WEBVTT - JPMorgan Sees Credit Risks Rising as Trade War Bites 0:00:18.120 --> 0:00:20.720 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:20.880 --> 0:00:23.840 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:23.840 --> 0:00:28.200 And I'm Jody Lurry, a senior credit analyst covering leisure, lodging, gaming, restaurants, 0:00:28.200 --> 0:00:30.440 and rental car companies at Bloomberg Intelligence. 0:00:31.040 --> 0:00:32.559 This week, we're very pleased to. 0:00:32.520 --> 0:00:36.280 Welcome Lisa Coleman, head of Global Investment Grade Corporate Credit 0:00:36.320 --> 0:00:37.839 at JP Morgan Asset Management. 0:00:37.880 --> 0:00:39.680 How are you, Lisa, I'm great. 0:00:39.840 --> 0:00:41.839 Thank you so much for having me over today. 0:00:42.560 --> 0:00:44.919 Well, it's wonderful to have you and I'm just so 0:00:44.960 --> 0:00:48.360 excited to dip into an area that I'm extremely passionate about. 0:00:48.400 --> 0:00:50.560 Great, see Lisa. Just to set the scene there before 0:00:50.560 --> 0:00:53.760 we begin, Global markets are getting whipswored by recession fears 0:00:53.800 --> 0:00:57.800 and haphazard and erretic US policymaking, particularly on trade. Despite 0:00:57.840 --> 0:01:01.000 that credit spreads are quite thin the board, there's a 0:01:01.040 --> 0:01:03.280 hope that the longer term trajectory of the US economy 0:01:03.280 --> 0:01:06.800 remains up despite some short term pain and volatility. Market 0:01:06.800 --> 0:01:10.039 optimists believe the new administration has their back and will 0:01:10.040 --> 0:01:12.200 do its best to defend the economy, that everything will 0:01:12.240 --> 0:01:14.720 be okay in the end, bond and loan markets are 0:01:14.720 --> 0:01:17.240 pricing in very low odds of US recession, even as 0:01:17.280 --> 0:01:21.280 talk of economic downturn and stagflation become more frequent, with 0:01:21.400 --> 0:01:24.440 consumers throwing in the towel and business leaders putting investments 0:01:24.480 --> 0:01:27.240 on hold, complaining that they can't take long term decisions 0:01:27.240 --> 0:01:31.160 in this kind of an environment. Treasury yields meanwhile remain high, 0:01:31.280 --> 0:01:34.319 keeping buyers of fixed income happy, especially those with floating 0:01:34.400 --> 0:01:37.560 rate assets. Above all, there's not enough supply of corporate 0:01:37.560 --> 0:01:40.760 debt to satisfy the growing demand. But what's your view, lease, 0:01:40.760 --> 0:01:42.280 So there seems to be a lot of risk out 0:01:42.319 --> 0:01:45.160 there that isn't maybe in the price. And from your standpoint, 0:01:45.200 --> 0:01:48.280 are we stressing too much? How our high grade borrowers 0:01:48.320 --> 0:01:50.480 doing in this environment at the moment? 0:01:50.680 --> 0:01:52.800 Hey, how much time do we have to talk about this? 0:01:53.080 --> 0:01:54.320 We can go on. We have time. 0:01:54.600 --> 0:01:57.240 So look, I mean, the way I like to think 0:01:57.280 --> 0:02:01.280 about it is, there's so much news bombarding us every 0:02:01.360 --> 0:02:05.720 day and the markets are just you know, swooning back 0:02:05.760 --> 0:02:08.400 and forth depending upon the news flow. So for me, 0:02:09.200 --> 0:02:11.880 I always try to take things back down to the basics, 0:02:12.480 --> 0:02:15.839 and so when I think about companies, you know, what's 0:02:16.000 --> 0:02:19.880 underpinning the strength of companies today, and so maybe we 0:02:19.919 --> 0:02:22.760 could start there and hopefully not get too much into 0:02:22.800 --> 0:02:23.320 the weeds. 