Fidelity: There are opportunities in the telecommunications and basic industries, while maintaining a cautious attitude towards the energy sector

Zhitong
2024.12.25 06:06
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Fidelity pointed out that the U.S. high-yield bond market offers attractive total returns, but narrow spreads pose limitations. Although spreads may narrow further, risks are emerging, particularly with the potential shift in the Federal Reserve's interest rate cuts and policy changes. Fidelity believes there are opportunities in the telecommunications and basic industrial sectors, while maintaining a cautious stance on the energy sector. It is expected that spreads will dominate returns in the coming year, and default rates should remain at low levels

According to the Zhitong Finance APP, Fidelity stated that the U.S. high-yield bond market offers attractive total returns, but narrow spreads pose limitations. However, supported by favorable company fundamentals and technical factors, spreads are expected to dominate returns. Although spreads may further narrow, risks are emerging, particularly from the potential shift in the Federal Reserve's interest rate cuts and upcoming changes in tariffs, government spending, and immigration policies. From an industry perspective, Fidelity believes there are opportunities in the telecommunications and basic industrial sectors to enhance value through credit selection. On the other hand, due to potential policy changes that could lead to falling oil prices and shifts in capital allocation strategies, Fidelity holds a cautious attitude towards the energy sector.

Fidelity pointed out that the U.S. high-yield bond market still offers attractive total returns, but narrow spreads pose limitations. In addition, supported by consistently good fundamentals and technical factors, spreads are expected to dominate returns in the coming year.

On the positive side, the fundamentals of relevant companies remain robust, and credit indicators show that companies are not taking on excessive risk overall. Although spreads are close to historical lows, the quality of the U.S. high-yield bond index is higher than in most historical periods. In terms of ratings, BB-rated bonds currently account for more than half of the index, with secured notes making up more than one-third of the index, which fully demonstrates that the current spread levels are reasonable. Given the strong performance of corporate balance sheets and the increasing options to extend the duration of distressed bonds (whether through liability management activities or other capital sources like private credit), the default rate should remain low.

However, even though spreads have not yet reached their bottom, they are certainly approaching it, and some risks are about to emerge. First, the Federal Reserve may reconsider the pace of interest rate cuts next year, which could force the market to reassess corporate strength, especially for the weakest group that still hopes for lower refinancing costs. As companies seek to refinance, new bond issuances increase with rising merger and acquisition activity, and the momentum for bond rating upgrades weakens, the support from technical factors may also diminish. Investors also need to evaluate the impact of upcoming changes in tariffs, government spending, and immigration policies on various credits, as these changes will bring both winners and losers.

Fidelity stated that credit spreads may still have room to narrow, but the narrower the spread, the less room there is for error. Therefore, investors need to adopt defensive strategies while selectively investing. Fortunately, due to the significant differences between various bonds, especially in the B-rated and CCC-rated bond sectors, there are many opportunities for credit selection. The core strategy remains to identify and invest in highly favored bonds while avoiding credits with significant downside risks.

The telecommunications industry is currently under close scrutiny, with spreads significantly higher than the index average, exceeding nearly 200 basis points, making it the only industry with spreads above the index. However, many telecommunications companies have over-leveraged capital structures, are struggling to cope with long-term demand changes, and are burdened by heavy capital expenditure, so this spread may not be surprising. However, some recent favorable developments have prompted investors to reassess this neglected industry.

It has been proven that the fundamentals of some sub-sectors, such as cables, are stronger than expected. In addition, recent demand driven by artificial intelligence for fiber capacity connecting data centers has brought unexpected positive factors Finally, the increase in merger and acquisition activities highlights the potential value of assets and drives market speculation about future mergers. This trend may accelerate with further relaxation of regulations.

Fidelity believes that the basic industries present another area where value can be increased through credit selection, including a range of sub-sectors such as chemicals, building materials, and metals and mining. Although the potential negative impact of tariffs poses a significant threat to these industries, the ultimate impact will vary by company due to differences in geographic and supply chain risks. While facing pressure from input costs, companies also have varying pricing power, with some able to pass costs onto customers, depending on the supply-demand balance in their markets and the size of their competitive moats. The good news is that the debt levels in the basic industries are below historical levels and the overall market, providing the capacity to withstand these upcoming challenges.

Investors should adopt a cautious attitude towards the energy sector. While the general market believes that the energy sector should perform strongly under the new government leadership, the return of policies encouraging increased production, along with potential impacts on economic growth in other parts of the world, may lead to lower oil prices. Recently, investors have tended to hold a heavy position in the energy sector, with valuations still relatively high and balance sheets healthy. However, management teams are likely to increase capital expenditures and seek mergers and acquisitions due to regulatory easing, marking a shift from the conservative capital allocation seen in recent years. In fact, for many of the same reasons, the energy sector performed poorly during Trump's first term. Nevertheless, even within the energy sector, there are differences, with potential winners including liquefied natural gas exporters and oilfield services among the sub-sectors