Within the first 2 months of the year, there was a self-feeding panic about the global economy slowing down and a potential recession looming in the US.
The equity markets were down severely (S&P500 –13% and Eurotoxx50 -18%) only to eventually rebound significantly from mid-February.
The market fears were not only crippling the world equities but also the US corporate sector with HY bonds being greatly negatively impacted (- 4.2%) on fears on significant defaults in the energy names.
There was also a worrisome contagion fear in Europe as the banking sector (-25% for Europe’s financials) got into the spotlight on large financial losses from prominent banks.
Witnessing the self-reinforcing negative feedback loop of bad news and falling equity, bond and oil prices, the ECB and the FED have issued statements that eventually calmed the markets (more QE in Europe and less interest rates hikes by the FED in the US). The FED announcement had a positive consequence of devaluing the USD versus all other currencies, and especially versus the EUR.
While short term visibility has increased (no immediate US recession or China hard landing is in the cards), the upside potential for risky assets in the foreseeable future is also capped after the strong rebound we have just experienced.
In a low growth & low yield environment, our preferred investments on the long-only side remain carefully selected senior loans and short term high yield bonds. On the alternative side, we currently like European CLO’s as well as exposure to credit long/short managers, especially the ones with a specific expertise in the middle market.