March 27, 2025 • 44 mins
Fundamental and technical pressures on credit markets are growing as trade wars escalate, according to JPMorgan Asset Management. “We just need to be paid a little bit more for the uncertainty risk now in the market,” says Lisa Coleman, the firm’s head of global investment-grade corporate credit. “The technicals from where we were at the beginning of the year have deteriorated,” Coleman, who manages $73 billion in assets, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jody Lurie in the latest Credit Edge podcast. Coleman and Lurie also discuss the earnings outlook for US companies, opportunities in consumer, health care and bank debt and fund flows.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jody Lurry, a senior credit analyst covering leisure, lodging, gaming, restaurants,
and rental car companies at Bloomberg Intelligence.
Speaker 3 (00:31):
This week, we're very pleased to.
Speaker 2 (00:32):
Welcome Lisa Coleman, head of Global Investment Grade Corporate Credit
at JP Morgan Asset Management.
Speaker 3 (00:37):
How are you, Lisa, I'm great.
Speaker 4 (00:39):
Thank you so much for having me over today.
Speaker 2 (00:42):
Well, it's wonderful to have you and I'm just so
excited to dip into an area that I'm extremely passionate about.
Speaker 1 (00:48):
Great, see Lisa. Just to set the scene there before
we begin, Global markets are getting whipswored by recession fears
and haphazard and erretic US policymaking, particularly on trade. Despite
that credit spreads are quite thin the board, there's a
hope that the longer term trajectory of the US economy
remains up despite some short term pain and volatility. Market
optimists believe the new administration has their back and will
(01:10):
do its best to defend the economy, that everything will
be okay in the end, bond and loan markets are
pricing in very low odds of US recession, even as
talk of economic downturn and stagflation become more frequent, with
consumers throwing in the towel and business leaders putting investments
on hold, complaining that they can't take long term decisions
in this kind of an environment. Treasury yields meanwhile remain high,
(01:31):
keeping buyers of fixed income happy, especially those with floating
rate assets. Above all, there's not enough supply of corporate
debt to satisfy the growing demand. But what's your view, lease,
So there seems to be a lot of risk out
there that isn't maybe in the price. And from your standpoint,
are we stressing too much? How our high grade borrowers
doing in this environment at the moment?
Speaker 4 (01:50):
Hey, how much time do we have to talk about this?
Speaker 1 (01:53):
We can go on. We have time.
Speaker 4 (01:54):
So look, I mean, the way I like to think
about it is, there's so much news bombarding us every
day and the markets are just you know, swooning back
and forth depending upon the news flow. So for me,
I always try to take things back down to the basics,
and so when I think about companies, you know, what's
(02:16):
underpinning the strength of companies today, and so maybe we
could start there and hopefully not get too much into
the weeds.
Speaker 5 (02:23):
But you know, one of the.
Speaker 4 (02:24):
Things we do is we try to understand what the
earnings growth looks like for companies, and so in our
world of credit, that means EBITDAH because that's an important
foundation for understanding the direction that leverage is going. And
so crucial to that is working with our analyst team
(02:45):
and we try to project out what forward EBITDUG growth
will look like for industrial companies, and that really allows
us to get a baseline for you know, what do
we expect companies to do. But also so if we
can aggregate up this individual company data into sectors and
then into the broader market, it can also provide us
(03:08):
some bottom up insight that can complement what we're getting
from top down economic data. So when we were ending
the fourth quarter of last year, we had asked our analysts,
so where do you think going forward for the next
twelve months, where do you think growth is going to
(03:29):
come in for the median industrial company? And the EBIT
down number was coming in around five percent, which feels
about right, you know, it's again we're not using like
the you can't comp that to the S and P
expectations because this is median. It's and we have a
different composition. But it gives you directionally where we were thinking.
(03:51):
And in fact, in the fourth quarter, oddly enough, you
know where did EBITDUG growth come in around five percent?
But now you know here we are, we're starting a
new quarter, and where do we think we're going to
be in twenty five And you know, to the point
you were making earlier James, about you know, a lot
of news hitting the market and fears. We began this
(04:13):
year with companies really guiding down a little bit from
where they were. You know, it makes sense is we're
starting a new year, companies have a chance to refresh,
they're recognizing some uncertainties, and so we saw earnings getting
guided down and in fact the starting point for us
now when we're looking at that forward growth for twenty
(04:36):
five is an EBADUG growth number actually closer to three percent.
So that's a big difference. Now, look, I think there's
probably a little bit of wiggle room in there and
a little bit of uncertainty, but I think that you know,
that is a starting point gives us a little bit
less of a cushion in the event that we start
(04:57):
to get bad news on tariffs.
Speaker 2 (05:00):
So, Lisa, you were one of our steamed guests at
the end of the year for our Credit Outlook event,
and during that event, everybody talked about potential for spreads
going even tighter, and it was a yield versus spread conversation. Now, now,
something you brought up which you touched on just now
(05:21):
with the fundamentals, but you said there were three parts
that you look at, fundamentals, technicals, and valuations. So it
sounds like the fundamental side you're a little bit less
optimistic about going into this year, But how are you
feeling on the technicals and the valuations.
Speaker 4 (05:36):
Okay, so you're right about the fundamentals, And if I
could just one other point on fundamentals before we talk
about technicals and valuations. One of the things that we
did is we did a little bit of stress testing
on the fundamentals and we said, we don't really know
where tariffs are going to shake out, but let's just
assume a ten percent across the board tariff that actually
(06:01):
is going to be a hit to these ebadon numbers.
By about a percentage point, and if I were to
put that in context, that gets us to ebadon numbers
that were prevalent back in twenty three. And remember in
twenty three that was a period where there were a
lot of fears about more of a hard landing, and
(06:23):
so I just think it's important to note that the
tariffs bring us into a territory that is.
Speaker 5 (06:29):
A little bit more uncertain.
Speaker 4 (06:31):
And also remember back in twenty three we were getting
some fiscal tailwinds from the IRA, from the Infrastructure Bill,
from the Chips and Science Act, which we may not
have sufficient or a similar kind of fiscal stimulus this year.
So just want to get that one point out. Now,
(06:51):
in the technicals, I think we're seeing a little bit
of a deterioration. In fact, we were just chatting about
this today in one of our STRES meetings. So in
twenty twenty four, what I think characterized some of the
strength in technicals were foreign flows and particularly European flows,
(07:13):
which were quite robust. The good news is, at least
since the beginning of the year, looking at TICK data
through January, we are seeing European flows still looking okay,
and in a way that kind of makes sense because
when we looked at the hedge spread for Europe, it
actually looks pretty good if you're a European investor looking
(07:35):
at the US market, so we can see how there
could be some demand there. But where we've seen I
think some deterioration would be in the area coming from Japan,
and so whether you're looking at things on a hedge
deal basis or on a hedge spread basis, the competition
(07:56):
from jgbs is pretty keen and we haven't seen that
years now. Granted, the Japanese investor hasn't been a big
contributor to flow, certainly last year, but we had thought
maybe this year we could see that change, but it
really doesn't look like with the way valuations for that
(08:18):
buyer base are looking that we can really count on that.
So then we have to shift our focus and say,
all right, well, domestically, you know what's going on with
mutual fun flows. And it's a little bit tough to
read the tea leaves right now, but EPFR started out
(08:38):
pretty strong for much of this year. However, the run
rate seems to be coming off a little bit. It's
still positive, but certainly not at the pace it was
several weeks ago. Now it's hard to know if that
is simply because there's more volatility investors or maybe a
little bit concerned at putting more money into fix income assets.
(09:01):
Who knows, And that could come back. But right now,
if we look at just a slightly lower run rate
or I shouldn't say slightly, a lower run rate of
EPFR and Japan investors not necessarily feeling that great about
the US market, and the European investor maybe coming in.
(09:23):
I feel like the technicals from where we were at
the beginning of the year have deteriorated.
Speaker 5 (09:29):
Now.
Speaker 4 (09:30):
The last point you asked me about was valuations, and
I think this is where I think we have to
be maybe a little bit more circumspect about how the
operating environment has changed. So when we look at spreads
where they are today, we're pricing in very low levels
(09:52):
of recession risk. And the way we think about that
as we go back and look at where spreads were
at various recessions andary periods and the distance from where
those spreads were to today and think about how much
predictability spreads are reflecting of recession coming forward, and so
(10:12):
it's virtually zero, and I would add that's also true
for Europe. But I think what's changed in the US
is bringing it all the way back to the fundamentals.
