Artisan Canvas

With vaccination rates ramping and the economy beginning to emerge from its COVID-induced slowdown, the days of record-low interest rates are likely numbered—which raises questions about the broader fixed income environment. While rising rates could mean conventional fixed income areas are in for a relatively rough ride, they could also provide an interesting environment for high yield and leveraged loans, which have historically fared relatively well as rates rise thanks to some potentially overlooked considerations. 

Stop us if you’ve heard this one before: A newly named Italian prime minister declares he will finally enact changes to the country’s bureaucratic and legal structures to get the third-largest EU economy rolling again. This time, it’s Mario Draghi—of euro-savior fame—who will also be coordinating efforts to secure €200 billion in funding from the EU’s inaugural stimulus package raising debt as an entity. Italy, whose economy has been deeply damaged by COVID-19, is set to receive more funds than any other country. If the EU plan is to succeed, Italy must arguably play a big part in the success. 

Supply/Demand is a semi-regular feature of the Artisan Canvas rounding up interesting and quirky subjects from across the Internet with a focus on economic and business trends. A good rule of thumb among the Artisan Canvas editorial staff is “never reason from a price change.” With that in mind, we present our latest edition of Supply/Demand.

As much of the world attempts to get business back to pre-pandemic norms, global supply chains face an added challenge in the form of shifting consumer preferences. As consumers and employees do more from home, this “new normal” has had some interesting impacts.

A year of increased asset purchases, new emergency facilities and lower interest rates—unleashed by global central banks in response to the pandemic’s economic disruption—has made it increasingly challenging for investors to find yield in today’s market. As it stands, only about 30% of the world’s bonds trade with yields over 1%. For investors looking to generate income over and above inflation, high yield credit stands as one of the last remaining asset classes that still offers compelling yield opportunities on an absolute and risk-adjusted basis.

“I leave Sisyphus at the foot of the mountain! One always finds one's burden again. But Sisyphus teaches the higher fidelity that negates the gods and raises rocks. He too concludes that all is well. This universe henceforth without a master seems to him neither sterile nor futile. Each atom of that stone, each mineral flake of that night filled mountain, in itself forms a world. The struggle itself toward the heights is enough to fill a man's heart. One must imagine Sisyphus happy.” —Albert Camus, The Myth of Sisyphus, 1942

The plight of Sisyphus is not wholly unfamiliar to value investors. And so it’s reasonable for these investors to ask themselves: Are we like Sisyphus?

Among the new US administration’s top priorities is another round of stimulus. Though the bill looks different from the measures previously passed under a more divided government, it doesn’t go as far as the Democrat-controlled House went in its May 2020 $3 trillion proposal. 

Well, they did it: The UK and EU signed a trade deal mere days before a no-deal Brexit would have become official. Beyond avoiding higher tariffs and significant trading delays , the agreement also frees the UK to seek separate trade deals with the US and other major partners—something that has, by and large, been on hold. Both sides won some important concessions:

The pandemic’s financial toll has been widespread, but a surprising silver lining has been the relatively short-lived corporate default wave. Default volumes were certainly elevated throughout 2020 but steadily declined over the last several months as risk-seeking capital rushed to meet companies’ liquidity shortfalls. Even more notable, defaults have been relatively rare among COVID-impacted businesses, with most default activity occurring in areas already struggling before the pandemic—not because of it.

In November 2020, US President Donald Trump signed an executive order prohibiting US investors from investing in a group of Chinese companies. The targeted companies are believed to supply and/or support China’s military. Subsequently, there have been media reports of the US government potentially adding companies to the blacklist. Most recently, media reports indicated the US government was considering adding Alibaba and Tencent. 

Amid a year peppered with trade disputes, Brexit talks and the pandemic’s all-encompassing impacts, long-time Japanese prime minister Shinzo Abe’s decision to step down may have gotten short shrift—a bit surprising, given Japan is the world’s third-largest economy. As Japan also looks to recover from the COVID’s economic disruption (destruction?), the question becomes whether new prime minister Yoshihide Suga and his already eponymously nicknamed economic plan, Suganomics, can finally usher in for Japan a new dawn of economic relevance. Perhaps not surprisingly, there are reasons for hope as well as for concern.