Global Credit Roundtable

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  • 45 mins 33 secs

With much weaker inflation again than we would have hoped for, political turmoil around the world and central bank policy coming to the end of its effectiveness, will volatility increase in credit markets? A panel of experts looks at the risks coming from the US elections and the Italian referendum and explain why they wouldn’t want to pick a fight with the Fed.

Taking part in the roundtable are:

  • Victor Verberk, Portfolio Manager, Global Credit, Robeco
  • Darren Ruane, Head of Fixed Interest, Investec Wealth & Investment
  • Edward Fane, Portfolio Manager, Morningstar
  • Samantha Lamb, Investment Director, Standard Life Investments

Robeco Global Credit quarterly report

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Roundtable
PRESENTER: Hello and welcome to Asset TV’s Roundtable with me Mark Colegate. We are looking at the outlook for global credit markets. We’ve got a panel of four experts who are already in our studio, let’s meet them. They are Edward Fane, Portfolio Manager for EMEA at Morningstar; Samantha Lamb, Investment Director for Credit at Standard Life Investments; Darren Ruane, Head of Fixed Interest at Investec Wealth and Investment; and Victor Verbeck, Head of Investment Grade at Robeco.

So let’s get things underway. Victor Verbeck, if I can come to you first. We’re looking at the outlook for credit, but just to start with where are credit markets at the moment?

VICTOR VERBECK: Well it’s started a little bit with the US economy, we believe, and that is approaching the last few innings. And the profit cycle is in its last few innings. So that means volatility will increase in the credit markets going forward.

PRESENTER: And Darren, from where you’re sat what’s your take on it?

DARREN RUANE: Maybe taking a step back from that where we’re generally globally with the world at the moment. So we’re seeing weak growth, we’re seeing much weaker growth than we would have hoped for, probably about 3% for the last few years, even though many would want for more. We’re seeing much weaker inflation again than we would have hoped for. That’s leading to political turmoil around the world, lots of disruption. And on top of that now we’ve got central bank policy probably coming to the end of its effectiveness. There’s hope for fiscal expansion, but we’re not seeing that quite yet. And so all of these things I think are very helpful for credit markets, because credit markets don’t want to have growth or inflation that’s too high, but nor do they want to have sagging growth and very low inflation. So I think this is an environment that’s built for credit.

PRESENTER: Samantha Lamb, what’s your take: is it world economy slowing down, is that good for credit?

SAMANTHA LAMB: I think credit, and I would totally agree, generally likes an environment that’s not either too hot or too cold. I think there have been some concerns with earnings, particularly in the US. But actually I think when you look ahead across the next six months there are some tailwinds which should help to see leverage stabilise. We have seen valuations come a very long way already this year, but again looking ahead technicals do look strong still. So when you look within there’s not too many disruptive factors at the moment, but I think there are a number of risks coming very much more from the external, so the political with the US election, with the vote on the Italian referendum etc.

PRESENTER: Fairly good technicals but do you worry about the risks that out there?

EDWARD FANE: Yes, I guess for me the more difficult question is the larger backdrop, which we’ve seen this process of quantitative easing and global liquidity that’s actually just driven yields so incredibly low. And you can talk about spreads, and you can talk about where they, they’ve been somewhere around, their mid-range is actually pushing back now towards actually those tighter ranges that we saw a couple of years ago. But actually if you’re a valuation investor and you’re trying to look for value, it’s really very difficult just because those yields are just so incredibly low at the moment and so fixed interest in general is a difficult asset class, I think.

PRESENTER: Do you think it’s significant that nowadays when people talk about global credit they seem to include high yield and emerging market debt in there; whereas perhaps 15 years ago when you said global credit you just assumed it was corporates around the world?

EDWARD FANE: I think almost in a way that’s the point. That was the goal of quantitative easing was just to really drive, support asset prices but actually drive flows of liquidity out into some of these other areas, and that’s fine, but you’re driving liquidity down into pools of assets that are generally much shallower. You’re pushing people out chasing yield into areas that traditionally would be perhaps too risky for them. But this is, it’s difficult to fight the Fed, it’s difficult to fight the central banks, and so we’ve all been forced into this uncomfortable position it seems to me when it comes to fixed interest investing.

PRESENTER: Well picking up on that Victor, would you ever want to pick a fight with the Fed, or is that just a?

VICTOR VERBECK: No, don’t fight the Fed or the ECB or BOJ or the MPC, don’t fight them. I was talking about fundamentals first, and that is in the last innings. You see S&P 500 leveraging up really fast, and consumers somewhere in emerging markets also. The technicals are extremely strong so it forces you to buy credits or equity. If you buy I buy, and as long as the credit market is open stock buy backs, share buy backs go on. And we all are in this vicious circle. But there are also pockets of lower leverage. European credit is lower leveraged, and some pockets of emerging markets are trying to delever. So you have to be flexible and unconstrained and find the value. So that’s our strategy.

