Credit fundamentals in perspective to valuation
By admin, October 31st, 2009,in making money, merger, money guide, money issues, money management »Tags: income, international markets, merger, revenue, shares | Comments Off
Sector fundamentals have to be put in perspective to valuation. The relative value approach is a common method for sector rotation strategies. It supplements the fundamental analysis of the sectors and improves the decision to overweight or underweight specific sectors. In a first step the aggregate spread levels of sector indices are compared with their respective spread volatilities. Typically the spread volatilities (annualised standard deviation of daily spread changes) will increase with an increasing spread level of the different sectors. This procedure allows to identify sectors whose risk-return profile relative to the whole market is attractive (overweight) or unattractive (underweight). This approach can also be applied on the company level but a lesser weight should be assigned to the results for lower rated credits which require an in-depth credit analysis in the first place.