing sustainably for the decades ahead
The Jupiter Global Sustainable Equities investment team reflect on the catalysts driving companies toward a more sustainable world.
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Read time - 6 min.
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07.12.2023
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Outlook 2024: EMD – Shifting the focus back to emerging markets
Outlook 2024: EMD – Shifting the focus back to emerging markets
Alejandro Arevalo and Reza Karim explain why they think 2024 could be a strong year for emerging market debt, as attention returns to the positive stories in EM.
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Read time - 6 min.
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07.12.2023
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The value of active minds: independent thinking
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.
No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK. 29664
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Jupiter Asset Management Limited (JAM), Jupiter Unit Trust Managers Limited (JUTM), Jupiter Fund Management plc (JFM) Jupiter Investment Management Group Limited (JIMG) and Jupiter Investment Management Limited (JIML) are registered in England and Wales (with company registration numbers 2036243 (JAM), 2009040 (JUTM), 6150195 (JFM), 792030 (JIMG) and 02949554 (JIML). The registered address of each of these is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. JUTM, JAM and JIML are authorised and regulated by the Financial Conduct Authority under the references 122488 (JUTM), 141274 (JAM) and 171847 (JIML). Jupiter Asset Management International S.A. (JAMI, the Management Company), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Jupiter Asset Management (Europe) Limited (JAMEL), the Irish Management Company), registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland which is authorised and regulated by the Central Bank of Ireland. For company contact details click the link at the top of the page. Full legal information can be viewed by clicking the link above. No part of this site may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. ©2022 Jupiter Fund Management plc
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