The outlook for 2022 for structured credit (SC) remains positive, with the potential for notable outperformance versus traditional assets. In the forthcoming days, we will outline the prospects for some of the most significant sectors and areas which offer compelling returns.
In our base case, the surge in growth as the rebound from the Covid-19 shock may have peaked but activity appears robust across the globe. Policy stimulus is also starting to unwind but the environment of excess liquidity and low returns that yield hungry investors have had to navigate for so long should persist in 2022. For the downside scenario, the potential for a further bout of market volatility (e.g. from another Covid-19 variant that is more serious than Omicron or from the Federal Reserve belatedly reacting to surging inflation) is significant at such elevated valuation levels but the lessons of the last decade suggest investors may have to react swiftly if an opportunity to buy safe, senior SC bonds recurs.
The benign credit environment, with low defaults persisting, and the shortage of yield in many other asset classes suggests that there should be further asset allocation into SC as it is one of the few sectors that has not hit previous peaks in valuations: Increasing inflation across the world also highlights the merits of asset-backed securities, offering something of a ‘hedge’ against the accelerating decline in the real value of many investments. This should be reinforced by the focus that Prytania has on the floating rate part of SC, which will both protect values compared to conventional government, corporate or EM bonds, and deliver a rising stream of income as coupons reset regularly.
The latest Prytania quarterly outlook by sector highlights the senior tranches of CLOs, CRE CLOs, Non-QM RMBS in the US and Trust Preferred CDOs as the most attractive. In terms of countries, the strongest ratings were affirmed for Portugal, Spain, Germany and Holland, with the sharpest drop since October seen in the US. Further details on each sector are available on request.
In addition to the appeal of SC bonds, we continue to find a range of compelling opportunities in the universe of private credit and other special situations and expect this environment to persist through 2022-3.