June 30, 2022 | 3 Minute Read
Corporate balance sheet health often serves as a bellwether for downgrade and default trends. In this Credit Check-In, we discuss how our outlook for corporate fundamentals is evolving amidst the current market volatility and rising recession risks, and why we believe US and European corporate balance sheets can withstand macro headwinds.
US and European investment grade (IG) and high yield (HY) corporate balance sheets entered this year from a position of relative strength, having benefited from the economic reopening in major economies and accommodative financial conditions which allowed debt to be issued or refinanced at low rates. Disciplined capital allocation, including higher-than-usual cash levels, has bolstered asset cushions. As a result, key credit metrics such as leverage, interest coverage, and earnings before interest, taxes, depreciation, and amortization (EBITDA) are all in much better standing compared to 2020 levels (Exhibit 1).
For now, many companies continue to benefit from healthy consumer demand given low unemployment, rising wage growth, and excess savings. That said, savings rates are falling and we are mindful that the buildup of excess savings that households are sitting on could crumble sooner than expected if inflation continues to run at multi-decade highs. We are also closely monitoring earnings trends given high input and labor costs facing the corporate sector.
Source: Goldman Sachs Asset Management, BofA Securities. As of March 31, 2022. IG ratio excludes financial issuers.
Heading into the third quarter, inflation and monetary tightening will likely remain at the root of market volatility. Soft landings are more common when long-run inflation expectations are well-anchored and the private sector balance sheet is strong, but less common when inflation is high.1 Today’s cycle reflects all three elements, underscoring uncertainty on the economic outlook.
The challenging macro backdrop has been reflected in corporate-level news, with companies beginning to adjust to the prospect of tighter financial conditions and the risk of a US recession. Weaker-than-expected first quarter earnings and/or lower second quarter earnings guidance from several large US companies have raised concerns around the outlook for corporate balance sheets. We are paying close attention to lower quality and cyclical companies, particularly those that are highly exposed to elevated inflation. At the moment, we believe that the corporate credit market has the strength to persevere through ongoing market volatility and to provide solid risk-adjusted returns for investors.
We decode the driver of these misses relative to expectations and downbeat outlooks in Exhibit 2. The common thread in the negative market response is a concern around a deceleration in consumer spending; however, we believe the underlying credit signal is more nuanced than headlines may suggest. In our view, the earnings developments were driven by a combination of sector-specific, structural, and cyclical factors. These nuances underscore the importance of active fundamental credit research.
Source: Goldman Sachs Asset Management. As of June 30, 2022.
Each month we feature quotes from our investment team, offering a glimpse into our investment views and what we are monitoring and analyzing.
“Companies have built up liquidity cushions to withstand a more challenging macro environment. Notwithstanding idiosyncratic challenges, we do not expect to see a rerun of the 2020 downgrade and default wave.”
Stephen Waxman, Head of Global Investment Grade Research
Goldman Sachs Asset Management | June 2022
In this weekly insight, we bring the global economy and fixed income markets to you. Macro at a Glance covers the latest developments in growth, inflation, and labor markets, while Policy Picture and Central Bank Snapshot details our outlook for monetary and fiscal policies. Fixed Income Navigator summarizes how our view of the world and financial markets informs and impacts our investment views.
Read MoreCredit sectors are reacting to the more challenging macroeconomic. We explore what the recent performance and flows trends in high yield and leveraged loans mean for investors.
Read MoreCommitted to providing you with the insights you need to build your practice.
1 Goldman Sachs Global Investment Research -US Economics Analyst: The Odds of a Soft Landing: Lessons from G10 Economies (April 17, 2022).
General Disclosures
Data and views expressed are as of June 30, 2022.
Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.
Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.
High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.
THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.
Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client's account should or would be handled, as appropriate investment strategies depend upon the client's investment objectives.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.
United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Euro area:
European Economic Area (EEA): This financial promotion is provided by Goldman Sachs Bank Europe SE. This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.
Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.
Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore and Malaysia. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).
Australia: This material is distributed in Australia and New Zealand by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (’GSAMA’) and is intended for viewing only by wholesale clients in Australia for the purposes of section 761G of the Corporations Act 2001 (Cth) and to clients who either fall within any or all of the categories of investors set out in section 3(2) or sub-section 5(2CC) of the Securities Act 1978, fall within the definition of a wholesale client for the purposes of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) and the Financial Advisers Act 2008 (FAA),and fall within the definition of a wholesale investor under one of clause 37, clause 38, clause 39 or clause 40 of Schedule 1 of the Financial Markets Conduct Act 2013 (FMCA) of New Zealand (collectively, a “NZ Wholesale Investor”). GSAMA is not a registered financial service provider under the FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand, this document, and any access to it, is intended only for a person who has first satisfied GSAMA that the person is a NZ Wholesale Investor. This document is intended for viewing only by the intended recipient. This document may not be reproduced or distributed to any person in whole or in part without the prior written consent of GSAMA. This information discusses general market activity, industry or sector trends, or other broad based economic, market or political conditions and should not be construed as research or investment advice. The material provided herein is for informational purposes only. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation.
Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.
Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.
Brazil: These materials are provided at your request and solely for your information, and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, any securities, funds, or products by any of Goldman Sachs affiliates in Brazil or in any jurisdiction in which such activity is unlawful or unauthorized, or to any person to whom it is unlawful or unauthorized. This document has not been delivered for registration to the relevant regulators or financial supervisory bodies in Brazil, such as the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) nor has its content been reviewed or approved by any such regulators or financial supervisory bodies. The securities, funds, or products described in this document have not been registered with the relevant regulators or financial supervisory bodies in Brazil, such as the CVM, nor have been submitted for approval by any such regulators or financial supervisory bodies. The recipient undertakes to keep these materials as well as the information contained herein as confidential and not to circulate them to any third party. These materials do not address any investment restriction or guideline that the requestor may be subject to in Brazil. Prior to investing in any securities, funds or products described herein, the requestor must review the prospectuses and other applicable documents, and make its own assessment on whether the securities, funds or products are adequate to it in light of the applicable Brazilian laws and regulations, and in light of requestor's own Investment Policy.
Confidentiality
No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.
Date of first use: June 30, 2022.
264558-TMPL-01/2022-1536241. 283729-OTU-1631197.