2023-06-20 09:01:43
Our proprietary model indicates that factors associated with credit fundamentals and valuations have contributed more than sentiment to investment returns since the pandemic. It is a reflection of changing macro and market conditions.
The era of face masks and hydroalcoholic gel may be over, but the impact of Covid-19 on financial markets is still beginning to show now. This week’s chart takes a data-driven look at the factors that have fueled returns in global credit markets.
A comparative analysis of data from the last eight years based on a multifactor credit model developed by Fidelity International It shows that there has been a pronounced tightening in credit markets, shifting from sentiment-based factors to a greater focus on fundamentals and valuations. The model categorizes approximately 200 signals per issuer into three groups of factors: fundamental, feelings y valuation. It then analyzes the profitability of these groups of factors in the long term for different markets, as well as at the issuer level.
The results show how sentiment factors have proven much less effective since March 2020, with its risk-adjusted return being virtually flat in investment grade bonds and negative in high yield bond markets. Fundamentals and valuation factors have shown positive risk-adjusted returns in both periods.
Sentiment was a robust source of returns before the pandemic. But in an environment where corporate profits are under pressure, investors have had to allocate their capital toward companies that can maintain the resiliency of their growth and profits, and that can continue to service their debt comfortably. Investors would also anticipate a greater divergence between winners and losers in a “hard landing” scenario for the global economy. The disproportionate importance of ratings illustrates the demand for more fall protection.
Even so, it would be risky to ignore the sentiment. Although the outlook for the global economy looks bleak at the moment, data from most developed markets has remained relatively strong. A surprise soft landing to the upside, or even a shallow recession, could swing the pendulum back in favor of sentiment. One of the advantages of a systematic, multi-factor approach is that it is designed to encourage diversification across factors and deliver returns in different market environments. It’s a helpful reminder to credit investors not to get too attached to any particular style or factor.
Tribunal of opinion by Konul Mustafayeva, Portfolio Engineer in Fidelity International’s Systematic Fixed Income team and Stuart Rumble, Head of Systematic Investing in Hong Kong.
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