PRESENTER: Well given Samantha, this issue with central banks pushing things up which we’ve talked about, is there a point where markets just lose confidence in their ability to do that, and it doesn’t become a one way bet? How far are we off that?

SAMANTHA LAMB: I mean I think in terms of, you can’t predict if and when that happens. What you can do is make sure that the companies that you own are more likely to perform well in that environment. So given the compression that we’ve seen in spreads, our focus is very much on looking at what those lower yields mean. So when you look at banks it’s having an impact on profitability. It’s having an impact on all banks’ profitability, but some are less sensitive to it than others. And it’s making sure that you’re investing in those banks that are better able to cope. When you look at non-financial corporates this is having a big impact on some of the pension liabilities. So again it’s looking at some of the additional factors that are impacting as a result of it, and making sure that you’re either comfortable with the impact on the pension liabilities, or ensuring that you’re investing in companies that don’t have those types of issues.

So we would see the environment where we’ve seen this spread compression that really you want to be just gradually moving up in quality, and making sure that if and when the tide does go out that you’re holding the credits and the names that you’re very comfortable with.

PRESENTER: Isn’t there a danger then that you’re holding I guess what the equity guys would call very expensive defensives? You know, they’re bid up, if something goes wrong you’re going to take a big capital hit on those bonds.

SAMANTHA LAMB: I’m not entirely sure that I follow that. In an environment where credit spreads widen, your higher quality companies, in that environment you’re right that all credit spreads will widen, but you’re in the names where you’re going to see less of that impact. So therefore you will lose less money.

PRESENTER: So it’s sort of playing a relative game.

SAMANTHA LAMB: Yes exactly.

PRESENTER: And Darren, from your point view, given this environment of very suppressed yields, what challenges does that throw up for you on fixed income?

DARREN RUANE: It’s not just fixed income, it’s for the whole business. So I work for a wealth management firm, and holding cash for many of our clients is a very difficult thing to do. And so we’re being encouraged by our clients to invest, but at the same time I think we’re all expressing some views around the table that we’re starting to get very late in the cycle, maybe we’re starting to worry about some of the fundamentals of companies in which we choose to invest, and so that means you want to be more defensive. But those defensive bonds are often the lowest yields. So again for our investors that seems uneasy. So it is, we’re living in a very funny world that’s presenting too many challenges.

PRESENTER: Well, Victor, what happens to ideas like mean reversion if it doesn’t exist?

VICTOR VERBECK: That’s our middle name almost. So if you talk about expensive defensives, it’s exactly what we do not do. So we try to find value, fundamental value, long-term value, and sometimes it is less risky to buy a solid Brazilian corporate at a thousand over than it is buying, I don’t know a BBB corporate at 10 over swaps because the ECB is pushing so hard on it. So we are very contrarian and looking for the value of companies that have re-levered or countries that have repriced, and then allocate our research resources to that and be very contrarian in that sense and then good returns are still there.

PRESENTER: One thing we’ve talked about and as Vic mentioned already is about monetary policy and whether it’s running out of steam. Samantha, do you think we’re at a stage, particularly somewhere like the UK who are about to move from monetary policy to the emphasis on things like fiscal easing?

SAMANTHA LAMB: I think it’s certainly, yes, I mean we’re definitely hearing people talking about whether we’re at the limits, and I think the fact that we’re now seeing unintended consequences of lower yields on companies is perhaps part of that conversation. Whether we’re moving to fiscal, I think we would certainly agree that it could be a good driver from a growth perspective. I think the challenge is less to do with the capacity of governments, and whether they have the money available to spend. It’s about the political process, and whether they can actually get the agreement in terms of spending. And I think when you look, whether it’s in Europe, the political systems, the divide to get that kind of agreement. So I think we will see some, I just don’t think it’s perhaps as much as people would hope for.

PRESENTER: And do you think governments have actually got the, can go to the markets and borrow money if they need it to have another bout of change in spending in the economy, or have we run out of cash?

SAMANTHA LAMB: No, I think they can certainly. I mean when you look at the yields where the UK government etc. can still borrow, I’m fairly confident at the moment they can still borrow some additional money.

PRESENTER: One thing I wanted to pick up on Darren, is with the Fed, for years everyone’s been trying to, we’ve guessed I think someone said something like 48 of the last one moves up by the Fed, but where do you think the chances are of the Fed’s moving rates up given where we are and the backdrop you’ve described?

