Investment grade (IG) indices remain close to recent tights. Similarly, corporate fundamentals are in an extremely strong position. Our credit work looks to identify where there is a mismatch between the fundamental expectations and valuations of issuers, on a name-by-name basis. We also aggregate the single name expectations each quarter to give a view of the market as a whole. This is based on the detailed, bottom-up forecasting our analysts complete on each of the names they cover and gives a perspective on the health of the largest corporates in the US and Europe, highlighting both winners and losers.
Figure 1 Spread (OAS) history and long run average
Source: ICE indices, as at 27 September 2024
At this point in the year, we can have increasing confidence over how 2024 will turn out and the focus starts to turn to the outlook for 2025. While it is still too early to take a lead from management teams' official guidance, certain themes are starting to stand out as potential threats and opportunities, which we highlight below.
Overall, from a credit perspective, fundamentals are in a very strong place. Post-Covid-19, the business environment has been very supportive to credit strength, with cost and efficiency measures put in place during the pandemic flowing through to profitability and cash flow.
We are starting to see some differences in the aggregate numbers between US and European-based corporates. Our forecasts for the US show moderate improvements in '25 for both margins and leverage (the amount of debt a company has relative to earnings – the lower the better), whereas in Europe we see a slight deterioration (Figures 2 and 3).
Figure 2: EBITDA margins, US (top) and Europe (bottom)
Source: Columbia Threadneedle Investments' analysis, as at September 2024
Figure 3: debt and leverage levels, US (top) and Europe (bottom)
Source: Columbia Threadneedle Investments' analysis, as at September 2024
The constituents of the data sets are very different, so these aggregate numbers should be viewed in the context of the sector outlooks below. Common between the two, however, is that balance sheets remain in a good position from a historical perspective. Margins are strong and leverage remains lower than pre-Covid levels, which is supportive for credit spreads.
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