The rotation argument, triggered by expectations of less restrictive measures, and the inflation proposition, stemming from substantial stimulus aid and growth prospects, were thus far the key themes of 2021.

Investment grade, conditioned by the moves witnessed in the U.S. Treasuries and Eurozone sovereign curves, generated total negative returns. Meanwhile, high yield corporate credit advanced. U.S., European, and Emerging Market high yield – the latter showing signs of weakness until Q1 2021, generated total positive returns. On a year-to-date basis, European high yield outperformed, generating a 1.56 percent return.

An improved economic outlook – mainly driven by a resumption in activity consequent to a lower infection rate probably owing to the ongoing vaccination drive in the developed market world, fiscal stimulus, and central banks maintaining an accommodative stance, continued to drive a rotation further into the previously pandemic-battered sectors.

Services: While the manufacturing sector showed remarkable resilience during a period characterised by coronavirus inflicted movement restrictions, services – reliant on direct contact, suffered. Albeit sentiment improved towards the end of 2020, particularly following the coronavirus vaccination developments, a surge in infections continued to hamper productivity. Services PMI – an index of the prevailing direction of economic trends, portrayed such scenario.

Services, then aided by; a coronavirus vaccination drive being well underway, easing of lockdown measures, and recovering confidence among clients, progressed.

The IHS Markit Eurozone Services PMI in April signalled the first expansion of business activity since August 2020. Similarly, the IHS Markit U.S. Services PMI signalled the sharpest pace of expansions since data collection began, late-2009.

U.S., European, and EM high yield names within the services sector have on a year-to-date basis witnessed credit spread tightening. EM issuers outperformed with credit spread tightening of 215bps.

Retail: The retail sector, largely conditioned by the health crisis and ensuing coronavirus-inflicted lockdown restrictions, have, in recent weeks, following a depressed period, advanced.

A resumption in activity due to a lower infection rate, perhaps owing to the ongoing vaccination drive, undoubtedly bode well. With the ongoing vaccination drive, retail – a contact intensive service sector is expected to continue witnessing a revival. Savings rate, which to-date remains largely elevated shall further aid the battered pandemic sector should it subside to pre-pandemic levels.

Eurozone's retail sales rose 2.7 percent in March from a month earlier, beating market expectations of 1.5 percent growth. On a yearly basis, retail sales jumped 12 percent, also above market consensus of 9.6 percent.

Retail sales in the U.S. rose by 9.8 percent month-on-month, following a downwardly revised 2.7 percent fall in February, and easily beating market forecasts of a 5.9 percent gain. It is the largest increase since May of 2020, as; more businesses reopened, following the distribution of fresh stimulus checks amounting to $1,400, and the weather improving after a relatively harsh winter.

European and EM issuers have on a year-to-date basis witnessed credit spread tightening of 125bps and 347bps, respectively.

Transportation: Although initially depressed, efforts made by issuers within the transportation sector, in terms of capacity management, cost reduction and other sorts of operational decisions, allowed them to survive.

With lockdowns introduced largely across all geographic regions, the world of travel was brought to a halt. Airlines undoubtedly struggled. However, improvement in industry metrics, such as airlines’ ‘load factor’ – an indicator that measures the percentage of available seating capacity that is filled with passengers, instilled optimism.

Also instilling confidence in the sector, specifically in the shipping industry, was the surge in demand for shipments. This, consequent to; improved macroeconomic conditions, an e-commerce boom, and disruptions in global trade due to the recent Suez Canal mishap. All catalysts have and shall continue to support freight rates, at least in the short-term.

Year-to-date, U.S. high yield names within the transportation sector recorded credit spread tightening of 245bps.

Basic Industry: Increased demand from China’s thriving economy and infrastructural investment by governments to instil economic growth led to a significant increase in demand and thus price increases for industrial metals.

Copper, often viewed as bellwether for the global economy has climbed to record levels. The price of the said industrial metal has been boosted by; an improved economic outlook as the global vaccine rollout gathered pace and a substantial economic stimulus – further lifting hopes of a robust recovery, a weakening U.S. dollar, and a shift towards cleaner energy.

Renewed demand comes at a time when the metal is set to experience a significant supply crunch as mine production is unlikely to keep up with the growing global appetite. The metal's integral role in the green-energy transition is further fanning expectations that the rally will possibly be long-lived. Countries worldwide are at present rolling out more aggressive climate targets.

Prices for iron ore also surged past $220 per tonne for the first time on record amid robust demand for the steel-making ingredient and lower supply.

U.S., European, and EM high yield names within the basic industry witnessed spread tightening. European high yield issuers outperformed with credit spread tightening of 123bps.

Automotive: Auto manufacturers were cautiously navigating a landscape of tenuous global demand before pandemic concerns disrupted worldwide production and upset supply and demand. Although the impact on consumption was severe when the pandemic hit, robust balance sheets allowed most automakers to navigate a di?cult 2020 safely. Following such turbulent year, 2021 started on a positive footing.

Car sales in China surged 8.6 percent year-on-year to 2.25 million in April of 2021, the thirteen-straight month of increase as the world's largest car market consolidates its recovery from last year's contraction.

China, the world’s biggest automotive market, aims to boost auto sales and add more charging facilities for EVs in 2021. Overall vehicle sales in China are expected to rise this year for the first time since 2017, reaching about 26.3 million units, according to China Association of Automobile Manufacturers (CAAM).

Year-to-date, European and EM issuers witnessed credit spread tightening of 60bps and 85bps, respectively.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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