0:02:23.400 --> 0:02:24.840 But you know, one of the. 0:02:24.800 --> 0:02:28.680 Things we do is we try to understand what the 0:02:28.720 --> 0:02:31.520 earnings growth looks like for companies, and so in our 0:02:31.560 --> 0:02:35.119 world of credit, that means EBITDAH because that's an important 0:02:35.160 --> 0:02:40.240 foundation for understanding the direction that leverage is going. And 0:02:40.320 --> 0:02:45.200 so crucial to that is working with our analyst team 0:02:45.800 --> 0:02:49.920 and we try to project out what forward EBITDUG growth 0:02:50.000 --> 0:02:54.680 will look like for industrial companies, and that really allows 0:02:54.760 --> 0:02:58.080 us to get a baseline for you know, what do 0:02:58.080 --> 0:03:00.400 we expect companies to do. But also so if we 0:03:00.440 --> 0:03:05.480 can aggregate up this individual company data into sectors and 0:03:05.520 --> 0:03:08.840 then into the broader market, it can also provide us 0:03:08.840 --> 0:03:13.359 some bottom up insight that can complement what we're getting 0:03:13.360 --> 0:03:17.600 from top down economic data. So when we were ending 0:03:18.440 --> 0:03:22.440 the fourth quarter of last year, we had asked our analysts, 0:03:22.520 --> 0:03:27.080 so where do you think going forward for the next 0:03:27.120 --> 0:03:29.560 twelve months, where do you think growth is going to 0:03:29.560 --> 0:03:35.320 come in for the median industrial company? And the EBIT 0:03:35.400 --> 0:03:38.880 down number was coming in around five percent, which feels 0:03:38.920 --> 0:03:41.760 about right, you know, it's again we're not using like 0:03:41.800 --> 0:03:43.600 the you can't comp that to the S and P 0:03:44.320 --> 0:03:47.320 expectations because this is median. It's and we have a 0:03:47.320 --> 0:03:51.120 different composition. But it gives you directionally where we were thinking. 0:03:51.840 --> 0:03:55.480 And in fact, in the fourth quarter, oddly enough, you 0:03:55.480 --> 0:03:58.480 know where did EBITDUG growth come in around five percent? 0:03:59.440 --> 0:04:01.400 But now you know here we are, we're starting a 0:04:01.400 --> 0:04:03.800 new quarter, and where do we think we're going to 0:04:03.800 --> 0:04:06.920 be in twenty five And you know, to the point 0:04:06.920 --> 0:04:09.440 you were making earlier James, about you know, a lot 0:04:09.480 --> 0:04:13.080 of news hitting the market and fears. We began this 0:04:13.240 --> 0:04:18.400 year with companies really guiding down a little bit from 0:04:18.400 --> 0:04:20.800 where they were. You know, it makes sense is we're 0:04:20.800 --> 0:04:23.640 starting a new year, companies have a chance to refresh, 0:04:23.960 --> 0:04:28.000 they're recognizing some uncertainties, and so we saw earnings getting 0:04:28.120 --> 0:04:32.080 guided down and in fact the starting point for us 0:04:32.640 --> 0:04:36.279 now when we're looking at that forward growth for twenty 0:04:36.320 --> 0:04:40.480 five is an EBADUG growth number actually closer to three percent. 0:04:41.920 --> 0:04:45.240 So that's a big difference. Now, look, I think there's 0:04:45.279 --> 0:04:48.359 probably a little bit of wiggle room in there and 0:04:48.440 --> 0:04:51.720 a little bit of uncertainty, but I think that you know, 0:04:51.760 --> 0:04:54.480 that is a starting point gives us a little bit 0:04:54.560 --> 0:04:57.520 less of a cushion in the event that we start 0:04:57.560 --> 0:04:59.040 to get bad news on tariffs. 0:05:00.680 --> 0:05:04.719 So, Lisa, you were one of our steamed guests at 0:05:04.720 --> 0:05:08.440 the end of the year for our Credit Outlook event, 0:05:09.160 --> 0:05:13.520 and during that event, everybody talked about potential for spreads 0:05:13.560 --> 0:05:18.360 going even tighter, and it was a yield versus spread conversation. Now, now, 0:05:18.400 --> 0:05:21.160 something you brought up which you touched on just now 0:05:21.200 --> 0:05:23.479 with the fundamentals, but you said there were three parts 0:05:23.520 --> 0:05:27.200 that you look at, fundamentals, technicals, and valuations. So it 0:05:27.240 --> 0:05:29.480 sounds like the fundamental side you're a little bit less 0:05:29.480 --> 0:05:33.400 optimistic about going into this year, But how are you 0:05:33.400 --> 0:05:35.839 feeling on the technicals and the valuations. 