BlackRock prefers credit to equities as equity risks ‘fade again’

BlackRock, the world’s largest asset manager, likes higher-quality credit more than equities as it sees “a new market regime with higher volatility taking shape,” according to a note released Monday by strategists at the bank. corporate investment institute.

Investment-grade credit can “resist a significant slowdown in growth while equities do not appear to be rated for this risk,” the strategists said in the note. “Yields look more attractive than at the start of the year,” they said, “helping to improve valuations and provide a bigger cushion against defaults.”

Treasury yields jumped this year before falling from their June peak as investors began pricing in lower rates amid slowing growth. Investment-grade credit spreads, or their yield relative to comparable government debt, had also widened before narrowing in recent weeks, according to a chart from the BlackRock report.


“We still like IG credit at these levels,” BlackRock strategists said. “Spreads have narrowed only slightly as investors turn to equities.”

Falling Treasury yields sparked a double-digit rally in equities, while investment-grade credit performance also benefited, according to their report. The yield of the 10-year Treasury note TMUBMUSD10Y,
fell 7.5 basis points on Monday to 2.763%, from 3.482% on June 14, according to Dow Jones Market Data.

“Equity valuations, meanwhile, do not yet reflect the possibility of a significant downturn, so earnings estimates are still optimistic,” the strategists wrote.

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US stocks closed mixed on Monday, with the S&P 500 SPX,
down 0.1% to around 4,140, ​​according to preliminary data from FactSet. The top-notch Dow Jones Industrial Average DJIA,
rose 0.1% as the tech-laden Nasdaq Composite COMP
down 0.1%.

‘Good shape’

Higher quality borrowers are in “good shape,” according to BlackRock strategists. “We believe credit quality remains strong,” they wrote.

High-quality corporate refinancing needs do not appear “pressing” after their increase in bond issuance last year, strategists said, noting that the supply of new bonds this year is “relatively low”.

On high-yield debt or junk bonds, strategists said “some parts of high-yield offer attractive returns, but concerns about spreads widening in a downturn steer us toward ‘quality. of investment.

Investors are waiting for Wednesday’s Consumer Price Index report for an indicator of U.S. inflation in July, which will tell them whether the Federal Reserve will continue its aggressive interest rate hikes to combat the surge in the Cost of life. Market participants fear the US central bank could cause a recession by raising rates too fast as it seeks to cool the economy.

“Markets currently appear to be expecting a slight contraction to translate into lower rates and lower inflation,” the strategists wrote. BlackRock expects a “soft landing” to be unlikely “in a volatile macro regime shaped by production constraints,” according to their memo.

“Central banks will have to plunge the economy into a deep recession if they are serious about crushing current inflation – or living with more inflation,” the strategists said, “but they are not yet ready to pivot.”

Against a backdrop of weaker growth and high inflation, “we see bond yields rising and equities at risk of slumping again,” they wrote. On a tactical horizon, which BlackRock defines as 6 to 12 months, strategists are “overweight” investment grade credit relative to equities, the report said.

“This is an improvement in quality in a total portfolio approach after we reduced risk throughout this year in response to higher macro volatility,” they said. The “signpost” for strategists to turn positive on equities again will be “a dovish pivot from central banks in the face of a sharp slowdown in growth, a sure sign that they will live with inflation.”

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