Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2: And I'm Jody Lurry, a senior credit analyst covering leisure, lodging, gaming, restaurants,
Speaker 2: and rental car companies at Bloomberg Intelligence.
Speaker 3: This week, we're very pleased to.
Speaker 2: Welcome Lisa Coleman, head of Global Investment Grade Corporate Credit
Speaker 2: at JP Morgan Asset Management.
Speaker 3: How are you, Lisa, I'm great.
Speaker 4: Thank you so much for having me over today.
Speaker 2: Well, it's wonderful to have you and I'm just so
Speaker 2: excited to dip into an area that I'm extremely passionate about.
Speaker 1: Great, see Lisa. Just to set the scene there before
Speaker 1: we begin, Global markets are getting whipswored by recession fears
Speaker 1: and haphazard and erretic US policymaking, particularly on trade. Despite
Speaker 1: that credit spreads are quite thin the board, there's a
Speaker 1: hope that the longer term trajectory of the US economy
Speaker 1: remains up despite some short term pain and volatility. Market
Speaker 1: optimists believe the new administration has their back and will
Speaker 1: do its best to defend the economy, that everything will
Speaker 1: be okay in the end, bond and loan markets are
Speaker 1: pricing in very low odds of US recession, even as
Speaker 1: talk of economic downturn and stagflation become more frequent, with
Speaker 1: consumers throwing in the towel and business leaders putting investments
Speaker 1: on hold, complaining that they can't take long term decisions
Speaker 1: in this kind of an environment. Treasury yields meanwhile remain high,
Speaker 1: keeping buyers of fixed income happy, especially those with floating
Speaker 1: rate assets. Above all, there's not enough supply of corporate
Speaker 1: debt to satisfy the growing demand. But what's your view, lease,
Speaker 1: So there seems to be a lot of risk out
Speaker 1: there that isn't maybe in the price. And from your standpoint,
Speaker 1: are we stressing too much? How our high grade borrowers
Speaker 1: doing in this environment at the moment?
Speaker 4: Hey, how much time do we have to talk about this?
Speaker 1: We can go on. We have time.
Speaker 4: So look, I mean, the way I like to think
Speaker 4: about it is, there's so much news bombarding us every
Speaker 4: day and the markets are just you know, swooning back
Speaker 4: and forth depending upon the news flow. So for me,
Speaker 4: I always try to take things back down to the basics,
Speaker 4: and so when I think about companies, you know, what's
Speaker 4: underpinning the strength of companies today, and so maybe we
Speaker 4: could start there and hopefully not get too much into
Speaker 4: the weeds.
Speaker 5: But you know, one of the.
Speaker 4: Things we do is we try to understand what the
Speaker 4: earnings growth looks like for companies, and so in our
Speaker 4: world of credit, that means EBITDAH because that's an important
Speaker 4: foundation for understanding the direction that leverage is going. And
Speaker 4: so crucial to that is working with our analyst team
Speaker 4: and we try to project out what forward EBITDUG growth
Speaker 4: will look like for industrial companies, and that really allows
Speaker 4: us to get a baseline for you know, what do
Speaker 4: we expect companies to do. But also so if we
Speaker 4: can aggregate up this individual company data into sectors and
Speaker 4: then into the broader market, it can also provide us
Speaker 4: some bottom up insight that can complement what we're getting
Speaker 4: from top down economic data. So when we were ending
Speaker 4: the fourth quarter of last year, we had asked our analysts,
Speaker 4: so where do you think going forward for the next
Speaker 4: twelve months, where do you think growth is going to
Speaker 4: come in for the median industrial company? And the EBIT
Speaker 4: down number was coming in around five percent, which feels
Speaker 4: about right, you know, it's again we're not using like
Speaker 4: the you can't comp that to the S and P
Speaker 4: expectations because this is median. It's and we have a
Speaker 4: different composition. But it gives you directionally where we were thinking.
Speaker 4: And in fact, in the fourth quarter, oddly enough, you
Speaker 4: know where did EBITDUG growth come in around five percent?
Speaker 4: But now you know here we are, we're starting a
Speaker 4: new quarter, and where do we think we're going to
Speaker 4: be in twenty five And you know, to the point
Speaker 4: you were making earlier James, about you know, a lot
Speaker 4: of news hitting the market and fears. We began this
Speaker 4: year with companies really guiding down a little bit from
Speaker 4: where they were. You know, it makes sense is we're
Speaker 4: starting a new year, companies have a chance to refresh,
Speaker 4: they're recognizing some uncertainties, and so we saw earnings getting
Speaker 4: guided down and in fact the starting point for us
Speaker 4: now when we're looking at that forward growth for twenty
Speaker 4: five is an EBADUG growth number actually closer to three percent.
Speaker 4: So that's a big difference. Now, look, I think there's
Speaker 4: probably a little bit of wiggle room in there and
Speaker 4: a little bit of uncertainty, but I think that you know,
Speaker 4: that is a starting point gives us a little bit
Speaker 4: less of a cushion in the event that we start
Speaker 4: to get bad news on tariffs.
