1. Sala de redação
  2. Positive on corporate debt
Menu
A UBP na imprensa 07.09.2021

Positive on corporate debt

Positive on corporate debt

Institutional Money (03.09.2021) - This year, we have held – and continue to hold – a positive bias on credit markets. This has been driven by our macro scenario of a robust and sustained global growth recovery as economies normalise following the vaccine rollout, coupled with the significant policy support coming from both monetary and fiscal authorities which should allow global growth to exceed its pre-Covid trend.


Crucially, we are seeing this strength in activity at macro level play out at company level as well, resulting in impressive corporate earnings and improving credit fundamentals across regions and sectors, which adds to our conviction of being invested in credit markets.

This environment is one in which the higher beta segments of the market can outperform and in which we believe credit compression can take place. High-yield spreads should benefit as the most severely impacted sectors from the pandemic continue to recover, whilst we also think that subordinated financial debt is providing an attractive opportunity given strong fundamentals in the banking sector and resilient earnings throughout the pandemic.

As regards corporate earnings, US investment-grade companies had a record earnings season in Q2 21, with around 85% of companies beating earnings expectations.

Companies have seen a sharp rebound in their revenues and earnings compared with Q2 20, which are, on average, now also significantly above their pre-crisis (Q2 19) levels. The recovery has been led by cyclical sectors, including energy, materials, autos and industrials, which have seen the strongest year-on-year improvements. From a credit metrics standpoint, improving earnings, combined with continued prudent balance sheet management, particularly in those sectors worst hit by the pandemic, has led to a drop in net leverage. As earnings further normalise in the coming quarters and balance sheet discipline is sustained in the face of uncertainty around Covid variants, we expect leverage to tick down further.

In Europe, fundamentals have continued to recover for non-financial issuers, with leverage also declining at the start of the year. Strong demand and pricing have raised earnings above pre-crisis levels in cyclical sectors. Companies have typically raised or kept their financial guidance for the year, confirming their own confidence in the outlook. Although share buy-backs are set to increase, they will be financed by free cash flow rather than new debt.

Therefore, we also expect deleveraging to continue in the coming quarters against a favourable backdrop in Europe.

As previously mentioned, we prefer subordinated financial debt, where Q2 proved to be another good quarter for banks, beating market expectations once again. This was generally driven by better revenues in the various capital market divisions, especially equity trading and M&A, whilst loan loss provisions continued to surprise on the upside. Several banks in the US and UK released provisions in Q2, but there have also been some provision releases from several continental European banks. Importantly for financial fundamentals, capital ratios have remained solid and did not deteriorate during the pandemic.

Taken together, both financial and non-financial earnings have surprised on the upside across regions and sectors, confirming our positive bias towards credit markets that has been driven by our macro scenario. As the macro environment continues to recover, we expect credit markets to continue to perform and are positioned accordingly.


Graub_Philippe_150x150.jpg
Philippe Graüb
Head of the Global & Absolute Return Fixed Income team
View his Linkedin profile

Bernard-McGrath_150x150.jpg
Bernard McGrath

Senior Investment Specialist
View his Linkedin profile

Expertise

Ações globais

Invista em empresas com uma capacidade de criação de valor superior e sustentável


Further reading

A UBP na imprensa 27.05.2024

How the US government might deleverage its economy

Hong Kong Economic Journal (17.05.2024) - US national government debt-to-GDP reached 120% in 2023, recapturing the level seen following years of wartime spending in 1945.

A UBP na imprensa 25.04.2024

Will the Fed continue to cut interest rates?

Hong Kong Economic Journal (19.04.2024) - Strong Q1 economic data from the US manufacturing, housing and employment sectors, combined with inflation of between 3.5–4% since mid-2023, have caused markets not to only price out the six rate cuts they had priced in up until the start of 2024, but, more recently, to also begin to question whether the Fed might forego rate cuts entirely in 2024.

A UBP na imprensa 17.04.2024

Diversification is crucial, especially in 2024

Agefi Luxembourg (03.2024) - As 2023’s concentrated market rally is extending into 2024, equity investors are worried about a potential consolidation or pullback.