Credit Outlook 2018
Are market expectations too good to be true?
For us, the benign consensus outlook for 2018 smacks of complacency, arguing for cautious credit portfolio positioning.
Consensus expectations for modest returns from credit markets in 2018 may well prove to be accurate. However, are investors underestimating the long-term isks posed by structural problems as central banks reverse their ultra-loose monetary policy?
Credit markets appear to be very well set up for 2018. Economic growth is robust, which is boosting corporate profitability, but not boiling over into accelerating inflation. The recently approved US tax reform is providing another tailwind for profits, while also reducing levels of bond issuance as a number of large US firms repatriate cash for buybacks and dividends, rather than asking corporate bond investors for money. While government bond yields could rise a little, this should be offset by credit spread tightening, which could lead to another year of positive total returns from credit markets.
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