0:05:36.279 --> 0:05:40.960 Okay, so you're right about the fundamentals, And if I 0:05:41.000 --> 0:05:43.560 could just one other point on fundamentals before we talk 0:05:43.600 --> 0:05:46.800 about technicals and valuations. One of the things that we 0:05:47.360 --> 0:05:50.760 did is we did a little bit of stress testing 0:05:50.760 --> 0:05:53.520 on the fundamentals and we said, we don't really know 0:05:53.520 --> 0:05:55.719 where tariffs are going to shake out, but let's just 0:05:55.800 --> 0:06:00.000 assume a ten percent across the board tariff that actually 0:06:01.080 --> 0:06:03.839 is going to be a hit to these ebadon numbers. 0:06:04.040 --> 0:06:06.760 By about a percentage point, and if I were to 0:06:06.760 --> 0:06:10.760 put that in context, that gets us to ebadon numbers 0:06:11.200 --> 0:06:15.440 that were prevalent back in twenty three. And remember in 0:06:15.480 --> 0:06:18.280 twenty three that was a period where there were a 0:06:18.320 --> 0:06:23.159 lot of fears about more of a hard landing, and 0:06:23.240 --> 0:06:25.600 so I just think it's important to note that the 0:06:25.640 --> 0:06:29.840 tariffs bring us into a territory that is. 0:06:29.839 --> 0:06:31.120 A little bit more uncertain. 0:06:31.720 --> 0:06:35.279 And also remember back in twenty three we were getting 0:06:35.600 --> 0:06:40.960 some fiscal tailwinds from the IRA, from the Infrastructure Bill, 0:06:41.080 --> 0:06:43.919 from the Chips and Science Act, which we may not 0:06:44.120 --> 0:06:48.760 have sufficient or a similar kind of fiscal stimulus this year. 0:06:48.880 --> 0:06:51.760 So just want to get that one point out. Now, 0:06:51.800 --> 0:06:54.760 in the technicals, I think we're seeing a little bit 0:06:54.760 --> 0:06:57.360 of a deterioration. In fact, we were just chatting about 0:06:57.360 --> 0:07:02.640 this today in one of our STRES meetings. So in 0:07:02.880 --> 0:07:08.159 twenty twenty four, what I think characterized some of the 0:07:08.279 --> 0:07:13.240 strength in technicals were foreign flows and particularly European flows, 0:07:13.280 --> 0:07:17.680 which were quite robust. The good news is, at least 0:07:17.720 --> 0:07:20.920 since the beginning of the year, looking at TICK data 0:07:20.960 --> 0:07:26.200 through January, we are seeing European flows still looking okay, 0:07:26.320 --> 0:07:28.280 and in a way that kind of makes sense because 0:07:28.360 --> 0:07:32.600 when we looked at the hedge spread for Europe, it 0:07:32.680 --> 0:07:35.720 actually looks pretty good if you're a European investor looking 0:07:35.800 --> 0:07:38.120 at the US market, so we can see how there 0:07:38.160 --> 0:07:41.800 could be some demand there. But where we've seen I 0:07:41.800 --> 0:07:46.440 think some deterioration would be in the area coming from Japan, 0:07:47.720 --> 0:07:51.480 and so whether you're looking at things on a hedge 0:07:51.520 --> 0:07:56.000 deal basis or on a hedge spread basis, the competition 0:07:56.120 --> 0:07:59.920 from jgbs is pretty keen and we haven't seen that 0:08:00.200 --> 0:08:05.880 years now. Granted, the Japanese investor hasn't been a big 0:08:06.840 --> 0:08:11.560 contributor to flow, certainly last year, but we had thought 0:08:11.720 --> 0:08:14.600 maybe this year we could see that change, but it 0:08:14.640 --> 0:08:17.680 really doesn't look like with the way valuations for that 0:08:18.120 --> 0:08:21.520 buyer base are looking that we can really count on that. 0:08:22.480 --> 0:08:24.880 So then we have to shift our focus and say, 0:08:25.440 --> 0:08:29.360 all right, well, domestically, you know what's going on with 0:08:29.480 --> 0:08:32.960 mutual fun flows. And it's a little bit tough to 0:08:33.000 --> 0:08:37.360 read the tea leaves right now, but EPFR started out 0:08:38.320 --> 0:08:42.840 pretty strong for much of this year. However, the run 0:08:42.960 --> 0:08:45.520 rate seems to be coming off a little bit. It's 0:08:45.559 --> 0:08:48.760 still positive, but certainly not at the pace it was 0:08:49.559 --> 0:08:52.960 several weeks ago. Now it's hard to know if that 0:08:53.200 --> 0:08:57.040 is simply because there's more volatility investors or maybe a 0:08:57.080 --> 0:09:01.079 little bit concerned at putting more money into fix income assets. 