Global short-dated high yield – thanks for the opportunity! | Insight Investment

Credit spreads have spiked higher as the world adjusts to a new era for US trade policy. We believe this indiscriminate selloff presents a potentially significant opportunity for investors.

Insight’s high yield stockpicker’s guide to tariff uncertainty

• Close contact with management is key: When investing in short-dated high yield, we believe it is crucial to have a deep understanding of the business plans of the companies we invest in, while maintaining regular contact with management to ensure the plan is progressing as expected. This approach becomes even more important during periods of economic turbulence, ensuring that investments are resilient to the prevailing conditions.
  
  
• Defensively domestic: Many high yield companies operate solely within their domestic market, making them less susceptible to international tariff risks. For these companies, the primary concern is of a broader economic slowdown. This can be mitigated by focusing on companies with predictable and resilient cashflows that can typically withstand economic volatility. Telecoms can exemplify this resilience, as consumers prioritise mobile services over other expenses, ensuring steady demand even during economic downturns.
  
  
• Localised resilience within global firms: The mid-sized nature of many high yield companies means they often operate in close geographical proximity to their customer base even when operating internationally. High yield companies are generally not international giants with extended global supply chains. As tariffs are only applicable to the cross-border flow of goods, and not based on the company’s country of incorporation, we believe this will provide significant resilience to the asset class.
  
  
• Stay away from CCCs: The companies within high yield markets that generally need growth to sustain their business models are those with the greatest leverage. These companies are primarily found in the CCC-rating category.
  
  
• Broaden your geographical focus: In the hunt for strong domestic franchises with tariff resilience, we believe now is the perfect time to broaden the search. With the appropriate expertise, many such opportunities can be found in the developing world. These companies, which issue debt in US dollars, often dominate their domestic market but their developing market status means they trade at a yield premium. Telecoms in Latin America serve as a prime example.
  
  
• Take advantage of sector stress: When a single sector moves into the headlines it can sometimes create stress across all issues within the same sector, even if they are only loosely affiliated with it. This phenomenon can currently be witnessed in the auto sector, which is at the heart of the US administration’s efforts to reindustrialise. As tariffs have been introduced to support this, so non-US auto-related credits have sold off. For those in the after-market parts business, the impact of tariffs is likely to be minimal, yet spreads have widened along with all other auto-related businesses. Other companies have suffered because they have an auto-related business within a broader conglomerate, with little consideration that other parts of their business may actually benefit from current developments.
  
  
• Time for European exceptionalism: The proposed relaxation of the German debt brake to allow greater defence spending, alongside a new €500bn infrastructure investment fund, is expected to boost growth across the eurozone. Arguably, fiscal largesse has been a critical driver of US exceptionalism in recent years, and Europe now seems ready to embark on a significant fiscal expansion. This is expected to underpin European growth and the outlook for high yield companies operating within the region. We see many businesses that should be geared into this opportunity across sectors such as chemicals, building and even autos.
  
  
• ETF sales provide liquidity: Some investors will inevitably react to the increased uncertainty by selling their high yield assets. This is particularly true for ETFs and could lead to indiscriminate selling. Issues are sold at the worst possible time, into volatile markets, and at prices well below where they would trade under normal market conditions. This can present significant opportunities to purchase high-quality issuers, or bonds with high coupons at levels that would normally be held to maturity.