Sensitivity of global investment grade credit funds to macro factors
The chart data shows the sensitivity of the five largest global investment grade credit funds to changes in macroeconomic factors: global default spreads, global term spreads, global inflation and global dividend yields. IPE and PureGroup selected from the largest dollar class domestic and cross-border institutional funds registered for sale in UK, in terms of assets, from the Morningstar database.
The selected funds are:
• Templeton Global Bond
• PIMCO Global Investment Grade Credit
• JPMorgan Global Corporate Bond
• Schroder International Selection Fund Global Corporate Bond
• BlueBay Global Investment Grade Corporate Bond
The higher the sensitivity of each fund to the macro factor, the higher the probability that performance will respond to changes in that factor. The top graphs show the sensitivity of the funds to the factors, while the bottom bar charts show the monthly year on year change of the factors over the past five years. The data was analysed using PureGroup’s Forward Perspective Model, a macroeconomic factor model built for the investment industry, covering open-ended, closed-end and exchange-traded products.
The backdrop to global markets is one of continued uncertainty with several mixed and at times conflicting messages across standard macroeconomic indicators. Low inflation and the suppressed interest rate environment continue to pose challenges to global growth. Recent political events may cause some cyclical swings, but the longer-lasting secular trends are more likely than not to persevere.
Global default spreads
The default spread is the difference in yield between BBB and AAA global corporate bonds. In spite of a recent reversal, we expect global default spreads are likely to widen, largely because of sluggish prospects for overleveraged energy and mining companies, the prospect of negative spill-overs of higher US rates on emerging markets and continued volatility in Europe through domestic elections and Brexit negotiations.
• PIMCO, Schroder, and BlueBay are neutral.
• JPMorgan fund will be the only fund to gain positively.
• The Templeton fund is the most vulnerable.
Global term spreads
The term spread is represented by the difference in value between long and short-dated government bond yields. It is doubtful that term spreads will expand, as global growth is unlikely to rise significantly. Although recent movements in US T-Bonds are the result of post-election hubris rather than anything more material. There still remain many downside risks to growth, such as a potential hard landing in China, and social and political balance for the entire euro-zone region.
• Templeton and PIMCO funds are positioned for the greatest benefit, with their consistent negative sensitivity.
• The JPMorgan fund will be the only one that would face headwinds, although Bluebay’s recently moved to a positive sensitivity.
Inflation is measured on the basis of the global consumer price index (CPI). Over the long term, inflation in advanced economies looks set to remain generally suppressed. The outlook for inflation in emerging markets is more uncertain as it depends on the strength of these countries’ currencies.
• The Templeton fund with its positive sensitivity will have a tailwind during rising inflation.
• The BlueBay and PIMCO funds will have a tailwind during periods of failing inflation
Global dividend yields
This factor is represented by an index that comprises a basket of global dividend yields. While equity markets continue to defy gravity and price/earnings ratios remain higher than average, we will see dividend yields falling or remain neutral. However, it would be expected that a correction may occur in the near-medium term, which would see dividend yields to rise.
• The Templeton funds will have a tailwind if equity markets correct from their historical highs.
• The BlueBay and JPMorgan funds will continue to benefit from low and failing yields.
Patrick Murphy, director, PureGroup puregroup.io/academic-research