Warnings from RBS that credit markets will enter a “very nasty period” later this year might have shocked some, but credit analysts across the city were largely in agreement.
Bob Janjuah, the RBS credit strategist, said he expected to see violent moves in equity and credit markets this autumn as rampant inflation prevented central banks from encouraging growth.
The significant bearish repricing I expect to see during August/September/October will be driven by massive negative revisions to growth and stubbornly high inflation, leading to earnings deterioration, massive negative revisions to earning expectations for H2 ‘08 and deep into 2009, weaker and weaker credit metrics, higher and higher defaults and ongoing problems/deleveraging in the financial sector.
“The very nasty period is soon to be upon us — be prepared, ” he said, urging clients to focus on quality, non-cyclical defensive names.
Mr Janjuah’s peers at other European banks agreed it was inevitable that credit markets would deteriorate later in the year, potentially quite dramatically, when large companies started to default on their debt. However, most said that RBS was a touch aggressive in forecasting that turmoil would strike as soon as August.
“[The predictions] are pretty much in line with what we’d expect,” said one strategist, “though we’re not so sure about the timeframe.” He said many struggling companies would be able to limp along into 2009 before falling apart.
RBS said the main iTraxx Europe index, which tracks the cost of insuring investment grade corporate debt against default, could rise to 130/150 while the Crossover index, which tracks mostly junk-rated debt, could hit 650/700.
The estimates are somewhat more bearish that other banks have put out, though as one strategist put it, “given what we’ve seen in the last 12 months, nothing’s unreasonable.”
On Wednesday, the iTraxx Europe rose 4 basis points to 84bp, while the iTraxx Crossover rose 15bp to 470bp.
