By Sriram Reddy – Man GLG: While Europe provides a rich hunting ground for credit investors, upcoming maturity walls and refinancing pressures pose opportunities as well as risks.
The biggest surprise to us in 2023 was the way in which economies shrugged off the most rapid Federal Reserve (Fed) monetary tightening since the 1980s. Furthermore, markets have quickly latched on to the idea of early and aggressive rate cuts in 2024 as inflation normalises. While it is entirely possible that continued consumer strength will result in a soft landing, it is by no means the only potential outcome and we think it is premature for equity and credit markets to price this in with complete certainty, as reflected in the 2023 equity and credit rally.
A good number of questions will be answered in 2024. Where will commercial and residential real estate land? How will the largest global economies land? Will ongoing geopolitical conflicts and China trade policy be resolved? And potentially the most significant – who will win the US presidential election in 2024 and will it be uncontested, and how will corporates refinance a mountain of 2025 and 2026 maturity debt?
Large swathes of credit and equity markets are at eye wateringly expensive levels and we have witnessed very little volatility to get here. We believe 2024 is likely to be forthcoming for volatility and arbitrage-type returns and unlikely to be a good environment for pure credit beta. Investors should be selective and build in some caution to more cyclically oriented parts of the market which price in little premium to more defensive segments. Here, we highlight three themes in credit which we will be watching closely in 2024.