In the great market rebound of 2019, not all rallies are created equal.
The best start to a year for U.S. stocks since 1987 is plagued by doubt, seen in seemingly relentless outflows, rising premiums for the safest shares and smart-money investors cowering on the sidelines.
It’s a different story in credit where the strongest first-quarter in a decade has been greeted with a growing sense of conviction. Junk bonds are outperforming better-rated counterparts, while equities with the strongest balance sheets trade close to 2013 highs versus the weakest.
Add strong inflows into fixed income and the tumbling cost of default swaps, and the credit landscape is looking decidedly bullish.
All told, the self confidence of debt investors versus their insecure equity peers tells you everything you need to know about this vexed business cycle.
“We see slower growth and potential problems with leverage and balance sheets -- and therefore investors are going into low volatility and strong balance-sheet stocks,” said Willem Sels, a London-based chief market strategist at HSBC Private Bank.
There’s no shortage of ways to think about the diverging sentiment.
It’s a story of how equity investors are paying through the nose for strong companies in a world bereft of economic growth. It’s a tale of how a $10 trillion pile of global bonds with below-zero yields is forcing fund managers to accept thinner risk premiums.
And it tells you that the post-crisis hospitality for corporate leverage is easing -- helping debt potentially outperform shares along the way.
Whatever your world view, the fears for corporate profits that hang over the stock rally are effectively a sideshow for fixed income right now. Dovish central banks are reducing the risks of default and intensifying the hunger for yield.