Insight | April 2, 2020
Long Term Valuations Can’t Be Ignored - April 2020
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- In our opinion, corporate credit markets have faced three large shocks: volatility, convexity and liquidity. These have rarely coincided.
- Globally, economic forecasts are still unstable and being revised downward almost on a weekly basis. We now believe that an exceptionally deep, but hopefully short recession is priced in.
- Monetary policy has been reactive with swift rate cuts and record quantitative easing programs which have yet to kick in.
- Fiscal policy is taking shape with significant stimulus programs planned globally.
- Banking support (particularly in Europe) is crucial through cheap financing and loan guarantee schemes.
- Corporate credit fundamentals have deteriorated but corporates are under pressure to improve credit metrics.
- Large corporate credit outflows have temporarily weakened technicals.
- Corporate credit spreads now incorporate a significantly higher risk of default or downgrade (fallen angels) and reflect an exceptionally high liquidity premium.
- Total return outlook for corporate credit has been historically positive when spreads have reached such crisis levels.
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