F&C's fixed interest fund manager Fatima Luis has warned that the credit cycle is changing and inves...
F&C's fixed interest fund manager Fatima Luis has warned that the credit cycle is changing and investors need to ensure they hold funds with sufficient flexibility to adapt to these changes.
Luis said corporates are increasingly looking to lever up their balance sheets to embark on growth strategies, indicating a turning point in the credit cycle.
She said: "The last few years have been characterised by bondholder-friendly actions, as companies have tidied up their balance sheets and paid down debt. Things have now moved on and corporates are now focused on expansion.
"Unusually, default rates in the high yield market have not yet started to rise as one might expect at such a point.
"But this is largely a function of hedge funds and private equity players stepping up to the role of 'lender of last resort' and propping up businesses that might naturally have gone bust. I expect this will change as we start to see downgrades by rating agencies outstripping upgrades."
Luis is currently taking a relatively cautious stance in the F&C Strategic Bond fund, which has a flexible remit.
Luis added: "The picture isn't all that rosy for corporate bonds at the moment. I'm certainly not a bear, but I do believe the easy money has already been made and at best, investors should anticipate coupon level returns."
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