Corporate credits post solid third quarter results

It has been largely anticipated that companies will report weaker third quarter results. For credit investors, a major driver of returns are company fundamentals, therefore we are paying great attention on how companies navigate this fragile market environment.

Investors need to look beyond the headlines

It is still early days, but despite few disappointments, we generally observe solid results. So far, we observed the following trends:

1. Among the US Financials, banks benefitted from margin expansion on the back of higher interest rates. Trading operations results partly exceeded expectations and most banks were able to optimize their risk-weighted assets, helping to improve capital ratios, such as the Common Equity Tier 1 capital (CET1) ratio. Loan loss provisions are on the rise, but charge-offs remains at low levels, indicating strong credit quality of their borrowers.
2. Non-Financial companies reported sales growth, so far up about 7% year-over-year while Earnings Per Share (EPS) is down about 2%, signaling margin pressure from higher input costs, as expected. Indeed, producer prices increased by 8.5% in September in the US, levels not seen for about 40 years. However, most companies affirmed or even increased their previous earnings guidance, helping to reassure investors.
3. A disappointment was the US Technology sector so far. Here, the pullback in consumer spending was more pronounced and the outlook for the coming quarters generally was weaker.
4. In Europe, earnings reporting presented only few signs of weakness to corporate balance sheets and credit metrics. Revenues advanced by about four percent versus the previous quarter and EBITDA growth was about three percent, albeit lower than in previous quarters. This earnings slowdown is well in-line with expectations and margins have eroded only modestly for Investment Grade companies.

Encouraging prospects for US credits

Going forward, analysts believe that net profit margins for the US market should remain at solid levels for the rest of this year and beyond compared to the third quarter 2022 figures, with net profit margins at 12 to 13%.

This confirms the trend of slowing earnings but also stable to even improving credit fundamentals such as corporate leverage or interest coverage. Even if these measures would slow down further into 2023, the overall level is likely to remain solid and corporate bond investors should remain confident.

An attractive entry point for investors

For more than a decade, investors engaged in a massive reach for yield trade, driven also by super-easy global monetary policies. The result were low yields for a long time and ample liquidity in the market. Since then, we made a significant U-turn: Year-to-date total returns have been dismal, at about -17 percent for the Global Investment Grade market, wiping out more than USD1.3trn of market value.

We believe, as soon as the macroeconomic outlook gets less clouded, with inflation on a downward trend and central banks taking their foot off the gas, this is likely to tame market volatility and therefore benefit more risky asset classes. In our view, the current market environment offers an attractive entry point for investors interested in global investment grade bonds.

Corporate bond valuations are becoming more attractive by the day with yields not as high since the financial crisis in 2009 and bond cash prices at record lows. At the same time, we observe newly issued investment grade bonds with coupons beyond seven percent, with an A or BBB credit rating and a maturity of three to five years. This should provide a solid cushion for investors and high recurring income for the years to come.