CORPORATE CREDIT UPDA 2019

Global Risks Abound, but Consumer Remains Healthy FIXED INCOME RESEARCH TEAM (FIR) Taxable fixed income credits generally remain attractive for 2019 Team Leaders Corporate Research economy continues to perform well on the strength of consumers. Fixed Income Research (FIR) favors a focus on higher exposure Mike Egizio, CFA to U.S. domestic markets. David Unger

Key Drivers for the Remainder of 2019 (+/-) Marie Winters, CFA, CAIA

Global Trade Tensions (-): Trade disputes between the U S and others, principally Analysts China, are reducing global trade and hurting corporate business confidence Marshall Birkey are unlikely to be resolved prior to the 2020 election. Evan Katz, CFA Strong U S Consumer (+): The U S consumer has been helped by low unemployment, elevated confidence and accelerating wage growth. Ajay Kushwaha Ben McCubbin, CFA Geopolitical Risks (-): Escalating military tension in multiple parts of the world and increasing deglobalization have the potential to disrupt the domestic Tarun Rathore, CFA and international econom . Leah Savageau, CFA Central Banks (+): Globally, central banks have shown a to step in and Anurag Varma, CFA support economies. David Worniak, CFA Investment Opportunities Year to date, credit spreads have been significantly more volatile than in recent years. FIR anticipates spreads to finish the year flat to slightly tighter, as the US consumer keeps the domestic economy going. FIR favors investment grade BBBs, as investors reach for yield. In high yield, we see opportunity in single Bs. Investors appear to be avoiding even lower rated (CCC) bonds, but BB credits are trading at low yield levels not seen since 2017.

Energy Overweight Communication & Technology Neutral Consumer Cyclical Neutral Consumer Non-Cyclical Neutral Financials Neutral Industrials Neutral Utilities Neutral Basic Industrial Healthcare

Northern Trust Asset Management 1 CORPORATE CREDIT UPDATE

Energy - Overweight • Energy sector fundamentals are likely to improve. • Volatility in energy prices generated selective opportunities YTD, driven by rising recession. • Near term FIR favors independent Exploration & Production and midstream sub sectors. Valuations look compelling for issuers with solid balance sheets, disciplined managements, and attractive cost structures.

Consumer Cyclical – Neutral • Stron consumer sentiment, low unemployment/low interest rates, support consumption •US auto sales remain strong despite the trade wars trength in housing highlights the health of the U S consumer •Low interest rates drive refinancing and housing turnover which should support consumption. • FIR favors domestic focused cyclicals.

Consumer Non-Cyclical – Neutral • Consumer staples firms are growing sales, but valuations remain tight. •Lower rates could benefit global companies if the U S dollar weake • Spreads on some specific credits are wider, but not compelling enough to warrant investment. • We favor protein producers as we expect higher margins from reduced competition.

Financials – Neutral • We prefer North American issuers with strong credit fundamentals. The healthy U.S. consumer underpins bank profitability. Outlook for commercial and investment banking is mixed. • Margin pressure from lower interest rates will keep management’s focus on costs, digitization, and automation.

Industrials – Neutral • Construction has remained robust. • YTD mid-single digit growth in global air traŽc, multi-year order backlogs, and growth in the defense budget. • FIR likes issue s with a domestic focus as well as the aerospace/defense sector.

Communications & Technology – Neutral • We prefer specific telecom and wireless issuers with emphasis on deleveraging and improving credit stories. Much of telecom is expected to migrate from BBB to A ratings over the next 12-24 months. • Cable credits continue to display solid underlying fundamentals.

• Technology has rich valuations combined with greater vulnerability to trade tensions. • FIR expects tech service companies will outperform hardware companies for the remainder of 2019.

Utilities – Neutral • Utilities o‘er some downside protection while providing yield over Treasuries. • fter 2018 tax reform reduced utility cash flows .

Northern Trust Asset Management 2 CORPORATE CREDIT UPDATE

Basic Industrial - Underweight • Moved to a Underweight on Metals and Mining in May, elevated global trade concerns. • Chemicals continue to be hurt by sluggish global industrial demand, especially in autos. • Paper and packaging challenged by regulatory changes and shifting consumer preferences towards sustainable packaging.

Healthcare – Underweight • olatility from both political and headline risk. •

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