Having just attended the Moody’s annual credit conference, packed with investors looking for clues to the prospects for credit markets. One can see from the turnout, almost standing room only, that there is an increased interest in the outlook for this asset class. As we have pointed out in the past, where credit goes, equities eventually follow. To support this view January’s Fund Manager survey from Merrill Lynch revealed that investors greatest current concern is the level of corporate leverage.
What did we learn? The picture painted was one that was somewhat consensual. One possible exception, a no deal Brexit could lead to a possible downgrade in our sovereign rating. In turn, this could, in theory, push up the cost of financing our sovereign debt.
What is the probability of an economic recession and what will be the cause? BNP’s Chief Economist Richard Barwell believes the world is possibly taking too much half empty rather than a half-full view of the world. However, Mr Barwell is concerned one of the possible causes of the next recession may be no more than the world talking itself into one. Some may think he is looking at the glass with rose tinted glasses.
As the ECB meeting on Thursday, after the latest PMI data, suggesting the euro area is another example of an economic slowdown. As expected, the ECB left rates unchanged and expect to do so for the foreseeable future. Mario Draghi acknowledged that economic data had weakened and for that reason will maintain favourable liquidity conditions and amble degree of monetary accommodation. Significant monetary stimulus remains essential to achieve inflation targets. There does seem to be a more dovish stance from central banks at the start of the year as growth concerns weigh.
Other themes for investors. In a hunt for yield, credit quality has decreased. The balance of AAA relative to below investment grade has decreased materially as the amount of cover lite issuance has increased. Banks are far better capitalised than they were in 2008. The leading causes for slowing economic growth are trade tariffs and higher US interest rates. At present like most other analysts they do not, as yet anyway, see the slow down to the point of a global recession.
The Moody’s conclusion, no global recession in 2019, credit quality has deteriorated. There is however no great wall of credit that needs to be refinanced in the short term, and interest rates remain low enough to allow favourable terms for what does require refinancing. Credit defaults have not picked up significantly. Could the next recession be as severe as 2008? The jury seemed out on that one, but this time if it comes the banks may not be the cause.