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2023 US IG & HY Sector Strategy Overview
CreditSights Staff
Executive Summary
- In conjunction with our 2023 US IG & HY Outlook, we provide an overview of our sector strategy recommendations. Sector strategy in 2022 proved a challenging endeavor as credit risk and duration risk weighed similarly on portfolios, an unusual dynamic that drove many to throw out the typical ‘risk off’ playbook.
- Heading into 2023, we are constructive on corporate credit as a whole, affirming our Overweight allocations to IG and upgrading HY to Overweight from Market Weight in our 2023 US IG & HY Strategy Outlook. Even so, credit selection, balancing sector nuances and idiosyncratic drivers are likely to drive portfolio performance amid tighter financial conditions and slowing global growth. Our updated sector strategy attempts to capitalize on recent dislocations, allowing for a mix of offense and defense in portfolios.
- We provide an overview of our key sector expectations, including recent changes in recommendations. For a robust overview of our sector strategy, we provide links to our Sector ‘Snapshots’, which provide the CreditSights analyst team’s sector recommendations, top picks and pans, key themes and risks for the coming year, the outlook for fundamentals and new issue and ESG considerations.
Relative Value
In 2022, credit risk and duration risk weighed similarly on portfolios, an unusual dynamic that drove many to throw out the typical ‘risk off’ playbook. This was particularly true of sector strategy, which proved a challenging endeavor as many typically ‘defensive’ sectors faced pressure from long duration profiles or idiosyncratic headwinds. Other more cyclical sectors, including Energy, HY Transportation and some consumer segments, like IG retail, posted far greater resiliency than many anticipated heading into an economic slowdown. Technicals also factored into sector performance as heavy new issue supply, particularly in Financials/the Big 6 Banks, weighed heavily on spreads.
Heading into 2023, we are constructive on corporate credit as a whole, affirming our Overweight allocations to IG and upgrading HY to Overweight from Market Weight in our 2023 US IG & HY Strategy Outlook. Even so, credit selection, balancing sector nuances and idiosyncratic drivers are likely to drive portfolio performance amid tighter financial conditions and slowing global growth. Our updated sector strategy attempts to capitalize on recent dislocations, allowing for a mix of offense and defense in portfolios.
For a robust overview of our sector strategy, we provide links to our Sector ‘Snapshots’, which provide the CreditSights analyst team’s sector recommendations, top picks and pans, key themes and risks for the coming year, the outlook for fundamentals and new issue and ESG considerations.
In US IG, sector performance was heavily influenced by technical factors in 2022, specifically sector duration and issuance volume. This was particularly true of the Big 6 Banks, which produced a third consecutive year of very heavy new issue supply, weighing on spreads amid elevated new issue concessions. Despite strong Energy fundamentals and relatively modest spread widening, the sector’s long duration profile (7.5 years) weighed on returns. Other sectors faced fundamental challenges with Media and Real Estate underperforming amid secular pressures and tighter financial conditions. Our IG sector strategy identifies opportunities driven by some of the more technical considerations that factored heavily in 2022, while also identifying opportunities for fundamental improvement.
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