Q3 2022 Corporate credit outlook: Quality time

Join Head of Investment Research Rob Hoffman as he outlines his thoughts on areas of opportunity in credit markets for second half of 2022.

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August 8, 2022 | 20 minute read

About this episode
With the Q2 GDP report hot off the press, revealing the second consecutive negative number, Chief U.S. Economist Lara Rhame shares why she Credit has arguably felt some of the most pain across asset classes in 2022, so where can investors turn as we enter the second half of the year? In this episode, Investment Research Director Kara O’Halloran is joined by Head of Investment Research Rob Hoffman to explore why they believe active approaches geared toward higher quality credit assets may prove effective. Rob reflects on his time as a portfolio manager in the credit space, examines opportunities in the CLO market and encourages investors to remain vigilant.

To access the full outlook, visit: https://fsinvestments.com/fs-insights/q3-2022-corporate-credit-outlook-quality-time/

Transcript excerpt:

[00:00:00] Kara O’Halloran:
Welcome back to FireSide, a podcast from FS Investments. My name is Kara O’Halloran. I’m a director on the investment research team here. And on today’s episode, we are diving into one of the harder hit areas of traditional finance this year, corporate credit markets. We’ll discuss what’s driven the price action, where we think markets go from here, and importantly, how investors should be positioned for a slowing economy and a potential recession. So to walk through all of this, I’m excited to welcome Rob Hoffman, the head of our research team. Rob, thanks for joining.

[00:00:30] Rob Hoffman:
Hello. Hello. Thanks for having me.

[00:00:32] Kara O’Halloran:
Anytime. So last time we checked in on corporate credit a few months ago, things weren’t looking great. And in the first quarter, the high yield market was down four and a half percent, which other than the COVID sell off in 2020, was the worst start to a year for the market in history. But over the past few months, things have gone from bad to worse. Through June 30th, the high yield index was down 14%.

[00:00:54] Kara O’Halloran:
We’ve seen the market recoup some of those losses in July, but it’s still been a pretty tough start to the year in high yield. Loans are doing better on a relative basis. They’re floating rate coupon, really help them avoid some of those acute price declines. But as we started to see concerns, shift from rising rates to ultimate the ultimate impact on economic growth loans have started to suffer as well. The market was down four and a half percent in the first half of the year. Again, recouping some of those losses in July, but still starting to see those declines with high yield. So I want to start to take a step back and just talk about the credit market as a whole, other than the returns that I just read off. What has really changed over the last three months in your view and what hasn’t?

[00:01:40] Rob Hoffman:
Yeah, I mean, it’s been, uh, it’s been really interesting, I think, to see how the market has changed in moving from the early part of the year, where you were really concerned about duration and rising rates, and then the impact that had on securities that had higher theoretical duration risk. Then that shifted into some growth concerns, and then you sort of got into July where you’re almost, I feel like at peak consensus that a recession is coming yet in response to what the Fed is expected to do. Inflation expectations have actually come down as a result. And so you’re seeing a rally in certain risk assets, like it all kind of doesn’t make sense to a certain extent, but you really have to look at each one of these periods very specifically.

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Kara O’Halloran, CFA

Director, Investment Research

Robert Hoffman, CFA

Managing Director, Investment Research

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