DARREN RUANE: To be honest I think it’s less about when they’ll move rates up, and they may have a few more interest rate rises left to occur. I mean we’ve only had one but we might have one in December, and certainly markets I think, the probability of a December rise is something close to 70%; having said that for me interest rate rises from here are going to be dovish, and if I can explain that. I think that the top in interest rate cycle in the US, because we’re in this very poor global economic environment, because fiscal spending is going to take a little bit of time to actually come through and we’ll see the benefits of that, I think interest rate rises are going to be very muted in the US. So I suspect we’re in this very low interest rate environment globally for an extended period of time.

PRESENTER: Do you think they’re looking for reasons not to raise rates rather than reasons to raise rates?

DARREN RUANE: No, I don’t. I think they generally want to raise rates. And I think they want to raise rates because they’re worried that if we go into a US economic slowdown, which we’ve talked about already, that they have the ability to push rates down, but I don’t think they’ll be able to push rates down from a much higher level.

PRESENTER: Victor, you’ve been talking about us being quite late in the cycle, but you’ve not used the R word. How far is the US economy from recession?

VICTOR VERBECK: Well if you data since the Second World War, and look at profit cycles, then it doesn’t look good. Five out of six times you get a recession after a profit recession like we see right now. In the late ‘80s it didn’t happen, because oil was down and there was a lot of monetary easing. Well guess what, that’s exactly what we’re having now so we might escape it. Yes, nobody has a crystal ball but slow growth for a much longer period with so much debt, that’s an easy go I think.

PRESENTER: All right, and that’s the US, what about Europe? They’re buying corporate paper, there’s all sorts of.

EDWARD FANE: Europe is certainly behind the US in terms of its credit cycle, still in the midst of quantitative easing. It’s got its, absolutely it’s got its own problems. For me I think the real issue here is we’re in that phase that’s reminiscent of post ‘30s Great Depression where you had that upswing of real political dissatisfaction. And actually that means it really creates difficulties in actually enacting the sort of policies and actually driving the global economy forward. Which is why I actually think some sort of fiscal response is probably quite important, because you really need to actually recreate I guess the conditions that actually allow populous to be brought into a system of capitalism and globalisation, and we’re at a really dangerous, I actually think a dangerous moment without being hyperbolic about it just at this point.

PRESENTER: Well are there any, Samantha, any lessons we can learn from Japan here, or is that an example from the ‘80s and the ‘90s that’s just sat by itself and just very different?

SAMANTHA LAMB: I think in terms of the lessons to be learned, the one thing that we’ve seen corporates doing, and I think the concern with the low financing levels, is that, and particularly in the US is the financing of the M&A and the share buybacks, and what we really need to find a way to do is to get companies’ confidence in terms of investment spending. Because at the point where you, if you see capex pick up that in itself would help to drive a bit of additional growth. And that’s something that we just don’t seem to be able to get moving in terms of the companies, or the key management confidence about the outlook. But again that’s something that really has to come from the political sphere.

PRESENTER: I wanted to move on to liquidity and then perhaps jump down a little bit further into investment grade credit. Darren, we’ve heard so much about the liquidity in bonds ever since 2007/2008, how big a problem is it for you as an investor?

DARREN RUANE: It is a problem. So we look at, we’re quite a large buyer of external bond funds. So we certainly look at liquidity in terms of how much we own of the fund, and also the markets in which we invest. But having said that we try and be medium to long-term investors, so that means that we can hopefully sell through those periods. We buy into it and we want to stick with that. And actually sometimes we invest in strategies where we embrace illiquidity. If we feel that we’re being paid for it we will happily buy into something and have it as a buy and hold. But there’s no doubt with, if we were to see a taper tantrum type experience again, they may well be funds that could have to close or soft close or something like that, because maybe there isn’t the underlying liquidity.

PRESENTER: And this great rise that we’ve been seeing Victor, over the years with things like ETFs, tracker funds, and also QE just pushing more people who want yield into corporate bond funds. Are there any, do you have any concerns there that it’s easy to get in but it won’t be easy to get out?

VICTOR VERBECK: Yes, well there are a lot of concerns. There’s a lot of worries waiting for us. What we do is you have to adapt. So we invest in trading, new IT systems, dark bulls, buy side to buy side platforms. We hold more cash in the mutual funds with daily liquidity, buying AAA ABS which is quite liquid nowadays as a safety margin. And yes, in the end clients you’d focus on the asset managers that did not become that big. So you have to have a critical size for your research resources and stuff like that. But at a certain moment you can be too big for this market if it ever turns definitely yes.

PRESENTER: So we’ve seen examples in the paper of people who have secured lines of credit so that if there was a run on their fund they could always pay the money back. Is that something Robeco would do?

