Janus Henderson Investors: Secured Credit outlook 2020 — heading for positive but more modest excess returns with increasing dispersion

Colin expects the returns pattern seen over the last two years, when viewed as a whole, to continue — namely positive but low relative excess returns, with increasing dispersion in performance and volatility.

Key takeaways

• Opportunities in 2020 will likely be found in consumer related asset‑backed securities, such as credit cards or mortgage pools, while corporate credit will require a more guarded approach from a risk perspective given the creeping leverage levels.
• Central banks are expected to remain accommodative; however, the Secured Credit Team will retain a cautious bias next year, both in terms of the types of companies that they look to invest in and also where in the capital structure.
• The team highlight the need to be on the lookout for anything that signals signs of compression or weakness in corporate margins, which could come as a result of a number of factors including possibly tighter labour markets, greater impact from tariffs or simply the lack of investment by companies starting to show in efficiency levels.

Video transcript

Where do you see the most important opportunities and risks within your asset class in 2020?

In terms of opportunities, consumer credit is looking pretty good. When you look at the employment statistics and the finances of individuals helped by low interest rates, that is generally in a good place. So, asset-backed securities that are supported by consumer credit risk, whether it is mortgages or credit cards, generally look pretty good as we go into 2020.

From a risk perspective, corporate credit feels like it needs more caution. The base macro outlook for most is stabilising as we go into 2020 — around low growth but stable growth — and central bankers are expected to continue to be accommodative. So, both of those are not bad for credit but we are conscious of creeping leverage levels. We see that across credit markets. To some extent that is offset by decent debt service levels, interest rates are low as we know and equity valuations generally provide pretty good cushions as well, but certainly there are some areas to be cautious of going into next year.

Are there key themes that are particularly relevant to your strategy?

The strategies that we run are benchmark‑unconstrained, so they give us a lot of flexibility in terms of where we position the portfolios and the level of risk that we can take in those portfolios. Generally, we are expecting to retain a pretty cautious bias, both in terms of the types of companies that we are looking to invest in and also where in the capital structure of the companies in which we are invested. That does not just mean only investing in higher rated bonds of issuers. For example, certain BB rated high yield bonds, which have pretty low spreads today, may not look as good value as a strong business that has some single B rated debt. It is about picking where you want to go.

How have your experiences in 2019 shifted your approach or outlook for 2020?

If we look at 2019, generally, it has been a strong year across risk asset classes, but actually if we dial the picture back a bit further and look at a two-year return view and a chart of some return numbers across that time horizon for a range of different asset classes – the grey (blue) showing total return and the red the excess return — that shows a somewhat different picture.

Total returns have been very strong, helped by central bank policy, so lower interest rates have driven up returns on, particularly, fixed rate bond portfolios. In terms of excess returns, these have generally been a bit more modest; the standout is loans, the European loans market, which has produced the highest excess returns. But we have also seen an uptick in the performance dispersion across markets as well. If we look at that picture, that is actually a pretty good summary of the picture we are expecting going into 2020 — positive but relatively low excess returns and increased volatility or dispersion.

Is there a particular ‘chart to watch’ as a key indicator for change in 2020?

The main charts that we will be looking at next year, will be anything that signals some signs of compression or weakness in corporate margins. This could come through because of tighter labour markets, albeit that is not apparent just now, tariff impacts starting to have a greater effect or perhaps just the lack of investments that we have seen companies making generally over the last couple of years starting to show through in efficiency levels. So really, any combination of one or more of those on businesses that have already relatively high leverage levels, may be something that we need to be careful of.