Corporate Credits Can Withstand Policy Normalization in 2022
Inflation and the pressure that it’s putting on central banks to normalize policy frame the outlook for 2022—particularly the early part of the year. After that, we expect global economic growth, though still above average, to slow as higher rates take effect.
Investors in government bonds worry that rising yields will cause capital losses, while investors in corporate bonds worry that slower growth, even at an above-average level, will weaken earnings and make it harder—especially when rates are rising—for companies to service their debt.
Our research suggests, however, that corporate bond issuers in many markets and sectors are well positioned to navigate the uncertainties, for a number of reasons: business dynamics are strong, balance sheets have been improving, risk factors are low or manageable, free cash flow is expanding, and companies are maintaining relatively conservative financial policies.
Earnings and Balance Sheets Improve
Businesses have benefited as economies have re-opened after the first waves of the pandemic. Most of the world’s companies—including US and European high-yield and investment-grade issuers, as well as many emerging-market corporations—are recovering and expanding.
Over the year, we expect many of the sectors now in the recovery phase to enter the next stage of the credit cycle. While progress won’t be uniform across all countries and sectors—Europe’s economy remains sluggish relative to the US, and Asia’s previously strong growth is slowing—it’s likely that most of the world’s corporate credits will be in expansion mode.