Speaker 5 (10:22):
Again.
Speaker 4 (10:23):
We're at a more precarious position starting the year, still positive,
but not the run rate that we were seeing at
the end of last year. And you know, again, the
tariffs are very uncertain, so we can't really have a
zero probability of recession. So what does that mean for me?
(10:43):
If we were to price in about a twenty percent
probability of recession, that would get you out to about
one hundred and twenty basis points on spreads. That feels
a little aggressive right now. But what I think it
does say is the idea of and I know we
throw out fifty five basis points when we were chatting.
That feels a little aggressive to me, and I think
(11:04):
that came up at that year end seminar and I
was probably a little bit more bullish on spreads. But
I think, you know, maybe this range of let's say
eighty eighty five basis points out to one hundred and
ten basis points could be the range that we find
ourselves in. And I think we just need to be
(11:25):
paid a little bit more for the uncertainty risk now
in the market.
Speaker 2 (11:30):
So, Lisa, you bring up a couple of extremely good
points that I'm going to see if I can tackle
in one neat follow up question, So you talk about
how the international investor may or may not be as
comfortable in the US, there's potential indication for some sort
(11:50):
of flight to quality. How are you seeing that manifest
in the investment grade space? And when you think about
that three percent you doug or that you did, that
you've thrown out, how are you then thinking about leverage
in general? Are you seeing it massively grow? Are you
seeing it sort of old steady assuming that companies won't
(12:13):
bring on the debt. Where are you sort of measuring
all of that?
Speaker 5 (12:17):
Yep.
Speaker 4 (12:18):
So when we look at our median industrial company leverage
has been incredibly stable now for several quarters. We don't
look particularly stretched at all. And in fact, you know,
when we look at the behavior of companies, what's been
interesting is if we divide up the world into let's say,
our single A rated companies and our triple B rated companies,
(12:42):
what you find is the single A rated companies really
have been much more active in terms of share.
Speaker 5 (12:49):
Buybacks and the like.
Speaker 4 (12:51):
Whereas you're finding the triple B companies are much more
conservative and not going down that path. So in that regard,
I don't think we see any aggressive behavior. And I
would also add that operating margins have been very stable
and for our cohort that we look at the medians
(13:11):
around fifteen percent, that's pretty good and it's been stable
so that I don't see really any deterioration at that
point or at the point we're at now, which kind
of makes sense. And frankly, debt growth that's not been
rising as well, So you know, this flight to quality,
(13:34):
it's how does that manifest itself? And I think you know,
you can look at the performance of let's say single
A and triple B companies, and during this period where
we've had a little bit of volatility, they've been kind
of moving in tandem. And so for us, we think
maybe this is a good opportunity to try and upgrade
(13:56):
your portfolio a little bit and maybe you lean a
little bit more heavily into single A rated companies. The
other thing we like, and I've been focusing mainly on
in industrials, but I think banks offer a very good opportunity.
I know it's consensus that a lot of people.
Speaker 5 (14:16):
Like the banks.
Speaker 4 (14:17):
But you know, when you look at bank earnings, bank
earnings have been very strong, capital has been very strong,
losses reserving has been low. I know there's been a
lot of talk about less regulation of banks, whether you
(14:38):
know that means uh Bassil three endgame, you know, keeping
things capital neutral, whether that means looking at the regional
banks where you require mark to market on securities portfolios, holding,
you know, issuing a little bit more debt for loss
absorption if that were to be necessary. U. I think
(15:00):
all these things, you know, when we look at them
all together, the picture is still one of a sector
that is in very good health. Yes, there might be
a little bit more or a little bit less regulation
for the jesips, maybe a little bit more regulation for
the regionals, but I think, you know, the resiliency of
these institutions make them very attractive in our opinion to hold.
(15:23):
And I would add likewise, for the European financials, particularly
European banks, the profitability is very strong, that capital is
very strong, reserves, you know, losses are very low. I
think they also make a lot of sense.
Speaker 1 (15:40):
The picture of painting least is quite a bearish outlook.
You know a lot of uncertainty. Fundamentals are getting weaker.
You know, technicals at the margin, you know, when you
talk about Japan are going to be under pressure. But
then you know, spread still around ninety on the US
credit Every time there's there's a bout of volatility, everyone
(16:02):
you know in the EPTY market panics in the market drop,
but credit just holds rock steady. What's what's going on there?
Speaker 5 (16:09):
You know, it's.
Speaker 4 (16:10):
Funny, I think, I think because companies are in such
you know, in such robust financial condition. I mean, the
leverage metrics.
Speaker 5 (16:21):
Haven't budged.
Speaker 4 (16:24):
The you know, and we're talking about a slow down
in the rate of growth of EBITDA. It's still positive
growth though we're not talking about declines in ebit done
negative EBITDA. We're talking about you know, tariffs coming on board.
I think for many of our investment grade companies in
(16:44):
many sectors, they have the ability to manage through that
if they just know what the tariffs are going to be.
So to me, I think we're we're creating an environment
where things look a little bit less robust than the
word were last year. If we get through this tariff period,
liberation day, we find out what the tariffs are companies.
(17:07):
Companies can't adjust, they just need to know what it
is they're adjusting to. Then I think we get to
a point where we'll manage along and you know, I
think we just have to price in a little bit
more tail risk. And so that range that I was
talking about earlier feels okay to me. It's if we
start to see a meaningful shift in flows and I look,
(17:32):
I see, you know, everything we're talking about is shades
of adjustment, right, and not something being completely upended. And
so I can see us and I still maintain that
maybe we'll have a carry like year return for investment
grade credit in the absence of some external event, whether
(17:57):
that be brought about through tear, whether that be brought
about through some extraneous event we don't know about. But
I would envision a period where we should be fairly stable,
but you just need to be paid a little bit
more to hold it.
Speaker 1 (18:14):
And you don't expect a ton of downgrades.
Speaker 4 (18:17):
I don't at this point in time. There are obviously
some large issuers that have been downgraded, but now I don't.
In fact, the trend still seems to be reasonably positive.
Speaker 3 (18:32):
You know.
Speaker 4 (18:32):
The other thing which we haven't talked about is, you know,
look at what's going on with Europe right now, and
that to me is a very interesting story. And this
comes around to the whole global growth story because you know,
we went through a period of time where growth was
(18:54):
so anemic in Europe and we were waiting for the
ECB to continue to cut and then we were worried
about tariffs. And now we've got Germany, you know, passing
these these programs for infrastructure and for defense spending, and
you know, these are multi year fiscal you know, fiscal
(19:15):
impulses that will have a positive impact on many companies.
And so I think, you know, we've now got another
part of the corporate market that should be beneficiaries. And
these are companies that are they may be based in Europe,
but they issue in dollar, they issue in euro they
issue in different currencies, and these are ones that you know,
(19:38):
perhaps we want to be focused on as beneficiaries, you know,
in the area of capital goods for example. You know,
there'll be companies that that I think will do well
and and some of the analysis that we've done also
when we're thinking about you know, these two opposing forces,
one of tariffs that that's bad that could imposed on
(20:00):
European companies, and one of infrastructure spending and defense spending
that creates a positive stimulus. We find that at least
in this coming year, the two probably offset each other,
which is terrific, you know, if you've got something to
offset the potential damage of tariffs. But as we start
(20:21):
to look into twenty six and twenty seven, there should
be a positive impulse for companies as a result of this.
Speaker 2 (20:30):
So, Lisa, something that I'm curious about. You know, you
hint a little bit at this earlier, but you talk
about how margins have kind of held study and how
companies are still doing well, but.
Speaker 3 (20:42):
We have that tariff potential.
Speaker 2 (20:46):
A lot of the companies, at least in my sector
post COVID cut costs in order to bolster margins, particularly
as they waited for consumers to come back. Thinking about
in that context, you know, obviously the leisure space is
indirectly affected by tariffs, you know, as compared to something
like autos that's much more directly affected. Where are you
(21:09):
sort of thinking in terms of measuring the tariff effect,
seeing what sort of cushion different types of companies have.
Speaker 3 (21:17):
Where are you thinking in terms of.
Speaker 2 (21:21):
How it's going to Oh, are companies going to be
able to absorb this and push it on or is
it going to be something that's so overhanging in this environment.
