A dynamic restart

Economic acceleration

Pent-up demand is translating into strong corporate earnings and accelerating a powerful global economic restart. Median estimated GDP is expected to grow 6% for the year1—a level we haven’t seen since the 1970s—as severe lockdowns recede and virus transmission rates decline in some countries, though not as rapidly in others. Credit spreads have tightened but investor demand for credit remains high in this low-yield environment. The uneven nature of global recovery will continue, in our view, to create structural changes across many countries and specific industries and continued dispersion in credit markets. Against this backdrop, we revisit our 2021 themes of rebuilding portfolios for income, bringing sustainability to the fore, and seeking opportunities in Asian credit.

Mark to market: tracking our 2021 themes

At the start of the year, we identified three themes that remain critical. We revisit them here.

1. (Re) building portfolios for recovery
2. Sustainability to the fore
3. Opportunities in Asian credit

Finding value, mitigating risk

At current valuations, we believe credit can best serve as a source of income and carry, with strong demand seen from investors in both public and private markets. Investors should consider adding exposure globally to enhance diversification and focus on selectivity to manage credit risk and take advantage of dispersion (see chart below).

We also expect the tax rate will be lower than initially proposed, possibly accelerating rotation within and across markets, but in our view this will not derail the positive trajectory of travel in the economic recovery.

Return dispersion exists beneath the surface

YTD total return

Inflation and defaults

Pent-up consumer demand, accommodative monetary policy and significant fiscal spending are combining to drive inflation expectations to levels not seen since 2006. As markets digest the push and pull of economic activity, policy and consumer needs, the impact on prices appears both substantial and widespread.

We believe default risk is likely to remain low in the near term as (1) liquidity is ample and issuers have refinanced and extended maturities, (2) high growth expectations support earnings even if bottom line results are challenged by higher input costs, and (3) private market growth creates new sources of financing to help a wider range of issuers avoid traditional bankruptcy.

What’s next

We expect global supply chains, deglobalization and consumer demand to shape decisions that will likely create more dispersion in the quarters ahead. By embracing complexity, thinking globally and enhancing selectivity, we believe investors will be better positioned to avoid negative credit events and capitalize on more significant investment opportunities across both public and private credit markets.

In a total portfolio context, we view a higher strategic credit allocation as an effective means to outperform traditional fixed income and diversify from equity risk factor exposures. This has already begun to play out across global markets, and should continue catalyzing the growth of global credit market opportunities and outcomes for investors.