0:09:01.120 --> 0:09:04.760 Who knows, And that could come back. But right now, 0:09:05.200 --> 0:09:09.280 if we look at just a slightly lower run rate 0:09:09.480 --> 0:09:12.480 or I shouldn't say slightly, a lower run rate of 0:09:12.520 --> 0:09:19.160 EPFR and Japan investors not necessarily feeling that great about 0:09:19.160 --> 0:09:22.760 the US market, and the European investor maybe coming in. 0:09:23.200 --> 0:09:26.120 I feel like the technicals from where we were at 0:09:26.120 --> 0:09:28.720 the beginning of the year have deteriorated. 0:09:29.760 --> 0:09:30.080 Now. 0:09:30.280 --> 0:09:33.640 The last point you asked me about was valuations, and 0:09:33.679 --> 0:09:37.360 I think this is where I think we have to 0:09:37.400 --> 0:09:41.080 be maybe a little bit more circumspect about how the 0:09:41.120 --> 0:09:46.760 operating environment has changed. So when we look at spreads 0:09:46.800 --> 0:09:52.560 where they are today, we're pricing in very low levels 0:09:52.600 --> 0:09:55.920 of recession risk. And the way we think about that 0:09:56.000 --> 0:09:58.240 as we go back and look at where spreads were 0:09:59.080 --> 0:10:02.800 at various recessions andary periods and the distance from where 0:10:02.800 --> 0:10:06.480 those spreads were to today and think about how much 0:10:06.520 --> 0:10:12.720 predictability spreads are reflecting of recession coming forward, and so 0:10:12.800 --> 0:10:15.880 it's virtually zero, and I would add that's also true 0:10:15.880 --> 0:10:19.160 for Europe. But I think what's changed in the US 0:10:19.840 --> 0:10:22.439 is bringing it all the way back to the fundamentals. 0:10:22.480 --> 0:10:22.800 Again. 0:10:23.559 --> 0:10:28.960 We're at a more precarious position starting the year, still positive, 0:10:29.440 --> 0:10:31.840 but not the run rate that we were seeing at 0:10:31.840 --> 0:10:35.959 the end of last year. And you know, again, the 0:10:36.000 --> 0:10:39.720 tariffs are very uncertain, so we can't really have a 0:10:39.800 --> 0:10:42.840 zero probability of recession. So what does that mean for me? 0:10:43.880 --> 0:10:46.120 If we were to price in about a twenty percent 0:10:46.200 --> 0:10:49.520 probability of recession, that would get you out to about 0:10:49.520 --> 0:10:52.440 one hundred and twenty basis points on spreads. That feels 0:10:52.440 --> 0:10:55.800 a little aggressive right now. But what I think it 0:10:55.840 --> 0:10:59.640 does say is the idea of and I know we 0:10:59.640 --> 0:11:02.120 throw out fifty five basis points when we were chatting. 0:11:02.360 --> 0:11:04.280 That feels a little aggressive to me, and I think 0:11:04.320 --> 0:11:07.400 that came up at that year end seminar and I 0:11:07.480 --> 0:11:10.240 was probably a little bit more bullish on spreads. But 0:11:10.360 --> 0:11:13.760 I think, you know, maybe this range of let's say 0:11:14.280 --> 0:11:17.360 eighty eighty five basis points out to one hundred and 0:11:17.520 --> 0:11:20.240 ten basis points could be the range that we find 0:11:20.280 --> 0:11:25.480 ourselves in. And I think we just need to be 0:11:25.640 --> 0:11:28.199 paid a little bit more for the uncertainty risk now 0:11:28.200 --> 0:11:28.840 in the market. 0:11:30.280 --> 0:11:33.280 So, Lisa, you bring up a couple of extremely good 0:11:33.320 --> 0:11:35.920 points that I'm going to see if I can tackle 0:11:36.040 --> 0:11:41.439 in one neat follow up question, So you talk about 0:11:41.480 --> 0:11:45.480 how the international investor may or may not be as 0:11:45.640 --> 0:11:50.600 comfortable in the US, there's potential indication for some sort 0:11:50.640 --> 0:11:54.920 of flight to quality. How are you seeing that manifest 0:11:55.200 --> 0:11:57.720 in the investment grade space? And when you think about 0:11:57.760 --> 0:12:00.240 that three percent you doug or that you did, that 