As usual, some shockers of truth and Koolaidlessness from Deutsche Bank's Jim Reid whose Credit Outlook 2015: Plate Spinning is a must read.
Views (about 2015) On A Page
- If it was a free market and central banks were not allowed to intervene anymore then we would be very bearish as the global financial system is still extremely fragile and not sustainable. Clearly this won't happen but illustrates our default position ex-intervention.
- Central banks do exist and at a global level will buy more assets in 2015 than they did in 2014. 2015 will be the 9th year of highly unconventional central bank policy and although we're no nearer to finding a sustainable solution, the same policy prescription will be used as better alternatives are currently unrealistic or unpalatable.
- The ECB will likely start broad based asset purchases in Q1 (probably March) including corporate and government bonds. This will help European credit withstand some risks in the early months, not least from possible pivotal Greece elections. There will also likely be an early year drag from US credit due to the effects of the falling oil price on the US energy sector and fears of a hawkish Fed.
- By H2 we expect the Fed to be more dovish as still soft global growth and low inflation makes it harder for them to pull the trigger on rate rises. So credit (especially US) may have a better H2 than H1.
- In a world of strong bond technicals and stretched Government valuations, we don't think credit spreads are too tight. Across EUR, USD and GBP no rating band is within its lowest spread quartile relative to history. We're a long way off the all time tights across the board and this cycle may end nearer these tights if Central banks remain highly accommodative.
- Within Europe we think 2014's sell-off in HY, especially single-Bs, makes it attractive against IG as technicals from the likely ECB buying spread to more 'yieldy' assets. Our excess return forecast for European HY is around 5% in 2015 while for EUR and GBP IG, excess return expectations range from 1.4%-4.9% across non-fins and fins with GBP outperforming EUR.
- Our US credit strategists expect the US HY default rate to rise to 3.5% in 2015 from September's cycle lows of 1.7%. This is led by the energy sector. For Europe all of our forward indicators currently point to a 1.5-2% default rate over the course of the year - still incredibly low. The risk is if US energy defaults start to lead to a wider mini credit crunch in global HY.
- We think EUR credit will outperform in the first part of the year, however as the macro develops valuations may move to a point where we will prefer USD over EUR credit later in the year.
- Overall Q1 could be a battle between the ECB and the usual positive seasonals on one hand and the Fed, US energy and Greece on the other. We think the former will win out but there could be points where spreads are wider first. The days of blanket US QE and low volatility are over. Expect some challenging conditions en route to tighter spreads by the end of H1 and indeed YE 2015.