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Goldman Sachs Asset Management Statement on the Russia-Ukraine War. Read it here .

   

February 28, 2022 | Corporate Credit Views

Credit Check-In: Geopolitics and Implications

A broader Russian invasion of Ukraine has added uncertainty to an already complex investment backdrop of high inflation, hawkish policy and extended valuations. Economic and financial market implications will depend on the severity of the Russia-Ukraine conflict and the response of major economies. Looking ahead, we are mindful of the potential for a moderation in growth due to a fading fiscal impulse, a squeeze on consumer incomes from high inflation and geopolitically-motivated tightening in financial conditions. This month we discuss implications for credit markets and outline where we see relative value opportunities opening up. For macro and monetary policy thoughts, please refer to our Fixed Income Weekly.

Geopolitics and Credit Markets

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. 

Even prior to an escalation in geopolitical developments, credit markets had underperformed in recent weeks as markets priced in faster-than-expected rate hikes, following higher-than-expected inflation data, and also due to technical factors. As a result, we believe investment grade and high yield corporate bond valuations screen more attractive than at the start of 2022 from a carry and spread compression standpoint. Second, while loans have outperformed investment grade and high yield to date, we anticipate that loans will be the bigger beneficiary of the rising rate environment. 

Overheard at Goldman Sachs

Each month we feature quotes from our investment team, offering a glimpse into our investment views and what we are monitoring and analyzing.

“In today’s market, investors have to navigate increased volatility and uncertainty while continuing to prepare for a rising rate environment. Overall, we continue to locate attractive investment opportunities in companies with robust fundamentals that we think are well-positioned for the complex macro and geopolitical backdrop.”

    Lori Pomerantz, Lead Portfolio Manager — High Yield, Bank Loans and Opportunistic Credit 

Goldman Sachs Asset Management | February 2022

 

Stay posted on the latest market developments and key investment implications.

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