0:12:00.280 --> 0:12:04.520 you've thrown out, how are you then thinking about leverage 0:12:05.040 --> 0:12:08.640 in general? Are you seeing it massively grow? Are you 0:12:08.720 --> 0:12:13.320 seeing it sort of old steady assuming that companies won't 0:12:13.320 --> 0:12:16.640 bring on the debt. Where are you sort of measuring 0:12:16.679 --> 0:12:17.120 all of that? 0:12:17.960 --> 0:12:18.200 Yep. 0:12:18.600 --> 0:12:22.480 So when we look at our median industrial company leverage 0:12:22.480 --> 0:12:26.360 has been incredibly stable now for several quarters. We don't 0:12:26.360 --> 0:12:31.920 look particularly stretched at all. And in fact, you know, 0:12:31.960 --> 0:12:35.120 when we look at the behavior of companies, what's been 0:12:35.160 --> 0:12:38.360 interesting is if we divide up the world into let's say, 0:12:38.360 --> 0:12:41.559 our single A rated companies and our triple B rated companies, 0:12:42.320 --> 0:12:46.760 what you find is the single A rated companies really 0:12:46.760 --> 0:12:49.600 have been much more active in terms of share. 0:12:49.440 --> 0:12:50.440 Buybacks and the like. 0:12:51.000 --> 0:12:53.559 Whereas you're finding the triple B companies are much more 0:12:53.600 --> 0:12:57.959 conservative and not going down that path. So in that regard, 0:12:58.160 --> 0:13:02.520 I don't think we see any aggressive behavior. And I 0:13:02.559 --> 0:13:07.000 would also add that operating margins have been very stable 0:13:08.559 --> 0:13:11.120 and for our cohort that we look at the medians 0:13:11.160 --> 0:13:14.080 around fifteen percent, that's pretty good and it's been stable 0:13:15.080 --> 0:13:20.280 so that I don't see really any deterioration at that 0:13:20.360 --> 0:13:23.520 point or at the point we're at now, which kind 0:13:23.559 --> 0:13:28.280 of makes sense. And frankly, debt growth that's not been 0:13:28.400 --> 0:13:33.920 rising as well, So you know, this flight to quality, 0:13:34.559 --> 0:13:38.160 it's how does that manifest itself? And I think you know, 0:13:38.200 --> 0:13:41.000 you can look at the performance of let's say single 0:13:41.000 --> 0:13:45.400 A and triple B companies, and during this period where 0:13:45.400 --> 0:13:48.200 we've had a little bit of volatility, they've been kind 0:13:48.200 --> 0:13:53.000 of moving in tandem. And so for us, we think 0:13:53.160 --> 0:13:56.320 maybe this is a good opportunity to try and upgrade 0:13:56.320 --> 0:13:59.599 your portfolio a little bit and maybe you lean a 0:13:59.640 --> 0:14:04.800 little bit more heavily into single A rated companies. The 0:14:04.920 --> 0:14:07.160 other thing we like, and I've been focusing mainly on 0:14:07.240 --> 0:14:13.680 in industrials, but I think banks offer a very good opportunity. 0:14:14.280 --> 0:14:16.600 I know it's consensus that a lot of people. 0:14:16.320 --> 0:14:17.080 Like the banks. 0:14:17.840 --> 0:14:22.320 But you know, when you look at bank earnings, bank 0:14:22.360 --> 0:14:26.760 earnings have been very strong, capital has been very strong, 0:14:28.440 --> 0:14:32.880 losses reserving has been low. I know there's been a 0:14:32.880 --> 0:14:38.840 lot of talk about less regulation of banks, whether you 0:14:38.920 --> 0:14:43.040 know that means uh Bassil three endgame, you know, keeping 0:14:43.120 --> 0:14:48.360 things capital neutral, whether that means looking at the regional 0:14:48.400 --> 0:14:54.040 banks where you require mark to market on securities portfolios, holding, 0:14:54.080 --> 0:14:57.160 you know, issuing a little bit more debt for loss 0:14:57.160 --> 0:15:00.640 absorption if that were to be necessary. U. I think 0:15:00.680 --> 0:15:02.680 all these things, you know, when we look at them 0:15:02.680 --> 0:15:05.600 all together, the picture is still one of a sector 0:15:05.640 --> 0:15:09.320 that is in very good health. Yes, there might be 0:15:09.360 --> 0:15:12.440 a little bit more or a little bit less regulation 0:15:12.640 --> 0:15:15.280 for the jesips, maybe a little bit more regulation for 0:15:15.360 --> 0:15:19.000 the regionals, but I think, you know, the resiliency of 0:15:19.000 --> 0:15:23.280 these institutions make them very attractive in our opinion to hold. 0:15:23.720 --> 0:15:27.200 And I would add likewise, for the European financials, particularly 0:15:27.240 --> 0:15:32.400 European banks, the profitability is very strong, that capital is 0:15:32.520 --> 0:15:37.920 very strong, reserves, you know, losses are very low. I 0:15:37.960 --> 0:15:39.760 think they also make a lot of sense. 