Multi-Sector Credit: Outlook 2020

Seeking value amid low rates, rising risk and political uncertainty

Ken Hill

Joseph Portera

After more than a decade of growth, the U.S. economy faces a raft of potential challenges heading into 2020 that could have a significant impact on fixed-income markets. While demand for goods and services remains strong domestically, and employment and wages continue to grow, too, conditions are not as favorable in other developed economies. Against this backdrop, it is not clear whether the Federal Reserve will continue to cut short-term interest rates that are already extraordinarily low. Meanwhile, geopolitical risk remains high, headlined by U.S.-China trade tensions, Brexit, the impeachment process in the U.S. and the 2020 presidential election.

Looking ahead to the new year, we believe ample liquidity and negative interest rates will continue to support risky assets, such as emerging market and high-yield debt, in our view making them more attractive than bank loans, floating-rate notes and investment-grade debt. We do not anticipate that moving out on the duration scale will yield the same excess returns we saw in the first three quarters of 2019, so our bias will be to hedge duration to preserve capital.

In the credit sector, we are generally industry agnostic but continue to find opportunities relating to advances in emerging 5G wireless technology. Regardless of industry, we generally see better-than-average potential in BBB-rated securities, where we tend to favor large companies with substantial free cash flow that have shown an ability and willingness to reduce leverage. We also continue to explore opportunities where our research depth and expertise seek to exploit advantages that others may overlook or misinterpret—among privately held companies, for example, and especially among smaller private issuers. In all of our work in the credit sector, we seek to take a normalized view of credits rather than try to pick tops or bottoms.

Naturally, we are closely monitoring developments on the geopolitical front. While no one has a crystal ball, we don’t see U.S.-China trade tensions resolving themselves anytime soon, in part because there appears to be support on both sides of the political aisle in the U.S. for a tougher stance on China. This suggests trade fights will continue to impact financial markets in the year ahead.

As for the 2020 election, we think the biggest impact will likely be on industry sectors, such as health care, where we find the widest policy differences between Republicans and Democrats. There could be broader fallout, though, as well. We already have a president facing impeachment, and depending on who wins the Democratic primary, the presidential race could create meaningful volatility. Financial markets are already starting to think about the implications of a contest that pits President Trump against Sen. Elizabeth Warren. If she were to win, we could see the market respond in a manner almost directly opposite to what it did following the 2016 election. Then, fixed-income yields shot up and stocks soared. This time, yields could plummet and stocks sell off.

We have structured Invesco’s Multi-Sector Credit strategy to navigate this type of uncertainty. Centered on four pillar asset classes—global high yield, bank loans, emerging market debt and global investment-grade debt—this strategy provides flexibility to opportunistically dial risk up and down. In doing so, we leverage multiple approaches to managing that risk. In the high-yield sector, for example, we manage risk not only via our extensive credit review process, which is designed to ensure that we invest in either turnaround stories or companies that generate free cash flow, but also via a full suite of derivative overlays which can be used as a means of hedging the portfolios exposures.

In addition to our research platform and tactical risk allocation overlays, our structure and operating platform further facilitate risk-management activities. As a global firm, we have team members in 14 locations around the world operating on a single investment platform, which allows each person to access to all of the data and information we have in real-time. The benefits of this global structure are made possible by continuous and ongoing communications between teams and locations. Each morning we have global team call to review every asset class. As part of that process, team members get to know each other well, which makes it easy to pick up the phone and call a colleague when their expertise could be helpful. If we see something noteworthy happening, we’ll use the platform to quickly pull people together from different asset class teams around the globe to work out the implications.

While we are looking for more volatility in fixed-income markets in 2020, we believe a multi-sector credit strategy would be well positioned to manage through it.


This article is for US Institutional Investor Use Only. Content was developed in November 2019. This is for informational purposes only and is not an offer to buy or sell any financial instruments. As with all investments there are associated inherent risks. This should not be considered a recommendation to purchase any investment product. Please obtain and review all financial material carefully before investing. The opinions expressed in this article are those of the authors and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

The strategy may invest in derivatives for the purpose of hedging against currency, duration and other risk exposures or managing cash balances pending the direct acquisition of an asset or investment in a fund. The strategy may also invest in derivatives in order to obtain exposure for purposes other than hedging, including opportunistic investments. Types of derivatives instruments that may be employed by the strategy are (i) Swap Contracts (including, without limitation, Credit Default Swaps, Credit Default Swap Indices, Total Return Swaps, Interest Rate Swaps, Foreign Currency Swaps and Volatility Swaps), (ii) Futures Contracts (including, without limitation, Interest Rate Futures Contracts), (iii) options (including, without limitation, Credit Default Swap Index options and options on Futures Contracts), (iv) Swaptions, (v) Forward Contracts and (vi) credit-linked notes, and/or other derivative instruments. Derivatives exposure is also permitted with in the Sector Funds. Derivatives held may have the economic effect of financial leverage by creating additional investment exposure, as well as the potential for greater gain or loss.

Invesco Advisers Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. NA12114