IMF Growth Outlook May Re-Ignite Credit Bubble Concern: Ballard
Source: BFW (Bloomberg First Word)
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(Bloomberg) -- Policy accommodation in response to economic weakness has been the bedrock of positive risk-asset performance in recent years. But in the continued absence of meaningful pickup in global growth, it may soon be difficult to reconcile robust risk-asset valuations with underlying fundamentals, Bloomberg strategist Simon Ballard writes.
Alert: HALISTER1- In its latest World Economic Outlook, IMF says that while growth in EM and developing economies is still seen as driving global expansion in 2016, prospects across countries remain uneven and generally weaker than over the past two decades; gains in advanced economies are forecast to remain modest
- The cautious IMF macro view may fuel questions about possible valuation bubble in speculative-grade credit
- It may be increasingly difficult to justify current tight risk-asset valuations and compressed yield spreads on the basis of low interest rates alone
- S&P data already shows U.S. trailing-12-month spec-grade corporate default rate widened to 3.8% in March -- the highest since 2010 -- and is expected to hit 3.9% by end of this year
- Concerns could be exacerbated if a more hawkish outlook is factored into U.S. Fed policy assumptions over 2016/2017; speculative-grade risk positions are most susceptible to rising interest costs over time, creating significant uncertainty
- More dovish outlook for ECB policy vs Fed, may again reiterate investor bias for outperformance of EUR risk assets compared to USD credit risk, albeit with weak macro likely to also favor up-in-quality investment strategies
- Central Bank stimulus and open-ended liquidity can only justify tight corporate spreads over longer term if economic growth and corporate profitability flourish, an outlook that is now in doubt
- Low interest-rate environment after the global financial crisis has encouraged investors to stretch into higher- yielding, higher-risk assets in order to maximize investment returns
- The yield spread differential between a risk asset and its underlying government bond benchmark is supposed to be an indicator of implied default risk; the wider the spread, the greater the compensation an investor receives for accepting a heightened level of default risk in the portfolio
- While loose monetary policy can facilitate corporate funding and minimize default risk, prolonged weak economic conditions eventually risk eroding corporate earnings, credit quality and the corp default-rate outlook
- NOTE: Simon Ballard is a credit strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
Source: BFW (Bloomberg First Word)
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UUID: 7947283