Speaker 4 (21:33):
So I think that's exactly the question to ask, and
maybe what I can do is give you two extremes.
One in an area that you'll be familiar with is
the retail space, an area where margins are already pretty thin,
and as you point out, I mean, companies there have
had to really adapt, work on supply chain, work on
(21:57):
cutting costs, trying to figure out efficiencies, and so the
room for error is pretty low in a space that
is highly exposed to foreign goods. And so when you
think about the retail companies, for many of them, at
(22:17):
least in the investment grade universe, as a percentage of sales,
imports run between let's say a third and fifty percent,
So it's substantial. And you know, one of the things
that many companies have done is they've tried to move
a little bit further away from China and diversify into
other spaces. You know, Vietnam is often cited is a
(22:39):
sourcing point, and yet you know, in a world where
tariffs are going to be spread across many countries, potentially
they're going to be very much in the crosshairs. Look
at Mexico, you know, retailers get fresh foods from Mexico
and the like. When you think of about you know,
(23:00):
other areas which I didn't mention, like China or Vietnam
and the like, it's appaeril, you know, it's electronics and
other things. So that they will be very much impacted.
Speaker 3 (23:12):
Now.
Speaker 4 (23:12):
You know, one of the things they can do is
they can go back to their suppliers and squeeze them more.
But you probably are aware of the article which highlights
that the Chinese government is saying no, no, you know
you can't. You can't absorb any of more of this
when the large US retailers are pushing back on you.
So that becomes a little bit challenging. But I think
(23:33):
what some of the largest retailers are very good at
is understanding the price points for the different products that
they offer, and so understanding where that elasticity is. And
I would almost think about this as let's say a
portfolio of products, and so you know that you've got
(23:53):
a little bit of wiggle room to raise price on
one skew, let's say, and you can watch and see
what happens to demand, and if you know, demand starts
to hit a little bit of a wall, then maybe
you hold back on that, but maybe there's another product
in the portfolio that you have scope to raise the
pricing on. So I think we'll see a lot of
(24:15):
different ways that that companies are going to adjust. But
the retail space is one that it's very very tariff
sensitive and it will have a very big impact on
EBITDAF for companies as if we are to see these
go into effect. On the other extreme is pharma and
(24:37):
that's one where there is more.
Speaker 5 (24:39):
Of a limited impact.
Speaker 4 (24:40):
And you know what people might say is whoa wait
a minute, you know what about you know the companies
that are producing in Ireland. You know what's going to
happen with them. They're going to get tariffed. And the
response that you know I have from talking with our
analysts who covers the spaces, you know, yes, there are
some high value products that are produced in Ireland. It's
(25:02):
not just about generics. But again everything is the tariff
is going to be based on cost and so these
companies are on the opposite extreme where they have very
high margins compared to what retailers have, and so they
do have an ability to absorb some of those costs.
The other part of pharma is, you know, you've got
(25:24):
the APIs the products that are used to create the pharmaceuticals,
the things, the inputs required that provide the therapeutic effect,
and you know those could potentially be tariffed as they
come into the US. But again, the cost of these
is small relative to the margins that pharma companies are experiencing.
(25:46):
And it's interesting and talking with our analyst about this,
you know what he says is, you know, maybe some
of the bigger threat to pharma companies comes in two sources.
The first is what's going on with the pricing negotiations
on the list of drugs for medicare and medicaid, which
(26:09):
it started out with ten drugs. Now we're expanding to fifteen,
so that will have an impact. But the other thing
is an area which I'm not an expert in, is
this whole issue of guilty, you know, the foreign tax
on IP and that is an area where granted right
now it's pretty low. I want to say it's a
(26:30):
little over ten percent. If I'm not mistaken, that may
increase in twenty six. But you know, if the new
administration wants to really pressure the pharma companies a little
bit more, if they are able to get congressional approval,
they could also raise guilty a little bit more. So
I just go down that you know, list of different
(26:52):
things that you know, here's a space in the pharma
area where tariffs maybe aren't going to have that big
an impact.
Speaker 5 (27:00):
You've got two other issues.
Speaker 4 (27:02):
You've got taxes, and you've got you know, now renegotiator
negotiated prices, but the margins are so big that it's
not likely to have a material impact.
Speaker 2 (27:15):
Before I dig deeper into the healthcare discussion, because I
am curious on your thoughts about the administration's choices in
terms of you know, HHS head who may or may
not be favorable to the pharma space. But beyond that,
going back to the consumer, something that that was interesting
that you brought up is you talked about apparel consumers
(27:37):
or a pair apparel retailing as well as food retailing,
and the food retailing of course being tremendously sourced from
Mexico or Canada in some cases, thinking along those lines,
so I write about restaurants, and obviously restaurants have been
a little bit more mixed over the past year because
low income consumers have definitely been pulling back into terms
(28:00):
of their spending.
Speaker 3 (28:02):
We're already seeing.
Speaker 2 (28:03):
That a lot of retailers, the traditional apparel retailers, are
being affected by consumers choosing not to spend on discretionary
spending of goods and rather on services, which is great
for a lot of my companies. But thinking along those
lines of you have apparel retailers, a lot of them
(28:25):
feeling the pressure of consumers not wanting to consume there.
Then you have restaurants that have already been a little
bit mixed. Then you throw tariffs into the mix. And Darden,
of course reported last week they indicated that.
Speaker 3 (28:40):
They're able to absorb a lot of it.
Speaker 2 (28:42):
They do have some concerns, but by and large, you know,
even from things such as kitchen supplies, they're short of
anticipating the effects of that. But even so, that's just
one company and a lot of the other companies might
be more directly affected.
Speaker 3 (28:59):
How are you sort of.
Speaker 2 (29:02):
Looking at it in terms of I guess sub sectors.
What area within consumer discretionary are you comfortable with or
are you just saying, you know what, right now it's
a little uncertain, let's just go into pharma, let's go
into healthcare.
Speaker 5 (29:18):
Yeah, So it's interesting.
Speaker 4 (29:20):
We don't have a lot to choose from in the
IG universe. You know, as you'll know, a lot of
the department stores no longer are investment grade, so we
don't have them to worry about. I'll leave that to
my high yield colleagues, and so that's their problem. So
really for us we have tilted into pharma. We like
(29:41):
that space. There are still you know, the pharma model
that has worked well for us.
Speaker 5 (29:49):
Is the company that makes an acquisition.
Speaker 4 (29:52):
And think about it, you know a lot of these
pharma companies aren't doing us. There are a lot of
their own R and D and research and eternally they're
looking for companies that are external and looking for an
opportunity to buy those. They buy them, they put a
little bit of leverage on the company, and then they
go through a deleveraging process. And so we like when
(30:15):
those opportunities happen where we have confidence that that is
the management's approach to acquisitions. You make the acquisition, you
add a little bit of leverage, you then deleverage over time,
and so in that regard, when those opportunities provide themselves
to us, we like to invest in those. And we
(30:39):
still think that there are some companies and well I
can't name specific companies, but there are some that are
still in the process of that deleveraging mode. And so
we like those stories, and we like the stability of pharma,
notwithstanding some of the challenges that they may be facing,
as you've highlighted in the coming year.
Speaker 1 (31:00):
Going back to the valuation point where we started, do
you buy the idea that this is a substantially fundamentally
different market now than you know where you started your career.
I mean, that's that's the pitch I'm getting. You know,
when I ask people about spreads all day long, they say,
first of all, don't look at the spreads, just look
at the yield, and we'll buy ig all day long
at five percent. Secondly, they say, it doesn't really matter
(31:22):
because you know, it's a different market, it's high quality,
it's more liquid, you can do these massive portfolio trades.
You know, it's much much, much more of a value
you know, there's all this value there that necessitates tighter spreads.
Do you buy that?
Speaker 4 (31:35):
I think the market has changed even more fundamentally than that.
