2018 Sector Teams’ Outlook: Corporate Credit

Investment grade 

We expect the pace of global growth, US Federal Reserve policy tightening, and progression of the credit cycle to be the biggest drivers of credit spreads in 2018. Our analysts forecast stability and strong free cash flow in the majority of US industries to fuel fundamentals that support credit. While investment grade corporate leverage remains at historical highs, we expect earnings growth to result in relatively flat leverage comparisons for 2018. Sources of uncertainty for 2018 include the pace of leveraging in mergers and acquisitions and the level of demand for spread product from foreign investors—Asia-based investors in particular.

High yield

Looking at 2018, we expect the expansion/late cycle environment to continue supporting high yield, although current yields will likely cap broad-based price appreciation. That said, we currently view valuations as fairly priced given low default loss expectations, positive EBITDA¹ growth and growing sales balanced against high cyclical corporate leverage. High yield spreads continue to look attractive relative to global alternatives, which should provide technical support into 2018.

¹Earnings before interest, taxes, depreciation and amortization

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