We continue to see this macro environment as positive for credit, as we do not anticipate an aggressive tightening in financial conditions as a result of hawkish central banks’ actions. Although we do expect real rates to rise (by as much as eight times for the U.S.), they are starting from historically depressed levels and so should not be disruptive for risk assets.
On the supply-side, constraints are expected to abate, as already observed with shipping costs starting to normalize and chip production returning. This, coupled with commodity price stabilization, should also allow headline inflation to moderate through 2022, which should be taken well by risk assets.
Given this positive backdrop for credit, the outlook for credit is positive. For example, net leverage for U.S. investment-grade names has fully reversed the increase observed during the pandemic, whilst a U.S. high-yield default rate of under 1% for 2021 highlights how this segment of the market benefitted from the reopening of economies on the back of the vaccine roll-out. Although there are plenty of concerns around inflation, research data suggest that if not too high it is actually good for corporates, where the inflation losers account for only 17% of the European IG credit market.
On the back of the Russian/Ukrainian crisis, the first three months of 2022 were particularly volatile. Yet, we see the emergence of risk and subsequent market repricing as an opportunity to allocate funds into this asset class as the corporation on both side of the Atlantic are well financed and can withstand a prolonged crisis.