Investment Case- Downturn Bonds
With the recent rise in volatility in the equity markets, some investors fear a more severe correction and widening spreads in the credit markets. Whilst an imminent downturn is not our scenario, we believe a correction will ultimately happen, and now is a good time to identify in the portfolios the weakest issuers and improve the global credit quality.
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We, today, are in the ninth year of economic expansion. Bond credit spreads have been tightening and rates have gone down, pushing the prices of corporates bonds up. Whilst in our view a recession is not immediately around the corner, we believe it will inevitably happen and fixed income investors should prepare their portfolios accordingly. Below are some defensive buy candidates.
The first ever contingent convertible was issued by Lloyds, during 2009. However, a large number of contingent convertibles were issued in 2013-2014. This means that the first batch of contingent convertibles issued then are reaching their first call date. Cocos have been popular with retail investors, as their emergence coincided with a period where yields were at their lows and bondholders were looking for sources of incremental yield.
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US60871RAF73 – USD 2.10% MOLSON COORS BREWING CO 15.07.2021
Consumer tastes are changing and many beer drinkers are now turning away from homogenized commercials beers and favour tastier craft beers. Brewers picked the trend and invested in or bought craft breweries or directly brew craft-like beers that they themselves have created. Amongst the big brewers, Molson Coors Brewing built the biggest craft beer brand portfolio, and is therefore the best positioned company to benefit from the changing landscape. Brewers showed resilience during the last recession.
US256746AF59 – USD 3.70% DOLLAR TREE INC 15.05.2023
An obvious choice are the dollar stores as they offer deep discount items that appeal to low income consumers or those that want to save money. They usually fare better than the rest of the market during harsh economic times. Moreover they are less likely to be victims of the store closure wave hitting the US as they offer generic goods less subject to fashion and consumer changes of taste.
US25468PCW41 – 2.35% WALT DISNEY COMPANY 01.12.2022
The company announced its intention to move into the streaming business, a service which is believed will be available late 2019, at a cheaper price than Netflix. This will enable the company to leverage its massive library, which includes blockbusters such as StarWars and Marvel movies. With contents appealing more to kids, the low absolute costs of such services and their “addictive” nature make them likely to remain part of consumers discretionary spending should a downturn happen.
US30161MAL72 – USD 4.25% EXELON GENERATION CO LLC 15.06.2022
The company announced its intention to move into the streaming business, a service which is believed will be Despite being highly leveraged and capital intensive, utilities also are natural choice during downturns. Exelon is the largest US utility company by revenue, generating more than USD 35bln in revenue over the last 12 months. The company delivers electricity and natural gas to 10 million customers, the most in the US. Compared to peers, Exelon offers good metrics and is relatively less leveraged.
XS1394760182 – USD 2% JAPAN TOBACCO INC 13.04.2021
This group constitutes in our view the foundation of any defensive portfolio, should the investor ESG policy permit. While the smoking share of population is diminishing in developed countries; in emerging markets, rising wages are pushing up the number of smokers switching to premium brands bearing higher margins. Moreover, to compensate the declining number of smokers, tobacco companies are developing many of tobacco free products such as vape and electronic cigarettes, which represents an ever growing share of their revenues.
US91324PCP53 – 3.75% UNITEDHEALTH GROUP INC 15.07.2025
Health care and health insurers are also a natural pick. UnitedHealth operates two distinct businesses. One is UntiedHealthcare, which is primarily an insurer and the other is Optum, which also operates a mail order pharmacy. The trend, as shown by the CVS/Aetna mega merger, of combining the insurance business with the drug distribution network, is a likely to be profitable in the future.
US98978VAK98 – 4.5% ZOETIS INC 13.11.2025
Zoetis is the world’s largest producer of animal medicines and vaccinations. The growing demand for meat and poultry is likely to support strong demand for animal health products and services. The recent past has also shown a higher frequency of infectious disease epidemics.
Some of the bonds highlighted in this report appear expensive. We however believe quality comes at a price and the objective targeted here is to preserve capital through a downturn rather than seek capital appreciation by picking cheap bonds.
bridport & co is a fixed income services company that provides advisory, execution and research to institutional investors. Read more on www.bridport.ch