Harlyn Research: FANG. Red Herrings and Credit

While all the attention is on technology stocks last week, investors need to be aware of a growing problem in US High-Yield credit, writes Simon Goodfellow of Harlyn Research. Harlyn’s analysis compares the total returns of every asset class and every sector in US dollars against medium-dated US Treasuries, with the probability of risk-adjusted outperformance ranked between 0-100%. The results show that Europe and some smaller EM markets are more bullish, while the US has fallen slightly from its March 10th score of 100%. Harlyn also provides useful long-term charts that look at equity performance relative to the 7-10 year bond return). Within the US sector breakdown things get really interesting. The only two sectors where things are improving are Utilities (equities) and Telecoms (IG), everything else is flat to down, says Goodfellow. Energy is singled out as the worst, with negative signals across equity, IG and HYL. Looking at specific sectors, the worst performers are Financials and Consumer Discretionary, which is where auto-loans are classified. High-Yield is bad across all sectors and for the index as a whole. Until recently most of the problems relating to high-yield were centred on Energy, now it is much broader, and Harlyn now sees evidence of contagion into Investment Grade. So while everyone else is fretting about the valuation of technology stocks, Goodfellow suggests investors devote a little time to credit analysis. This piece is available for purchase on RSRCHXchange.