Commodity prices have been hit severely in recent months by a combination of both supply and demand factors, that has left many companies in the energy and basic industry sectors on the floor.
As a result of these declines, Lundie said the contribution of the energy and basic industry sectors to the overall risk of the global high yield market has risen in notional weight terms.
And, he said, the increase is even more noticeable if one uses duration times spread (DTS) as a measure, which takes account of duration and credit quality.
On such a measure, the two sectors together account for 36.7% of the risk in the market – a 40% increase over 12 months.
But, while the risks within high yield have been dramatically skewed towards basic resources, Lundie believes the current scenario could provide investors with opportunity.
Both these sectors have underperformed in recent weeks, he said, but added that Hermes expects to see divergent performances from within them as stressed companies “begin to engage in much more bondholder-friendly corporate activity at the expense of near-term equity performance”.
As an example, he said, both Chesapeake Energy and Linn Energy chose to halt their dividends and have instituted aggressive capex cuts. Linn also announced it would buy back up to $650m of its own bonds in the open market during Q2 2015. On the announcement, he said, Linn stock dropped over 25%, while its 2020 bonds rose between three and five basis points.
“These actions may still not be enough to ward off the troubles faced by these companies amid weak commodity prices, but they indicate what is likely to become a trend,” Lundie said.
However, he added, the significant change in the market also reinforces the importance of a global mandate, as the road ahead will require the ability nimbleness and flexibility to navigate in and out of both sectors and geographies.
