In our latest “Talking Markets” podcast, Bill Zox and John McClain, portfolio managers with Brandywine Global, join Amer Hasan to discuss how current market and economic conditions could benefit high yield investors, the opportunities and risks right now, and why the asset class is often overlooked or misunderstood.
Host: Hello and welcome to Talking Markets: exclusive and unique insights from Franklin Templeton.
Ahead on this episode: how current market and economic conditions could benefit high yield investors, the opportunities and risks right now, and why the asset class is often overlooked or misunderstood. Bill Zox and John McClain, Portfolio Managers with Brandywine Global, join Amer Hasan for this conversation.
Amer Hasan: Bill and John, you know, with high yield spreads near historical tights, and nominal yields near historic lows, what would you say to investors who question if now is a good time to add or increase an allocation to high yield?
Bill Zox: We’ve been talking about this in much the same way for the last year, and it’s important to look at high yield, not in a vacuum, but in the context of all other asset classes. The analogy I think about is when I was in the backseat of my car and my 15-year-old daughter was learning how to drive, my wife was in the front seat. And inevitably it would end in tears with both my wife and my daughter crying. The car would be pulled over in middle of the street, and my daughter would get out of the car. My wife would take over the wheel. But in the back seat, there really wasn’t much I could do. They were not listening to me. They were not listening to each other. And that’s really how I see the high yield market right now. The high yield market is in the back seat, while the equity market is behind the wheel and the Treasury market is in the passenger seat. But one key difference is that the equity market is driving very skillfully right now. And the Treasury market is not doing too much to grab the wheel.
So, the bottom line is, on the Treasury side, we still have very significant negative real yields. That 10-Year TIP [Treasury Inflation Protected Security] is -1.2% right now. There’s still over US$13 trillion of negative-yielding debt around the world. And if you’re an investor it has the objective of a positive real return, you have to look farther out the risk spectrum to generate a positive real return. And the high yield market in the US is very compelling compared to investment grade fixed income markets around the world.
And then on the equity side, you’re still looking at near-peak multiples on near-peak profit margins, and the value of equities has exploded relative to the value of debt. So, the value of corporate debt in the US is at record lows compared to the equity market cap of US equities. So, high yield spreads are tight and yields are low, but the fundamentals are fantastic right now, in large part, because of the strength of that equity cushion, which also leads to access to capital, both equity capital, and debt capital, and on the fixed income side, the need for investors to find the US high yield market to achieve their objectives.