Right after the initial March market sell-off, and aided by central bank actions, market participants rapidly shifted freshly cashed-out funds into both investment grade and high-yield corporate credit. As of today, the inflow into high-yielding debt has slowed down, while the investment grade universe is still the preferred asset class (mainly due to central bank support). However, the central banks support is not set to last forever as some Treasury secretaries (U.S.) are already claiming back funds dedicated to corporate credit purchases posing an imminent risk to corporate credit markets.

However, some sectors have attracted larger inflows than others: automobile, retail, healthcare and consumer goods have reversed most of the spread-widening experienced during the peak of the pandemic. On the other hand, the sectors most affected by the Covid-19 crisis are still suffering from a structural deterioration of their credit quality (as depicted by the wider spreads), including leisure, energy and transportation. From a regional perspective, this extreme V-shaped market reaction has been more marked in the Eurozone, where most of the corporate credit risk has now completely reversed the initial widening. The only outliers of this reversal remain leisure and real estate.

We developed a combinational Z-score index that allows the combination of both equity and corporate credit market movements, and translates it into a proprietary market sentiment indicator. Following this methodology we are able to rank sectors based on the market’s risk perception / sentiment. Additionally, we have decided to weight both equity and corporate credit sectors as 50-50% irrespective of their relative market value weight within each asset class index as we believe markets are not currently looking at the structural differences in terms of investment instrument weights but rather at sectors and single names in isolation.