Global credit funds & CLO's
November 2020
| Issue 229
Published in London & New York.
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November 2020 | Issue 229
Less credit volatility expected in Q4 despite US election fallout
Hugh Minch
CLO issuance was expectedly low in the final week of October in the run-up to the US election, as issuers brace for what has historically been a volatility-inducing macro-event.
But prominent market participants say the unprecedented economic backdrop resulting from the pandemic means the outcome of the 2020 election is less likely to move the dial as much as in cycles past.
One CLO tranche investor told Creditflux that managers have less need to position their portfolios conservatively in advance of the election because the coronavirus pandemic means they are already taking conservative steps. In addition, fiscal stimulus is expected regardless of whether the Republicans or Democrats triumph on 3 November.
Whether there is a so-called blue wave, red wave or a split-decision will impact the timing or nature of the fiscal stimulus, but polling suggests a Democratic sweep is the most likely outcome and the seeming lack of uncertainty is reflected in credit markets, says Alcentra’s co-chief investment officer Leland Hart.
“The market’s reaction to the increased chance of a blue wave is much more positive than what was being discussed two months ago,” Hart says. “In the past, Democrat victory usually implied higher taxes, equity under pressure and the economy slowing down, but that’s not what the market is saying right now, where the chance of a blue wave is going up and the market seems to be pretty robust.”
Hart believes the confidence in the market is caused by a reduction in uncertainty, both in the election result and in the impact on the economy of a Democrat fiscal stimulus.
Goldman Sachs’ research desk has written that a Biden victory could lead to increased taxes with negative implications for credit quality, but that this could be offset by a large fiscal stimulus. A victory for Trump would have the opposite outcome, with lower tax rates offset by “much less fiscal stimulus”.
Other forecasters are pointing to how different outcomes would impact different sectors, with JP Morgan’s US equity strategy and global quantitative research identifying two baskets of sectors where performance hinges on the election outcome.
The Biden basket includes alternative energy, infrastructure and healthcare, whereas the Trump basket contains fossil fuels and financials.
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“The seeming lack of uncertainty is reflected in credit markets”
Leland Hart
, Co-chief investment officer | Alcentra
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