VICTOR VERBECK: Yes, we did consider that. They are not yet in place. The problem is banks overcharge for that situation. And if you really ask the questions for funds that executed on that, it’s not a committed credit line, so the bank can always withdraw, and guess what if it gets dark outside the bank line will not be there. So that sounds ideal, but you’d better be contrarian in your investment policy and that you can buy when everybody is selling, have a bit of cash available and stuff like that. That’s a better defence.

PRESENTER: Just as a matter of interest if somebody did do that and borrow the money off the bank, or had that line and was paying, is that a charge that goes against the fund or is it that something the product provider would pick up?

VICTOR VERBECK: I’m not sure. I think so, I’m not sure.

PRESENTER: Darren, would you know?

DARREN RUANE: I mean I would expect, I would be surprised if the fund manager themselves were to pick up the cost; they would see it as a cost of running the fund, and it would be built within there.

PRESENTER: In the TER somewhere probably.

DARREN RUANE: It would.

PRESENTER: All right, one to have a look at. And in terms of this issue of liquidity Samantha, does it have much of an impact on how you’re running portfolios? You’ve got big funds there at Standard Life.

SAMANTHA LAMB: Yes, I think Victor’s made the point that you adjust to how you run the funds over time. And there is a lot of focus on this question of liquidity, but I don’t think liquidity, the nature of it has changed. It’s always been a bid to lose rate. It’s always been here one day gone the next. I think even when you look at this year you could have bought whatever you really wanted in February at very interesting levels. And now it’s much harder to buy paper. So your job as a fund manager is to start anticipating some of those cycles, and to ensure that you’re trying to buy or add risk into your portfolios at the time when the levels are cheaper. And that you’re not necessarily trying to put the money in at the point where the market is tighter, and you’re taking advantage of when spreads have compressed to reduce.

So there is a side to the additional things like introducing better trading capability etc. Just from the fund manager’s perspective there’s more thought that has to go into when you’re trying to execute a particular trade.

PRESENTER: But would you say if you looked back on it you’re more of a contrarian or a value investor today than you were when you were running money, or Standard Life was running money say 10 years ago?

SAMANTHA LAMB: I don’t think the nature, I mean we’ve always been about stock selection, and it’s always been about the fundamentals of the company, so the point the ideal time to buy the debt of a company is when they’ve just made a large acquisition and you can see that you’re going to hold the debt for a long time as that business continues to delever. Are we more contrarian? I don’t think it’s, I think we’re more conscious of the fact that if there’s a name that’s done particularly well and we think we ought to take profits, and there’s a good bid in the market today. I think we’re much more conscious that you need to execute it when you have the opportunity, and you don’t assume that you’ll be able to find the same price in six weeks’ time. So I think it’s much more about the focus on execution and the timing of it.

PRESENTER: Ed, you at Morningstar mix active and passive funds. Do you have a preference for which you go with at the moment in fixed income?

EDWARD FANE: So, I guess, so my view on it is we talked about that wave of liquidity pushing out and pushing into markets, and it’s been very beneficial for holders of financial assets on the way up. The difficulty obviously comes as that tide rolls back again, and the challenge is can you do that in an orderly way. But nonetheless as you’re pulling that liquidity out there is going to be an element of reckoning in that. And absolutely the best strategy therefore is to actually build portfolios that can deal with that. But we do look at both sides of things, and I think for instance the ETF market has got a lot of stick recently for the idea that it’s put money in or out, or it could cause problems with liquidity. And Morningstar did a bit of research on that where they actually just felt that there’s a significant, because the nature of an ETF is it’s actually exchange traded.

So a lot of the time a lot of the trading that’s going on is just actually netting off. And it’s not actually causing, it’s not necessitating really a lot of trading in the actual cash bonds underlying. Then the feeling is in many periods then actually that can act as, if you like as much as anything almost like an escape valve, and actually reduce the pressure on a market that absolutely suffers from a lack of liquidity. It’s an over the counter market etc. However that won’t protect you and you will have an issue if you do get a swathe, a big move in investors trying to move. But then that’s less about the structure, the ETF structure itself, and that’s more likely to affect all investors. And that’s where I actually agree with this idea that sometimes it’s actually worth understanding that there is illiquidity in this market.

So you at least want to try and find somewhere that you’re actually getting paid for it. So actually paying, being prepared to accept some illiquidity where you’re being paid for it is sometimes an important thing.

PRESENTER: But if you’ve got funds that are daily priced, how easy is it to get exposure to this illiquidity premium because it suggests you don’t have to get rid of some of the underlyings?

EDWARD FANE: It is a real challenge and there are limits to it. And I think for daily dealing open-ended funds then it’s really very much, it has to be at the margins. There are other managers that board and brace other structures like closed-ended funds to allow them to invest into some of these areas. But we know it’s a problem. You look at what happened in property markets, which is the absolute classic of that mismatch of a more illiquid asset and a daily dealing liquid entry point. And so it is certainly an issue.

