High Yield has not suffered as much in 2020 as other asset classes. Even though the positive trend should continue in 2021 on a global perspective, investors have to consider geographical differences. “We favour the US High Yield over European High Yield because we are expecting a strong economic recovery in the US, lower political risks, a larger decline in default rates compared to 2020 and a lower net supply. In EM High Yield we expect the highest total return with attractive valuations in Asian High Yield. However, there are uncertainties regarding the net supply of Asian companies due to significant refinancing needs and the default rates of Chinese companies”, explains Akram Gharbi, Head of High Yield Investment at La Française AM.

Positive 2021 outlook for High Yield markets and favourable technical signals

Only 5% of the global Fixed Income market offers 4% yield or higher (Hedged in euros). This includes the High Yield market and the AT1 market. “The main driver for High Yield market flows will remain Investment Grade funds, especially in Europe”, states Gharbi. A 1% increase in EUR Investment Grade funds implies €28 billion of net inflows into High Yield which represents 7% of the total asset class in Europe. “This trend should continue as there is a lag of opportunities to get yield in an environment where the average sovereign rate in Europe is about zero percent”, says Gharbi.

The fundamentals are expected to be especially strong in the US and stable in Europe as well as in the EM. “We expect a strong momentum for the US High Yield market with an almost 50% decrease in default rate compared to 2020”, explains Gharbi. The main reason being a strong recovery of the US economy which will most likely not be the case in Europe due to the slow roll-out of the vaccine programmes. The massive government support of European companies which are in difficulty could be a swing factor for default rates in Europe as well. For EM, the situation is slightly different. The default rate should remain stable, but there is a lot of uncertainty. “Asian issuers, especially Chinese companies that are the biggest contributors to the Asian High Yield Index, have a huge amount of debt. The same is true for some Argentinian companies that are one of the biggest contributors to the Latin American High Yield Index (8% on the index). The question is whether there is enough liquidity to roll-out the debt.”

Market positioning could be a powder keg

The valuations are quite mixed for the High Yield markets. When comparing “BB”, “B”, and “ CCC ” issuers, the valuations for the EM look quite good (Figure 2). “But when the biggest contributors to the Asian and Latin American High Yield Index are excluded, the yield does not look that attractive anymore”, states Gharbi. Overall, the expert does not see a lot of opportunity in “BB” issuers. “More than 70% of companies with BB bonds are trading with negative convexity. In 2021, we do not see a lot of opportunity in European, Latin American and US High Yield BB issuers.”