Our Head of Corporate Credit Research Andrew Sheets argues that
while investor hopes are running high, corporate confidence
isn’t.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Today I’m going to
talk about optimism, how we measure it, whether it’s overly
excessive and what lies ahead.
It's Friday January 24th at 2pm in London.
A central tenet of investing, including credit investing, is to
be on the lookout for excessive optimism. By definition, the
highest prices in a market cycle will happen when people are the
most convinced that only great things lie ahead. The lowest
prices, when you’d love to buy, happen when investors have given
up all hope.
But identifying peak optimism, in real time, is tricky. It’s
tricky because there is no generally agreed definition; and it's
tricky because, sometimes, things just are good. Investors have
been excited about the US Technology sector for more than a
decade now. And yet this sector has managed to deliver
extraordinary profit growth over this time – and extraordinarily
good returns.
Yet this debate does feel relevant. The US equity market has
soared over 50 per cent in the last two years. Equity valuations
are historically high, both outright and relative to bonds.
Credit risk premiums are near 20-year lows. Speculative investor
activity is increasing. And so, have we
finally hit peak optimism, a level from which we can go no
further?
Our answer, for better or worse, is no. While we think investor
optimism is elevated, corporate optimism is not. And corporations
are really important in this debate, enjoying enormous financial
resources that can invest in the economy or other companies.
While we do think corporate confidence will pick up, it is going
to take some time.
One of our favorite measures of corporate confidence is merger
and acquisition activity. Buying another company is one of the
riskiest things management can do, making it a great proxy for
underlying corporate confidence. Volumes of this type of activity
rose about 25 per cent last year, but they are still well below
historical averages. And it would be really unusual for a major
market cycle to end without this sort of activity being
above-trend.
Another metric is the riskiness of new borrowing. Taking on new
debt is another measure of corporate confidence, as you generally
do something like this when you feel good about the future, and
your ability to pay that debt off. But for the last three years
the volume of low-rated debt in the US market has actually been
shrinking, while the issuance of the riskiest grades of corporate
borrowing is also down significantly from the 2017-2022 average.
Again, these are not the types of trends you’d expect with
excessive corporate optimism.
Uncertainties around tariffs, or the policies from the new US
administration could still hold corporate confidence back. But
the low starting point for corporate confidence, combined with
what we expect to be a deregulatory push, mean we think it is
more likely that corporate activity and aggressiveness have room
to rise – and that this continues throughout 2025. Such an
increase usually does present greater risk down the line; but for
now, we think it is too early to position for those more negative
consequences of increasing corporate aggression.
Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.