Outlook 2024: Scaling a wall in high yield credit
Adam Darling discusses the yields on offer in high yield credit, why some companies may struggle with debt funding costs and the implications of an upcoming maturity ``wall.’’
![Adam Darling Jupiter Fund Manager, Fixed Income](https://www.jupiteram.com/uploads/2021/01/3543fa167fdb1da07c9ce5b964f2cd79/adam_darling_350x350.jpg)
So you might expect me to be pessimistic about the outlook for high yield credit. I am not at all. I see good opportunities because yields are high on a historic basis. That means that investors are being adequately compensated for the risk they take. If you are an active investment manager who is cognizant of these risks and able to use careful credit analysis to avoid highly stressed parts of the market, there is potential for attractive returns, in my view.
Global high yield market
Global high yield market: historical yield to maturity and coupon, last 10 years
The chart above shows the significant gap between the average coupon and the average yield to maturity that a company would face refinancing in the current market. Some companies may struggle with a combination of higher funding costs and deteriorating performance as the economy weakens and profitability softens. It may require internal self-help actions such as cutting capex and dividends, or an external boost from asset disposals or equity injection. Investors must anticipate how refinancing risks will play out — we are already seeing companies today that are restructuring to address maturities due as late as 2027. I would expect companies that over levered their balance sheets when rates were low to face difficulty, distress and, in some cases, default. For high yield investors, this makes credit selection even more important.
Maturity wall
Prevailing yields pose a challenge for 2024/25
Global high yield market: maturity wall
I am extremely cautious about owning consumer discretionary and industrial companies given where we are in the economic cycle. I also am bearish on telecoms companies as telecoms tends to be an over-levered sector with limited growth potential and heavy capex requirements.
Although our macro perspective is cautious, we are happy to go long on risk that we think is cheaply priced. We also think it prudent to focus on liquidity within a high yield portfolio; it makes sense to have defensive ballast in the form of higher cash levels because the market hasn’t bottomed yet.
Commentators talk about the “high yield market,” but for active investors the market is a melting pot of thousands of businesses with individual strengths and weaknesses. With careful credit selection, it’s now possible to own a portfolio of high yield bonds that offer double-digit yields and adequately price the risk of a deteriorating macro environment. Yield is always the safety cushion in fixed income, and the higher yields that we now see in areas of the high yield bond market offer the potential for strong future returns as well as cushioning against the volatility we may see in 2024.
Robust credit analysis will be crucial. It will be important to look at individual companies, analysing closely how they can perform in what may be a tricky 12-18 months for the global economy. Weaker businesses with too much short-term debt may go to the wall. Yet, yields are now at a point where I believe you can make good risk-adjusted returns. Our approach, as always, is to be “active, pragmatic and risk aware.’’ Realistic, but not pessimistic.
Outlook 2024: Navigating a new world
Our latest investment outlook brings together expert views and analysis from our top fund managers as they look ahead to the opportunities and challenges in 2023.
Please fill in your details to subscribe to Jupiter’s newsletter.
This interest sign-up form is strictly for Professional or Institutional investor only. Please be informed that by submitting this form, you confirmed that you are a Professional or Institutional investor. Jupiter Asset Management reserves the right, with or without notice to remove you from the list if you are not a Professional or Institutional investor.
Outlook 2024 Articles
A barbell approach to leisure sector credit
Outlook 2024: Japan’s radical restructuring
Outlook 2024: India’s booming as voters back pro-growth Modi
Outlook 2024: Better news for bonds but stay cautious
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.
No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK. 29664