Profit season: corporate prospects will be especially interesting

Investors entered 2022 amid concerns about high inflation in the United States and Europe, supply chain problems and expectations of rising Fed rates; a negative feeling that later intensified during the war in Ukraine. Despite widespread macroeconomic uncertainty, the upcoming US corporate income season is set to shed more light on the impact on profits, profits and cash flow.

Christian Huntel, portfolio manager

Revenues are currently under review: for the US market, analysts estimate that earnings growth in the first quarter of 2022 should slow to about 9% year on year from 25% in the fourth quarter of 2021 (this time the figure is supported by recovery after Covid). So we will not be surprised if there is a pressure on profits or a decrease in profits during this reporting season. The most affected sectors are cyclical activities such as automotive and transport, while telecommunications and energy, on the other hand, need to save more.

A reliable credit profile does not deteriorate overnight

The review of profits should be seen in context: given the record high margin, especially in the US, some erosion should not be interpreted as a serious negative for corporate bondholders.

In the current environment of high inflation and rapid growth, companies have a strong profile, characterized by favorable ratios of liquidity, interest coverage and leverage, both in Europe and in the United States. Therefore, they must be able to withstand the current environment without serious losses.

In addition, we expect the positive rating trend to continue in global credit markets. Key indicators, including corporate leverage, interest coverage, or targets for specific credit ratios, such as debt-to-debt cash flow, reflect relative strength in supporting rating agencies’ forecasts. Therefore, in our opinion, the number of rising stars should increase.

Credit spreads increased compared to last year, as the average yield on corporate bonds more than doubled. However, the macroeconomic context has also changed and now contains higher risks. At the same time, default rates remain very low, as companies generally have a strong financial position, which justifies tighter spreads.

From a bottom-up perspective, the banking sector remains fully attractive due to the solid levels of capital accumulated by banks over the past few years under low-risk economic models. In recent quarters, US institutions, in particular, have been able to take advantage of favorable conditions: an increase in net interest margins, very low problem loans and solid profits from market activities.

In addition, in anticipation of rising yields, the issue of US bank bonds in the first quarter was higher than in previous years. This trend is expected to slow over the next few months, especially after the earnings season, which may ultimately support secondary market bond performance.

Capital inflows confirm the attractiveness of global corporate bonds

Investor demand is growing for several reasons. On the one hand, awareness of the importance of investing globally for the effective diversification of sources of efficiency and risk. An approach focused on all global markets yields better risk-adjusted returns (measured by the Sharpe ratio) than local investments. This is a structural development, which means that investors make long-term commitments regarding the asset class. On the other hand, comparing yield levels in different regions reveals inefficiencies, such as increasing the attractiveness of the US market following the recent increase in yields in the United States.

In the global universe, investors are likely to notice incorrect prices between bonds of one issuer. Thus, bonds of the same company denominated in different currencies often have a difference in price, which creates so many opportunities for relative value. By identifying the most attractive bonds in major currencies, investors can exploit market inefficiencies while benefiting from full currency hedging. This inefficiency is explained by differences in investment behavior in different regions, as the investor base may differ between two bonds issued in euros and US dollars, respectively, by one issuer. The current market environment exacerbates valuation anomalies, and increasing dispersion in the global corporate bond market creates opportunities for loyal and active investors.