Corporate Credit Update November 2019
Total Page：16
File Type：pdf, Size：1020Kb
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 trac, 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 oer 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. • Northern Trust Asset Management 3 IMPORTANT INFORMATION. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its aliates may have positions in and may eect transactions in the markets, contracts and related investments dierent than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an oer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Information is subject to change based on market or other conditions. Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could dier materially from the results indicated by this information. Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors Inc. (NTGA), 50 South Capital Advisors, LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. © 2019 Northern Trust Corporation. Head Oce: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. northerntrust.com Q63150 (1 /19) Northern Trust Asset Management 4.