Credit Check-In: Geopolitics and Implications

In line with the broader risk-off sentiment, corporate credit spreads widened this month and new supply moderated.

Our direct exposure to Russia and Ukraine across our investment grade and high yield corporate credit platform is limited. That said, we are mindful of the indirect exposures that developed market (DM) corporates have to the region. At present, we do not believe geopolitical developments present material implications for DM credit fundamentals. More broadly, we continue to monitor the potential sector- and issuer-specific headwinds, as well as the implications of tighter global financial conditions and upside inflation risks. The key implication we are monitoring is the impact of higher oil prices on the consumer, as well as rising natural gas prices on European utility companies, both of which could impact consumers and consumer sentiment. Overall, we believe healthy corporate balance sheets, characterized by strong liquidity positions, as well as limited direct exposure to Russia and Ukraine should provide an anchor for US and European credit markets.

• Regional views: Relative to the US, Europe has closer trade ties with Russia and is more reliant on Russian energy exports. For context, Russia provides roughly 25%-30% of European energy supplies. However, dovish European Central Bank (ECB) commentary suggests policy normalization may be delayed, which should provide some offset. As such, we continue to monitor European credit relative to US credit. We remain overweight euro-denominated credit (albeit to a lesser degree than last year).
• Sector views: Given Europe’s higher macro exposure, we are closely monitoring the impact of higher natural gas prices on European utility companies and consumer sentiment. Globally, we are also mindful of potential headwinds for the aerospace, auto and technology sectors in event of supply disruptions, particularly given existing pressures on automotive and semiconductor production. Russia accounts for 43% of global palladium production—a key input for catalytic converters—and 13% for nickel—an input for EV batteries, suggesting potential for further disruptions to global auto supply. More broadly, both investment grade and high yield commodity-oriented sectors stand to benefit from higher oil and gas prices. With respect to the financial sector, while some European banks have lending exposures in Russia, we think sufficient capital buffers would limit any impact on capital ratios for most in event of write-downs.