PRESENTER: Right, now we’ve been focusing on lots of negatives, but I mean it’s a bond programme so we have to. But let’s turn it on where some of the opportunities are. I wanted to pick up in the investment grade space on financials. Now, Victor, looking at the Robeco funds, that’s an area you’ve been pretty keen on, why?

VICTOR VERBECK: Well there is only one sector that stands out in deleveraging, also driven by the same policymakers we have been talking about a minute ago. So if you look at solvency rates, the run ratios, M&R ratios, doesn’t matter, they all go up. So then I’m not talking about German banks or Italian banks, we are proud to say that we have never ever bought a German bank at the firm so that helps. Same for Southern Italian banks or stuff like that. But Scandinavian banks, even UK banks, American banks, they look healthier than they have ever been before. Balance sheets are clean. They’ve got no treasury assets or legacy assets. There’s only one problem, and that is low yields. That low yield theme yeah of course, both equity and credit in financial space to underperform on a risk adjusted basis. But yes, if you look for good returns, higher yields in terms of 81 or subordinated bonds of banks that delever and recover quickly, and there are a lot of opportunities out there.

PRESENTER: So, Samantha, I saw you were nodding along with that. Are you, again at Standard Life are you fans of banks, and if so where do you want to be in the capital structure?

SAMANTHA LAMB: Yes, I mean I think we would, as Victor said I think you’ve seen over, well really since the financial crisis you’ve only seen this sector gradually getting better. So through the capital build in terms of the asset quality, so there’s a lot in terms of the fundamentals to be comfortable with. And in terms of the capital structure, we are happy to, we’re very happy to go down the capital structure, but our focus would be on the banks where we have most conviction. So I think you just don’t get involved with a name where you don’t have any confidence at all, and then there is the stronger fundamentals, at that point you’re normally happy to move down to tier two or the 81. Generally we prefer tier two debt at the moment, but that’s just a valuation and point in the cycle at the moment. So I think there are times where we have owned more 81 than we do at the moment.

PRESENTER: We’ve had a question in. Darren, I’ll come to you with this one. It basically says in a nutshell is Deutsche Bank a bund with a decent yield?

DARREN RUANE: Cor, open question. In many ways I guess some would say the clue’s in the name, Deutsche Bank. Having said that I think like the others, I mean we’re big fans of financial bonds also, we’re really keen on 81s, the CoCos, and we also like the idea you invest with the banks that you like. I mean we’re UK based so we really like the UK banks. The Lloyds, the Nationwides and the building societies, we think they’re very strong, and we’d be happy to go with those. And so generally we would be steering clear of Deutsche Bank because it’s not where we’re at. It’s not even that the bonds themselves will be triggered, it’s that the coupons could be turned off, and that would be a bad outcome for the price.

PRESENTER: So just for those, you mean what, they’d still give you your money back at the end of the day but they might go through a period of just not paying you six monthly for a while.

DARREN RUANE: That’s right. The coupons are discretionary, and there are rules around that. The regulatory may step in and tell a bank you must not pay out any awards either to equity holders or also to these additional tier one securities as they’re known. So if that’s the case you can get very high returns from investing in another bank, and other bank bonds right through the capital structure, with the more risky end being attractive at the moment.

PRESENTER: We mentioned tier ones, tier twos, CoCos, just could you give us a quick overview of what the, quick overview of the structure of how a bank works, but what are these basic levels and which ones carry more risk and which carry less?

DARREN RUANE: Right, I guess we start at the very top, and in fact there’s even, there’s levels above this. But very simply you get senior unsecured bonds. There is a level above that cover bonds, but senior unsecured. These are the people that if a bank goes bust they should be first to be paid out. And then from there’s levels that go down through tier two, which Samantha talked about, and it goes all the way down to tier one bonds essentially. And these are the ones that have often become called contingent convertibles, so CoCos. And they’re the ones that if a bank’s capital falls to below a certain level they trigger either into equity or they’re written down to zero. So there’s a lot of risk with them, but you’re being paid very high coupons at the moment.

PRESENTER: All right, well we had a little look at financials. From your point of view Ed, is that an area, I mean I guess do you want to be in a slightly riskier paper in something like a bank or in less risky in American retail?

EDWARD FANE: Yes, so the portfolios that actually I run I run very much on a valuation basis. And actually we just, we actually start, we run with a return, specifically a return target, a real return target. So actually we start from cash, we start from not investing. We will only invest where we find value. And so fixed income, it’s just a very difficult asset class. So we’ve been very specific about where we invest, and it has tended to be with strategic managers who have absolutely been. So they’ve played the retirement of some of the old lower tiered structures as this change was happening, as the re-regulation was happening, and absolutely now I think there is value in the financials and in the CoCos. But it’s a question for me of portfolio construction.