So I started my career back in the eighties. It
was a long time ago, and I think the difference
is that the environment has changed. And so for much
of my career, you had periods of time where you
had an economic cycle, and so you had periods where
(31:58):
you know, the economy would be growing, companies would be
putting on leverage, and then you know, they'd become over
levered and something would happen with the economy and you
weren't going to necessarily get bailed out by the FED
or by aggressive fiscal policy, and you'd have these corrections
(32:18):
which would clear out a lot of the you know,
the offenders, and in my market, that would mean they
would get downgraded to high yield. And I think about
that period of one oh two where you had corporate
malfeasance which really compounded problems, or you just had you know,
companies just leveraged up at a period of time where
(32:39):
the economy fell away and you had a cleansing. And
you know, now, what I think happens is we don't
at least an investment grade. Really have that. And you know,
I think back on when we had COVID hit and
you had a coupled a couple of companies that were downgraded,
(33:02):
and that happened before the FED had announced their plan
to back essentially backs up corporate debt, which then put
a floor under things. So I feel like there's and
I hate to say it, there's a put because I
think it's just an awful way to describe things. But
I don't think we have, you know, the same market
(33:23):
where you get these massive moves and spreads because there
is this risk of widespread downgrades, we seem to have
some official support that prevents that from happening.
Speaker 1 (33:36):
And how much of it do you think comes from
the lack of supply? You know, net new supply, There's
not much of it. There's no deal making. Also, you know,
the private credit guys have got their eyes on IG
as well, So you know, potentially you've got all the
supply being siphoned off and demand remains steady. Maybe it
drops off a bit, but that just squeezes the spread,
doesn't it.
Speaker 4 (33:53):
It does bear in mind it's interesting just the size
of our market. Also, we're talking about this today. So
the size of our market has been growing and growing,
and think back to twenty twenty, where we had so
much issuance that was going on, and now we're in
a period where five years later, a lot of that
issuance is now maturing and is getting rolled over. And
(34:17):
so just to stay invested, you have to just keep buying.
So it's not just you know, the private credit people
might be circling for ig Although I hear a lot
about it, I still I'm not quite sure how it's
all going to work. But you hear a lot about that,
and you have you know, more diversified buyer bases and like.
But I just think the reinvestment of the size of
(34:39):
our market is very large and creates a natural demand.
Speaker 1 (34:43):
Been a kind of you know, perception at least. And
I'm interested in your thoughts and how real it is
that you know, maybe people need to diversify out of
the US, given you know, the volatility, given the changes
that are happening very very quickly in the political side.
To what extent you seeing that, to what e's scent?
Is it real? And what are the limits to that?
Speaker 4 (35:02):
Yeah, I think there was an amazing opportunity within the
past several months to be able to invest in European
credit relative to US credit. And I remember we were
looking at some things in one of our strategy meetings
and it was just so striking the differentials between the
two and it just seemed to make sense that, you know,
(35:27):
even for US companies that were that had Euro denominated debt,
the spreads, even adjusting for swap spread differentials, just were
that much cheaper. So that to US was a really
great opportunity. Now what we've seen is that differential really compressed,
so the two markets are now essentially on a government
(35:48):
bond spread basis, or spread over government bonds trading on
top of each other. So you know, maybe that opportunity
has waned for a little bit, but we did see
over the past several weeks a little bit of US
under performance. So one of the things you can do
is say, well, maybe there are some very rich European bonds,
(36:11):
we can now swap those back into US. So I
think there's great opportunities to rotate between the two markets.
And I do think, you know, as I was saying before,
what's going on with Europe is really pretty incredible, and
I think you will see companies that are that are
going to benefit, whether that's in the transport space. I
(36:35):
mentioned the camp Good space. I think banks in Europe
are going to benefit from what's happening there. So I
think we just have to watch when the valuations lean
more into that area to take advantage of those.
Speaker 1 (36:47):
Is there any risks all the defense spending the government
level crowding out some of this corporations, do you think
in terms of the demand for it.
Speaker 4 (36:55):
You know, that's a good question, right because you can
look at, you know, some of the government agency type debt.
If we start getting the kind of Eurozone collective debt issuance,
it may for some of the higher quality parts of
the market, I could probably see that. But I think
there's enough in single A and triple B debt and
(37:18):
probably enough spread that it should still be able to
attract investors and list.
Speaker 2 (37:24):
So if we think about beyond corporate ig I mean
for the areas in which you can occasionally dip into
other markets, are you looking at that, are you just
really sticking to your bread and butter and are you
considering it from you know, you talked about it being
very much a carry trade these days. Are you seeing
(37:44):
any sort of benefit. I mean, it sounds like Europe
and US it's now just a wash at this point.
Speaker 4 (37:50):
But yeah, so you know, it's interesting. I we have
the flexibility in many of our stresses to go into
high yield and kind of a natural a natural place
for someone managing an investment grade strategy is to look
at double B, look for rising stars, look for opportunities there.
(38:15):
And you know what happened, and up until just recently
where the spreads have shifted a bit, but that relationship
between triple B and double B spreads became very, very compressed.
And what we found to offer better value was going
back to those hybrid securities that I was talking about,
(38:35):
or some of the bank securities, where for the same
type of spread that you would receive on a double
B rated company spawns you could actually buy something issued
by an investment grade company, but you were coming down
in the capital structure, and we felt that that offered
a more compelling story and you know, in some cases
(39:02):
a better volatility profile. Now, when some of the utility
hybrids were first getting started, we're starting to see some issuance.
They traded with a little bit more volatility than you
might find in traditional double B high yield. But I
think over time is that market has begun to fill
(39:22):
out and more participants have come in. The volatility has
really started.
Speaker 5 (39:27):
To come down.
Speaker 4 (39:28):
So for me, I would prefer owning an investment grade
company coming down in cap structure then necessarily buying a
double B rated company where the spreads had been pretty tight.
Now we have seen some underperformance of high yield, and
I'm a little bit more interested to look there. But
(39:50):
I think that market is still pretty well bid, and
so you know, I think I think I'll stick to
my hybrids and my bank capital for the time being.
Speaker 1 (40:00):
Is that where the best value is right now in
terms of your global portfolio, where would you pinpoint relative
value for the next let's say, twelve or eighteen months.
Speaker 4 (40:08):
So if we think about the top ideas that we
have right now in portfolios, we've done a bit more
of an up and quality trade in ig We think that,
you know, there's a lot of very interesting single A
companies that we think should do well. We've decided to
lean into financials. We like the banks, and then to
(40:32):
spice up our portfolios. It's a little bit of a barbell.
Maybe you will look at a little bit of at
one because we still think that story in Europe is
very compelling, and we'll look at the hybrid securities.
Speaker 2 (40:48):
And Lisa, I kind of crack up about the hybrid conversation,
only because in my prior life though, it was something
that I did a lot of, well, the fixed to floats,
a lot of the preferred, the twenty five dollars par bonds,
all that fun stuff. So it really does feel like
it's coming full circle now. One thing that I do wonder,
and you talked a little bit or a lot bit
(41:10):
about tariffs, but beyond that, what keeps you up at
night in everything that's going on. I mean, there's so
much happening, but what's really the factor that's keeping up
at night these days?
Speaker 5 (41:23):
That's a great question, you know. I think I think
we are.
Speaker 4 (41:31):
Embarking on a very different approach to the role of
the US and how the US is going to be
run from an economic perspective, from a political perspective, and
it's a lot of change very quickly, and so in
my mind this is not meant to be political at all.
But when you start to see very big shifts in
(41:53):
terms of you know, philosophy of how things should be done.
When you're making change very quickly, sometimes things can unintentionally
break and so that worries me is I try to
figure out what is it that we're going too quickly
on Where could we fall short? You know, right now
(42:15):
we're talking about tariffs. The next thing we're going to
be talking.
Speaker 5 (42:18):
About is the budget.
Speaker 4 (42:22):
You know, we've got t c JA coming up. This
this rollover. You know, what is the environment going to
be like for companies? There are there's a school of
thought that you know, maybe this isn't going to be
quite as accommodating an environment for companies as was thought.
(42:43):
You know, back toward the end of last year, you know,
you hear about some things being floated that could have
a negative impact on companies. You know, you you hear
about business or corporate salt that's worth a lot of
money to companies. So that's something that may have to
adjust to.
Speaker 1 (43:02):
Great stuff. Lisa Coleman, head of Global Investment Grade Corporate
Credit at JP Morgan Asset Management, It's been a pleasure
having you on the credit edge. Many thanks, and of
course we're very grateful to Jody Luri from Bloomberg Intelligence
thanks for joining us today, Jody. For more Credit Analysis,
read all of Jody's great work on the Bloomberg Terminal.
Bloomberg Intelligence is part of our research department, with five
(43:23):
hundred analysts and strategists working across all markets. Coverage includes
over two thousand equities and credits and outlooks on more
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Please do subscribe to the Credit Edge wherever you get
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(43:46):
us a review, tell your friends, or email me directly
at jcromb eight at Bloomberg dot net. I'm James Cromby.
