We see a divide between American and non-American perspectives.
Valuations have improved markedly in recent months as rate hikes by central banks in developed markets have been priced into futures curves, as have growing concerns over the European and Chinese economic cycles over the next two quarters. . As a result, we see a divide between American and non-American perspectives.
Although China is facing many difficulties, including the consequences of the zero COVID policy, its government has embarked on a series of strong measures to revive fiscal and monetary stimuli whose results we hope to see early in the year. ‘next year. We remain somewhat concerned regarding the weight of the war on Europe and the energy crisis that is looming.
In the US, we believe we have not seen the full cumulative effect of Fed tightening activities and have yet to see the impact of quantitative tightening (QT) measures. We expect a further slowdown in the economy and earnings. However, the worst is not certain, and some easing of recent strong inflationary pressures might help preserve the chances of a soft landing if the Fed eases its rate hike following the September meeting. With current US market spreads implying defaults above historical averages, we believe overall valuations have returned to fairness, although a significant pick-up in issuance activity in the US Investment Grade market may cause some technical pressure on short-term spreads.
Similarly, European credit market valuations have improved significantly. It remains to be seen how effective fiscal measures and changes in the energy market will be in helping households and industry contain their energy bills and, therefore, reduce headline inflation.
Nonetheless, we believe the value proposition of European High Yield already looks more attractive to long-term investors. Within emerging markets, following taking into account the very wide spreads of China and Eastern Europe, we find that overall valuations and reasonably strong fundamentals are more in line with those of developed markets.
