• Quarterly outlook

Credit outlook: When Pollyanna met Cassandra

This quarter’s title captures the competing narratives shaping credit markets: Pollyanna points to resilient fundamentals, supportive technicals and strong demand for yield, while Cassandra warns that tight valuations leave little room for disappointment.

Authors

    Portfolio Manager
    CIO High Yield, Portfolio Manager

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Summary

  1. Robust fundamentals meet a more hawkish policy backdrop
  2. Tight spreads mask what is going on under the hood
  3. Valuations leave the asymmetry unattractive

On the face of it, the performance of credit this year has been nothing short of remarkable. Be it private credit jitters, AI disruption fears or geopolitical chaos – the market has shown little real concern. For all the noise, spreads look set to end the quarter wrapped around multi-year tights in most places.

During our most recent credit quarterly outlook, we found ourselves in broad agreement on many topics. But on other themes – including the AI endgame, geopolitics and private credit – we see a true divergence of opinion, ranging from Pollyanna-like optimism to predictions of impending disaster akin to Cassandra.

For us, the AI debate remains the million-dollar question. Or should that be the trillion-dollar question? In a short space of time, we are seeing widespread adoption and it’s already deeply embedded in our daily lives. There can be little disagreement that this is game-changing technology. But will the vast investments actually pay off? We can’t and won’t try to settle that here; the more useful story for now is the widening dispersion within the AI complex, not the binary boom-or-bust call that so many seem keen to make.

In our outlook, we set out our latest thinking on credit market fundamentals, technicals and valuations, and what they mean for portfolio positioning heading into the second half – with some input from Pollyanna and Cassandra1 .

Footnote

1Pollyanna stands for cheerful optimism, while Cassandra represents warnings of trouble ahead that others dismiss.

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