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January 2019 | Corporate Credit Views

False Alarm: The Case for Corporate Credit

In short: Corporate credit and other risk assets may face headwinds in 2019 as they cycle ages but we do not see a recession on the horizon. We expect investor sentiment and valuations to improve in line with underlying fundamentals and we believe corporate credit offers an attractive risk-return profile.

Key Takeaways:

1) Valuations are attractive.
Following the late-2018 risk asset sell off, corporate credit spreads have moved from levels that were expensive relative to history to levels closer to fair or attractive by historical standards.

 

Corporate Credit Spreads Have Moved from Tight to Fair or Attractive Relative to History

Source: Bloomberg Barclays US Corporate, US High Yield, Euro High Yield and Euro Corporate indices. As of December 2018.


2)    Fundamentals remain healthy.

Credit market volatility in 2016 effectively hit the reset button on late-cycle corporate initiatives. Expenditure on share buybacks, dividends and capital projects has moderated, debt growth has slowed and leverage has declined (albeit from elevated levels). As a result, we see a benign environment for credit risk and expect recent volatility to have a similar effect on corporate behavior, which could extend the credit cycle even further.

Revenue Growth is Slowing but Positive

Source: Bloomberg, GSAM. As of January 2019. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved.

We Expect Default Activity To Remain Muted

Source: JP Morgan, GSAM. As of January 2019. Default rate is 12-month trailing par-weighted rate. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved.


3)    There are investment opportunities despite the risks.

We have taken a cautious approach to corporate credit in recent years; we now see more opportunity based on:

  • Improved valuations, with higher spreads providing additional income that may serve as a cushion against continued volatility;
  • The potential for sentiment to improve (which we have already seen since the turn of the year) based on our expectation that growth in the economy and corporate revenues will remain positive; and
  • The likelihood that caution among corporate management teams will further extend the credit cycle.

We are mindful that risk assets are likely to remain volatile. We also sympathize with concerns around late-cycle behaviors in BBB-rated portion of the US investment grade market and credit-issuer friendliness among bank loans. We navigate this backdrop by taking a relatively tactical approach to credit exposure while emphasizing sectors and securities we believe offer the most attractive risk-return characteristics.

Related Insights

December 2018 | GSAM Connect
2019 Outlook: Continue to Tread with Caution and Conviction

Following a sharp reset lower in valuations in 2018, particularly during this quarter, we think the early-2019 investment backdrop presents an opening to add exposure to high conviction views at attractive levels. We are overweight US investment grade and US high yield corporate credit, and in dedicated portfolios we are overweight European high yield.