As equity markets gyrate in response to unpredictable U.S.
policy, credit has taken longer to respond. Our Head of Corporate
Credit Research, Andrew Sheets, suggests other indicators
investors should have an eye on, including growth data.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley.
Today on the podcast, I’ll be discussing how much comfort or
concern equity and credit markets should be taking from each
other’s recent moves.
It’s Friday, March 14th at 2pm in London.
Credit has weakened as markets have gyrated in the face of rising
uncertainty around U.S. economic policy. But it has been a clear
outperformer. The credit market has taken longer to react to
recent headlines, and seen a far more modest response to them.
While the U.S. stock market, measured as the S&P 500, is down
about 10 per cent, the U.S. High Yield bond index, comprised of
lower-rated corporate bonds, is down about just 1 per cent.
How much comfort should stock markets take from credit’s
resilience? And what could cause Credit to now catch-down to that
larger weakness in equities?
A good place to start with these questions is what we think are
really three distinct stories behind the volatility and weakness
that we’re seeing in markets.
First, the nature of U.S. policy towards tariffs, with plenty of
on-again, off-again drama, has weakened business confidence and
dealmaking; and that’s cut off a key source of corporate animal
spirits and potential upside in the market.
Second and somewhat relatedly, that reduced upside has lowered
enthusiasm for many of the stocks that had previously been doing
the best. Many of these stocks were widely held, and that’s
created vulnerability and forced selling as previously popular
positions were cut.
And third, there have been growing concerns that this lower
confidence from businesses and consumers will spill over into
actual spending, and raise the odds of weaker growth and even a
recession.
I think a lot of credit’s resilience over the last month and a
half, can be chalked up to the fact that the asset class is
rightfully more relaxed about the first two of these issues.
Lower corporate confidence may be a problem for the stock market,
but it can actually be an ok thing if you’re a lender because it
keeps borrowers more conservative. And somewhat relatedly, the
sell-off in popular, high-flying stocks is also less of an issue.
A lot of these companies are, for the most part, quite different
from the issuers that dominate the corporate credit market.
But the third issue, however, is a big deal. Credit is extremely
sensitive to large changes in the economy. Morgan Stanley’s
recent downgrade of U.S. growth expectations, the lower prices on
key commodities, the lower yields on government bonds and the
underperformance of smaller more cyclical stocks are all
potential signs that risks to growth are rising. It's these
factors that the credit market, perhaps a little bit belatedly,
is now reacting to.
So what does this all mean?
First, we’re mindful of the temptation for equity investors to
look over at the credit market and take comfort from its
resilience. But remember, two of the biggest issues that have
faced stocks – those lower odds of animal spirits, and the heavy
concentration in a lot of the same names – were never really a
credit story. And so to feel better about those risks, we think
you’ll want to look at other different indicators.
Second, what about the risk from the other direction, that credit
catches up – or maybe more accurately down – to the stock market?
This is all about that third factor: growth. If the growth data
holds up, we think credit investors will feel justified in their
more modest reaction, as all-in yields remain good. But if data
weakens, the risks to credit grow rapidly, especially as our U.S.
economists think that the Fed could struggle to lower interest
rates as fast as markets are currently hoping they will.
And so with growth so important, and Morgan Stanley’s tracking
estimates for U.S. growth currently weak, we think it's too early
to go bottom fishing in corporate bonds.
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.