The ever-evolving nature of the U.S. administration’s trade
policy has triggered market uncertainty, impacting corporate and
consumer confidence. But our Head of Corporate Credit Research
Andrew Sheets explains why he believes this volatility could
present a silver lining for credit investors.
Read more insights from Morgan Stanley.
----- 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 how high uncertainty can be a risk for credit, and
also an opportunity.
It's Wednesday, April 16th at 9am in New York.
Markets year-to-date have been dominated by questions of U.S.
trade policy. At the center of this debate is a puzzle: What,
exactly, the goal of this policy is?
Currently, there are two competing theories of what the U.S.
administration is trying to achieve. In one, aggressive tariffs
are a negotiating tactic, an aggressive opening move designed to
be bargained down into something much, much lower for an ultimate
deal.
And in the other interpretation, aggressive tariffs are a new
industrial policy. Large tariffs, for a long period of time, are
necessary to encourage manufacturers to relocate operations to
the U.S. over the long term.
Both of these theories are plausible. Both have been discussed by
senior U.S. administration officials. But they are also mutually
exclusive. They can’t both prevail.
The uncertainty of which of these camps wins out is not new.
Market strength back in early February could be linked to
optimism that tariffs would be more of that first negotiating
tool. Weakness in March and April was linked to signs that they
would be more permanent. And the more recent bounce, including an
almost 10 percent one-day rally last week, were linked to hopes
that the pendulum was once again swinging back.
This back and forth is uncertain. But in some sense, it gives
investors a rubric: signs of more aggressive tariffs would be
more challenging to the market, signs of more flexibility more
positive. But is it that simple? Do signs of a more lasting
tariff pause solve the story?
The important question, we think, is whether all of that back and
forth has done lasting damage to corporate and consumer
confidence. Even if all of the tariffs were paused, would
companies and consumers believe it? Would they be willing to
invest and spend over the coming quarters at similar levels to
before – given all of the recent volatility?
This question is more than hypothetical. Across a wide range of
surveys, the so-called soft data, U.S. corporate and consumer
confidence has plunged. Merger activity has slowed sharply. We
expect intense investor focus on these measures of confidence
over the coming months.
For credit, lower confidence is a doubled edged sword. To some
extent, it is good, keeping companies more conservative and
better able to service their debt. But if it weakens the overall
economy – and historically, weaker confidence surveys like we’ve
seen recently have indicated much weaker growth in the future;
that’s a risk. With overall spread levels about average, we do
not see valuations as clearly attractive enough to be outright
positive, yet.
But maybe there is one silver lining. Long term Investment grade
corporate debt now yields over 6 percent. As corporate confidence
has soured, and these yields have risen, we think companies will
find it unattractive to lock in high costs for long-term
borrowing. Fewer bonds for sale, and attractive all-in yields for
investors could help this part of the market outperform, in our
view.
Thanks for listening. If you enjoy the show, leave us a review
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