Our Head of Corporate Credit Research Andrew Sheets recaps an
exceptional year for credit — but explains why 2025 could be a
more challenging year for the asset class.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Today I’ll be
discussing the Outlook for global Credit Markets in 2025.
It’s Monday, Dec 2nd at 2 pm in London.
Morgan Stanley Strategists and Economists recently completed our
forecasting process for the year ahead. For Credit, 2025 looks
like a year of saying goodbye.
2024 has been an exceptionally good environment for credit. As
you’ve probably grown tired of hearing, credit is an asset class
that loves moderation and hates extremes. And 2024 has been full
of moderation. Moderate growth, moderating inflation and gradual
rate cuts have defined the economic backdrop. Corporates have
also been moderate, with stable balance sheets and still-low
levels of corporates buying each other despite the strong stock
market.
The result has been an almost continuous narrowing of the extra
premium that companies have to pay relative to governments, to
some of the lowest, i.e. best spread levels in over 20 years.
We think that changes. The U.S. election and resulting Republican
sweep have now ushered in a much wider range of policy outcomes –
from tariffs, to taxes, to immigration. These policies are in
turn driving a much wider range of economic outcomes than we had
previously, to scenarios that include everything from much
greater corporate optimism and animal spirits, to much weaker
growth and higher inflation, under certain scenarios of tariffs
and immigration.
Now, for some asset classes, this wider range of outcomes may
simply be a wash, balancing out in the aggregate. But not for
credit. This asset class doesn’t stand to return more if
corporate activity booms; but it stands to still lose if growth
slows more than expected. And given the challenges that tariffs
could pose to both Europe and Asia, we think these dynamics are
global. We see spreads modestly wider next year, across global
regions.
But if 2025 is about saying goodbye to the credit-friendly
moderation of 2024, we’d stress this is a long goodbye. A key
element of our economic forecasts is that even if major changes
are coming to tariffs or taxes or immigration policy, that won’t
arrive immediately. Today’s strong, credit-friendly economy
should persist – well into next year. Indeed, for most of the
first half of 2025, Morgan Stanley’s forecasts look much like
today: moderate growth, falling inflation, and falling central
bank rates.
In short, when thinking about the year ahead, 2025 may be a
turning point for credit – but one that doesn’t arrive
immediately. Our best estimate is that we continue to see quite
strong and supportive conditions well into the first half of the
year, while the second half becomes much more challenging. We
think leveraged loans offer the strongest risk-adjusted returns
in Corporate Credit, while Agency Mortgages offer an attractive
alternative to corporates for those looking for high quality
spread.
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