As investors move their focus away from inflation and towards the real economy, asset classes that are sensitive to economic indicators – such as equities and high yield – will likely underperform investment-grade bonds.
“We expect valuations to reprice to reflect lower earnings in the first half of the year, but for any recession to be relatively short lived,” says Ben Pakenham, head of European high yield and global loans at Abrdn. “As such, we expect riskier assets to outperform in the second half of the year.”
We expect riskier assets to outperform in the second half of the year
Abrdn’s view is that European corporate bond spreads do not yet reflect the expected deterioration in the economic picture, but this is not because it is particularly worried about default risk.
Pakenham notes that most companies, especially in the more levered parts of the market, have done a good job of terming out their debt and locking in historically low interest rates.
“Refinancing risk for high-yield companies does not begin to increase materially until 2025, so that potential trigger for default is not currently there,” he adds.
