Suki Mann, credit strategist at SocGen and reformed bull, is not convinced by the contrarian case that credit is overdue for a rally.
He contends, inter alia:
We’re in a period of maximum bearishness and popular theory is that when sentiment is this way inclined, being contrarian will pay dividends. Not this time, or at least, not just yet.
We’ve seen significant monetary easing; fiscal policy is being loosened aggressively now as well and the blockbuster tactic of quantitative easing (in the US at the moment) highlights how desperate policy has become to stave off a deflationary spiral. Through it all, the consumer is firmly in defensive mode as employment uncertainty means that deleveraging an overburdened balance sheet comes before the temptation to splurge any (borrowed or not) cash.
Economic growth is declining rapidly; CPIs, PPIs and PMIs are all falling sharply as demand drops and inventories are at high levels. And the corporate sector is responding by cutting production aggressively, slashing capex and investment and shedding staff. That is, liquidity preservation is paramount and the aforementioned factors are the cheapest way to do it in the face of the ever increasing cost of capital as banks remain unwilling to loosen the purse strings despite the best efforts of the political elite.
And the new issue market is where we continue to see the bulk of the demand, while secondary cash remains subdued (only slightly wider) and we don’t see a marginal bidder come in to help spreads go sustainably tighter. Still, the tremendous carry and breakevens means the many investors are content to add risk at these levels (and for spreads to remain wide) as long as default fears remain low.
Moreover:
Judging by the price action on the iTraxx indices, the equity market is wagging the tail of the credit market for now.
Still, there are some glimmers of light amid the gloom:
Even though the news flow on a macro level and on single names remains unequivocally bad, cash credit remains fairly resilient through it all.