Speaker 2: So, Lisa, you were one of our steamed guests at
Speaker 2: the end of the year for our Credit Outlook event,
Speaker 2: and during that event, everybody talked about potential for spreads
Speaker 2: going even tighter, and it was a yield versus spread conversation. Now, now,
Speaker 2: something you brought up which you touched on just now
Speaker 2: with the fundamentals, but you said there were three parts
Speaker 2: that you look at, fundamentals, technicals, and valuations. So it
Speaker 2: sounds like the fundamental side you're a little bit less
Speaker 2: optimistic about going into this year, But how are you
Speaker 2: feeling on the technicals and the valuations.
Speaker 4: Okay, so you're right about the fundamentals, And if I
Speaker 4: could just one other point on fundamentals before we talk
Speaker 4: about technicals and valuations. One of the things that we
Speaker 4: did is we did a little bit of stress testing
Speaker 4: on the fundamentals and we said, we don't really know
Speaker 4: where tariffs are going to shake out, but let's just
Speaker 4: assume a ten percent across the board tariff that actually
Speaker 4: is going to be a hit to these ebadon numbers.
Speaker 4: By about a percentage point, and if I were to
Speaker 4: put that in context, that gets us to ebadon numbers
Speaker 4: that were prevalent back in twenty three. And remember in
Speaker 4: twenty three that was a period where there were a
Speaker 4: lot of fears about more of a hard landing, and
Speaker 4: so I just think it's important to note that the
Speaker 4: tariffs bring us into a territory that is.
Speaker 5: A little bit more uncertain.
Speaker 4: And also remember back in twenty three we were getting
Speaker 4: some fiscal tailwinds from the IRA, from the Infrastructure Bill,
Speaker 4: from the Chips and Science Act, which we may not
Speaker 4: have sufficient or a similar kind of fiscal stimulus this year.
Speaker 4: So just want to get that one point out. Now,
Speaker 4: in the technicals, I think we're seeing a little bit
Speaker 4: of a deterioration. In fact, we were just chatting about
Speaker 4: this today in one of our STRES meetings. So in
Speaker 4: twenty twenty four, what I think characterized some of the
Speaker 4: strength in technicals were foreign flows and particularly European flows,
Speaker 4: which were quite robust. The good news is, at least
Speaker 4: since the beginning of the year, looking at TICK data
Speaker 4: through January, we are seeing European flows still looking okay,
Speaker 4: and in a way that kind of makes sense because
Speaker 4: when we looked at the hedge spread for Europe, it
Speaker 4: actually looks pretty good if you're a European investor looking
Speaker 4: at the US market, so we can see how there
Speaker 4: could be some demand there. But where we've seen I
Speaker 4: think some deterioration would be in the area coming from Japan,
Speaker 4: and so whether you're looking at things on a hedge
Speaker 4: deal basis or on a hedge spread basis, the competition
Speaker 4: from jgbs is pretty keen and we haven't seen that
Speaker 4: years now. Granted, the Japanese investor hasn't been a big
Speaker 4: contributor to flow, certainly last year, but we had thought
Speaker 4: maybe this year we could see that change, but it
Speaker 4: really doesn't look like with the way valuations for that
Speaker 4: buyer base are looking that we can really count on that.
Speaker 4: So then we have to shift our focus and say,
Speaker 4: all right, well, domestically, you know what's going on with
Speaker 4: mutual fun flows. And it's a little bit tough to
Speaker 4: read the tea leaves right now, but EPFR started out
Speaker 4: pretty strong for much of this year. However, the run
Speaker 4: rate seems to be coming off a little bit. It's
Speaker 4: still positive, but certainly not at the pace it was
Speaker 4: several weeks ago. Now it's hard to know if that
Speaker 4: is simply because there's more volatility investors or maybe a
Speaker 4: little bit concerned at putting more money into fix income assets.
Speaker 4: Who knows, And that could come back. But right now,
Speaker 4: if we look at just a slightly lower run rate
Speaker 4: or I shouldn't say slightly, a lower run rate of
Speaker 4: EPFR and Japan investors not necessarily feeling that great about
Speaker 4: the US market, and the European investor maybe coming in.
Speaker 4: I feel like the technicals from where we were at
Speaker 4: the beginning of the year have deteriorated.
Speaker 5: Now.
Speaker 4: The last point you asked me about was valuations, and
Speaker 4: I think this is where I think we have to
Speaker 4: be maybe a little bit more circumspect about how the
Speaker 4: operating environment has changed. So when we look at spreads
Speaker 4: where they are today, we're pricing in very low levels
Speaker 4: of recession risk. And the way we think about that
Speaker 4: as we go back and look at where spreads were
Speaker 4: at various recessions andary periods and the distance from where
Speaker 4: those spreads were to today and think about how much
Speaker 4: predictability spreads are reflecting of recession coming forward, and so
Speaker 4: it's virtually zero, and I would add that's also true
Speaker 4: for Europe. But I think what's changed in the US
Speaker 4: is bringing it all the way back to the fundamentals.
Speaker 5: Again.
Speaker 4: We're at a more precarious position starting the year, still positive,
Speaker 4: but not the run rate that we were seeing at
Speaker 4: the end of last year. And you know, again, the
Speaker 4: tariffs are very uncertain, so we can't really have a
Speaker 4: zero probability of recession. So what does that mean for me?
