Corporate credit fundamentals have room to worsen this year as corporate earnings continue to deteriorate and despite signs that inflation has peaked and the possibility of a soft landing for the economy is growing, according to the latest report. Janus Henderson Investors analysis.
Jim Cielinski, global manager of Renta Fija at Janus Henderson Investmentrs, stated that the firm’s credit monitor shows that, given the contraction of spreads in the last quarter, “it should be evident that the rally in credit is not sustainable.” The expert believes that fundamental weakness will proliferate as 2023 progresses. Still, despite the fall in inflation seen in the last three months, it is a “critical prerequisite for a soft landing in the economy.” what investors want. Cielinski believes that the cycle is deteriorating, but points out that the wild card of inflation has reduced the risk that central banks will be forced to act more forcefully. Meanwhile, James Briggs, manager at Janus Henderson Investors, believes that seeing dispersion in credit markets increase from current levels will depend on whether there is a soft or hard landing for the economy.
He Credit Risk Monitor de Janus Henderson Investorswhich monitors corporate fundamentals and macroeconomic indicators to indicate the situation of the credit cycle and how to position the portfolio, shows that its main indicators are in the red: cashflow and earnings, debt and access to capital markets. As for the first of them, profits seem to have peaked, while forecast results are expected to get progressively worse. All regions show flat or negative earnings revisions for 2023. At the same time, high costs, including energy, continue to impact cash flows. However, a soft landing for the economy or a shallow recession is more than possible, while earnings could rebound as early as 2024, especially in emerging markets. This normalization of corporate earnings has started to affect fundamentals in certain areas, which we expect to increase.
Meanwhile, signs of recession have emerged on economic activity data as investment flows and yield curves have moved into recession-indicating territory. In addition, central bank liquidity continues to be withdrawn from the system. In a context in which real interest rates have risen and signal higher financing costs, issues in the primary market have been buoyant and have been absorbed by investors. High yield offerings, by contrast, have been more limited, providing technical support for valuations. In addition, the better performance of lower quality paper with respect to the rest of issues persisted. In short, the demand for credit is strong, according to Janus Henderson Investors.
Finally, the weakness of the benefits can go to more. But the companies’ economic metrics should improve in the second half of the year. As we start to see weak data related to consumer confidence and interest rates take their toll on the economy, experts expect the corporate margin decline to start to become apparent.
