japanja
The outlook for credits: crowding out credit

The outlook for credits: crowding out credit

05-10-2018 | 四半期アウトルック

The US economy is still firing on all cylinders. The Fed is continuing to hike and the resulting tighter dollar liquidity is putting pressure on some emerging markets, while in Europe the ECB is reluctant to tighten more aggressively as political risk is overshadowing economic fundamentals. Co-heads of the Credit team Victor Verberk and Sander Bus do not think the negative correlation between the US and international credit markets can continue indefinitely.

  • Victor  Verberk
    Victor
    Verberk
    Co-Head Credit team
  • Sander  Bus
    Sander
    Bus
    Co-head Credit team

Speed read

  • Risk of US overheating, stress in emerging markets
  • Opportunities in EMD as bear market unfolds
  • Treasury supply, dollar squeeze & end of QE don’t favor credits

This divergence is reflected in global bond market performance in the last three months with US spreads tightening, while Europe and especially emerging markets have underperformed. “We reaffirm our belief – made in our last outlook for Q3 – that the tightest spreads in this cycle are behind us”, says Bus. “And although there is no reason to expect a full-blown crash anytime soon, spreads are likely to widen gradually.”

Verberk goes on to highlight the importance that weak market technicals are playing in the current environment. “The fact that the Fed is on a hiking path and the ECB’s quantitative easing is drawing to a close are not helping fixed income as an asset class. The increased US Treasury issuance to finance President Trump’s fiscal deficit could crowd out other financial assets and US investment grade credit is right in the line of fire.” 

クレジットに関する最新の「インサイト」を読む
クレジットに関する最新の「インサイト」を読む
配信登録

How long can the US go it alone?

The US economy is growing well above potential, job openings exceed the number of unemployed workers and consumer sentiment indices are strong. Although inflation remains muted – core CPI ex-shelter is still at just 1.3% – wages are definitely rising. “Nor should we overlook the extent to which inflation is a lagging variable: it could be with us before we are fully aware of it,” says Verberk. “Leverage is higher as a result of M&A-related debt issuance and although headwinds in the form of tighter margins and higher input costs will increase, a corporate crisis does not seem to be a major risk as earnings continue to grow at a healthy pace.” 

In Europe, Italy remains a cause for concern and it could have a significant destabilizing effect, especially on the peripheral markets. “Business sentiment in Europe is still positive, but industrial production has come down,” explains Bus. “And although inflation could trend higher from its current range-bound levels on the back of higher wages, the ECB is not under huge pressure to hike rates too quickly or aggressively.”

Emerging markets that depend on foreign funding, like Turkey and Argentina are feeling the pain of the dollar squeeze. Some have been forced to hike rates to shore up their weakening currencies. “If this trend continues it could lead to a severe economic downturn,” acknowledges Verberk. “Demand in China is weakening. Lower infrastructure spending is evident in the falling demand for industrial metals. The Chinese authorities have limited policy options left to stimulate the economy and may have to fall back on fiscal stimulus in the form of tax cuts.”

Better value in Europe

While the market in Europe is not cheap, there are some relative comparisons that are worth noting. If you divide US IG spreads by European IG spreads, the ratio has dropped from 1.7 to 1.0 since the start of the year and the story is similar in the high yield space. “In the case of high yield, it’s important to realize that it’s not just a case of a better spread in Europe; the quality of debt is much better too,” explains Bus. “Current US CCC credit spreads do not offer sufficient compensation for a average default scenario.”

As far as emerging markets are concerned, we are not convinced the worst is behind us. “Spreads are still not wide enough across the board, but we are prepared to take positions in bonds that have repriced to more attractive levels in the recent turmoil.”

‘US credit has continued to outperform and is now outright expensive’

Technicals create ongoing headwinds for credit

“Reduced central bank liquidity is still a clear driver for markets,” says Verberk. Higher US rates are affecting US dollar reserves and causing the first cracks to appear in the offshore dollar market. “In the US, credits are facing increased competition from the new issue Treasury market, for example, while European IG spreads have already widened significantly in anticipation of the end of the ECB’s bond buying programs.”

Another interesting technical development is the massive growth of the BBB universe. This market has more than tripled in Europe and more than doubled in the US. “If the tide turns in the market and rating agencies are forced to act, the relatively small high yield market could be inundated with a wave of ‘fallen angels’ as companies lose their IG status,” explains Bus. “But given the still solid outlook for corporate profitability, this is not a major worry in the short run.”

World of shrinking liquidity

“Valuations have become slightly better in Europe and emerging markets, but not enough to justify a more aggressive positioning,” says Verberk. “The new era of tighter monetary policy means we are probably going to see more instances of aggressive de-risking in pockets of the market. We also still see value in financials, although we are selective in terms of the issuers in which we invest and prefer the more senior parts of the capital structure.”

“Tighter global monetary policy, diverging growth patterns in the major economic regions, shrinking dollar liquidity and increasing competition from US Treasuries could crowd out credit,” admits Bus. “But, in general, fundamentals remain solid, especially for corporates and a scenario of gradually rising spreads offers opportunities for us to find value in those pockets of the market that reprice to more attractive levels.”

Read the outlook

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会