David Nagle, Managing Director within IG credit, recently hosted a webinar with a panel of experts across corporate, structured credit, emerging markets, securitized products and macro research. They shared their views on the markets, and addressed front-of-mind topics.
David Nagle: We began the year with a positive tone following a rocky end to 2018. But the normalization came to a screeching halt in late January, when global growth slowed and central banks once again turned dovish. Credit spreads tightened and U.S. Treasury yields dropped sharply—both of which contributed to robust returns across the investment grade landscape. But surprisingly, the markets’ “wall of worry” has only grown larger—drawing a series of questions: Have rates gone too far? Does the economic cycle or policy matter more right now? Are spreads too tight for this environment? We will explore all of these questions and more. But let’s start with the elephant in the room: Trump, trade wars and tariffs. For that, we’ll turn to Christopher Smart, Head of the Barings Investment Institute, for his views. Christopher—where do you think we’re headed on the issue of trade wars? And is the market being a bit too pessimistic here?
Christopher Smart: While there has certainly been a negative mood in the market, I think it’s important to point toward some of the harder data, which is not as bad as the current rhetoric might suggest. In fact, for the first time in a long time, we’ve had a recovery in productivity in the U.S., in addition to decent wage growth and low unemployment—all of which have created a backdrop of strong consumers and strong households. Additionally, even as the economy appears to be slowing down in the U.S., Europe and Asia—it’s important to note that it is still growing. So, while certain risks do exist in the financial markets, the underlying economy is quite strong.
Regarding political concerns—the tariffs between the U.S. and China are not going to tip us into a recession on their own. Our exports to China represent about 2% of our GDP, and their exports to us account for roughly 4-5%. So, tariffs on those flows alone are not enough to make a meaningful impact. But the uncertainty itself is a bigger concern—and it’s weighing on things like capital expenditures and industrial expansion. For instance, if you’re a CEO, it creates a lot of questions: Where do you invest? Where do you build your next factory? How can you know where your supply chain will come from? How can you be sure where your investible market will be? So, investors are struggling with uncertainty about the future, despite the good underlying economic data.