Investors may need to reconsider their sentiment towards credit with the possibility of the asset class becoming less compelling by the middle of this year and beyond, according to global market analysis by Russell Investments.
"At Russell, we have been credit bulls for the last year and a half. While initially this view came under great stress, the recovery in corporate debt markets in 2009 has been heartening. At this juncture, we feel it is prudent to reconsider this position," Russell senior investment strategist Andrew Pease said.
"Looking to early 2010, we still think that cyclical momentum will work to the benefit of the asset class in the short term. Corporate earnings are continuing to show a much welcomed recovery, risk aversion has declined to acceptable levels and demand for corporate credit is healthy."
Pease said these factors should all conspire to keep credit's upward momentum on track, even if the occasional bump in the road should present itself.
"However, as we move into the middle of 2010 and beyond, we think that the story in favour of credit could become less compelling," he said.
"Valuations, which a year or so ago were pricing in default rates worse than those observed in the darkest days of the Great Depression, are now approaching much more normal levels."
Two of the underlying themes driving Russell's 2010 outlook were that global economic growth might well be subdued and ongoing deleveraging will crimp demand for new debt.
"Credit spreads will probably settle down but remain at levels that provide a sufficient risk premium for holding this asset class," Pease said.
"However, we suspect that the argument for holding credit in weights above a neutral strategic asset allocation will be increasingly hard to make."