Speaker 4: If we were to price in about a twenty percent
Speaker 4: probability of recession, that would get you out to about
Speaker 4: one hundred and twenty basis points on spreads. That feels
Speaker 4: a little aggressive right now. But what I think it
Speaker 4: does say is the idea of and I know we
Speaker 4: throw out fifty five basis points when we were chatting.
Speaker 4: That feels a little aggressive to me, and I think
Speaker 4: that came up at that year end seminar and I
Speaker 4: was probably a little bit more bullish on spreads. But
Speaker 4: I think, you know, maybe this range of let's say
Speaker 4: eighty eighty five basis points out to one hundred and
Speaker 4: ten basis points could be the range that we find
Speaker 4: ourselves in. And I think we just need to be
Speaker 4: paid a little bit more for the uncertainty risk now
Speaker 4: in the market.
Speaker 2: So, Lisa, you bring up a couple of extremely good
Speaker 2: points that I'm going to see if I can tackle
Speaker 2: in one neat follow up question, So you talk about
Speaker 2: how the international investor may or may not be as
Speaker 2: comfortable in the US, there's potential indication for some sort
Speaker 2: of flight to quality. How are you seeing that manifest
Speaker 2: in the investment grade space? And when you think about
Speaker 2: that three percent you doug or that you did, that
Speaker 2: you've thrown out, how are you then thinking about leverage
Speaker 2: in general? Are you seeing it massively grow? Are you
Speaker 2: seeing it sort of old steady assuming that companies won't
Speaker 2: bring on the debt. Where are you sort of measuring
Speaker 2: all of that?
Speaker 5: Yep.
Speaker 4: So when we look at our median industrial company leverage
Speaker 4: has been incredibly stable now for several quarters. We don't
Speaker 4: look particularly stretched at all. And in fact, you know,
Speaker 4: when we look at the behavior of companies, what's been
Speaker 4: interesting is if we divide up the world into let's say,
Speaker 4: our single A rated companies and our triple B rated companies,
Speaker 4: what you find is the single A rated companies really
Speaker 4: have been much more active in terms of share.
Speaker 5: Buybacks and the like.
Speaker 4: Whereas you're finding the triple B companies are much more
Speaker 4: conservative and not going down that path. So in that regard,
Speaker 4: I don't think we see any aggressive behavior. And I
Speaker 4: would also add that operating margins have been very stable
Speaker 4: and for our cohort that we look at the medians
Speaker 4: around fifteen percent, that's pretty good and it's been stable
Speaker 4: so that I don't see really any deterioration at that
Speaker 4: point or at the point we're at now, which kind
Speaker 4: of makes sense. And frankly, debt growth that's not been
Speaker 4: rising as well, So you know, this flight to quality,
Speaker 4: it's how does that manifest itself? And I think you know,
Speaker 4: you can look at the performance of let's say single
Speaker 4: A and triple B companies, and during this period where
Speaker 4: we've had a little bit of volatility, they've been kind
Speaker 4: of moving in tandem. And so for us, we think
Speaker 4: maybe this is a good opportunity to try and upgrade
Speaker 4: your portfolio a little bit and maybe you lean a
Speaker 4: little bit more heavily into single A rated companies. The
Speaker 4: other thing we like, and I've been focusing mainly on
Speaker 4: in industrials, but I think banks offer a very good opportunity.
Speaker 4: I know it's consensus that a lot of people.
Speaker 5: Like the banks.
Speaker 4: But you know, when you look at bank earnings, bank
Speaker 4: earnings have been very strong, capital has been very strong,
Speaker 4: losses reserving has been low. I know there's been a
Speaker 4: lot of talk about less regulation of banks, whether you
Speaker 4: know that means uh Bassil three endgame, you know, keeping
Speaker 4: things capital neutral, whether that means looking at the regional
Speaker 4: banks where you require mark to market on securities portfolios, holding,
Speaker 4: you know, issuing a little bit more debt for loss
Speaker 4: absorption if that were to be necessary. U. I think
Speaker 4: all these things, you know, when we look at them
Speaker 4: all together, the picture is still one of a sector
Speaker 4: that is in very good health. Yes, there might be
Speaker 4: a little bit more or a little bit less regulation
Speaker 4: for the jesips, maybe a little bit more regulation for
Speaker 4: the regionals, but I think, you know, the resiliency of
Speaker 4: these institutions make them very attractive in our opinion to hold.
Speaker 4: And I would add likewise, for the European financials, particularly
Speaker 4: European banks, the profitability is very strong, that capital is
Speaker 4: very strong, reserves, you know, losses are very low. I
Speaker 4: think they also make a lot of sense.
Speaker 1: The picture of painting least is quite a bearish outlook.
Speaker 1: You know a lot of uncertainty. Fundamentals are getting weaker.
Speaker 1: You know, technicals at the margin, you know, when you
Speaker 1: talk about Japan are going to be under pressure. But
Speaker 1: then you know, spread still around ninety on the US
Speaker 1: credit Every time there's there's a bout of volatility, everyone
Speaker 1: you know in the EPTY market panics in the market drop,
Speaker 1: but credit just holds rock steady. What's what's going on there?
Speaker 5: You know, it's.