It's been a pleasure having you join us again next
week on the Credit Edge.
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jody Lurry, a senior credit analyst covering leisure, lodging, gaming, restaurants,
and rental car companies at Bloomberg Intelligence.
Speaker 3 (00:31):
This week, we're very pleased to.
Speaker 2 (00:32):
Welcome Lisa Coleman, head of Global Investment Grade Corporate Credit
at JP Morgan Asset Management.
Speaker 3 (00:37):
How are you, Lisa, I'm great.
Speaker 4 (00:39):
Thank you so much for having me over today.
Speaker 2 (00:42):
Well, it's wonderful to have you and I'm just so
excited to dip into an area that I'm extremely passionate about.
Speaker 1 (00:48):
Great, see Lisa. Just to set the scene there before
we begin, Global markets are getting whipswored by recession fears
and haphazard and erretic US policymaking, particularly on trade. Despite
that credit spreads are quite thin the board, there's a
hope that the longer term trajectory of the US economy
remains up despite some short term pain and volatility. Market
optimists believe the new administration has their back and will
(01:10):
do its best to defend the economy, that everything will
be okay in the end, bond and loan markets are
pricing in very low odds of US recession, even as
talk of economic downturn and stagflation become more frequent, with
consumers throwing in the towel and business leaders putting investments
on hold, complaining that they can't take long term decisions
in this kind of an environment. Treasury yields meanwhile remain high,
(01:31):
keeping buyers of fixed income happy, especially those with floating
rate assets. Above all, there's not enough supply of corporate
debt to satisfy the growing demand. But what's your view, lease,
So there seems to be a lot of risk out
there that isn't maybe in the price. And from your standpoint,
are we stressing too much? How our high grade borrowers
doing in this environment at the moment?
Speaker 4 (01:50):
Hey, how much time do we have to talk about this?
Speaker 1 (01:53):
We can go on. We have time.
Speaker 4 (01:54):
So look, I mean, the way I like to think
about it is, there's so much news bombarding us every
day and the markets are just you know, swooning back
and forth depending upon the news flow. So for me,
I always try to take things back down to the basics,
and so when I think about companies, you know, what's
(02:16):
underpinning the strength of companies today, and so maybe we
could start there and hopefully not get too much into
the weeds.
Speaker 5 (02:23):
But you know, one of the.
Speaker 4 (02:24):
Things we do is we try to understand what the
earnings growth looks like for companies, and so in our
world of credit, that means EBITDAH because that's an important
foundation for understanding the direction that leverage is going. And
so crucial to that is working with our analyst team
(02:45):
and we try to project out what forward EBITDUG growth
will look like for industrial companies, and that really allows
us to get a baseline for you know, what do
we expect companies to do. But also so if we
can aggregate up this individual company data into sectors and
then into the broader market, it can also provide us
(03:08):
some bottom up insight that can complement what we're getting
from top down economic data. So when we were ending
the fourth quarter of last year, we had asked our analysts,
so where do you think going forward for the next
twelve months, where do you think growth is going to
(03:29):
come in for the median industrial company? And the EBIT
down number was coming in around five percent, which feels
about right, you know, it's again we're not using like
the you can't comp that to the S and P
expectations because this is median. It's and we have a
different composition. But it gives you directionally where we were thinking.
(03:51):
And in fact, in the fourth quarter, oddly enough, you
know where did EBITDUG growth come in around five percent?
But now you know here we are, we're starting a
new quarter, and where do we think we're going to
be in twenty five And you know, to the point
you were making earlier James, about you know, a lot
of news hitting the market and fears. We began this
(04:13):
year with companies really guiding down a little bit from
where they were. You know, it makes sense is we're
starting a new year, companies have a chance to refresh,
they're recognizing some uncertainties, and so we saw earnings getting
guided down and in fact the starting point for us
now when we're looking at that forward growth for twenty
(04:36):
five is an EBADUG growth number actually closer to three percent.
So that's a big difference. Now, look, I think there's
probably a little bit of wiggle room in there and
a little bit of uncertainty, but I think that you know,
that is a starting point gives us a little bit
less of a cushion in the event that we start
(04:57):
to get bad news on tariffs.
Speaker 2 (05:00):
So, Lisa, you were one of our steamed guests at
the end of the year for our Credit Outlook event,
and during that event, everybody talked about potential for spreads
going even tighter, and it was a yield versus spread conversation. Now, now,
something you brought up which you touched on just now
(05:21):
with the fundamentals, but you said there were three parts
that you look at, fundamentals, technicals, and valuations. So it
sounds like the fundamental side you're a little bit less
optimistic about going into this year, But how are you
feeling on the technicals and the valuations.
Speaker 4 (05:36):
Okay, so you're right about the fundamentals, And if I
could just one other point on fundamentals before we talk
about technicals and valuations. One of the things that we
did is we did a little bit of stress testing
on the fundamentals and we said, we don't really know
where tariffs are going to shake out, but let's just
assume a ten percent across the board tariff that actually
(06:01):
is going to be a hit to these ebadon numbers.
By about a percentage point, and if I were to
put that in context, that gets us to ebadon numbers
that were prevalent back in twenty three. And remember in
twenty three that was a period where there were a
lot of fears about more of a hard landing, and
(06:23):
so I just think it's important to note that the
tariffs bring us into a territory that is.
Speaker 5 (06:29):
A little bit more uncertain.
Speaker 4 (06:31):
And also remember back in twenty three we were getting
some fiscal tailwinds from the IRA, from the Infrastructure Bill,
from the Chips and Science Act, which we may not
have sufficient or a similar kind of fiscal stimulus this year.
So just want to get that one point out. Now,
(06:51):
in the technicals, I think we're seeing a little bit
of a deterioration. In fact, we were just chatting about
this today in one of our STRES meetings. So in
twenty twenty four, what I think characterized some of the
strength in technicals were foreign flows and particularly European flows,
(07:13):
which were quite robust. The good news is, at least
since the beginning of the year, looking at TICK data
through January, we are seeing European flows still looking okay,
and in a way that kind of makes sense because
when we looked at the hedge spread for Europe, it
actually looks pretty good if you're a European investor looking
(07:35):
at the US market, so we can see how there
could be some demand there. But where we've seen I
think some deterioration would be in the area coming from Japan,
and so whether you're looking at things on a hedge
deal basis or on a hedge spread basis, the competition
(07:56):
from jgbs is pretty keen and we haven't seen that
years now. Granted, the Japanese investor hasn't been a big
contributor to flow, certainly last year, but we had thought
maybe this year we could see that change, but it
really doesn't look like with the way valuations for that
(08:18):
buyer base are looking that we can really count on that.
So then we have to shift our focus and say,
all right, well, domestically, you know what's going on with
mutual fun flows. And it's a little bit tough to
read the tea leaves right now, but EPFR started out
(08:38):
pretty strong for much of this year. However, the run
rate seems to be coming off a little bit. It's
still positive, but certainly not at the pace it was
several weeks ago. Now it's hard to know if that
is simply because there's more volatility investors or maybe a
little bit concerned at putting more money into fix income assets.
(09:01):
Who knows, And that could come back. But right now,
if we look at just a slightly lower run rate
or I shouldn't say slightly, a lower run rate of
EPFR and Japan investors not necessarily feeling that great about
the US market, and the European investor maybe coming in.
(09:23):
I feel like the technicals from where we were at
the beginning of the year have deteriorated.
Speaker 5 (09:29):
Now.
Speaker 4 (09:30):
The last point you asked me about was valuations, and
I think this is where I think we have to
be maybe a little bit more circumspect about how the
operating environment has changed. So when we look at spreads
where they are today, we're pricing in very low levels
(09:52):
of recession risk. And the way we think about that
as we go back and look at where spreads were
at various recessions andary periods and the distance from where
those spreads were to today and think about how much
predictability spreads are reflecting of recession coming forward, and so
(10:12):
it's virtually zero, and I would add that's also true
for Europe. But I think what's changed in the US
is bringing it all the way back to the fundamentals.
Speaker 5 (10:22):
Again.
Speaker 4 (10:23):
We're at a more precarious position starting the year, still positive,
but not the run rate that we were seeing at
the end of last year. And you know, again, the
tariffs are very uncertain, so we can't really have a
zero probability of recession. So what does that mean for me?
