Despite the gray atmosphere, the sky is only partly cloudy
This timely report explores the outlook for leveraged credit after the worst quarterly performance on record.
NEW YORK, May 24, 2022 (GLOBE NEWSWIRE) — Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today released its outlook for high yield and bank lending for the second quarter of 2022. Titled “Despite the gray mood, the skies are only partly cloudy,” the report explores the outlook for credit amid rising inflation, monetary tightening by major central banks and war in Europe.
Among the highlights of the 13-page report:
While the leveraged credit market posted one of the worst performances on record in the first quarter, there is reason to conclude that conditions are not as dire as they appear.
While caution is warranted, this credit cycle is not over yet and this cautious risk-taking in the high yield and bank loan markets may offer rewards to investors who can look through the gloom.
Uncertainty from the intensity of rising inflation and the Russian-Ukrainian war is a headwind for credit markets, but underlying fundamentals remain strong in many cases.
Real gross domestic product growth in the first quarter was -1.4% quarter over quarter on an annualized basis. However, this negative number is misleading, as the slowdown was due to trade (more imports than exports) and a slower pace of inventory investment. Underlying domestic demand remains robust and the labor market is historically tight.
Rising prices for most inputs, including labor and energy, along with supply chain constraints and shipping/transportation delays remain major challenges for many businesses Americans. Despite these challenges, we believe that we are far from the tensions that would trigger a default cycle.
The current environment provides an opportunity to begin shedding some exposure to issuers that are more exposed to non-US earnings and have little pricing power to deal with rising costs.
For corporate issuers with little exposure to Europe, the ability to absorb rising labor or energy costs, and balance sheets with manageable leverage, the current period may be favorable to better than expected performance.
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About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with over $252 billion1 of total assets in bond, equity and alternative strategies. We focus on the return and risk needs of insurance companies, private and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers and high net worth investors. Our more than 250 investment professionals conduct rigorous research to understand market trends and identify undervalued opportunities in often complex and under-tracked areas. This approach to investment management has enabled us to deliver innovative strategies that offer opportunities for diversification and attractive long-term results.
1. Guggenheim Investments assets under management are as of 03.31.2022 and include leverage of $20 billion. Guggenheim Investments represents the following affiliated investment management companies: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC and Guggenheim Partners India Management.
Investing involves risk, including possible loss of principal. Investments in fixed income instruments are subject to the possibility that interest rates will rise causing their value to decline. High yield and unrated debt securities have a higher risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and loan-backed obligations (“CLOs”), generally receive payments consisting partly of interest and partly of repayment of principal. These payments may vary depending on the repayment rate of the loans. Certain asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to direct investment in loans, such as credit, interest rate, counterparty, prepayment, liquidity and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or variable interest rate.
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This material contains the opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its affiliates. The opinions contained in this document are subject to change without notice. Forward-looking statements, estimates and certain information contained herein are based on proprietary and non-proprietary research and other sources. The information contained herein has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Past performance does not represent future results. There is no representation or warranty as to the current accuracy of decisions based on this information, nor any liability for it. No part of this material may be reproduced or referred to in any form without the express written permission of Guggenheim Partners, LLC.