0:15:40.680 --> 0:15:43.640 The picture of painting least is quite a bearish outlook. 0:15:43.640 --> 0:15:47.040 You know a lot of uncertainty. Fundamentals are getting weaker. 0:15:47.960 --> 0:15:51.040 You know, technicals at the margin, you know, when you 0:15:51.080 --> 0:15:55.120 talk about Japan are going to be under pressure. But 0:15:55.280 --> 0:15:59.040 then you know, spread still around ninety on the US 0:15:59.200 --> 0:16:02.480 credit Every time there's there's a bout of volatility, everyone 0:16:02.520 --> 0:16:04.640 you know in the EPTY market panics in the market drop, 0:16:04.720 --> 0:16:08.400 but credit just holds rock steady. What's what's going on there? 0:16:09.200 --> 0:16:10.800 You know, it's. 0:16:10.640 --> 0:16:17.000 Funny, I think, I think because companies are in such 0:16:17.400 --> 0:16:20.440 you know, in such robust financial condition. I mean, the 0:16:20.520 --> 0:16:22.000 leverage metrics. 0:16:21.680 --> 0:16:22.920 Haven't budged. 0:16:24.160 --> 0:16:27.560 The you know, and we're talking about a slow down 0:16:27.760 --> 0:16:31.040 in the rate of growth of EBITDA. It's still positive 0:16:31.080 --> 0:16:34.240 growth though we're not talking about declines in ebit done 0:16:34.280 --> 0:16:40.520 negative EBITDA. We're talking about you know, tariffs coming on board. 0:16:41.120 --> 0:16:44.480 I think for many of our investment grade companies in 0:16:44.560 --> 0:16:47.800 many sectors, they have the ability to manage through that 0:16:48.280 --> 0:16:50.320 if they just know what the tariffs are going to be. 0:16:51.080 --> 0:16:55.480 So to me, I think we're we're creating an environment 0:16:55.560 --> 0:16:59.720 where things look a little bit less robust than the 0:16:59.720 --> 0:17:03.560 word were last year. If we get through this tariff period, 0:17:04.040 --> 0:17:07.480 liberation day, we find out what the tariffs are companies. 0:17:07.600 --> 0:17:10.879 Companies can't adjust, they just need to know what it 0:17:10.920 --> 0:17:13.800 is they're adjusting to. Then I think we get to 0:17:13.880 --> 0:17:17.919 a point where we'll manage along and you know, I 0:17:17.960 --> 0:17:20.280 think we just have to price in a little bit 0:17:20.320 --> 0:17:22.280 more tail risk. And so that range that I was 0:17:22.280 --> 0:17:26.840 talking about earlier feels okay to me. It's if we 0:17:26.960 --> 0:17:32.520 start to see a meaningful shift in flows and I look, 0:17:32.560 --> 0:17:36.640 I see, you know, everything we're talking about is shades 0:17:36.640 --> 0:17:41.840 of adjustment, right, and not something being completely upended. And 0:17:41.920 --> 0:17:46.320 so I can see us and I still maintain that 0:17:46.480 --> 0:17:50.480 maybe we'll have a carry like year return for investment 0:17:50.520 --> 0:17:57.639 grade credit in the absence of some external event, whether 0:17:57.720 --> 0:18:01.760 that be brought about through tear, whether that be brought 0:18:01.800 --> 0:18:05.720 about through some extraneous event we don't know about. But 0:18:05.840 --> 0:18:10.280 I would envision a period where we should be fairly stable, 0:18:10.359 --> 0:18:12.200 but you just need to be paid a little bit 0:18:12.240 --> 0:18:14.000 more to hold it. 0:18:14.080 --> 0:18:15.760 And you don't expect a ton of downgrades. 0:18:17.640 --> 0:18:21.480 I don't at this point in time. There are obviously 0:18:21.520 --> 0:18:26.800 some large issuers that have been downgraded, but now I don't. 0:18:26.960 --> 0:18:30.800 In fact, the trend still seems to be reasonably positive. 