While economic growth appears to be slowing, we do not believe we are likely headed over a cliff edge in a manner similar to 2008. While markets sold off aggressively in the fourth quarter, they have since stabilised and we think it is unlikely the US will fall into recession this year.
We like it when growth is slowing as it stops management from doing stupid things; they become more cautious, careful in their borrowing and spending. By the same token, though there are companies that need growth. We believe it is probably best to avoid those.
We compare the current high yield market to mushrooms – some might be toxic, others are harmless. The important thing is to pick the right ones. Maturity is another element in this selection. During the difficult December period, for instance, investors would have made more money in short-dated high yield than the long-dated form of the asset class.
Over the past two years, you could have picked any mushroom. There were so many buyers in high yield that it was easy for companies to flog toxic securities. Today, if you pick the wrong bond, it could be disastrous. In managing short-dated high yield investments, we believe it pays to be brave and to not be constrained by a benchmark.
Ulrich Gerhard, portfolio manager. Insight Investment, a BNY Mellon company