Speaker 4: Funny, I think, I think because companies are in such
Speaker 4: you know, in such robust financial condition. I mean, the
Speaker 4: leverage metrics.
Speaker 5: Haven't budged.
Speaker 4: The you know, and we're talking about a slow down
Speaker 4: in the rate of growth of EBITDA. It's still positive
Speaker 4: growth though we're not talking about declines in ebit done
Speaker 4: negative EBITDA. We're talking about you know, tariffs coming on board.
Speaker 4: I think for many of our investment grade companies in
Speaker 4: many sectors, they have the ability to manage through that
Speaker 4: if they just know what the tariffs are going to be.
Speaker 4: So to me, I think we're we're creating an environment
Speaker 4: where things look a little bit less robust than the
Speaker 4: word were last year. If we get through this tariff period,
Speaker 4: liberation day, we find out what the tariffs are companies.
Speaker 4: Companies can't adjust, they just need to know what it
Speaker 4: is they're adjusting to. Then I think we get to
Speaker 4: a point where we'll manage along and you know, I
Speaker 4: think we just have to price in a little bit
Speaker 4: more tail risk. And so that range that I was
Speaker 4: talking about earlier feels okay to me. It's if we
Speaker 4: start to see a meaningful shift in flows and I look,
Speaker 4: I see, you know, everything we're talking about is shades
Speaker 4: of adjustment, right, and not something being completely upended. And
Speaker 4: so I can see us and I still maintain that
Speaker 4: maybe we'll have a carry like year return for investment
Speaker 4: grade credit in the absence of some external event, whether
Speaker 4: that be brought about through tear, whether that be brought
Speaker 4: about through some extraneous event we don't know about. But
Speaker 4: I would envision a period where we should be fairly stable,
Speaker 4: but you just need to be paid a little bit
Speaker 4: more to hold it.
Speaker 1: And you don't expect a ton of downgrades.
Speaker 4: I don't at this point in time. There are obviously
Speaker 4: some large issuers that have been downgraded, but now I don't.
Speaker 4: In fact, the trend still seems to be reasonably positive.
Speaker 3: You know.
Speaker 4: The other thing which we haven't talked about is, you know,
Speaker 4: look at what's going on with Europe right now, and
Speaker 4: that to me is a very interesting story. And this
Speaker 4: comes around to the whole global growth story because you know,
Speaker 4: we went through a period of time where growth was
Speaker 4: so anemic in Europe and we were waiting for the
Speaker 4: ECB to continue to cut and then we were worried
Speaker 4: about tariffs. And now we've got Germany, you know, passing
Speaker 4: these these programs for infrastructure and for defense spending, and
Speaker 4: you know, these are multi year fiscal you know, fiscal
Speaker 4: impulses that will have a positive impact on many companies.
Speaker 4: And so I think, you know, we've now got another
Speaker 4: part of the corporate market that should be beneficiaries. And
Speaker 4: these are companies that are they may be based in Europe,
Speaker 4: but they issue in dollar, they issue in euro they
Speaker 4: issue in different currencies, and these are ones that you know,
Speaker 4: perhaps we want to be focused on as beneficiaries, you know,
Speaker 4: in the area of capital goods for example. You know,
Speaker 4: there'll be companies that that I think will do well
Speaker 4: and and some of the analysis that we've done also
Speaker 4: when we're thinking about you know, these two opposing forces,
Speaker 4: one of tariffs that that's bad that could imposed on
Speaker 4: European companies, and one of infrastructure spending and defense spending
Speaker 4: that creates a positive stimulus. We find that at least
Speaker 4: in this coming year, the two probably offset each other,
Speaker 4: which is terrific, you know, if you've got something to
Speaker 4: offset the potential damage of tariffs. But as we start
Speaker 4: to look into twenty six and twenty seven, there should
Speaker 4: be a positive impulse for companies as a result of this.
Speaker 2: So, Lisa, something that I'm curious about. You know, you
Speaker 2: hint a little bit at this earlier, but you talk
Speaker 2: about how margins have kind of held study and how
Speaker 2: companies are still doing well, but.
Speaker 3: We have that tariff potential.
Speaker 2: A lot of the companies, at least in my sector
Speaker 2: post COVID cut costs in order to bolster margins, particularly
Speaker 2: as they waited for consumers to come back. Thinking about
Speaker 2: in that context, you know, obviously the leisure space is
Speaker 2: indirectly affected by tariffs, you know, as compared to something
Speaker 2: like autos that's much more directly affected. Where are you
Speaker 2: sort of thinking in terms of measuring the tariff effect,
Speaker 2: seeing what sort of cushion different types of companies have.
Speaker 3: Where are you thinking in terms of.
Speaker 2: How it's going to Oh, are companies going to be
Speaker 2: able to absorb this and push it on or is
Speaker 2: it going to be something that's so overhanging in this environment.
Speaker 4: So I think that's exactly the question to ask, and
Speaker 4: maybe what I can do is give you two extremes.
