Written by Richard Warne.
It was only six months ago when the S&P 500 in the US reached all-time highs, in a world where lingering supply chain pressures and potential COVID-19 outbreaks seemed to be the most pressing risks to equities. While those two risks have largely abated throughout the year, the refreshed slate of macro-overhangs may be more daunting than ever. From the heart-breaking war in Ukraine to unprecedented levels of inflation around the world, it is safe to say few could have imagined this is how 2022 would play out.
Rates, Recession and Refinance – the Three “R”’ ‘s. There is a lot to talk about within markets at large and credit in particular. We are now in an interesting part of the economic cycle, which we have not seen in almost 15 years. Rates and spreads (yields on corporate bonds are increasing) with both moving wider. Ultimately, this is now leading to much higher all-in financing rates for corporates, despite the fact there is not a massive wall of maturities (refinance risk) this year. As an example, if one priced today a typical “benchmark” high yield bond in Europe, the implied cost would be over 6.8%. However, at the start of 2022 the implied cost would have been closer to 2%, assuming one was pricing over the 5-year German government bond. Great in the medium term for bond investors, however higher all-in yields leads to a more difficult/expensive primary market, and we are seeing this play out now.
Russia is on the verge of defaulting on its external sovereign bonds for the first time in a century, the culmination of global sanctions over its invasion of Ukraine. Because of the soaring price of energy, the Kremlin does have the means to pay its debt, just not the route, and any path forward remains uncertain.
In corporate news – Apple is planning an overhaul of some of its products which will set the stage for its next slate of devices and potentially an ambitious era for the Company. They include four iPhone 14 models, several Macs with M2 and M3 chips and the Company’s first mixed-reality headset, whatever that means!