Europe braces for long dip amid fear of rising inflation

Sayed Kadiri

Editor

Credit markets are heading into uncertain times, with soaring inflation rates and the subsequent actions of central banks the primary drivers. This could mean the next credit downturn persists for longer than previous episodes where dispersion was high.

Ivelina Green founded credit investor Pearlstone Alternative last year and is its chief investment officer. She says uncertainty will play out differently in Europe compared to the US. “The credit cycle does not turn nearly as fast or as vigorously in Europe and that means opportunities are set to come over a prolonged period,” she says.

London-based Green, a former head of European distressed trading at Goldman Sachs, thinks that repricing in credit caused by inflation will have a bigger impact than geopolitical risks over the medium-term. Mounting political escalation over Ukraine could act as a catalyst for a sell-off, but it is not the primary driving force.

“I think inflation is a really big deal. Frankly, people are not concerned enough about it and they should be because we have high inflation numbers coupled with corporate leverage being at all-time peaks,” she says.

“There is no silver bullet — we cannot spend our way out of this predicament”

Ivelina Green, Chief investment officer | Pearlstone Alternative

“There is no silver bullet — we cannot spend our way out of this predicament. The solution is painful and as a function of that you might end up with a long period of uncertainty rather than a V-shaped recovery. A lot of market participants are conditioned to ‘buy the dip’, but doing that when the dip lasts for a year or longer can be anything but straightforward.”

To capitalise on these conditions, Pearlstone will target small companies where it can provide liquidity solutions. It will also look at distressed-for-control situations and opportunistic credit as part of its broad special situations strategy.

Last month, Pimco chief investment officer Dan Ivascyn also said that investors need to acknowledge “extreme uncertainty” in terms of how quickly the US Fed will raise interest rates. As such, his base case is to be underweight duration, but he sees opportunities in private markets if investors are willing to give up some liquidity.

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Global credit funds & CLO's

March 2022 | Issue 243

Published in London & New York.