Speaker 4: One in an area that you'll be familiar with is
Speaker 4: the retail space, an area where margins are already pretty thin,
Speaker 4: and as you point out, I mean, companies there have
Speaker 4: had to really adapt, work on supply chain, work on
Speaker 4: cutting costs, trying to figure out efficiencies, and so the
Speaker 4: room for error is pretty low in a space that
Speaker 4: is highly exposed to foreign goods. And so when you
Speaker 4: think about the retail companies, for many of them, at
Speaker 4: least in the investment grade universe, as a percentage of sales,
Speaker 4: imports run between let's say a third and fifty percent,
Speaker 4: So it's substantial. And you know, one of the things
Speaker 4: that many companies have done is they've tried to move
Speaker 4: a little bit further away from China and diversify into
Speaker 4: other spaces. You know, Vietnam is often cited is a
Speaker 4: sourcing point, and yet you know, in a world where
Speaker 4: tariffs are going to be spread across many countries, potentially
Speaker 4: they're going to be very much in the crosshairs. Look
Speaker 4: at Mexico, you know, retailers get fresh foods from Mexico
Speaker 4: and the like. When you think of about you know,
Speaker 4: other areas which I didn't mention, like China or Vietnam
Speaker 4: and the like, it's appaeril, you know, it's electronics and
Speaker 4: other things. So that they will be very much impacted.
Speaker 3: Now.
Speaker 4: You know, one of the things they can do is
Speaker 4: they can go back to their suppliers and squeeze them more.
Speaker 4: But you probably are aware of the article which highlights
Speaker 4: that the Chinese government is saying no, no, you know
Speaker 4: you can't. You can't absorb any of more of this
Speaker 4: when the large US retailers are pushing back on you.
Speaker 4: So that becomes a little bit challenging. But I think
Speaker 4: what some of the largest retailers are very good at
Speaker 4: is understanding the price points for the different products that
Speaker 4: they offer, and so understanding where that elasticity is. And
Speaker 4: I would almost think about this as let's say a
Speaker 4: portfolio of products, and so you know that you've got
Speaker 4: a little bit of wiggle room to raise price on
Speaker 4: one skew, let's say, and you can watch and see
Speaker 4: what happens to demand, and if you know, demand starts
Speaker 4: to hit a little bit of a wall, then maybe
Speaker 4: you hold back on that, but maybe there's another product
Speaker 4: in the portfolio that you have scope to raise the
Speaker 4: pricing on. So I think we'll see a lot of
Speaker 4: different ways that that companies are going to adjust. But
Speaker 4: the retail space is one that it's very very tariff
Speaker 4: sensitive and it will have a very big impact on
Speaker 4: EBITDAF for companies as if we are to see these
Speaker 4: go into effect. On the other extreme is pharma and
Speaker 4: that's one where there is more.
Speaker 5: Of a limited impact.
Speaker 4: And you know what people might say is whoa wait
Speaker 4: a minute, you know what about you know the companies
Speaker 4: that are producing in Ireland. You know what's going to
Speaker 4: happen with them. They're going to get tariffed. And the
Speaker 4: response that you know I have from talking with our
Speaker 4: analysts who covers the spaces, you know, yes, there are
Speaker 4: some high value products that are produced in Ireland. It's
Speaker 4: not just about generics. But again everything is the tariff
Speaker 4: is going to be based on cost and so these
Speaker 4: companies are on the opposite extreme where they have very
Speaker 4: high margins compared to what retailers have, and so they
Speaker 4: do have an ability to absorb some of those costs.
Speaker 4: The other part of pharma is, you know, you've got
Speaker 4: the APIs the products that are used to create the pharmaceuticals,
Speaker 4: the things, the inputs required that provide the therapeutic effect,
Speaker 4: and you know those could potentially be tariffed as they
Speaker 4: come into the US. But again, the cost of these
Speaker 4: is small relative to the margins that pharma companies are experiencing.
Speaker 4: And it's interesting and talking with our analyst about this,
Speaker 4: you know what he says is, you know, maybe some
Speaker 4: of the bigger threat to pharma companies comes in two sources.
Speaker 4: The first is what's going on with the pricing negotiations
Speaker 4: on the list of drugs for medicare and medicaid, which
Speaker 4: it started out with ten drugs. Now we're expanding to fifteen,
Speaker 4: so that will have an impact. But the other thing
Speaker 4: is an area which I'm not an expert in, is
Speaker 4: this whole issue of guilty, you know, the foreign tax
Speaker 4: on IP and that is an area where granted right
Speaker 4: now it's pretty low. I want to say it's a
Speaker 4: little over ten percent. If I'm not mistaken, that may
Speaker 4: increase in twenty six. But you know, if the new
Speaker 4: administration wants to really pressure the pharma companies a little
Speaker 4: bit more, if they are able to get congressional approval,
Speaker 4: they could also raise guilty a little bit more. So
Speaker 4: I just go down that you know, list of different
Speaker 4: things that you know, here's a space in the pharma
Speaker 4: area where tariffs maybe aren't going to have that big
Speaker 4: an impact.
Speaker 5: You've got two other issues.
Speaker 4: You've got taxes, and you've got you know, now renegotiator
Speaker 4: negotiated prices, but the margins are so big that it's
Speaker 4: not likely to have a material impact.
