The credit market is going through interesting times. For investors who are seeking higher yields by going out the risk curve, this is dangerous territory. Even the credit specialists, like Cheyne Capital, say investors need to be wary about the likely volatility ahead.
Anthony Robertson, the CIO of strategic value credit at Cheyne Capital, based in London, says the credit markets are still well underpinned, however. Coupled with the synchronised growth of developed markets – especially Europe – this shows that the underlying beta of the market is well positioned to deliver solid returns. But there’s a rider: credit cycles are usually precursors to downturns.
A tightening in credit spreads, as we are seeing now, usually correspond with low points in unemployment. Robertson said on a visit to Australia last month that the environment was exacerbated by several factors. They include:
. The withdrawal of central bank expansion. Europe has been “the only buyer in town” for the past few years and now it is withdrawing
. Quantitative tightening in the US is coinciding with likely higher interest rates.
But these factors don’t even begin to reflect traditional investment factors, Robertson says. For instance, there is much more retail money coming into the fixed income market but, as an unintended consequence, those investors are providing less liquidity.
“Those investors tend to focus on the cheapest fee available and an ‘indiscriminate’ purchase of beta.”
Robertson said that it would not take much for passive investors to wake up to what was happening in the market. “We all know about the impending risks with rising rates. When the door closes there may only be a handful of escapees,” he said.
Cheyne Capital tends to focus on niches in the credit market that fall outside of the traditional range. It exploits non-core performing corporate loans in Europe, for instance. It tries to capture the upside I n the asymmetry in the credit market.
“There’s always something to do in credit,” Robertson says. “We are offering for Australian and New Zealand investors a strategy through Allen Partners. Investors should know we are at the late stage of the credit beta cycle. This is a here-and-now opportunity.”