(10:43):
If we were to price in about a twenty percent
probability of recession, that would get you out to about
one hundred and twenty basis points on spreads. That feels
a little aggressive right now. But what I think it
does say is the idea of and I know we
throw out fifty five basis points when we were chatting.
That feels a little aggressive to me, and I think
(11:04):
that came up at that year end seminar and I
was probably a little bit more bullish on spreads. But
I think, you know, maybe this range of let's say
eighty eighty five basis points out to one hundred and
ten basis points could be the range that we find
ourselves in. And I think we just need to be
(11:25):
paid a little bit more for the uncertainty risk now
in the market.
Speaker 2 (11:30):
So, Lisa, you bring up a couple of extremely good
points that I'm going to see if I can tackle
in one neat follow up question, So you talk about
how the international investor may or may not be as
comfortable in the US, there's potential indication for some sort
(11:50):
of flight to quality. How are you seeing that manifest
in the investment grade space? And when you think about
that three percent you doug or that you did, that
you've thrown out, how are you then thinking about leverage
in general? Are you seeing it massively grow? Are you
seeing it sort of old steady assuming that companies won't
(12:13):
bring on the debt. Where are you sort of measuring
all of that?
Speaker 5 (12:17):
Yep.
Speaker 4 (12:18):
So when we look at our median industrial company leverage
has been incredibly stable now for several quarters. We don't
look particularly stretched at all. And in fact, you know,
when we look at the behavior of companies, what's been
interesting is if we divide up the world into let's say,
our single A rated companies and our triple B rated companies,
(12:42):
what you find is the single A rated companies really
have been much more active in terms of share.
Speaker 5 (12:49):
Buybacks and the like.
Speaker 4 (12:51):
Whereas you're finding the triple B companies are much more
conservative and not going down that path. So in that regard,
I don't think we see any aggressive behavior. And I
would also add that operating margins have been very stable
and for our cohort that we look at the medians
(13:11):
around fifteen percent, that's pretty good and it's been stable
so that I don't see really any deterioration at that
point or at the point we're at now, which kind
of makes sense. And frankly, debt growth that's not been
rising as well, So you know, this flight to quality,
(13:34):
it's how does that manifest itself? And I think you know,
you can look at the performance of let's say single
A and triple B companies, and during this period where
we've had a little bit of volatility, they've been kind
of moving in tandem. And so for us, we think
maybe this is a good opportunity to try and upgrade
(13:56):
your portfolio a little bit and maybe you lean a
little bit more heavily into single A rated companies. The
other thing we like, and I've been focusing mainly on
in industrials, but I think banks offer a very good opportunity.
I know it's consensus that a lot of people.
Speaker 5 (14:16):
Like the banks.
Speaker 4 (14:17):
But you know, when you look at bank earnings, bank
earnings have been very strong, capital has been very strong,
losses reserving has been low. I know there's been a
lot of talk about less regulation of banks, whether you
(14:38):
know that means uh Bassil three endgame, you know, keeping
things capital neutral, whether that means looking at the regional
banks where you require mark to market on securities portfolios, holding,
you know, issuing a little bit more debt for loss
absorption if that were to be necessary. U. I think
(15:00):
all these things, you know, when we look at them
all together, the picture is still one of a sector
that is in very good health. Yes, there might be
a little bit more or a little bit less regulation
for the jesips, maybe a little bit more regulation for
the regionals, but I think, you know, the resiliency of
these institutions make them very attractive in our opinion to hold.
(15:23):
And I would add likewise, for the European financials, particularly
European banks, the profitability is very strong, that capital is
very strong, reserves, you know, losses are very low. I
think they also make a lot of sense.
Speaker 1 (15:40):
The picture of painting least is quite a bearish outlook.
You know a lot of uncertainty. Fundamentals are getting weaker.
You know, technicals at the margin, you know, when you
talk about Japan are going to be under pressure. But
then you know, spread still around ninety on the US
credit Every time there's there's a bout of volatility, everyone
(16:02):
you know in the EPTY market panics in the market drop,
but credit just holds rock steady. What's what's going on there?
Speaker 5 (16:09):
You know, it's.
Speaker 4 (16:10):
Funny, I think, I think because companies are in such
you know, in such robust financial condition. I mean, the
leverage metrics.
Speaker 5 (16:21):
Haven't budged.
Speaker 4 (16:24):
The you know, and we're talking about a slow down
in the rate of growth of EBITDA. It's still positive
growth though we're not talking about declines in ebit done
negative EBITDA. We're talking about you know, tariffs coming on board.
I think for many of our investment grade companies in
(16:44):
many sectors, they have the ability to manage through that
if they just know what the tariffs are going to be.
So to me, I think we're we're creating an environment
where things look a little bit less robust than the
word were last year. If we get through this tariff period,
liberation day, we find out what the tariffs are companies.
(17:07):
Companies can't adjust, they just need to know what it
is they're adjusting to. Then I think we get to
a point where we'll manage along and you know, I
think we just have to price in a little bit
more tail risk. And so that range that I was
talking about earlier feels okay to me. It's if we
start to see a meaningful shift in flows and I look,
(17:32):
I see, you know, everything we're talking about is shades
of adjustment, right, and not something being completely upended. And
so I can see us and I still maintain that
maybe we'll have a carry like year return for investment
grade credit in the absence of some external event, whether
(17:57):
that be brought about through tear, whether that be brought
about through some extraneous event we don't know about. But
I would envision a period where we should be fairly stable,
but you just need to be paid a little bit
more to hold it.
Speaker 1 (18:14):
And you don't expect a ton of downgrades.
Speaker 4 (18:17):
I don't at this point in time. There are obviously
some large issuers that have been downgraded, but now I don't.
In fact, the trend still seems to be reasonably positive.
Speaker 3 (18:32):
You know.
Speaker 4 (18:32):
The other thing which we haven't talked about is, you know,
look at what's going on with Europe right now, and
that to me is a very interesting story. And this
comes around to the whole global growth story because you know,
we went through a period of time where growth was
(18:54):
so anemic in Europe and we were waiting for the
ECB to continue to cut and then we were worried
about tariffs. And now we've got Germany, you know, passing
these these programs for infrastructure and for defense spending, and
you know, these are multi year fiscal you know, fiscal
(19:15):
impulses that will have a positive impact on many companies.
And so I think, you know, we've now got another
part of the corporate market that should be beneficiaries. And
these are companies that are they may be based in Europe,
but they issue in dollar, they issue in euro they
issue in different currencies, and these are ones that you know,
(19:38):
perhaps we want to be focused on as beneficiaries, you know,
in the area of capital goods for example. You know,
there'll be companies that that I think will do well
and and some of the analysis that we've done also
when we're thinking about you know, these two opposing forces,
one of tariffs that that's bad that could imposed on
(20:00):
European companies, and one of infrastructure spending and defense spending
that creates a positive stimulus. We find that at least
in this coming year, the two probably offset each other,
which is terrific, you know, if you've got something to
offset the potential damage of tariffs. But as we start
(20:21):
to look into twenty six and twenty seven, there should
be a positive impulse for companies as a result of this.
Speaker 2 (20:30):
So, Lisa, something that I'm curious about. You know, you
hint a little bit at this earlier, but you talk
about how margins have kind of held study and how
companies are still doing well, but.
Speaker 3 (20:42):
We have that tariff potential.
Speaker 2 (20:46):
A lot of the companies, at least in my sector
post COVID cut costs in order to bolster margins, particularly
as they waited for consumers to come back. Thinking about
in that context, you know, obviously the leisure space is
indirectly affected by tariffs, you know, as compared to something
like autos that's much more directly affected. Where are you
(21:09):
sort of thinking in terms of measuring the tariff effect,
seeing what sort of cushion different types of companies have.
Speaker 3 (21:17):
Where are you thinking in terms of.
Speaker 2 (21:21):
How it's going to Oh, are companies going to be
able to absorb this and push it on or is
it going to be something that's so overhanging in this environment.
Speaker 4 (21:33):
So I think that's exactly the question to ask, and
maybe what I can do is give you two extremes.