Speaker 2: Before I dig deeper into the healthcare discussion, because I
Speaker 2: am curious on your thoughts about the administration's choices in
Speaker 2: terms of you know, HHS head who may or may
Speaker 2: not be favorable to the pharma space. But beyond that,
Speaker 2: going back to the consumer, something that that was interesting
Speaker 2: that you brought up is you talked about apparel consumers
Speaker 2: or a pair apparel retailing as well as food retailing,
Speaker 2: and the food retailing of course being tremendously sourced from
Speaker 2: Mexico or Canada in some cases, thinking along those lines,
Speaker 2: so I write about restaurants, and obviously restaurants have been
Speaker 2: a little bit more mixed over the past year because
Speaker 2: low income consumers have definitely been pulling back into terms
Speaker 2: of their spending.
Speaker 3: We're already seeing.
Speaker 2: That a lot of retailers, the traditional apparel retailers, are
Speaker 2: being affected by consumers choosing not to spend on discretionary
Speaker 2: spending of goods and rather on services, which is great
Speaker 2: for a lot of my companies. But thinking along those
Speaker 2: lines of you have apparel retailers, a lot of them
Speaker 2: feeling the pressure of consumers not wanting to consume there.
Speaker 2: Then you have restaurants that have already been a little
Speaker 2: bit mixed. Then you throw tariffs into the mix. And Darden,
Speaker 2: of course reported last week they indicated that.
Speaker 3: They're able to absorb a lot of it.
Speaker 2: They do have some concerns, but by and large, you know,
Speaker 2: even from things such as kitchen supplies, they're short of
Speaker 2: anticipating the effects of that. But even so, that's just
Speaker 2: one company and a lot of the other companies might
Speaker 2: be more directly affected.
Speaker 3: How are you sort of.
Speaker 2: Looking at it in terms of I guess sub sectors.
Speaker 2: What area within consumer discretionary are you comfortable with or
Speaker 2: are you just saying, you know what, right now it's
Speaker 2: a little uncertain, let's just go into pharma, let's go
Speaker 2: into healthcare.
Speaker 5: Yeah, So it's interesting.
Speaker 4: We don't have a lot to choose from in the
Speaker 4: IG universe. You know, as you'll know, a lot of
Speaker 4: the department stores no longer are investment grade, so we
Speaker 4: don't have them to worry about. I'll leave that to
Speaker 4: my high yield colleagues, and so that's their problem. So
Speaker 4: really for us we have tilted into pharma. We like
Speaker 4: that space. There are still you know, the pharma model
Speaker 4: that has worked well for us.
Speaker 5: Is the company that makes an acquisition.
Speaker 4: And think about it, you know a lot of these
Speaker 4: pharma companies aren't doing us. There are a lot of
Speaker 4: their own R and D and research and eternally they're
Speaker 4: looking for companies that are external and looking for an
Speaker 4: opportunity to buy those. They buy them, they put a
Speaker 4: little bit of leverage on the company, and then they
Speaker 4: go through a deleveraging process. And so we like when
Speaker 4: those opportunities happen where we have confidence that that is
Speaker 4: the management's approach to acquisitions. You make the acquisition, you
Speaker 4: add a little bit of leverage, you then deleverage over time,
Speaker 4: and so in that regard, when those opportunities provide themselves
Speaker 4: to us, we like to invest in those. And we
Speaker 4: still think that there are some companies and well I
Speaker 4: can't name specific companies, but there are some that are
Speaker 4: still in the process of that deleveraging mode. And so
Speaker 4: we like those stories, and we like the stability of pharma,
Speaker 4: notwithstanding some of the challenges that they may be facing,
Speaker 4: as you've highlighted in the coming year.
Speaker 1: Going back to the valuation point where we started, do
Speaker 1: you buy the idea that this is a substantially fundamentally
Speaker 1: different market now than you know where you started your career.
Speaker 1: I mean, that's that's the pitch I'm getting. You know,
Speaker 1: when I ask people about spreads all day long, they say,
Speaker 1: first of all, don't look at the spreads, just look
Speaker 1: at the yield, and we'll buy ig all day long
Speaker 1: at five percent. Secondly, they say, it doesn't really matter
Speaker 1: because you know, it's a different market, it's high quality,
Speaker 1: it's more liquid, you can do these massive portfolio trades.
Speaker 1: You know, it's much much, much more of a value
Speaker 1: you know, there's all this value there that necessitates tighter spreads.
Speaker 1: Do you buy that?
Speaker 4: I think the market has changed even more fundamentally than that.
Speaker 4: So I started my career back in the eighties. It
Speaker 4: was a long time ago, and I think the difference
Speaker 4: is that the environment has changed. And so for much
Speaker 4: of my career, you had periods of time where you
Speaker 4: had an economic cycle, and so you had periods where
Speaker 4: you know, the economy would be growing, companies would be
Speaker 4: putting on leverage, and then you know, they'd become over
Speaker 4: levered and something would happen with the economy and you
Speaker 4: weren't going to necessarily get bailed out by the FED
Speaker 4: or by aggressive fiscal policy, and you'd have these corrections
Speaker 4: which would clear out a lot of the you know,
Speaker 4: the offenders, and in my market, that would mean they
Speaker 4: would get downgraded to high yield. And I think about
Speaker 4: that period of one oh two where you had corporate
Speaker 4: malfeasance which really compounded problems, or you just had you know,
Speaker 4: companies just leveraged up at a period of time where
Speaker 4: the economy fell away and you had a cleansing. And
Speaker 4: you know, now, what I think happens is we don't
Speaker 4: at least an investment grade. Really have that. And you know,
Speaker 4: I think back on when we had COVID hit and
Speaker 4: you had a coupled a couple of companies that were downgraded,
Speaker 4: and that happened before the FED had announced their plan
Speaker 4: to back essentially backs up corporate debt, which then put
Speaker 4: a floor under things. So I feel like there's and
Speaker 4: I hate to say it, there's a put because I
Speaker 4: think it's just an awful way to describe things. But
Speaker 4: I don't think we have, you know, the same market
Speaker 4: where you get these massive moves and spreads because there
Speaker 4: is this risk of widespread downgrades, we seem to have
Speaker 4: some official support that prevents that from happening.
