High-yield corporates
Given the reasonable fundamentals of the majority of the high-yield asset class, limited refinancing risk, low overall levels of leverage and decent earnings outlook, we still view high yield as an attractive investment alternative. We continue to be cautious on the higher beta part of the market. As a result, we do not believe this is the time to stretch for return or reach for yield by adding significant risk to the portfolio. As such, we remain cautious and are positioned defensively in both the energy and materials sectors. We are not constructive on the oil field services or mining sectors due to supply issues related to overcapacity and soft demand in developing markets, resulting in meaningful weakness in the underlying commodity. As a result, we expect defaults to rise in these two areas.
Our view on the energy exploration and production industry is for a lower-for-longer commodity price environment due to continued supply and demand imbalances. While we don’t think the current range of $20-$30 oil prices is sustainable longer term, the duration of this low-price environment is critical to the performance of the sector. We believe we are positioned in companies that can operate at lower commodity prices and avoid restructuring given their positions in low-cost basins, hedging profiles and adequate liquidity. However, even well-positioned credits could be challenged by a continuation of prices at current levels.
Lastly, we are constructive on the pipeline/midstream sector. Most companies in the sector generate strong cash flows and have the ability to delever if shareholder dividends are reduced. We see longer term upside in spreads but continue to monitor technical and fundamental developments in this sector.
For investors seeking opportunities within fixed income, we believe the keys to success will continue to be strong credit research and active risk management in the face of complex and changing market conditions.
Katherine Nuss is director of fixed-income product management at Columbia Threadneedle Investments.