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Updated as of September 21, 2020 

We continue to aim to strike an appropriate balance between our commitment to the health and safety of all our employees, and our obligation as a firm and individuals to continue providing essential services to our clients. To that end, and in line with Federal, Provincial, and Municipal recommendations for businesses, we have implemented a Return To Work Plan that, with appropriate and reasonable safeguards to protect them, will see employees work on site and from home on a rotational basis. We have enacted standard health and safety measures such as: avoiding non-essential travel outside of Canada, maintaining physical distancing between workstations, frequent hand washing, and wearing  a  mask whenever physical distancing is not possible. In addition to these standard health and safety measures, we have enhanced the air filtrations system in our offices by adding air purifiers and high grade filters to our HVAC system to boost the air quality throughout the building. RPIA will endeavour to update these efforts as the pandemic evolves and new expert advice becomes available.

Market Conditions & Opportunities Ahead

COVID-19 has and will continue to reshape the global economic landscape. Six months on from the liquidity crisis of March 2020, investors are faced with a difficult challenge. Equity markets have rebounded strongly and valuations sit at elevated levels by historical standards. In contrast, fixed income securities provide a very low yield, with little margin of safety if interest rates rise. A 60/40 blend of equities and bonds may not deliver the return individuals and institutions are looking for.

We believe investors should be looking to credit strategies as a way of addressing this challenge. Credit is often referred to as “equity light” – a way of generating a reasonable return without the downside risk of equity investments. The performance of credit investments has been strong since March 2020. Looking forward, we continue to be excited by the opportunity to invest in corporate bonds at attractive levels. Uncertainty in the market generally leads to volatility, which we believe represents an opportunity for actively managed credit strategies.

Please contact a member of the Client Portfolio Management team if you would like to discuss our market views or strategies in more detail.

Market Insights

Finding the Right Balance

August, 2020

Executive Summary

  • Financial markets continued to recover with strong performance in corporate bonds.
  • We continue to focus on a conservative core positioning with selective exposure to areas of the market where the Federal Reserve is not an active participant


Our portfolios posted positive returns in July as financial markets continued to recover. Central bank policy has clearly been instrumental in market performance since March. However, the strong performance of credit was also bolstered by improving economic data as global economies continued to re-open and pent-up demand was unleashed.  The performance of the financial markets since March has been remarkable but we must remember it will take longer for the “real economy” to fully recover.  We cannot discount how deep the shocks were to the global economy due to pandemic lock-downs. One of the starkest indicators of the severity of the shutdowns was April’s job number in the US. The number of jobs lost during that month was 20.8 million (as per US Bureau of Labor Statistics) – basically wiping out the previous decade’s job gains. Thus, while we are encouraged by improving economic data, we need to remind ourselves that the recovery will be long and uneven.

Despite continued strong performance we still believe corporate bond valuations are attractive. Credit spreads have retraced a significant amount since March, when valuations were pushed to extraordinary levels owing to a temporary liquidity vacuum. In that environment prices were detached from fundamentals. Since that time, central bank intervention and better economic data has caused investment grade bonds to retrace 85% of their initial widening and high yield by 77%.1 However, we still see value in credit, especially relative to other asset classes. Government yields are at all-time lows and equity valuations looks relatively high for their risk. Conversely, current investment grade credit spread levels are pricing in an approximately 7% default rate in US and Canadian markets over the next 5 years. Going back to the 1980’s the highest 5-year cumulative default rate experienced in the US was 2%. 2 Although the impact of COVID-19 and future shutdowns is significant, we believe there is still value left in the asset class.

We are employing a selective approach focusing on the pockets of the market where there is most value. Dispersion in credit markets remains elevated. Credit spreads for certain companies are now narrower than pre-pandemic levels. Examples include AT&T, Bank of America and Apple. Other corporate bonds still come with credit spreads well above long-term averages in hard-hit sectors such as retail, leisure and airlines. This dispersion across markets is an opportunity for relative value and selective positioning. The Federal Reserve’s buying program in the US has led to significant compression of credit spreads in USD corporate bonds with 5 years or less to maturity. Thus, alongside core defensive positions we are also searching for opportunities outside of this segment of the market for opportunities that are being overlooked by those investors who are simply “following the Fed”.

We continue to focus on “core” high quality sectors and businesses and are using a highly selective approach with cyclically sensitive companies. Because of dispersion many of our portfolios are positioned with high quality “cores” focused on defensive positioning.  We continue to view Financials as part of this core as they are well-positioned at this point in the cycle.  Although there will be earnings headwinds for banks, they are well-capitalized companies which gives us comfort as bondholders. In the portfolios we have  been rotating some exposures from US bank’s home currency issues to the same bank's issuance in currencies outside of the US dollar which offer relative value without taking more credit risk. Certain mandates also added select subordinated securities in global diversified banks where valuations were attractive versus senior bonds. We have also found attractive opportunities in the short-term bonds of leasing companies who recently increased their balance sheet liquidity. Alongside these opportunities within the core part of our portfolio, some of our mandates have established highly selective satellite positions in more cyclically sensitive issuers. Many of these companies have issued bonds over the last quarter at attractive yields despite being secured by high-quality assets. With many unknowns ahead we believe this approach strikes the right balance between risk and reward. 

 

 

Thank you for your support and please contact us should you have any questions.


 

 

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Please submit all your inquiries regarding our COVID-19 Response, below. You can also email your questions to COVID19.info@rpia.ca.