Speaker 1: And how much of it do you think comes from
Speaker 1: the lack of supply? You know, net new supply, There's
Speaker 1: not much of it. There's no deal making. Also, you know,
Speaker 1: the private credit guys have got their eyes on IG
Speaker 1: as well, So you know, potentially you've got all the
Speaker 1: supply being siphoned off and demand remains steady. Maybe it
Speaker 1: drops off a bit, but that just squeezes the spread,
Speaker 1: doesn't it.
Speaker 4: It does bear in mind it's interesting just the size
Speaker 4: of our market. Also, we're talking about this today. So
Speaker 4: the size of our market has been growing and growing,
Speaker 4: and think back to twenty twenty, where we had so
Speaker 4: much issuance that was going on, and now we're in
Speaker 4: a period where five years later, a lot of that
Speaker 4: issuance is now maturing and is getting rolled over. And
Speaker 4: so just to stay invested, you have to just keep buying.
Speaker 4: So it's not just you know, the private credit people
Speaker 4: might be circling for ig Although I hear a lot
Speaker 4: about it, I still I'm not quite sure how it's
Speaker 4: all going to work. But you hear a lot about that,
Speaker 4: and you have you know, more diversified buyer bases and like.
Speaker 4: But I just think the reinvestment of the size of
Speaker 4: our market is very large and creates a natural demand.
Speaker 1: Been a kind of you know, perception at least. And
Speaker 1: I'm interested in your thoughts and how real it is
Speaker 1: that you know, maybe people need to diversify out of
Speaker 1: the US, given you know, the volatility, given the changes
Speaker 1: that are happening very very quickly in the political side.
Speaker 1: To what extent you seeing that, to what e's scent?
Speaker 1: Is it real? And what are the limits to that?
Speaker 4: Yeah, I think there was an amazing opportunity within the
Speaker 4: past several months to be able to invest in European
Speaker 4: credit relative to US credit. And I remember we were
Speaker 4: looking at some things in one of our strategy meetings
Speaker 4: and it was just so striking the differentials between the
Speaker 4: two and it just seemed to make sense that, you know,
Speaker 4: even for US companies that were that had Euro denominated debt,
Speaker 4: the spreads, even adjusting for swap spread differentials, just were
Speaker 4: that much cheaper. So that to US was a really
Speaker 4: great opportunity. Now what we've seen is that differential really compressed,
Speaker 4: so the two markets are now essentially on a government
Speaker 4: bond spread basis, or spread over government bonds trading on
Speaker 4: top of each other. So you know, maybe that opportunity
Speaker 4: has waned for a little bit, but we did see
Speaker 4: over the past several weeks a little bit of US
Speaker 4: under performance. So one of the things you can do
Speaker 4: is say, well, maybe there are some very rich European bonds,
Speaker 4: we can now swap those back into US. So I
Speaker 4: think there's great opportunities to rotate between the two markets.
Speaker 4: And I do think, you know, as I was saying before,
Speaker 4: what's going on with Europe is really pretty incredible, and
Speaker 4: I think you will see companies that are that are
Speaker 4: going to benefit, whether that's in the transport space. I
Speaker 4: mentioned the camp Good space. I think banks in Europe
Speaker 4: are going to benefit from what's happening there. So I
Speaker 4: think we just have to watch when the valuations lean
Speaker 4: more into that area to take advantage of those.
Speaker 1: Is there any risks all the defense spending the government
Speaker 1: level crowding out some of this corporations, do you think
Speaker 1: in terms of the demand for it.
Speaker 4: You know, that's a good question, right because you can
Speaker 4: look at, you know, some of the government agency type debt.
Speaker 4: If we start getting the kind of Eurozone collective debt issuance,
Speaker 4: it may for some of the higher quality parts of
Speaker 4: the market, I could probably see that. But I think
Speaker 4: there's enough in single A and triple B debt and
Speaker 4: probably enough spread that it should still be able to
Speaker 4: attract investors and list.
Speaker 2: So if we think about beyond corporate ig I mean
Speaker 2: for the areas in which you can occasionally dip into
Speaker 2: other markets, are you looking at that, are you just
Speaker 2: really sticking to your bread and butter and are you
Speaker 2: considering it from you know, you talked about it being
Speaker 2: very much a carry trade these days. Are you seeing
Speaker 2: any sort of benefit. I mean, it sounds like Europe
Speaker 2: and US it's now just a wash at this point.
