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Five reasons why 2023 could be a good year for global credit

The health of corporate balance sheets and anticipation of resilient earnings are among factors potentially benefiting global credit this year. 

1. Prospective returns from the asset class have risen

The uptrend in bond yields globally in 2022 has pushed the prospective yield of credit portfolios close to the highest level in more than a decade. 

First Sentier Wholesale Global Credit Income Fund – yield

Source: First Sentier Investors. Data shown March 2014 December 2022

Yields on other income-producing investment options are rising too. One-year term deposit rates went from around 0.25% a year ago to more than 3% today, and yields on government bonds rose in 2022 too. But neither currently come close to the prospective yields available from global credit.  

We expect global credit yields to remain elevated throughout this year, which could prove enticing for income-oriented investors in particular.  

2. Corporate balance sheets appear to be in good shape

Large companies worldwide are in the process of releasing their financial results for the December quarter and for the 2022 calendar year as a whole. Early indications suggest most firms remain in healthy shape financially.  

While it’s possible the default levels might rise back up towards long-term average levels from an extremely low base, we’re not anticipating a meaningful pickup in default rates among corporate issuers.  

Encouragingly, the volume of corporate bonds with ‘negative’ outlooks from major rating agencies is close to the lowest level on record1.

More importantly, higher default rates across the broader market will only affect portfolios if one of the companies in the portfolio defaults, either by missing a regular coupon payment or being unable to repay its debt on the maturity date.  

It’s very important to avoid the failures, so we’re always on the lookout for signs of distress and aim to sell bonds before escalating default risk starts to affect their valuation. 

3. Any economic downturn could be quite modest

The latest forecasts from the International Monetary Fund2 suggest major economies will be quite resilient this year, despite headwinds from higher interest rates, ongoing supply-chain bottlenecks, and secondary impacts of the war in Ukraine. Any recessions are expected to be short and shallow in nature.  

We expect to see lower levels of economic activity in some areas, but is encouraging that the International Monetary Fund still projects global economic growth to be 2.9% in 2023; only down modestly from an estimated 3.4% last year.  

Credit investors should be reassured by these latest projections, as there’s generally quite a strong correlation between economic activity levels and company profitability. As long as companies can service their debt repayment obligations, the regular income stream from coupons will support returns from global credit portfolios. 

4. An uptick in activity among institutional investors

Institutional investors seem to be sitting up and taking notice of the higher prospective returns on offer.  

We have seen an uptick in due diligence with prospective investors considering increasing exposure to the asset class. Sophisticated investors in the US, Europe and elsewhere, including pension funds and sovereign wealth funds, are among the prospective investors looking to allocate to corporate credit portfolios. This is important, as sizeable inflows into the asset class typically help support valuations.  

During January, we saw a good level of new corporate bond issuance. More than US$160 billion of new corporate bonds were issued in the US alone during the month3, which ranks among the highest January totals on record.  

Encouragingly, all of this new issuance was comfortably digested by the market. This underlines the demand for credit worldwide and signals that there may still be large amounts of money sitting on the side lines ready to be deployed in high quality, yielding investments. This could help ensure new issues remain well-supported, and also potentially boost the valuations of existing securities trading in secondary markets.  

5. Potential for performance divergence from different companies

Operating conditions always vary for different firms, both geographically and across industry sectors.  

While the overall outlook for credit remains encouraging, there will almost certainly be pockets of weakness to avoid. This underlines the value of active management in this asset class. 

Over the past two years or so we’ve seen problems with Chinese property developers, for example, many of which had borrowed too much money and weren’t able to repay their debt following a slowdown in demand and an associated drop in revenue.  

On the flipside, we generally favour firms with pricing power in their respective industries, as they are less prone to margin erosion and are therefore least at risk of running into financial difficulty. 

Avoiding the blow-ups helps preserve capital and can result in our funds outperforming credit benchmarks and peers that might have some exposure to the defaulting firms. 


1 Source: Bloomberg, as at 1 January 2023
2 International Monetary Fund World Economic Outlook Update, published January 2023
3 Source: Bloomberg, as at 1 February 2023

Important information  

This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for FSI AIM is available from First Sentier Investors on its website. 

This material is directed at persons who are ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) (Corporations Act)) and has not been prepared for and is not intended for persons who are ‘retail clients’ (as defined under the Corporations Act). This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation.  

The product disclosure statement (PDS) or Information Memorandum (IM) (as applicable) for the First Sentier Wholesale Global Credit Income Fund ARSN 094 088 454 (Fund), issued by Colonial First State Investments Limited (ABN 98 002 348 352, AFSL 232468) (CFSIL), should be considered before deciding whether to acquire or hold units in the Fund(s). The PDS or IM are available from First Sentier Investors. The target market determination (TMD) for the Fund is available from First Sentier Investors on its website and should be considered by prospective investors before any investment decision to ensure that investors form part of the target market. 

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