Stuart Steven

Credit remains attractive despite bumpy Brexit ride

Stuart Steven

Bumpy road

Credit spreads have widened out over summer on the back of renewed weakness in the global economy, primarily resulting from heightened concerns over US/China trade negotiations and fears over the possibility of a no-deal Brexit. Notwithstanding this deterioration in sentiment, however, we continue to believe the economic backdrop remains supportive for corporate bonds.

Overall, despite the warning lights, the risk of a global and US recession is low and we see three main supportive factors. First, the service sector, the largest component of developed economies, remains strong, bolstered by low unemployment, positive real wages and robust housing markets.

Second, central banks continue to be supportive, with the US Federal Reserve recently cutting rates for the first time since 2008, the European Central Bank (ECB) signalling its intent to ease (via rate cuts and/or further balance sheet stimulus) and the Bank of England reversing its rhetoric on the need to hike in the face of Brexit.

Finally, corporate profitability remains relatively strong, and credit metrics, especially within investment grade, are being managed conservatively.

Looking forward, although credit spreads will continue to be influenced by headlines over trade wars and Brexit, we believe corporate bonds will outperform government bonds. Ultimately, credit valuations are (selectively) attractive and central bank initiatives will continue to support economies and credit markets. Meanwhile, historically low government yields in the UK and Europe encourage investors to buy investment grade credit, particularly if spreads are relatively attractive.

We also continue to be cautiously positive on the two major macro risks, believing a full-on US/China trade war will be avoided, as will a no-deal Brexit. On the former, it is not in President Trump’s interest to continue to slow the US economy and stock market ahead of his re-election campaign. China has plenty of fiscal/monetary firepower, along with other measures such as restrictions on exporting rare-earth minerals, which can hurt the US economy.

As for Brexit, we feel a no-deal would be political suicide for the Conservative party for a swathe of reasons. First and foremost, it is likely to put the UK into recession, causing high-profile blockages in the supply chain and, politically speaking, it would make a mockery of its traditional position as the party of business and the economy. To invoke a no-deal, they would need to push the boundaries of governmental power and undermine parliamentary democracy, with more than 60 Conservative MPs opposing leaving without a deal. The current strategy is one of attempting to improve the UK’s negotiating power.

All that said, the risk of an “accidental” no-deal Brexit is real although we believe that, in this scenario, the Bank of England would again step in to do what is necessary to support the economy and financial markets – as it did after the initial referendum result.

We continue to believe valuations for UK credit are attractive relative to their core European and US company equivalents, and our funds have limited direct exposure to sectors that would be most exposed to the short-term impact of a no-deal, namely those exposed to imports and exports such as industrials, oil and gas, consumer goods and technology.

We also have a focus on high-quality names within the banking (robust capital and retail banking focus) and insurance (very high levels of solvency) sectors.                                                                

In summary, while it could be a bumpy ride for credit leading up to the new Brexit date of 31 October, we continue to believe credit will outperform over the medium to long term as the issues described above are resolved or overcome.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Monday, August 19, 2019, 12:17 PM