We also find actually when we look at fixed income across the board we really don’t, we see very few assets that are offering us what we would over a 10-year period real returns, so real local currency returns, which is what we look for, on the assumption of some return to normalcy in terms of yield curves. But we see little pockets exactly as you said, so pockets of value of good companies in investment grades. But actually a little bit in high yield and in some of the emerging market bonds. And so we would just literally invest very specifically in those areas.

PRESENTER: Just very quickly, because given we’re all sat at a time where sterling has just disappeared through the floor against everything, how does that model work when a currency has a major move down or up?

EDWARD FANE: Yes, so it’s been wonderful for the portfolios. We had a very international bent. But we model everything on a real local currency basis. But we also then have currency models that are actually built up sort of on a PPP basis. So the currency decision is a separate decision. Our natural position therefore I guess would to be hedged wherever we can. But if we see real value in the currencies, we actually saw some value in emerging market currencies for instance over the course of the last year now. It was a difficult position. There was a lot of negativity, strong dollar, you know, worries about the turn of the commodity cycle. It’s very much that value contrarian way of thinking about things. We actually just, because we have this very cautious portfolio construction we just felt able actually therefore to go in and actually start investing in there, and we benefited nicely therefore from the events that have been happening since. There’s a lot of money going into hard currency at the moment, but actually we think local as well remains reasonably attractive.

PRESENTER: Now, just looking at the mainstream markets, overall, Samantha, would Standard Life be favouring US over Europe or Europe over US when it comes to investment grade credit at the moment?

SAMANTHA LAMB: I mean in terms of that top-down allocation I would say it’s very difficult. Because I think there’s so many moving parts going on at the underlying level that you really do have to dissect the markets into greater detail. I think particularly when you look at the US there is this fear that the companies are leveraging up. And we actually feel that that feels overdone at the moment. That when you look at the headwinds at the US corporates market we’re facing you’d had three challenges. One has been the M&A and also the share buybacks. You’ve then also had the sector, the oil sector effectively in recession. And you’ve also had a number of companies suffering with their foreign earnings because of the stronger dollar. All of those things are starting to abate now.

When you look at shareholder buybacks, they’re not getting rewarded by equity owners in the same way anymore. The dollar versus most currencies has stabilised, and then in terms of the, which means that your foreign earnings are starting to stabilise as well. And the oil price as we know has recovered. So you can see a situation where the US earnings are starting to look better over the next few months, and certainly the stabilisation in terms of leverage and then a gradual improvement. So I think we’re still really much focused on a name by name, and we think it’s very difficult to say that one area is looking better value than the other.

PRESENTER: So in a sense you think that the issue with the US will sort itself out, it will be self-correcting.

SAMANTHA LAMB: I think there’s reasons and good reasons to look at where leverage has got, and to ask whether we should be concerned. But I think there were a number of headwinds which are now abating. So that whilst we’re concerned certainly with the six to twelve month view, I think you’ll see leverage stabilising and improving in non-financial US corporates.

PRESENTER: Victor, can I just get your thoughts on that, because you’re obviously a little?

VICTOR VERBECK: Yes, it’s a very intriguing question. It’s all about where is the value? Now the value is gone in non-financials in Europe because Draghi make that impossible to make money, but there are good companies in Latin America. Maybe the US banks have become expensive but are great recovery stories in banks in Europe. So region by region, sector by sector, we look for the value. We don’t think that there’s value in, I don’t know, Asian credit, but there is opportunity, there are opportunities maybe to short a few of those credits and benefit off, I don’t know, devaluation in China.

So looking for value is not constrained by a region itself, but if you put a gun to my head and say US over Europe, then we still prefer Europe. Because the technical is holding credits tighter, while the Fed or recession fear or slowdown whatever, then the US might look cheap but it might be a value trap. And by the way if you correct for difficult words like basis swaps and maturity profiles, then it’s not that cheap versus Europe. So small preference for Europe I would say.

PRESENTER: All right, now we’ve had a question in, how is Brexit affecting UK or UK related credits? Darren, could we get a quick response to that?

DARREN RUANE: People when they talk about Brexit they expect it to impact the UK equity market in a big way and the UK bond market. And it does, but I mean most of the companies, particularly investment grade companies that will issue bonds will tend to be global companies. So the truth is the UK economy will not have a big impact on many of those companies. So overall I don’t see it having a big impact. The ones where you really need to look out for will be those that are domestic earners. I mean one that comes to mind immediately would be a Travis Perkins in the UK, which is just below the investment grade line. It’s BB. That’s definitely predicators on the outcome of the UK economy whether we’re weak or whether we’re strong. But otherwise investment grade shouldn’t be hugely impacted on fundamentals.

