When researching the best opportunities in the near trillion-pound, global high-yield bond market there are dual fear factors: those of losses that could be sustained through default, or opportunities lost through lack of conviction.
Emotional bias does influence many investors, but the market has broadened substantially over the past decade and has become far more robust, with a number of issuers across multiple sectors and regions.
Traditionally, emerging markets have had higher levels of risk associated with them, yet this belies their relative popularity and growth in recent years – accounting for roughly 15 per cent of the high-yield market.
This aversion does not recognise that the bulk of issuance comes from countries rated investment grade, with firms with stronger foundations and earnings growth underpinned by reduced gearing.
That is not to say that emerging market issuance is without risk – most marked in Russia with Ukrainian tensions and the fall in the oil price – or presents the best opportunity in high yield. But it is important to factor in new world developments that have changed investment models and thinking.
This applies equally to the traditional, more mature and favoured territories.
US issuers still account for more than 50 per cent of the high-yield market, although that share has plummeted since the Lehman Brothers crash when it was nearly 80 per cent.
The mature US market undoubtedly remains attractive because of the large issuance and wide choice of debt, but uncertainty over rates, deflation, the fall in the price of oil – about 70 per cent of US markets are in energy – and oscillating consumer confidence, puts pressure on default rates.
In Europe, the market for high yield has expanded since the banks started their deleveraging programme in 2008. Many corporates have had to go to the bond market, having been caught by the changes in financial support and forced changes to their capital structures.
This has increased the diversity and volume in European high yield, with sectors in retail and insurance issuance seeing big rises. The economic outlook is not too dissimilar to the US market. But in spite of remaining attractive and accounting for roughly a quarter of the overall sector, there are still fear factors to be wary of, particularly as larger issuance naturally leads to a growing amount of defaults.
So where does this leave us? There are many factors involved in selecting the best high-yield opportunities and traditional biases and fears have changed significantly post Lehman.
The market for high yield has trebled during the past seven years and along has come a new breed of factors to consider amid a unique overhang of macro and micro factors impacting regional economies.
These economic variances are becoming increasingly blurred. Each of the main markets follows a similar pattern but they will still hit highs and lows and experience defaults at different times. Combined with disparities in global growth rates, this makes a focus on regional allocation even more likely to add value.