One in an area that you'll be familiar with is
the retail space, an area where margins are already pretty thin,
and as you point out, I mean, companies there have
had to really adapt, work on supply chain, work on
(21:57):
cutting costs, trying to figure out efficiencies, and so the
room for error is pretty low in a space that
is highly exposed to foreign goods. And so when you
think about the retail companies, for many of them, at
(22:17):
least in the investment grade universe, as a percentage of sales,
imports run between let's say a third and fifty percent,
So it's substantial. And you know, one of the things
that many companies have done is they've tried to move
a little bit further away from China and diversify into
other spaces. You know, Vietnam is often cited is a
(22:39):
sourcing point, and yet you know, in a world where
tariffs are going to be spread across many countries, potentially
they're going to be very much in the crosshairs. Look
at Mexico, you know, retailers get fresh foods from Mexico
and the like. When you think of about you know,
(23:00):
other areas which I didn't mention, like China or Vietnam
and the like, it's appaeril, you know, it's electronics and
other things. So that they will be very much impacted.
Speaker 3 (23:12):
Now.
Speaker 4 (23:12):
You know, one of the things they can do is
they can go back to their suppliers and squeeze them more.
But you probably are aware of the article which highlights
that the Chinese government is saying no, no, you know
you can't. You can't absorb any of more of this
when the large US retailers are pushing back on you.
So that becomes a little bit challenging. But I think
(23:33):
what some of the largest retailers are very good at
is understanding the price points for the different products that
they offer, and so understanding where that elasticity is. And
I would almost think about this as let's say a
portfolio of products, and so you know that you've got
(23:53):
a little bit of wiggle room to raise price on
one skew, let's say, and you can watch and see
what happens to demand, and if you know, demand starts
to hit a little bit of a wall, then maybe
you hold back on that, but maybe there's another product
in the portfolio that you have scope to raise the
pricing on. So I think we'll see a lot of
(24:15):
different ways that that companies are going to adjust. But
the retail space is one that it's very very tariff
sensitive and it will have a very big impact on
EBITDAF for companies as if we are to see these
go into effect. On the other extreme is pharma and
(24:37):
that's one where there is more.
Speaker 5 (24:39):
Of a limited impact.
Speaker 4 (24:40):
And you know what people might say is whoa wait
a minute, you know what about you know the companies
that are producing in Ireland. You know what's going to
happen with them. They're going to get tariffed. And the
response that you know I have from talking with our
analysts who covers the spaces, you know, yes, there are
some high value products that are produced in Ireland. It's
(25:02):
not just about generics. But again everything is the tariff
is going to be based on cost and so these
companies are on the opposite extreme where they have very
high margins compared to what retailers have, and so they
do have an ability to absorb some of those costs.
The other part of pharma is, you know, you've got
(25:24):
the APIs the products that are used to create the pharmaceuticals,
the things, the inputs required that provide the therapeutic effect,
and you know those could potentially be tariffed as they
come into the US. But again, the cost of these
is small relative to the margins that pharma companies are experiencing.
(25:46):
And it's interesting and talking with our analyst about this,
you know what he says is, you know, maybe some
of the bigger threat to pharma companies comes in two sources.
The first is what's going on with the pricing negotiations
on the list of drugs for medicare and medicaid, which
(26:09):
it started out with ten drugs. Now we're expanding to fifteen,
so that will have an impact. But the other thing
is an area which I'm not an expert in, is
this whole issue of guilty, you know, the foreign tax
on IP and that is an area where granted right
now it's pretty low. I want to say it's a
(26:30):
little over ten percent. If I'm not mistaken, that may
increase in twenty six. But you know, if the new
administration wants to really pressure the pharma companies a little
bit more, if they are able to get congressional approval,
they could also raise guilty a little bit more. So
I just go down that you know, list of different
(26:52):
things that you know, here's a space in the pharma
area where tariffs maybe aren't going to have that big
an impact.
Speaker 5 (27:00):
You've got two other issues.
Speaker 4 (27:02):
You've got taxes, and you've got you know, now renegotiator
negotiated prices, but the margins are so big that it's
not likely to have a material impact.
Speaker 2 (27:15):
Before I dig deeper into the healthcare discussion, because I
am curious on your thoughts about the administration's choices in
terms of you know, HHS head who may or may
not be favorable to the pharma space. But beyond that,
going back to the consumer, something that that was interesting
that you brought up is you talked about apparel consumers
(27:37):
or a pair apparel retailing as well as food retailing,
and the food retailing of course being tremendously sourced from
Mexico or Canada in some cases, thinking along those lines,
so I write about restaurants, and obviously restaurants have been
a little bit more mixed over the past year because
low income consumers have definitely been pulling back into terms
(28:00):
of their spending.
Speaker 3 (28:02):
We're already seeing.
Speaker 2 (28:03):
That a lot of retailers, the traditional apparel retailers, are
being affected by consumers choosing not to spend on discretionary
spending of goods and rather on services, which is great
for a lot of my companies. But thinking along those
lines of you have apparel retailers, a lot of them
(28:25):
feeling the pressure of consumers not wanting to consume there.
Then you have restaurants that have already been a little
bit mixed. Then you throw tariffs into the mix. And Darden,
of course reported last week they indicated that.
Speaker 3 (28:40):
They're able to absorb a lot of it.
Speaker 2 (28:42):
They do have some concerns, but by and large, you know,
even from things such as kitchen supplies, they're short of
anticipating the effects of that. But even so, that's just
one company and a lot of the other companies might
be more directly affected.
Speaker 3 (28:59):
How are you sort of.
Speaker 2 (29:02):
Looking at it in terms of I guess sub sectors.
What area within consumer discretionary are you comfortable with or
are you just saying, you know what, right now it's
a little uncertain, let's just go into pharma, let's go
into healthcare.
Speaker 5 (29:18):
Yeah, So it's interesting.
Speaker 4 (29:20):
We don't have a lot to choose from in the
IG universe. You know, as you'll know, a lot of
the department stores no longer are investment grade, so we
don't have them to worry about. I'll leave that to
my high yield colleagues, and so that's their problem. So
really for us we have tilted into pharma. We like
(29:41):
that space. There are still you know, the pharma model
that has worked well for us.
Speaker 5 (29:49):
Is the company that makes an acquisition.
Speaker 4 (29:52):
And think about it, you know a lot of these
pharma companies aren't doing us. There are a lot of
their own R and D and research and eternally they're
looking for companies that are external and looking for an
opportunity to buy those. They buy them, they put a
little bit of leverage on the company, and then they
go through a deleveraging process. And so we like when
(30:15):
those opportunities happen where we have confidence that that is
the management's approach to acquisitions. You make the acquisition, you
add a little bit of leverage, you then deleverage over time,
and so in that regard, when those opportunities provide themselves
to us, we like to invest in those. And we
(30:39):
still think that there are some companies and well I
can't name specific companies, but there are some that are
still in the process of that deleveraging mode. And so
we like those stories, and we like the stability of pharma,
notwithstanding some of the challenges that they may be facing,
as you've highlighted in the coming year.
Speaker 1 (31:00):
Going back to the valuation point where we started, do
you buy the idea that this is a substantially fundamentally
different market now than you know where you started your career.
I mean, that's that's the pitch I'm getting. You know,
when I ask people about spreads all day long, they say,
first of all, don't look at the spreads, just look
at the yield, and we'll buy ig all day long
at five percent. Secondly, they say, it doesn't really matter
(31:22):
because you know, it's a different market, it's high quality,
it's more liquid, you can do these massive portfolio trades.
You know, it's much much, much more of a value
you know, there's all this value there that necessitates tighter spreads.
Do you buy that?
Speaker 4 (31:35):
I think the market has changed even more fundamentally than that.
So I started my career back in the eighties. It
was a long time ago, and I think the difference
is that the environment has changed. And so for much
of my career, you had periods of time where you
had an economic cycle, and so you had periods where
(31:58):
you know, the economy would be growing, companies would be
putting on leverage, and then you know, they'd become over
levered and something would happen with the economy and you
weren't going to necessarily get bailed out by the FED
or by aggressive fiscal policy, and you'd have these corrections
(32:18):
which would clear out a lot of the you know,
the offenders, and in my market, that would mean they
would get downgraded to high yield. And I think about
that period of one oh two where you had corporate
malfeasance which really compounded problems, or you just had you know,
companies just leveraged up at a period of time where
(32:39):
the economy fell away and you had a cleansing. And
you know, now, what I think happens is we don't
at least an investment grade. Really have that. And you know,
I think back on when we had COVID hit and
you had a coupled a couple of companies that were downgraded,
(33:02):
and that happened before the FED had announced their plan
to back essentially backs up corporate debt, which then put
a floor under things. So I feel like there's and
I hate to say it, there's a put because I
think it's just an awful way to describe things. But
I don't think we have, you know, the same market
(33:23):
where you get these massive moves and spreads because there
is this risk of widespread downgrades, we seem to have
some official support that prevents that from happening.