PRESENTER: All right, now we’ve talked a lot about investment grade credit, I want to move on quickly if I may to the high yield markets. Samantha, how important are they as a component of a global credit portfolio?

SAMANTHA LAMB: I think the sources of additional yield, as Victor has been talking about, outside of the traditional euro investment grade, US investment grade, you’ve seen the growth of I think corporates has also been kind of important within that context. I think the high yield markets though still do present good opportunities, but you really do have to think about it more from an individual name basis, or company. I think when you look at US high yield in particular, valuations have run a long way now.

So in terms of where we would prefer to take additional risk within our portfolios we would really try and identify those companies that we thought were potentially going to be upgraded to investment grade, and where you would then see a spread compression as a result of that ratings transition. And then similarly I think there are good opportunities within emerging market corporates to add that additional value. But there’s also a risk when you talk about EM, I mean you are talking about 60 different countries, and there’s a lot of different political situations and challenges going on across. So you have to have confidence not only in the underlying business profile, but what’s happening at the sovereign level as well.

PRESENTER: Taking that point on, have you got an example of a developed market high yield credit that you like? Put that round the table, Victor yes.

VICTOR VERBECK: To mention a few, we are in the UK here. I think Tesco is a slow burn back to investment grade. If you look at European holdings we like (Tirios? 35:33), maybe not that familiar to everybody but it’s a big sugar company. And sugar prices were rock bottom and those companies had to re-lever, lever up a lot. But since sugar prices are now up due to drought and harvests failing, that is 400, 450 over bunds for a strong BB moving up towards investment grade. Companies like that we like.

PRESENTER: Why aren’t lots of people piling into a company like that if everyone’s yield hungry, you’re talking about a very big yield pick up there?

VICTOR VERBECK: I think that has to do with market segmentation. Most investment grade funds stick to investment grade. And at Robeco yes, it’s really unconstrained so you pick the rising stars like [unclear 36:17]. Not all of them but just you pick the best pockets and yeah, probably not everybody can do that. So there is some kind of hard boundary between investment grade and high yield, and that has been there ever since. And yes, you can benefit off that.

PRESENTER: But I suppose we’re living in a world with a lot of disruption, and we’re seeing a lot of discount retailers for example coming in. I suppose that does raise the question why would anybody want to lend money to Tesco on a 10-year view? Do you ever worry they might not be around?

VICTOR VERBECK: Now for non-food retailing I agree. But for food retailing and the traditional food retailing companies that move into internet delivery, that’s a business we believe that is here to stay. But for non-food yeah, that can be much more difficult, I agree on that.

PRESENTER: All right, thank you for that. Now we’ve touched on emerging market debt, and we’ve had a question in on this, which Ed, I’m going to put to you if I may. The spread in EM debt’s attractive looking historically and EM countries’ economies are in good balance. But how would a Trump Presidency affect EM? If you wanted to narrow it down to country, how about Mexico?

EDWARD FANE: OK, well there’s the prism we’re going to talk about yeah. I mean look, firstly now I think that the chance of a Trump Presidency seems to be receding a little bit. But it’s something that one needs to take very seriously. How would it affect global, the economy globally? But absolutely I think it would send some reverberations through emerging markets in particular, the obvious example being Mexico who would have to cough up for the wall obviously, which would be a very expensive enterprise for them. But I jest. It would cause significant tension, significant problems. And I think you do, I think one of the things you have to be slightly wary of, and it’s why I think in certain of these areas an active approach is incredibly important. If you actually look at the pricing say of the global diversified, which is the main hard currency market.

When we looked at it, so I guess what you can do is you can look at its credit rating overall. And you can look at what therefore would be the spread for that sort of credit rating in US markets, just to give you something to look at it against. If you look at it actually its spreads was quite a lot wider, so it looks really attractive. But if you actually go down and analyse where that difference in spread came from, 60% of that difference actually was just coming from Venezuela, even though Venezuela is only 2.5% of that market.

PRESENTER: And to be clear Venezuela’s not in a good place right now.

EDWARD FANE: And Venezuela’s in a, yes, horrendous position. I don’t want to answer the question of where Venezuela’s going but it does pose the problem that if you’re a, you know, the difficulty with choosing between active and passive, and why it’s quite difficult for active managers I think to outperform sometimes is if you have something like Venezuela, because spreads move so much when something’s in stress, then you’re actually almost in a lose-lose situation. Because do you really invest into that credit? If you get it wrong then you really lose out. If you don’t invest in it however and you’ve taken a more prudent stance, should it not go bust and actually you see those spreads come in, an index or a passive vehicle that’s going to invest across the piece therefore, as long as you don’t get the defaults is actually therefore at a bit of an advantage.

