Economics

Themes we are watching in global credit

The scope of the global corporate bond universe can be a daunting prospect; identifying key investment themes is one way to navigate this landscape and make good investment decisions.

20 March 2018

Michael Scott

Michael Scott

Fund Manager - Fixed Income

The vastness of the global credit (ie corporate bond) universe, with its many thousands of issuers, presents a huge scope of opportunities to investors looking to profit from bottom-up selection, even when from a top-down level markets don’t appear to offer compelling value.

An effective way to identify these opportunities is to understand the secular trends, or ‘themes’ that are influencing the performance of companies, which can help find the winners and losers across all sectors in credit.

Here are just a few that we’re finding helpful.

Growing demand for online data  

We live in a digital age where we conduct more of our business and spend more of our leisure time online. Companies are using data in more efficient ways to identify, communicate with and serve their customers. The volume of data is increasing, placing greater demands on the communications networks that provide the bandwidth.

Companies able to develop the necessary infrastructure and innovate to offer the right product packages seem well placed to thrive in this digital age. On the flip side, companies that aren’t able to respond to changing consumer demand patterns could be vulnerable.   

Demographics

It is crucial for companies to understand the demographics of their customer base. Our population is living longer. The younger generations have a much better understanding of health issues such as diet and smoking, and better access to healthcare.

Wealth is distributed differently across demographic groups. They spend their money on different things and consumer habits differ across generations. As technological change continues, some groups will face new challenges in employment.

As investors, we have to consider which company business models are adapting effectively to these demographic trends as they develop, and which companies are at risk.

Technology

Technology is developing at a rapid pace and is affecting all of our lives in one way or another.  For businesses, it is creating opportunities to improve efficiency by reducing reliance on the limited capacity of human labour. These efficiencies apply across the business process, from the factory floor through design to accounting and human resource management.

A growing understanding of the threats to our environment from pollution will result in changes in technology being forced upon us, such as cleaner energy in manufacturing and transport. Consumers are demanding more sophisticated solutions such as through smartphones and electronic gadgets.

While the more obvious beneficiaries may be the tech firms that build the robots or the artificial intelligence solutions, the impacts will be felt throughout the value chain, via the suppliers of materials, financiers and employees for example. 

We also have to consider threats to technology, such as cybercrime and how companies are dealing with this highly sophisticated threat.  We can look for bond issuers with well thought-out plans that are resilient to this threat, or which could even benefit by providing cybersecurity solutions for instance. 

Environmental impact of diesel engines

The relatively low carbon dioxide emissions of diesel engines compared with gasoline made diesel engines popular over recent years. However, research now indicates that the nitrogen dioxide and particulates from diesel engines may be particularly harmful to health. As a result of this and targets for lowering environmental pollution, governments are placing greater restrictions on vehicle emissions and increasing taxes on fossil-fuelled cars.

It is important to take a forward-looking view on which vehicle manufacturers have the financial budget to easily meet new emissions criteria and which will find it more difficult. We also need to understand the development of electric vehicle technology: which companies are driving innovation and which companies are lagging.

Fossil-fuelled engines involve a complex value chain. It is important to research which suppliers may be vulnerable amid a decline in diesel sales if they do not diversify (such as diesel specific engine components or fuel delivery infrastructure) and which suppliers may be indifferent (perhaps vehicle interiors and instruments).

These are a few examples of the themes that can be researched in order to determine how the world is changing. Themes do not play out in isolation, they will tend to blend together (i.e. technology and online data demand). 

These themes provide a forward-looking view of the world, providing the context within which to make a judgement on individual issuers and whether their business model will meet the challenges the themes present.

By identifying multiple themes and in particular instances where themes combine this can indicate high conviction towards a particular issuer, or indeed risks, in a very forward-looking way.

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