What to consider for portfolio positioning.
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Nicholas Leach, vice-president, CIBC Asset Management

So where we are going into 2019: high-yield credit spreads are now at 430 basis points. That’s the highest since the end of 2016. And it’s actually pretty close to the long-run medium. The effective yield is now over 7%, and that’s the highest since mid-2016. And when we look at our positioning, our high-yield exposures, we’re predominantly in U.S.-based companies—telecom companies, media, consumer products, healthcare, entertainment, food and beverage. These companies are actually benefiting from the low unemployment, the strong consumer confidence, and this means better credit quality for these companies and lower default rates.

Now, there are some pockets of volatility in terms of fundamentals, and that’s mainly isolated right now to the energy sector. Within the energy sector we have about a 15% exposure, but half of that is midstream and downstream. And those types of companies are not really impacted by the volatile oil prices. When we look at those companies that are impacted by the oil prices, we have about an 8% exposure, and those are to exploration and production companies, and oil field services. And our exposure in this area is actually underweight relative to the broader market. But it’s important to keep in mind that these are the companies that survived 2016 when oil was below $30. These companies are in much better shape than they were in 2016 to deal with the type of oil prices that we’re seeing today compared to what they were three years ago.

But I think, most importantly, high-yield markets and credit markets in general are always better positioned in a rising rate environment. When we look at nominal yields in many areas of Europe, they’re still in negative territory. And European Central Bank is expected to reduce quantitative easing by the end of the year. The Federal Reserve is also expected to raise the federal funds rate. So again, high yield and corporate credit is always well positioned in this rising rate environment.

And even if interest rates don’t rise—if things do change and rates, expectations do change and rates don’t rise—investors in corporate credit and high yield will still earn that extra coupon carry. And with a 7% yield, a 430-basis-points spread in terms of high yield, we’re in a much better position today than where we were at the beginning of 2018.

I will say as the Federal Reserve continues to raise short-term rates and the European Central Bank will stop its quantitative easing program, short-term rates will continue to rise. And one of the offsetting factors of that, we’ve seen a lot of negative sentiment and uncertainty surrounding the global trade wars. So that could be a factor that would alter the expectations of rising interest rates. But, again, these are global macro sort of risks, and many of it is political.

So what we really look for within our portfolios are companies that will continue to pay their coupon, will continue to see improved credit quality—companies like mobile companies, healthcare companies, entertainment companies, food and beverage companies. These are the types of companies that, they’re consumer oriented and they’re going to be actually benefiting from the, again, as I said, benefiting from the low unemployment, benefiting from consumer confidence.

And the actual credit quality, the fundamentals of these companies, will not be affected by some of these global macroeconomic themes that we’re seeing. And we’re very confident that these companies will continue to service their debt and actually improve in their credit quality given the strength of the U.S. economy.

Renaissance High-Yield Bond Fund
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