Goldman's credit-investing chief told us how investors can profit from the Fed's mammoth stimulus - including a strategy that would reasonably earn 15% within a year

Akin Oyedele

Apr 7, 2020, 22:39 IST

Goldman's credit-investing chief told us how investors can profit from the Fed's mammoth stimulus - including a strategy that would reasonably earn 15% within a year

Ashish Shah

Cash-rich companies that will benefit from the Federal Reserve's investments in corporate debt are attractive buys for credit investors, according to Ashish Shah, the co-CIO for fixed income of Goldman Sachs Asset Management.
In an exclusive interview with Business Insider, he also discussed a corner of the high-yield credit market where a "15%-type of return" over 12 months would be "very reasonable."
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The Federal Reserve sprang into action to support credit markets as the coronavirus pandemic gripped the US economy.

Besides returning interest rates to zero and initiating so-called quantitative easing without limits, it announced two new facilities to purchase $200 billion worth of corporate bonds.

But not every corner of the debt market is part of the Fed's bonanza. Specifically, companies without investment-grade ratings are excluded because the central bank does not want to take on the default risks associated with them.

It then follows that investors should be positioned in companies that would benefit from the Fed's stimulus, according to Ashish Shah, the co-chief investment officer for fixed income of Goldman Sachs Asset Management.

Throughout this crisis, he has focused on companies that are likely to retain their investment-grade ratings and generate cash. Some companies are already taking proactive steps like cutting their dividends in order to survive and stay in the good graces of ratings agencies.

So where exactly should credit investors find these quality firms? Shah pointed to the market for investment-grade bonds that mature in five years or less as a "very cheap" space where returns can be earned without much risk-taking.

"I think it's going to richen over the next couple of months as the Fed starts buying that part of the curve," Shah told Business Insider in an exclusive interview.

The investment-grade bond market has gone into overdrive in the weeks since the Fed announced its buying intentions. Companies raised a record $220 billion through bond sales over the past two weeks even as their borrowing costs rose, according to Refinitiv data cited by Reuters.

Their rush to raise cash is smart, Shah said. By all indications, the economy is sinking into a deep recession. This means cash will be king for dealmaking and other initiatives that help companies survive.

Where to shop in high-yield

Given the economy's sudden stop, rating agencies have executed a massive wave of downgrades. Fitch, Moody's, and S&P collectively announced downgrades on investment-grade companies in March at their fastest pace since 2002, according to data compiled by Bank of America. Their actions gave birth to many so-called fallen angels that go from the lowest rung of investment grade to junk overnight.

Investors are already pricing in many of these downgrades - and will be wise to find babies thrown out with the bath water.

"The companies that are highly likely to be downgraded are already pricing in a significant premium almost to the point where they have the potential to rally once they become high yield," Shah said.

He added, "Over time, fallen angels end up being the best performing part of the high-yield market."

Shah recommends selective buying in the high-yield space - specifically BB-rated companies - in addition to buying quality companies the Fed will be going after.

"In the BB space, a 15%-type of return over the course of the next 12 months is very reasonable given where we're seeing new issuers tap into that market," he said.

"Obviously you have to pick the right names and stay away from things that are really junky."

As broad themes, he re-emphasized buying companies that generate free cash flow and those that benefit from federal government stimulus.

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