Tune in to our insights.
US corporate debt excluding Financials has risen to levels of GDP previously associated with US recessions, while a number of key leverage ratios paint a similarly negative picture. We assess the risks and their implications.
- A 300% rise in outstanding Investment Grade (IG) BBB over the past decade warrants close attention. But in our view, the bigger threat lies in US leveraged loans, where the value of debt to increasingly poor quality borrowers has soared while lender protections have diminished.
- Overall our view is that US corporate balance sheets are in stretched territory, but in aggregate not dangerously so given our base case for growth and policy rates.
- Crucially for the US economy, consumer debt is more important than corporate debt; it is hard for us to see US demand growth collapsing given continued wage growth, a robust labor market and the healthy state of US household finances.
- Key takeaway is that high corporate leverage increases economic ‘tail’ risks should growth slow more than we expect.
- Already fully priced? After derating of US equities and widening of credit spreads since early October, US risk assets do not look significantly mispriced on a short-term basis.
- Nonetheless, macro uncertainty, debt refinancing wall, downgrade risk, and lower EPS growth are likely to weigh on US credit spreads and equity PE multiples over the medium term; alongside higher volatility, this is the new normal.
- Cooling demand impulse, low inflation, tightening financial conditions and US debt backdrop are all part of why we believe the Fed is close to the top of the rate tightening cycle and that USD will weaken over the medium term.
- From a multi asset perspective, current risk/reward is more attractive away from US assets on a tactical basis:
- In credit, we prefer local currency emerging market (EM) debt to US IG or high yield (HY), but expect US credit to offer plenty of opportunities as the cycle matures
- In equities, high leverage and still expensive relative equity valuations in the US are key drivers to our preference for ex-US equities; EM and Japan are our favored markets
- Cross asset: underweight US HY may be a potentially effective hedge to overweight equities in multi asset portfolios
THIS WEBSITE IS NOT INTENDED FOR AND SHOULD NOT BE ACCESSED BY PERSONS LOCATED OR RESIDENT IN ANY JURISDICTION WHERE (BY REASON OF THAT PERSON'S NATIONALITY, DOMICILE, RESIDENCE OR OTHERWISE) THE PUBLICATION OR AVAILABILITY OF THIS WEBSITE IS PROHIBITED OR CONTRARY TO LOCAL LAW OR REGULATION OR WOULD SUBJECT ANY UBS ENTITY TO ANY REGISTRATION OR LICENSING REQUIREMENTS IN SUCH JURISDICTIONS. IT IS YOUR RESPONSIBILITY TO BE AWARE OF, TO OBTAIN ALL RELEVANT REGULATORY APPROVALS, LICENCES, VERIFICATIONS AND/OR REGISTRATIONS UNDER, AND TO OBSERVE ALL APPLICABLE LAWS AND REGULATIONS OF ANY RELEVANT JURISDICTION IN CONNECTION WITH YOUR ENTRANCE TO THIS WEBSITE. EACH INVESTMENT PRODUCT AND SERVICE REFERRED TO ON THIS WEBSITE IS INTENDED TO BE MADE AVAILABLE ONLY TO RESIDENTS IN SINGAPORE.
UBS RESERVES THE RIGHT TO CHANGE, MODIFY, ADD OR REMOVE CONTENT ON THE WEBSITE AS WELL AS THESE TERMS AT ANY TIME FOR ANY REASON WITHOUT NOTICE. SUCH CHANGES SHALL BE EFFECTIVE IMMEDIATELY UPON POSTING. YOU ACKNOWLEDGE THAT BY ACCESSING OUR WEBSITE AFTER WE HAVE POSTED CHANGES TO THESE TERMS, YOU ARE AGREEING TO THESE TERMS AS MODIFIED.