Video - Outlook 2022: Global credit

Four factors that credit markets will need to navigate

2022 will be about identifying opportunities for relative outperformance within the credit space and a big focus on single name selection to capture alpha return potential.

There are four factors that we think credit will need to navigate around which will likely impact the asset class.

1) First is growth.

As market concerns subside from Omicron concerns, we believe the recovery can continue and 2022 could yet still be a firm growth environment for credit.

2) Second is the potential of developed market central bank normalisation.

Global central bank liquidity is moderating from high levels and there are risks around US Federal Reserve tapering and rate lift-off combined with volatility around extension of ECB Asset purchase program next year.

However, we believe as long as rate normalisation is not very fast and well communicated by the central banks, it is not a risk for credit unless it leads to material faltering of growth.

3) Third factor is inflation and its impact on credit.

Thus far with strong demand, corporate profit margins have held up in face of rising input costs and labour wage pressures, but there are concerns around ability to pass through cost increases going forward, leading to higher distinction between sectors.

Here we believe utilities and consumer discretionary sectors could be at risk from EBITDA margin squeeze whilst we feel some of the cyclical sectors tend to benefit the most from a margins perspective during a rising inflationary environment.

4) Fourth is increased M&A activity and increase in leverage metrics.

Another fundamental aspect is that we have already started to see increased M&A activity as companies use attractive financing which would lead to increase in leverage metrics. And so as the cycle starts to mature, we would look to avoid sectors or corporate names that are looking to re-leverage via excessive shareholder-friendly activity.

Opportunities within global credit

Given our economists view of stronger potential growth in Europe than in the US next year, where next generation EU fiscal disbursement into next year will also be supportive, combined with potential for credit upgrades from high yield to investment grade yet to come in Europe this cycle, we expect some good alpha opportunities in Europe, especially within the BB space where even the defensive BBs look interesting.

The other pocket of value is within emerging market high yield Sovereign from a valuation perspective, and here if inflation does prove to be transitory with not too aggressive tightening from the US Federal Reserve, it does provide emerging markets room for pause and we believe stability of relative growth momentum could benefit emerging markets next year where any monetary and targeted easing from China will also be supportive.