Corporate Credit Outlook 2020 – The Big Squeeze

Key Takeaways

Please click here to read the full piece.

Credit – Supported by Hunt for Yield and Strong Technicals in 2020

  • We foresee a marginal improvement in corporate fundamentals in an ongoing environment of low interest rates
  • Credit spreads may have room to tighten further, supported by a strong technical backdrop
  • We see opportunities in EM hard currency corporates in short and regular duration bonds, US investment grade BBB rated credits and bonds at the long end of the curve due to possible flattening
  • We maintain a constructive view of financials, particularly within Europe, and of corporate hybrids where we are selective due to rich valuations
  • The performance of US and European loans lagged in 2019 and we believe offer some relative value opportunities in 2020
  • The outperformance in BB rated bonds has created more dispersion in credit markets, which active credit specialist portfolio managers may want to exploit by moving slightly lower down the credit spectrum

Macroeconomic Environment – The corporate credit outlook for 2020 is very dependent on the macroeconomic scenario,  in our view:

  • Global Economy – Fragile but with potential for recovery if trade tensions abate
  • Geopolitical Risk – Always some uncertainty
  • Monetary Policy – US has greater capacity for rate cuts than other central banks, if needed
  • Environmental, Social and Governance (ESG) Factors – Increasing awareness and implementation
  • China – Focus on economic health remains prominent
  • Macroeconomic Feedthrough into Credit – Maintain a quality bias until macroeconomic recovery firms

Fundamentals – Signs of Improvement Ahead

  • We see more encouraging signs for fundamentals in 2020 and believe corporates are likely to focus on deleveraging
  • From a regional standpoint, we believe there is an argument to overweight US and EM corporate credit

Valuations – Tight, But Room for More?

  • Given the macroeconomic cycle is still below its potential output level, we believe investors should avoid the lowest-quality credits, i.e. those with the weakest balance sheets
  • The lack of significant compression between A and BBB rated bonds in the US market suggests there is a potential for relative spread compression in investment grade. Also opportunities in higher quality Bs versus BBs in Europe
  • We believe the relative value argument may be more balanced in favour of loans over high yield bonds in 2020, as there is less to gain from long duration positioning and more focus on carry going forward

Technicals – Underpinned by Strong Demand and Limited Supply

  • We see persistent demand for positive-yielding credit
  • In our view, the long end of the US investment grade credit market should benefit from non-domestic investor demand
  • The supply situation may become more positive for investors; it could decline in 2020 in the US due to deleveraging within the investment grade market, while the high yield market could see more balanced supply/demand
  • We also believe the reverse yankee phenomenon in European investment grade (where US companies issue on the European bond market) is likely to persist and the European Central Bank’s quantitative easing programme should absorb some of the extra supply


Important Information

The information, views and opinions provided within this video are for illustrative and discussion purposes only and should not be construed as an offer to buy or sell or invitation to engage in any investment activity. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and are subject to change without notice. Historic market trends are not reliable indicators of actual future market behavior.

Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich & Co., Inc. (“Muzinich”); its accuracy or completeness cannot be guaranteed. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Muzinich hereby disclaims any duty to provide any updates or changes to the analysis contained herein. 

Past performance is not indicative of future results and the value of investments and the income from them may fall as well as rise. Investors may not get back the full amount invested. Investors should confer with their independent financial, legal and tax advisors prior to making any decision to invest.

Any research in this presentation has been procured and may have been acted on by Muzinich for its own purpose. Muzinich has used reasonable skill and care in the preparation of this video, using sources believed to be reliable, but gives no warranties or representations as to the accuracy or completeness of this information and is subject to change at any time.

Certain information herein constitutes forward-looking statements which may prove to be incorrect.  Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future. Muzinich gives no undertaking that it shall update any of the information, data and opinions in this video.

Muzinich & Co., Inc. is a Registered Investment Adviser with the US Securities and Exchange Commission. Muzinich & Co. Limited is authorised and regulated by the UK Financial Conduct Authority FRN: 192261.