Supply chains set to become less dependent on China over time.
Over the next 10 years, the global automotive industry is expected to face one of the most significant changes in its history – the replacement of internal combustion engine (ICE) vehicles with electric vehicles (EVs).
Equity and credit markets have thus far taken lackluster earnings results and lower expectations in stride, but we think this could change if confidence readings drop further.
While slower earnings growth is a broad headwind for both corporate debt and equities, it also tends to increase performance dispersion.
We believe the spotlight on the burgeoning BBB credit market has diverted attention from the risks in the smaller single-A market.
Bond investors will need to be very selective due to recent changes in sector credit quality.
Financial media and investors have been focusing on the BBB segment of the U.S. investment grade (IG) corporate bond market this year.
Amid overall caution on credit, we believe short-dated investment grade corporate bonds offer a compelling risk/reward profile today.
Years of significant growth in the U.S. corporate bond market have been accompanied by a steady decrease in overall credit quality and a trend toward higher leverage. Close to $80 billion in U.S. corporate bonds currently rated BBB potentially could be downgraded below investment grade in 2018, according to our estimates.
Investors may want to consider taking a more cautious and selective approach to BBB nonfinancial corporate bonds, particularly those in the low BBB rated segment, where the risk of downgrades is higher and the room for error is lower.
That said, we find many compelling BBB bonds in the U.S. marketplace today. As a large active fixed income manager, PIMCO is in our view ideally positioned to manage the risks in the complicated universe of BBB bonds.
