(Pictured: Scott Minerd)
Investors who have sought out higher-yielding credit for their fixed income portfolios due to generally low interest rates need to be cautious about sentiment following the slump in oil prices. Spreads have widened as energy makes up 15 per cent of the high-yield corporate bond index.
Guggenheim Partners, a global credit specialist, has warned that now is the time to monitor significant exposures that may cause underperformance. Scott Minerd, Guggenheim CIO, says: “Recent price action in the market is telling us something important. It is betraying that we potentially have something darker and more sinister on our hands. If things play out as I suspect, [both] interest rates and oil prices may head lower in the near term.”
Guggenheim believes that the risk of defaults among bond issuers in the energy sector are limited in the near term. However, weak supply and demand dynamics for oil over the next 12 months heighten the risk of further losses in the energy sector. The manager is advising clients to “stress” portfolios for a fall in the oil price to below US$40 a barrel.
In a report to investors last week, Guggenheim says: “Examining energy-related credits addresses the first-order effect of declining oil prices, but there may also be second-order effects to come. This refers to the contagion-like effect, where pressure in the energy industry may unexpectedly put pressure on other industries.
“Some examples include companies that provide the chemicals required for the fracking process and financial services companies that have enjoyed gains from significant energy-related new issue activity over the past several years. Ultimately, this process may help investors identify the Black Swan that could lead to significant losses in the market.”