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November 2020 | GSAM Connect

Credit Markets and Tail Risks

November Review: Corporate credit market performance has fluctuated around two key tail risks in 2020: the COVID-19 pandemic and the US election. Resolution of US election event risk and encouraging efficacy news on several vaccines in late-stage trials boosted risk sentiment in November.

Potential Implications of the US Election Outcome:

  • Corporate Tax Policy. Under a divided government—Democratic presidency but Republican Congress—we see limited prospects of corporate tax reform. This is more supportive for investment grade corporate bond issuers relative to high yield, given many large profitable companies that would be most impacted by higher corporate taxes reside in the investment grade market.
  • Regulatory Agenda. We expect the regulatory environment will be less stringent than what we may have observed in a ‘Blue Wave’ scenario. Certain regulations can be enacted via executive order, though this would not be unequivocally negative from a credit perspective, with the exception of the Energy sector which faces headwinds from renewed focus on the climate transition and renewable energy sources. 
  • Fiscal Stimulus. US Congress has recessed for Thanksgiving without progress on additional fiscal measures, reducing the likelihood of major fiscal support before year-end. A smaller effort of temporary extensions seems more likely this year. In 2021, it is unclear whether a brightening outlook for widespread vaccine distribution will temper the magnitude of additional fiscal support delivered. 
  • Trade Policy. While US tensions with China is a bipartisan issue, policy priorities differ by political party. Less focus on bilateral trade and a possible reprieve on trade actions against certain Chinese telecommunications and electronics companies could support semiconductor and consumer electronics sectors. 
  • Corporate Actions. Potential for greater scrutiny of mergers activity and share buybacks may limit additional leverage and bond supply, both of which could be supportive for corporate credit. 

Outlook: Search-for-yield, central bank buying, a slowdown in new issuance and a vaccine-induced economic recovery look set to support credit markets in 2021. A key risk is revived inflation and in turn higher rates, though this is not our base case expectation given considerable economic slack

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