Contrasting January, where markets remained relatively wary of the risks posed – particularly as the number of reported coronavirus cases continued to rise, following both the festive period and due to the newly emerging virus variants – February proved positive for corporate credit.

The risk-on mode drove government bond yields, which move inversely to price, higher while corporate credit advanced.

Following a mixed start in the first month of the year, corporate credit, contrasting government bonds which saw a sharp sell-off, particularly in late February, performed well. Investor optimism, fuelled by improving economic conditions offset lingering doubts surrounding the health crisis, which to-date, seem far from abating.

In February, spreads of corporate credit across all credit rating buckets, particularly at the lower end of the credit rating spectrum as investors continued to search for yield, tightened. Notably, European and US corporate issuers falling within the ‘CCC and lower rating bucket’ witnessed credit spread tightening of 56bps and 41bps, respectively.

While all sectors, generally, witnessed tightening, the sectors most sensitive to the economy, such as basic industry, energy, and automotive continued their rotation momentum. The more traditionally defensive sectors, such as utilities, lagged.

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, an industrial metal, often viewed as bellwether for the global economy witnessed significant gains.

Also driving a surge in demand for the metal is the ongoing drive towards greener energy. Demand from renewable power generation, battery storage, EVs, charging stations, and related grid infrastructure accounts for about a fifth of copper consumption, according to Citigroup Global Markets Inc. With governments aiming for net zero emission targets in the coming decades, the demand for the said metal shall undoubtedly increase.

Energy: WTI Crude – still depressed at the beginning of the year following the breaking up of the OPEC+ agreement in April 2020 and lingering economic uncertainty, consequent to the health crisis registered substantial gains. A decline in coronavirus cases and vaccine optimism boosted hopes for a sustained recovery in economic activity and ultimately, energy demand.

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 somewhat on a positive footing. Car sales in China surged 30 per cent YoY to 2.5 million in January of 2021, the tenth straight month of increase.

China, the world’s biggest automotive market, aims to boost auto sales and add more charging facilities for EVs in 2021. Overall vehicle sales are expected to rise this year for the first time since 2017, reaching about 27.2 million units, according to CAAM. Demand for EVs offered by the likes of Tesla Inc. and China’s Nio Inc. should help drive the rebound.

While government support, through both fiscal incentives and infrastructural incentives shall prove supportive and possibly lay the foundation for a quicker economic recovery, coronavirus immunisation remains crucial.

The sectors most sensitive to the economy may possibly maintain their recent pace, should an imminent exit from the pandemic transpire, thanks to a rapid vaccination rollout.

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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