January 2022 | Issue 241

Banks and loans to benefit in 2022 as safe havens dwindle

Dan Alderson
Deputy editor
Safe havens and sector pitfalls are among some of the top considerations for portfolio managers this year, as a consensus forms that credit could suffer versus other asset classes.
Strategists and economists are deeply divided between those who are bullish and bearish on the overall picture for financial markets in 2022. But few are picking credit to outperform — a realisation that dogged spreads even before omicron panic set in.
Nor is going up the credit quality spectrum necessarily an answer. In fact there look to be more pitfalls in this approach, with buy-siders tipping leveraged loans to outstrip high yield bonds, which in turn will best investment grade.
For those confined to the investment grade arena, this leaves hard choices about what to prioritise amid increasing capex requirements and the threat of fund outflows. In this context, debt from banks themselves could be a top candidate.
“Defensive picks would be companies whose bond prices don’t depend on central bank support, since asset purchase tapering will be a big factor in 2022,” says Viktor Hjort, global head of credit strategy at BNP Paribas. “Banks are super defensive as central banks don’t buy their bonds, they don’t need to issue much and are constricted from taking their capital ratio lower.”
“Banks are super defensive as central banks don’t buy their bonds”
Viktor Hjort, Global head of credit strategy | BNP Paribas
Away from banks there are notable headwinds for investment grade. BNP Paribas, which is ‘bullish selectively’ on financial assets but overall bearish on credit, projects 2022 will bring a 50% increase in IG corporate net supply as tapering begins.
“Borrowers will have less excess liquidity and their capital expenditure must go up,” says Hjort. “This will result in corporate bond abundance rather than scarcity for the first time in a long while.”
Bank of America, whose chief investment strategist Michael Hartnett is bearish on 2022 due to the likelihood of a rates shock, similarly expects “bigger, fatter trading ranges” for high grade credit. But BofA credit strategists part with BNP Paribas in forecasting Euro net IG supply at negative €25 billion for the first time since 2013.
At the riskier end of the credit spectrum, near-term economic growth — thanks to fiscal stimulus — should suppress defaults in the coming year.
“We see this as good news for high-yield in ’22, and even better news for loans,” says BofA. “Rising stars should be back as inflation starts to fall.”
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Global credit funds & CLO's
January 2022 | Issue 241
Published in London & New York.
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