Our Head of Corporate Credit Research
explains why moderate economic growth offers opportunities in
credit markets – if investors choose carefully.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley, along with my
colleagues, bring you a variety of perspectives Today, I'll be
talking about our outlook for credit markets over the next 12
months.
It's Friday, May 24th, at 9 a. m. in New York. Morgan Stanley's
global economic and strategy teams have recently published our
mid year outlook. Twice a year, all of us get together to take a
step back, debating what we think the outlook could look like
over the 12 months ahead. For credit, we think that backdrop
still looks pretty good.
Corporate credit, in representing lending to companies, is an
asset class that loves moderation and hates extremes. An economy
that's too weak raises the risk that companies fail, and has been
consistently bad for returns. But an economy that's too strong
also causes challenges, as companies take more risks, the rewards
of which often go to stockholders, not their lenders.
The good news for credit is that Morgan Stanley's latest economic
forecasts are absolutely full of moderation for economic growth.
We see the U.S. growing at about 2 percent this year and next and
Europe growing at about 1%. Right in that temperate zone, the
credit usually finds optimal.
We see inflation falling, with core inflation back to 2 percent
in the U. S. and Europe over the next 12 months. And monetary
policy should also moderate, with the Federal Reserve, European
Central Bank, and the Bank of England All lowering interest rates
as this inflation comes down.
For credit, forecasts that expect moderate growth, moderating
inflation, and moderating interest rates are exactly that down
the fairway outcome that we think markets generally like. The
challenge, of course, is that spreads have narrowed and lower
risk premiums are discounting a lot of good news. So how do
investors navigate richer valuations within what we think is
still a very supportive economic backdrop?
One thing we continue to like is leveraged loans, where
yields and spreads we think are more attractive. In the U. S.,
yields on loans are still north of 9%. We like short dated
investment grade bonds, which we think offer a good mix of income
and stability, and also happen to correspond to the maturity
range that our interest rate colleagues expect yields to see the
largest decline.
That should help total returns. And in Europe, we don't
think spreads are particularly tight. And that should be further
supported by relatively upbeat views on the European stock market
from our equity strategies. Morgan Stanley's macroeconomic
backdrop, which is full of moderation, is supportive for credit.
Tighter valuations are a challenge, but given this moderate
backdrop, we think they can stay expensive. We still think there
are good opportunities within credit, but investors will have to
pick their spots. Thanks for listening. If you enjoy the show,
please leave us a review wherever you listen, and share thoughts
on the market with a friend or colleague today.
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