Morgan Stanley says investors should consider this port in the market storm right now

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The great British pound sell-off, which was credited with sharpening the global rout for markets last week, is set to continue to wreak some havoc on Monday.

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The economic woes at Old Blighty are adding to the list of growing concerns for the markets, driving more investors into the dollar and out of riskier assets like US stocks and oil.

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Wall Street has many concerns of its own, with many looking to the S&P 500 SPX

Sooner or later go back to June lows. and large institutional investors seem unwilling to take any risk, alleged expenses To save $34.3 billion in sales on stock options in the latest four weeks, the largest on record in 2009.

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Morgan Stanley strategist Vishwanath Tirupattur explained in a note to clients on Sunday how tough these days are. “Navigating these choppy waters for the economy and markets is a challenge in both risk-free and riskier assets, owing to the risk of the former and growth/earnings in the latter,” the strategist said.

but also offered an idea for the investor against the wall, earning a spot in our call of the day, “Against this background, we think that US investment grade (IG) corporate credit bonds, especially those at the front end of the curve (segment 1 to 5 years), may offer less downside for investors looking for income. with a safer alternative, especially on the back of very high yields.”

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Tirupattur offered some figures to back up its call, first that it is a large market, with a face value of $3 trillion and a market value of $2.87 trillion, which is based on the ICE-BAML index.

“At current prices, the average yield is around 5% with a period of 2.64” [years] and A3/BAA1 credit quality. These levels include a sharp increase in
Further that the Fed has indicated at this week’s meeting.”

“Of course, further increases are possible beyond market expectations. However, the relatively short duration of these bonds makes them less sensitive to incrementally higher rates, and with a 5% return, they offer a fairly attractive carry. It is also worth noting that with just 13% of the ICE-BAML index maturing between now and the end of 2024, the maturity wall is not particularly applicable for these bonds,” the strategist said.

“This means that the vast majority of issuers of these bonds do not need to enter the new issue market to borrow at the current higher rates,” he said.

Morgan Stanley

As far as those concerned about deteriorating credit fundamentals as the economy slows down or enters a recession and the company’s earnings turn south, Tirupattur says the starting point for IG is crucial.

The strategist said that after the increase in the previous quarter, mean IG gross leverage improved slightly in 2022, from 2.37 times in the first quarter to 2.33 times, reaching a peak of 2.9 times in the second quarter of 2020 due to COVID-19. , citing the bank’s credit strategists, Vishwas Patkar and Mr. Sankaran.

And despite sharply higher rates, interest coverage remains a bright spot for the sector, with average coverage trending from 12.5x to 12.6x in the first quarter, around the highest levels since the early 1990s. Is.

This means that even though the return on new debt is higher than the average of all outstanding loans, maturing bonds tend to have relatively high coupons. So most companies have had to refinance at a higher level.

Then there is history. “Looking at the period of stagflation of the 1970s and 1980s, while we saw many recessions and volatility in equity markets, IG Credit (though before the high-yield market as we know it came into existence) was relatively stable, With only a fairly minor omission, Tirupattur said.

“Finally, it is worth noting that we are talking about front-end IG bonds, not high-yield bonds, which are more vulnerable to defaults in a growth slowdown,” he said.


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