BlackRock Alternatives
Seeking Resilience: 2022 Global Midyear Credit Outlook
2022 has been a challenging year across global markets, including credit. Supply chain issues have persisted, Russia’s invasion of Ukraine jolted business confidence and caused prices for food and energy to spike, and labor costs continue to rise. We expect the debate over inflation & policy will keep the volatility of risk premiums high.
[00:00:04.36] JAMES KEENAN: 2022 has been a challenging year across global markets, including credit. Supply chain issues have persisted as the pandemic continues to impact businesses, especially China. Russia's invasion of Ukraine jolted business confidence and caused prices for food and energy to spike. Labor costs continue to rise as demand rebalances away from goods and back towards services, and financial conditions are tightening as central banks take decisive action to contain inflation but at the risk of slowing growth and going too far and triggering a recession.
[00:00:40.90] At this point, we do not expect a deep recession or a large spike in corporate defaults. However, we do expect continued debate over inflation and policy will keep the volatility of risk premiums high. And these challenging market conditions bring opportunities for investors. Experience through multiple economic and credit cycles helps us find investment opportunities for our clients to drive value through these uncertain and volatile times.
[00:01:08.38] We see three key themes impacting credit markets over the next six months. First, rising risk from rising prices-- companies are dealing with a range of challenges resulting from persistent inflation, rising labor, energy and input costs combined with a desire to near shore production and improve supply chain resiliency all contributing to rising costs for companies and prices faced by consumers as central banks try to slow demand.
[00:01:36.49] Second, declining liquidity-- the cost of debt is rising as years of ultra-accommodative monetary policies begin to recede, and financial conditions begin to tighten. Risk premiums are rising, and investor protections are improving. And as public market volatility remains high, some companies will turn to private markets for financing solutions.
[00:01:57.76] Third, increasing dispersion-- the risks I've described will impact countries, markets, sectors, and individual companies in different ways. These diverging trends should offer more relative value opportunities for investors to consider. These factors will weigh on markets and investor sentiment over the coming months. But we see a range of opportunities to help investors find value through these complex markets. Check out our full mid-year outlook for investment ideas and continue the conversation with us.
The current state of play in credit
Watch James Keenan, Chief Investment Officer & Global Head of Credit, discuss three key themes we are focusing on across credit markets today.
Key themes
01
Rising risk from rising prices
Companies are dealing with a range of challenges resulting from persistent inflation. Rising labor, energy, and input costs, combined with a desire to nearshore production and improve supply chain resiliency are all contributing to rising costs for companies and prices faced by consumers, as central banks try to slow demand.
02
Declining liquidity
The cost of debt is rising as years of ultra-accommodative monetary policies begin to recede and financial conditions tighten. Risk premiums are rising and investor protections are improving, and as public market volatility remains high, some companies will turn to private markets for financing solutions.
03
Increasing dispersion
Higher costs will impact countries, markets, sectors, and individual companies in different ways. Investors need to consider relative value between the US, Europe, and Asia; between sectors as post-pandemic demand trends become clear; and the individual fundamentals of each company, as management teams navigate tighter financial conditions.
Below are highlights from the full report which goes into greater detail on our views on credit market conditions and opportunities looking ahead.
Pricing pressures abound
Global prices for everything from oil and gasoline to cereal and milk are significantly higher this year, escalating pressure on consumers and companies alike. Median global inflation is nearly 8% vs. approximately 3% a year ago1, and the high absolute level of inflation will have lasting effects. High and persistent inflation can become more difficult to eliminate outside of a recession, and those risks are important to assessing credit fundamentals.
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Price Index (Jan 2006 = 100)
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Food Inflation raises stability risks
Source: Refinitiv Datastream, BlackRock Investment Institute as of June 15, 2022. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. You cannot invest directly in an unmanaged index.
No longer a rising tide
Regime change is difficult to quantify, especially when it is occurring in real time. And yet the shift in monetary policy of both higher interest rates, an end to asset purchases, and in particular a reduction to the Federal Reserve’s balance sheet highlight a significant policy shift in response to the highest inflation levels experienced in 40 years. A variable but persistent tailwind of the last many years which has come to an end, and now we’ll see what businesses are truly ready to withstand tightening financial conditions.
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Year to date High Yield total returns by sector
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Dispersion in sector performance so far in 2021
Source: SIFMA Capital Markets Factbook as of June 11, 2021. BlackRock proprietary index consists of a weighted average of z-scores of 12-month differences for U.S. Government TII 5Y Real Yield, U.S. Money Supply (M2) as a % of GDP, U.S. Fed System Open Market Account Total Holdings as a % of GDP and U.S. Fed Trade Weighted Nominal Broad Dollar Index. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. You cannot invest directly in an unmanaged index.
Winners and losers
As companies react to higher input and financing costs, the idiosyncrasies of individual business models begins to diverge. At a time of slowing economic growth, the risks and opportunities can be more pronounced, and offer greater alpha potential to those able to navigate them.
Navigating greater uncertainty
A wider distribution of outcomes is a function of more uncertainty. We view a wide lens as critical to understanding the range of market opportunities today, while selectivity remains critical to positioning us to be able to create differentiated outcomes.
