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Addressing the default outlook

As we head towards spring and vaccine hopes lift the global mood, the hunt for income is taking investors to credit markets in search of high-yielding solutions. With default levels well contained, demand pent-up and monetary policies supportive, we are positive on the asset class and predict the continuation of constructive flow dynamics well into 2021.

“Credit investors, particularly those operating in the murkiest corners of leveraged loan and high yield markets, have a habit of being professional worriers.”

Our view on defaults

  • 2020’s defaults were largely already-troubled names in retail and energy, which fell after years of struggle. Other sectors only saw small increases on a typical year.
  • We’re not expecting a fresh default cycle – a potentially severe liquidity crunch was averted by policymakers.
  • We anticipate 2021 default levels to be around the 5-year median; 3-3.5% in non-investment grade credit.
  • The generosity of government programmes reduced solvency stress in the corporate & household sector at the expense of government deficits. Solvency is a potential risk in only a tiny fraction of the market.
  • We believe the outlook for high yield and loans is positive. We expect growth to recover alongside vaccine progress, with ample pent-up demand and supportive policies. Our market is populated by liquid, well-capitalised names across most sectors.
  • Return potential will likely remain sufficiently attractive for asset allocators even after the strong end to 2020.

“There will be pockets of stress...however, we expect the overriding trend to be one of recovery and repair.”

Download the PDF to read more on the default landscape and our views on the high yield universe in 2021.