0:18:32.000 --> 0:18:32.239 You know. 0:18:32.760 --> 0:18:36.840 The other thing which we haven't talked about is, you know, 0:18:37.800 --> 0:18:40.640 look at what's going on with Europe right now, and 0:18:40.880 --> 0:18:44.080 that to me is a very interesting story. And this 0:18:44.240 --> 0:18:51.119 comes around to the whole global growth story because you know, 0:18:51.440 --> 0:18:54.320 we went through a period of time where growth was 0:18:54.359 --> 0:18:57.240 so anemic in Europe and we were waiting for the 0:18:57.280 --> 0:19:01.040 ECB to continue to cut and then we were worried 0:19:01.080 --> 0:19:05.640 about tariffs. And now we've got Germany, you know, passing 0:19:05.680 --> 0:19:11.320 these these programs for infrastructure and for defense spending, and 0:19:11.480 --> 0:19:15.440 you know, these are multi year fiscal you know, fiscal 0:19:15.560 --> 0:19:19.840 impulses that will have a positive impact on many companies. 0:19:20.720 --> 0:19:24.240 And so I think, you know, we've now got another 0:19:24.320 --> 0:19:28.480 part of the corporate market that should be beneficiaries. And 0:19:28.560 --> 0:19:32.280 these are companies that are they may be based in Europe, 0:19:32.280 --> 0:19:34.679 but they issue in dollar, they issue in euro they 0:19:34.720 --> 0:19:38.040 issue in different currencies, and these are ones that you know, 0:19:38.160 --> 0:19:42.760 perhaps we want to be focused on as beneficiaries, you know, 0:19:42.800 --> 0:19:45.359 in the area of capital goods for example. You know, 0:19:45.400 --> 0:19:48.080 there'll be companies that that I think will do well 0:19:48.160 --> 0:19:51.880 and and some of the analysis that we've done also 0:19:52.000 --> 0:19:56.320 when we're thinking about you know, these two opposing forces, 0:19:57.080 --> 0:20:00.560 one of tariffs that that's bad that could imposed on 0:20:00.600 --> 0:20:06.520 European companies, and one of infrastructure spending and defense spending 0:20:06.560 --> 0:20:10.200 that creates a positive stimulus. We find that at least 0:20:10.240 --> 0:20:14.440 in this coming year, the two probably offset each other, 0:20:15.200 --> 0:20:18.119 which is terrific, you know, if you've got something to 0:20:18.160 --> 0:20:21.399 offset the potential damage of tariffs. But as we start 0:20:21.400 --> 0:20:24.359 to look into twenty six and twenty seven, there should 0:20:24.359 --> 0:20:28.080 be a positive impulse for companies as a result of this. 0:20:30.240 --> 0:20:34.600 So, Lisa, something that I'm curious about. You know, you 0:20:34.800 --> 0:20:37.880 hint a little bit at this earlier, but you talk 0:20:37.920 --> 0:20:40.000 about how margins have kind of held study and how 0:20:40.080 --> 0:20:42.840 companies are still doing well, but. 0:20:42.960 --> 0:20:44.960 We have that tariff potential. 0:20:46.760 --> 0:20:49.040 A lot of the companies, at least in my sector 0:20:49.440 --> 0:20:54.960 post COVID cut costs in order to bolster margins, particularly 0:20:54.960 --> 0:20:59.000 as they waited for consumers to come back. Thinking about 0:20:59.040 --> 0:21:01.920 in that context, you know, obviously the leisure space is 0:21:02.080 --> 0:21:05.480 indirectly affected by tariffs, you know, as compared to something 0:21:05.520 --> 0:21:09.560 like autos that's much more directly affected. Where are you 0:21:09.640 --> 0:21:14.320 sort of thinking in terms of measuring the tariff effect, 0:21:14.520 --> 0:21:17.120 seeing what sort of cushion different types of companies have. 0:21:17.760 --> 0:21:19.199 Where are you thinking in terms of. 0:21:21.560 --> 0:21:25.359 How it's going to Oh, are companies going to be 0:21:25.400 --> 0:21:28.320 able to absorb this and push it on or is 0:21:28.359 --> 0:21:31.960 it going to be something that's so overhanging in this environment. 0:21:33.520 --> 0:21:37.080 So I think that's exactly the question to ask, and 0:21:37.200 --> 0:21:39.440 maybe what I can do is give you two extremes. 