During our regular meetings with investors, the question we are asked most often is a rather simple one: "What is your outlook for the high yield market?" The question's form can take one of several iterations (e.g. Are you bullish or bearish and why? What past environment best resembles the current environment?), but each is straightforward and the underlying objective for each is indistinguishable. Unfortunately, a simple question is not always a prelude to a simple answer.
The complexities involved in answering this question are significant. For the sake of simplicity and brevity, we address the question by isolating three principal facets of the high yield market: 1) Fundamentals; 2) Technicals; and 3) Valuation. The combined appraisal of these three factors forms our opinion of the current state of the overall high yield market.
In preview, we are neither exceptionally bullish nor exceptionally bearish on the current state of the high yield market. We view fundamentals as above-average, technicals as average, and valuation as below-average. The combination of these opinions results in a neutral view. We will explore how we arrived at these conclusions by assessing each of the three aspects in greater detail.
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