31 Dec 2015
US credit feels the pressure of high commodity exposure – Deutsche Bank
FXStreet (Delhi) - Research Team at Deutsche Bank, notes that the US credit markets made a U-turn midway through 2015, as doubts began to surface with respect to issuer fundamentals and exposure to commodities and EM.
Key Quotes
“Though current spread levels are more attractive than those prevailing just a few months ago – both HY and IG are at 3- to 4-year wides – we expect the push-and-pull to continue between those seeking more yield and those seeing signs of a cycle turn. However, we expect only a moderate rise in ex-energy defaults and continued pressure on HY spreads. Higher vulnerability of HY therefore makes IG credit a more attractive alternative, especially in light of current levels.”
“We recommend avoiding sectors exposed to the energy sector’s capital expenditure declines, such as capital goods. Two to three hikes by the Fed should not be problematic for credit. Fundamentals are better for European credit: debt accumulation has been nowhere near as aggressive as in the US market, and European credit has far less exposure to the energy and materials sectors. Overall, Europe is some way behind the US in terms of a deteriorating credit cycle, so we believe European credit can continue to outperform even if US credit widens further.”
Key Quotes
“Though current spread levels are more attractive than those prevailing just a few months ago – both HY and IG are at 3- to 4-year wides – we expect the push-and-pull to continue between those seeking more yield and those seeing signs of a cycle turn. However, we expect only a moderate rise in ex-energy defaults and continued pressure on HY spreads. Higher vulnerability of HY therefore makes IG credit a more attractive alternative, especially in light of current levels.”
“We recommend avoiding sectors exposed to the energy sector’s capital expenditure declines, such as capital goods. Two to three hikes by the Fed should not be problematic for credit. Fundamentals are better for European credit: debt accumulation has been nowhere near as aggressive as in the US market, and European credit has far less exposure to the energy and materials sectors. Overall, Europe is some way behind the US in terms of a deteriorating credit cycle, so we believe European credit can continue to outperform even if US credit widens further.”