US-based investment manager MFS has outlined five reasons for investors to consider global credit.
The time may be right for broader use of global credit in fixed income portfolios, according to MFS senior managing director Benoit Anne, who said the asset class is ticking several boxes amid a complex market backdrop.
With de-risking from equities looking “compelling” amid strong performance and potential valuation headwinds ahead, and rising yields in longer-dated government bonds unsettling investors, Anne argued global credit offers a middle ground for both objectives.
It comes as equities, particularly US equities, have rallied strongly in recent months on AI optimism, though a recent sell-off in tech and chip stocks has seen the Nasdaq plummet the most since April last year.
And while sentiment remained positive in May, State Street’s latest Risk Appetite Index showed risk appetite eased in the month from April’s highs.
Against this backdrop, Anne said global credit warrants consideration in fixed income portfolios for five key reasons.
He argued the asset class offers strong diversification benefits, particularly as country and regional concentration risk rises amid geopolitical fragmentation and macroeconomic uncertainty.
“In an environment defined by uncertainty, macro and policy divergence and a less-reliable US-only playbook, global credit stands out as a compelling asset class for investors seeking broader diversification within fixed income,” Anne said.
By design, he said global credit inherently provides significant country diversification.
While the US remains the largest country of risk, its weight in the index is well below 50 per cent, which is considerably lower than its equity weighting. The Eurozone accounts for 15 per cent, followed by supranationals and emerging markets at 11 per cent.
This country diversification also supports sector breadth, as different markets have varying weightings and areas of specialisation.
“The US market may provide depth in sectors such as communications, health care and large-cap industrials, while Europe can offer attractive opportunities in financials, utilities and select investment-grade issuers. Canada and other developed markets can add further variety.”
Moreover, while mega-cap tech stocks dominate equity benchmarks, Anne noted that in global credit, technology accounts for just 3.8 per cent of the index.
Secondly, Anne suggested that macro fundamentals are now supportive of the asset class.
“The global economy continues to display a clean bill of health, which, we believe, produces a positive signal for risky assets, including credit.”
He argued there are so far no signs the ongoing geopolitical crisis has materially dented the global economic outlook, pointing to OECD leading indicators that continue to signal resilience.
While he acknowledged global macro risks remain skewed to the downside, including supply chain disruption, inflationary pressures and the risk of disappointment around AI-driven productivity, he said overall conditions remain broadly positive.
He said this is being reflected in credit markets, with investment-grade fundamentals strengthening and emerging market fundamentals showing resilience.
Despite this, optimism around global growth remains uncertain, with Fitch Ratings recently downgrading its forecasts as higher oil prices weigh on demand.
Additionally, Anne stated that by historical standards, global credit yields currently screen as attractive.
“At over 4.5 per cent, global credit yields screen as historically attractive. This is an important consideration given that starting yields tend to exert significant influence on subsequent returns.”
With the global credit yield now standing at 4.62 per cent, Anne pointed out that historically, periods where the starting yield was between 4.3 per cent and 4.9 per cent meant the subsequent five-year period produced a median return of 6.15 per cent.
Meanwhile, he added that break-even yields point to a considerable valuation cushion.
“Indeed, a sharp rise in total yields – exceeding 80 basis points (bps)-would have to occur for global credit-expected total returns over the next year to turn negative. There is no denying that at roughly 70 bps, global credit spreads are tight, but we currently do not see a catalyst that would trigger a substantial spread correction in the period ahead.”
Fourth, Anne argued global credit stands out as an attractive de-risking asset class, without investors having to give up income or move entirely into cash-like assets.
One reason for this, he said, is its resilience in the face of macro uncertainty.
“Credit markets have held up relatively well even as the global backdrop has become more complicated, with spread moves modest by historical standards in both the US and Europe. Specifically, global credit total return volatility stands at 6.3 per cent over the past three years’, or about half that of the MSC! World Index,” Anne said.
He added that its de-risking features are best combined with a quality bias and careful security selection, with portfolios constructed to be deliberately defensive.
Finally, with global sovereigns facing significant headwinds amid concerns over weak fiscal dynamics and deteriorating public debt profiles, he argued global credit also offers an attractive re-risking alternative to Treasuries – while also offering better risk-adjusted returns.
“Whether one looks at the 1-year, 3-year or 5-year timeframes, the historical returns per unit of volatility for global credit have been considerably higher than for its treasury counterpart.
“For instance, over the past three years, the global credit index has produced an annualised return of 5.15 per cent for a volatility of 6.4 per cent. In contrast, the annualised return of the global treasury index over the same period has been only 1.26 per cent, combined with a higher volatility of 7.3 per cent.”
Ultimately, Anne said now is a good time to consider global credit, with active management best placed to navigate regional differences, avoid weaker areas and capture the strongest sources of value.