So there’s a real difficulty between being prudent when you’re investing in emerging markets and really trying to access those opportunities. It all comes down to portfolio construction in my view.

PRESENTER: Thank you for that. Now we’ve got a couple of minutes left, so has anybody else got any thoughts on just what a Trump Presidency would mean for emerging markets?

VICTOR VERBECK: Well we only tell that politics do not matter that much. Whether it’s the referendum of [unclear 40:04], we all were freaked out on the referendum, whether it is Renzi or Brexit or Trump, in a few weeks people forget about it and other things like flows and earnings is much more important.

DARREN RUANE: And so maybe where I’d be concerned is about the dollar. I think the dollar is a big driver of emerging market returns. So if Trump gets in and there’s a whole debate around this, is the dollar strong if Trump were to win, or is it weak? So the argument for it being strong is that it’s a risk off scenario, and monies will rush into yen and the dollar. The weakness to the dollar argument I think is around the US economy being much weaker, and so the dollar should be much weaker. But if we go with the stronger dollar scenario we’ve seen in the past that that’s led to a big underperformance of emerging market currencies, particularly from 2014 out.

I mean our own view at the moment we’re much more constructive on emerging market debt. We see that the stabilisation of the dollar that we’ve talked about, that’s been very helpful to inflation rates in emerging market countries. And with lower inflation rates you can have lower interest rates. It’s positive for growth, that should, and obviously bond yields falling, so all of that’s both good for emerging market debt and emerging market equity as well.

PRESENTER: And just very quickly, I mean let’s use the Trump, potential Trump Presidency as an example, but how much work would you do at Investec to work out what the implications would be? I mean is this something people crunch for hours and hours, or is this a bit of a gut feel and just throw it out there as an idea?

DARREN RUANE: No, absolutely not a gut feel. I mean there are so many outcomes from something like that. We did the same thing for Brexit. We sat down with a whole team of strategists and we tried to work out within each individual component parts what would happen to that component part and what contribution it would make to the portfolio. So that’s what we’ll do. We’ll sit down and we’ll try and work out the contributions.

PRESENTER: All right, now we’ve got time for one more question. Samantha, I can come to you on this one. Do negative interest rates pose any concerns additional to those that exist for low interest rates generally?

SAMANTHA LAMB: At the moment what’s it doing, and I think we’ve talked about it already, is for the most part squeezes us along the curve. When you look at the overall, the bond market as a whole I believe the figures stand at something like 25% is currently in a negative yield. And you’ve got another 25% of the market that’s a level of sub 1% yield. So in terms of the challenges that it poses it’s simply that the technicals at the moment have got considerably stronger so there’s more money chasing fewer bonds. And it’s really just making sure that in that environment as an investor that you remain incredibly disciplined and don’t assume that that buyer, that technical is going to remain.

PRESENTER: Now we’ve talked through a lot in the last 45 minutes. I’m going to finish off by asking each of you if there’s one thought from this that you’d like to leave with us what would that be? Ed, could I start with you?

EDWARD FANE: So I guess what I would say is we’re in an extraordinary environment. And it requires you to think about markets on a realistic basis through the prism of where we are. So fixed interest becomes much more problematic, but I do think that real adherence to a valuation discipline and selectivity is important.

PRESENTER: Thank you. Samantha?

SAMANTHA LAMB: I think when you look at the market as a whole, credit at the moment, or US credit in particular is making up about 30%. So even though it’s 12% of the overall fixed income market, it’s making up about 30% of income. So to some extent credit is one of the only games in town if you are looking for sustainable yield. But I think given the low levels of growth that we’re seeing, we are vulnerable to volatility. And so good stock selection and discipline in this environment I think remain really important.

PRESENTER: Darren?

DARREN RUANE: To pick up Samantha’s point, that’s where I started from. I think we’re in this very low interest rate world for a very long period of time. I think people like ourselves will embrace credit, because I think carry is going to be the name of the game for the next five to ten years. Unfortunately that’s also going to mean putting up with a level of volatility when it comes. And it could be that we just go through bigger drawdowns than we’ve been used to, but over the long term we should come out with a higher return.

PRESENTER: Victor?

VICTOR VERBECK: I make it into two small things. You asked the question about Japan. I think there is a key to the future studying Japan. They put the door open for fiscal easing, and I don’t know what politicians need to go in for fiscal easing, a recession, a crisis, maybe European political crisis, but as soon as the fiscal stimulus comes to the table, which is not the case right now, then it might also be the end of the low yield environment. So that is I think macro economically interesting to think about, and again portfolio with, you have to be as flexible and research focused as possible, because there is value but not everywhere.

PRESENTER: Thank you all very much. And thank you for watching and for sending in your questions. From all of us here on the panel, goodbye for now.