Speaker 4: But yeah, so you know, it's interesting. I we have
Speaker 4: the flexibility in many of our stresses to go into
Speaker 4: high yield and kind of a natural a natural place
Speaker 4: for someone managing an investment grade strategy is to look
Speaker 4: at double B, look for rising stars, look for opportunities there.
Speaker 4: And you know what happened, and up until just recently
Speaker 4: where the spreads have shifted a bit, but that relationship
Speaker 4: between triple B and double B spreads became very, very compressed.
Speaker 4: And what we found to offer better value was going
Speaker 4: back to those hybrid securities that I was talking about,
Speaker 4: or some of the bank securities, where for the same
Speaker 4: type of spread that you would receive on a double
Speaker 4: B rated company spawns you could actually buy something issued
Speaker 4: by an investment grade company, but you were coming down
Speaker 4: in the capital structure, and we felt that that offered
Speaker 4: a more compelling story and you know, in some cases
Speaker 4: a better volatility profile. Now, when some of the utility
Speaker 4: hybrids were first getting started, we're starting to see some issuance.
Speaker 4: They traded with a little bit more volatility than you
Speaker 4: might find in traditional double B high yield. But I
Speaker 4: think over time is that market has begun to fill
Speaker 4: out and more participants have come in. The volatility has
Speaker 4: really started.
Speaker 5: To come down.
Speaker 4: So for me, I would prefer owning an investment grade
Speaker 4: company coming down in cap structure then necessarily buying a
Speaker 4: double B rated company where the spreads had been pretty tight.
Speaker 4: Now we have seen some underperformance of high yield, and
Speaker 4: I'm a little bit more interested to look there. But
Speaker 4: I think that market is still pretty well bid, and
Speaker 4: so you know, I think I think I'll stick to
Speaker 4: my hybrids and my bank capital for the time being.
Speaker 1: Is that where the best value is right now in
Speaker 1: terms of your global portfolio, where would you pinpoint relative
Speaker 1: value for the next let's say, twelve or eighteen months.
Speaker 4: So if we think about the top ideas that we
Speaker 4: have right now in portfolios, we've done a bit more
Speaker 4: of an up and quality trade in ig We think that,
Speaker 4: you know, there's a lot of very interesting single A
Speaker 4: companies that we think should do well. We've decided to
Speaker 4: lean into financials. We like the banks, and then to
Speaker 4: spice up our portfolios. It's a little bit of a barbell.
Speaker 4: Maybe you will look at a little bit of at
Speaker 4: one because we still think that story in Europe is
Speaker 4: very compelling, and we'll look at the hybrid securities.
Speaker 2: And Lisa, I kind of crack up about the hybrid conversation,
Speaker 2: only because in my prior life though, it was something
Speaker 2: that I did a lot of, well, the fixed to floats,
Speaker 2: a lot of the preferred, the twenty five dollars par bonds,
Speaker 2: all that fun stuff. So it really does feel like
Speaker 2: it's coming full circle now. One thing that I do wonder,
Speaker 2: and you talked a little bit or a lot bit
Speaker 2: about tariffs, but beyond that, what keeps you up at
Speaker 2: night in everything that's going on. I mean, there's so
Speaker 2: much happening, but what's really the factor that's keeping up
Speaker 2: at night these days?
Speaker 5: That's a great question, you know. I think I think
Speaker 5: we are.
Speaker 4: Embarking on a very different approach to the role of
Speaker 4: the US and how the US is going to be
Speaker 4: run from an economic perspective, from a political perspective, and
Speaker 4: it's a lot of change very quickly, and so in
Speaker 4: my mind this is not meant to be political at all.
Speaker 4: But when you start to see very big shifts in
Speaker 4: terms of you know, philosophy of how things should be done.
Speaker 4: When you're making change very quickly, sometimes things can unintentionally
Speaker 4: break and so that worries me is I try to
Speaker 4: figure out what is it that we're going too quickly
Speaker 4: on Where could we fall short? You know, right now
Speaker 4: we're talking about tariffs. The next thing we're going to
Speaker 4: be talking.
Speaker 5: About is the budget.
Speaker 4: You know, we've got t c JA coming up. This
Speaker 4: this rollover. You know, what is the environment going to
Speaker 4: be like for companies? There are there's a school of
Speaker 4: thought that you know, maybe this isn't going to be
Speaker 4: quite as accommodating an environment for companies as was thought.
Speaker 4: You know, back toward the end of last year, you know,
Speaker 4: you hear about some things being floated that could have
Speaker 4: a negative impact on companies. You know, you you hear
Speaker 4: about business or corporate salt that's worth a lot of
Speaker 4: money to companies. So that's something that may have to
Speaker 4: adjust to.
Speaker 1: Great stuff. Lisa Coleman, head of Global Investment Grade Corporate
Speaker 1: Credit at JP Morgan Asset Management, It's been a pleasure
Speaker 1: having you on the credit edge. Many thanks, and of
Speaker 1: course we're very grateful to Jody Luri from Bloomberg Intelligence
Speaker 1: thanks for joining us today, Jody. For more Credit Analysis,
Speaker 1: read all of Jody's great work on the Bloomberg Terminal.
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