Fidelity: Opportunities exist in the telecommunications and basic industrial sectors, but be cautious about the energy industry.

Fidelity's article stated that the high-yield bond market in the United States offers an attractive overall yield, but narrow spreads present limitations. However, supported by strong corporate fundamentals and technical factors, it is expected that spreads will continue to drive returns. Despite the possibility of further spread narrowing, risks are beginning to emerge, particularly from potential shifts in Federal Reserve interest rates, as well as upcoming changes in tariffs, government spending, and immigration policies. From an industry perspective, Fidelity sees opportunities in the telecommunications and basic industrial sectors, where credit selection can add value. On the other hand, due to potential policy changes that could lead to lower oil prices and shifts in capital allocation strategies, Fidelity is cautious about the energy sector. Fidelity points out that the high-yield bond market in the United States still offers an attractive overall yield, but narrow spreads pose limitations. In addition, supported by strong fundamentals and technical factors, it is expected that spreads will continue to drive returns over the next year. On the positive side, the fundamentals of relevant companies remain robust, with credit indicators showing that companies as a whole are not taking on excessive risk. Although spreads are close to historic lows, the quality of the high-yield bond index in the United States is higher than in most periods in history. In terms of ratings, BB-rated bonds now account for over half of the index, with secured notes accounting for over one-third, demonstrating that the current level of spreads is reasonable. Given the strong performance of corporate balance sheets and the increasing options for extending the maturity of bad bonds (either through debt management activities or other capital sources such as private credit), default rates are expected to remain at low levels. However, even though spreads have not hit rock bottom yet, they are certainly getting close and some risks are about to emerge. First, the Federal Reserve may reconsider its pace of interest rate cuts next year, which could force the market to reevaluate the strength of companies, especially those that are still relying on lower refinancing costs. As companies seek new lending, issuance of new bonds increases with more M&A activity, and the weakening of the momentum for bond rating upgrades, the support from technical factors may also weaken. Investors also need to assess the impact of upcoming changes in tariffs, government spending, and immigration policies on various credits, which could bring winners and losers. Fidelity states that credit spreads may still have room to narrow, but the narrower the spreads, the smaller the margin for error. Therefore, investors need to adopt a defensive strategy and be selective in their investments. Fortunately, there are many opportunities for credit selection, especially in the areas of B-rated and CCC-rated bonds, as the differences between bonds are still significant. The core strategy remains to identify and invest in bonds that are highly valued, while avoiding credits with significant downside risks. The telecommunications industry is currently attracting attention, with spreads much higher than the average index level, exceeding nearly 200 basis points, making it the only industry with spreads higher than the index. However, many telecommunications companies have heavily leveraged capital structures, are struggling to adapt to long-term changes in demand, and are burdened by heavy capital expenditure, so the higher spreads in this industry may not be surprising. However, some recent positive developments have prompted investors to reassess this neglected industry. Indeed, the fundamentals of some sub-industries such as cables have proven to be stronger than expected. In addition, the recent demand for fiber capacity in data centers driven by artificial intelligence has brought unexpected positive factors. Finally, an increase in M&A activities highlights the potential value of assets and stimulates speculation about future mergers, a trend that may accelerate with further relaxation of regulations. Fidelity believes that the basic industrial sector is another area where value can be added through credit selection, including chemicals, building materials, and a range of sub-industries such as metals and mining. Although the potential negative impact of tariffs poses a major threat to these industries, considering the different geographic and supply chain risks of companies, the ultimate impact will vary by company. Although companies face cost pressures, their pricing power also varies, with some able to pass on costs to customers depending on the balance of supply and demand in their markets and the size of their competitive moats. The good news is that the debt levels in the basic industrial sector are lower than historical levels and the overall market level, making them able to withstand the upcoming challenges. Investors should be cautious about the energy sector. While the general market believes that the energy industry will perform well under the new government leadership, policies that encourage increasing production may lead to lower oil prices and have an impact on economic growth in other regions globally. Recently, investors have been cautious about the energy sector, yet valuations remain high and balance sheets are healthy. However, management teams are likely to increase capital spending and seek M&A opportunities due to regulatory relaxation, signaling a shift from the conservative capital allocation seen in recent years. In fact, for many of the same reasons, the energy industry underperformed during Trump's first term. However, there are differences within the energy industry, with potential winners including LNG exporters and sub-industries such as oilfield services.