0:21:41.359 --> 0:21:44.240 One in an area that you'll be familiar with is 0:21:44.280 --> 0:21:48.640 the retail space, an area where margins are already pretty thin, 0:21:49.320 --> 0:21:52.520 and as you point out, I mean, companies there have 0:21:52.640 --> 0:21:57.080 had to really adapt, work on supply chain, work on 0:21:57.160 --> 0:22:01.240 cutting costs, trying to figure out efficiencies, and so the 0:22:01.359 --> 0:22:05.679 room for error is pretty low in a space that 0:22:05.840 --> 0:22:12.399 is highly exposed to foreign goods. And so when you 0:22:12.440 --> 0:22:17.399 think about the retail companies, for many of them, at 0:22:17.480 --> 0:22:21.360 least in the investment grade universe, as a percentage of sales, 0:22:21.480 --> 0:22:24.720 imports run between let's say a third and fifty percent, 0:22:25.359 --> 0:22:28.840 So it's substantial. And you know, one of the things 0:22:28.840 --> 0:22:31.920 that many companies have done is they've tried to move 0:22:31.960 --> 0:22:35.960 a little bit further away from China and diversify into 0:22:36.000 --> 0:22:39.360 other spaces. You know, Vietnam is often cited is a 0:22:39.600 --> 0:22:44.520 sourcing point, and yet you know, in a world where 0:22:44.600 --> 0:22:48.760 tariffs are going to be spread across many countries, potentially 0:22:49.800 --> 0:22:53.400 they're going to be very much in the crosshairs. Look 0:22:53.400 --> 0:22:57.560 at Mexico, you know, retailers get fresh foods from Mexico 0:22:57.640 --> 0:23:00.760 and the like. When you think of about you know, 0:23:00.840 --> 0:23:04.560 other areas which I didn't mention, like China or Vietnam 0:23:04.600 --> 0:23:07.520 and the like, it's appaeril, you know, it's electronics and 0:23:07.560 --> 0:23:11.200 other things. So that they will be very much impacted. 0:23:12.280 --> 0:23:12.560 Now. 0:23:12.960 --> 0:23:14.560 You know, one of the things they can do is 0:23:14.600 --> 0:23:17.399 they can go back to their suppliers and squeeze them more. 0:23:17.920 --> 0:23:20.680 But you probably are aware of the article which highlights 0:23:20.680 --> 0:23:23.159 that the Chinese government is saying no, no, you know 0:23:23.680 --> 0:23:25.800 you can't. You can't absorb any of more of this 0:23:25.960 --> 0:23:28.960 when the large US retailers are pushing back on you. 0:23:30.200 --> 0:23:33.160 So that becomes a little bit challenging. But I think 0:23:33.200 --> 0:23:36.480 what some of the largest retailers are very good at 0:23:36.880 --> 0:23:41.840 is understanding the price points for the different products that 0:23:41.880 --> 0:23:46.720 they offer, and so understanding where that elasticity is. And 0:23:47.080 --> 0:23:49.919 I would almost think about this as let's say a 0:23:49.960 --> 0:23:53.840 portfolio of products, and so you know that you've got 0:23:53.840 --> 0:23:56.680 a little bit of wiggle room to raise price on 0:23:56.680 --> 0:24:00.400 one skew, let's say, and you can watch and see 0:24:00.400 --> 0:24:04.080 what happens to demand, and if you know, demand starts 0:24:04.080 --> 0:24:06.360 to hit a little bit of a wall, then maybe 0:24:06.400 --> 0:24:09.760 you hold back on that, but maybe there's another product 0:24:09.880 --> 0:24:13.040 in the portfolio that you have scope to raise the 0:24:13.080 --> 0:24:15.720 pricing on. So I think we'll see a lot of 0:24:15.720 --> 0:24:20.719 different ways that that companies are going to adjust. But 0:24:20.880 --> 0:24:24.159 the retail space is one that it's very very tariff 0:24:24.240 --> 0:24:27.119 sensitive and it will have a very big impact on 0:24:27.200 --> 0:24:31.560 EBITDAF for companies as if we are to see these 0:24:31.680 --> 0:24:37.280 go into effect. On the other extreme is pharma and 0:24:37.320 --> 0:24:39.119 that's one where there is more. 0:24:39.000 --> 0:24:40.080 Of a limited impact. 0:24:40.920 --> 0:24:43.280 And you know what people might say is whoa wait 0:24:43.320 --> 0:24:45.720