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Credit resilience persists…but for how long?

  • Investment Manager
  • Blog post submitted on 13th March 2018

February was a bumper month for credit. The volatility and weakness witnessed during the month left their trails and have been a taste of what sentiment and market could look like if cracks in the market get deeper. True, markets have recovered over recent trading sessions, but the asset classes have not emerged intact. Having said that, we think that they have managed to manoeuvre themselves pretty well given the potential recent turbulence had to derail credit. The asset class remains robust and in our opinion resilient too despite the ongoing market themes and tight valuations.

In our previous writings since the turn of the year, we had stressed on a number of occasions that we had expected markets to remain supportive and benevolent for credit markets, as they remain buoyed by strong macro, fundamental and technical factors. However, heading into the second quarter of the year, things could get a tad more challenging, as government bond yields continue to rise and the scheduled EU’s Corporate Sector Purchase Programme (CSPP) draws to a close. And if that is not enough to worry about, we have the possibility of a trade war to rack our brains about.

It is extremely difficult to gauge or predict how last week’s antics are expected to impact economies, companies and the markets in general in the months to come. However, in the interim, we do not expect credit metrics to be adversely impacted in an imminent manner given the fact that the initial tariffs relate primarily to steel and aluminium exported to the US, whilst the expected reprisal from the EU will most likely target particular European exports.

What is expected to be extremely challenging for market participants is the escalation of the whole situation; if it will remain confined and controlled or whether it will impact the greater scheme of things. US president Trump has often opined that there exist a number of countries which might be taking advantage of the US and is renegotiating NAFTA, having exempted Canada and Mexico from the tariffs as long as they reach a new agreement. At this juncture, it is yet unclear of how widely dispersed and deep the trade war situation could get.

With credit still in good shape, we are not particularly concerned in the short term as we do not expect any material carnage to the asset class, but it is seen as something which credit could have done without as recent ECB indicates that the central bank appears more intent than ever to stop QE this coming September. It is well known that the CSPP has been instrumental at keeping markets supported, and with the absence of a sizeable and timely bid on the market, we are aware and remain concerned at the rate of increase in government bond yields in the second half of the year.

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