Speaker 1 (33:36):
And how much of it do you think comes from
the lack of supply? You know, net new supply, There's
not much of it. There's no deal making. Also, you know,
the private credit guys have got their eyes on IG
as well, So you know, potentially you've got all the
supply being siphoned off and demand remains steady. Maybe it
drops off a bit, but that just squeezes the spread,
doesn't it.
Speaker 4 (33:53):
It does bear in mind it's interesting just the size
of our market. Also, we're talking about this today. So
the size of our market has been growing and growing,
and think back to twenty twenty, where we had so
much issuance that was going on, and now we're in
a period where five years later, a lot of that
issuance is now maturing and is getting rolled over. And
(34:17):
so just to stay invested, you have to just keep buying.
So it's not just you know, the private credit people
might be circling for ig Although I hear a lot
about it, I still I'm not quite sure how it's
all going to work. But you hear a lot about that,
and you have you know, more diversified buyer bases and like.
But I just think the reinvestment of the size of
(34:39):
our market is very large and creates a natural demand.
Speaker 1 (34:43):
Been a kind of you know, perception at least. And
I'm interested in your thoughts and how real it is
that you know, maybe people need to diversify out of
the US, given you know, the volatility, given the changes
that are happening very very quickly in the political side.
To what extent you seeing that, to what e's scent?
Is it real? And what are the limits to that?
Speaker 4 (35:02):
Yeah, I think there was an amazing opportunity within the
past several months to be able to invest in European
credit relative to US credit. And I remember we were
looking at some things in one of our strategy meetings
and it was just so striking the differentials between the
two and it just seemed to make sense that, you know,
(35:27):
even for US companies that were that had Euro denominated debt,
the spreads, even adjusting for swap spread differentials, just were
that much cheaper. So that to US was a really
great opportunity. Now what we've seen is that differential really compressed,
so the two markets are now essentially on a government
(35:48):
bond spread basis, or spread over government bonds trading on
top of each other. So you know, maybe that opportunity
has waned for a little bit, but we did see
over the past several weeks a little bit of US
under performance. So one of the things you can do
is say, well, maybe there are some very rich European bonds,
(36:11):
we can now swap those back into US. So I
think there's great opportunities to rotate between the two markets.
And I do think, you know, as I was saying before,
what's going on with Europe is really pretty incredible, and
I think you will see companies that are that are
going to benefit, whether that's in the transport space. I
(36:35):
mentioned the camp Good space. I think banks in Europe
are going to benefit from what's happening there. So I
think we just have to watch when the valuations lean
more into that area to take advantage of those.
Speaker 1 (36:47):
Is there any risks all the defense spending the government
level crowding out some of this corporations, do you think
in terms of the demand for it.
Speaker 4 (36:55):
You know, that's a good question, right because you can
look at, you know, some of the government agency type debt.
If we start getting the kind of Eurozone collective debt issuance,
it may for some of the higher quality parts of
the market, I could probably see that. But I think
there's enough in single A and triple B debt and
(37:18):
probably enough spread that it should still be able to
attract investors and list.
Speaker 2 (37:24):
So if we think about beyond corporate ig I mean
for the areas in which you can occasionally dip into
other markets, are you looking at that, are you just
really sticking to your bread and butter and are you
considering it from you know, you talked about it being
very much a carry trade these days. Are you seeing
(37:44):
any sort of benefit. I mean, it sounds like Europe
and US it's now just a wash at this point.
Speaker 4 (37:50):
But yeah, so you know, it's interesting. I we have
the flexibility in many of our stresses to go into
high yield and kind of a natural a natural place
for someone managing an investment grade strategy is to look
at double B, look for rising stars, look for opportunities there.
(38:15):
And you know what happened, and up until just recently
where the spreads have shifted a bit, but that relationship
between triple B and double B spreads became very, very compressed.
And what we found to offer better value was going
back to those hybrid securities that I was talking about,
(38:35):
or some of the bank securities, where for the same
type of spread that you would receive on a double
B rated company spawns you could actually buy something issued
by an investment grade company, but you were coming down
in the capital structure, and we felt that that offered
a more compelling story and you know, in some cases
(39:02):
a better volatility profile. Now, when some of the utility
hybrids were first getting started, we're starting to see some issuance.
They traded with a little bit more volatility than you
might find in traditional double B high yield. But I
think over time is that market has begun to fill
(39:22):
out and more participants have come in. The volatility has
really started.
Speaker 5 (39:27):
To come down.
Speaker 4 (39:28):
So for me, I would prefer owning an investment grade
company coming down in cap structure then necessarily buying a
double B rated company where the spreads had been pretty tight.
Now we have seen some underperformance of high yield, and
I'm a little bit more interested to look there. But
(39:50):
I think that market is still pretty well bid, and
so you know, I think I think I'll stick to
my hybrids and my bank capital for the time being.
Speaker 1 (40:00):
Is that where the best value is right now in
terms of your global portfolio, where would you pinpoint relative
value for the next let's say, twelve or eighteen months.
Speaker 4 (40:08):
So if we think about the top ideas that we
have right now in portfolios, we've done a bit more
of an up and quality trade in ig We think that,
you know, there's a lot of very interesting single A
companies that we think should do well. We've decided to
lean into financials. We like the banks, and then to
(40:32):
spice up our portfolios. It's a little bit of a barbell.
Maybe you will look at a little bit of at
one because we still think that story in Europe is
very compelling, and we'll look at the hybrid securities.
Speaker 2 (40:48):
And Lisa, I kind of crack up about the hybrid conversation,
only because in my prior life though, it was something
that I did a lot of, well, the fixed to floats,
a lot of the preferred, the twenty five dollars par bonds,
all that fun stuff. So it really does feel like
it's coming full circle now. One thing that I do wonder,
and you talked a little bit or a lot bit
(41:10):
about tariffs, but beyond that, what keeps you up at
night in everything that's going on. I mean, there's so
much happening, but what's really the factor that's keeping up
at night these days?
Speaker 5 (41:23):
That's a great question, you know. I think I think
we are.
Speaker 4 (41:31):
Embarking on a very different approach to the role of
the US and how the US is going to be
run from an economic perspective, from a political perspective, and
it's a lot of change very quickly, and so in
my mind this is not meant to be political at all.
But when you start to see very big shifts in
(41:53):
terms of you know, philosophy of how things should be done.
When you're making change very quickly, sometimes things can unintentionally
break and so that worries me is I try to
figure out what is it that we're going too quickly
on Where could we fall short? You know, right now
(42:15):
we're talking about tariffs. The next thing we're going to
be talking.
Speaker 5 (42:18):
About is the budget.
Speaker 4 (42:22):
You know, we've got t c JA coming up. This
this rollover. You know, what is the environment going to
be like for companies? There are there's a school of
thought that you know, maybe this isn't going to be
quite as accommodating an environment for companies as was thought.
(42:43):
You know, back toward the end of last year, you know,
you hear about some things being floated that could have
a negative impact on companies. You know, you you hear
about business or corporate salt that's worth a lot of
money to companies. So that's something that may have to
adjust to.
Speaker 1 (43:02):
Great stuff. Lisa Coleman, head of Global Investment Grade Corporate
Credit at JP Morgan Asset Management, It's been a pleasure
having you on the credit edge. Many thanks, and of
course we're very grateful to Jody Luri from Bloomberg Intelligence
thanks for joining us today, Jody. For more Credit Analysis,
read all of Jody's great work on the Bloomberg Terminal.
Bloomberg Intelligence is part of our research department, with five
(43:23):
hundred analysts and strategists working across all markets. Coverage includes
over two thousand equities and credits and outlooks on more
than ninety industries and one hundred market industries, currencies, and commodities.
Please do subscribe to the Credit Edge wherever you get
your podcasts. We're on Apple, Spotify, and all other good
podcast providers, including the Bloomberg Terminal at bpod Go. Give
(43:46):
us a review, tell your friends, or email me directly
at jcromb eight at Bloomberg dot net. I'm James Cromby.
It's been a pleasure having you join us again next
week on the Credit Edge.
Host
James Crombie
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