BlackRock Says Credit Now More Attractive Than Equities

By Nick Hedley

BlackRock, which has $8.5 trillion in assets under management, says investment grade (IG) credit is poised to outperform equities over the next 12 months.

“We believe IG credit can weather a significant growth slowdown whereas equities don’t look priced for this risk,” the asset manager says in a new research note co-authored by Wei Li, global chief investment strategist at the BlackRock Investment Institute.

It notes that valuations in IG credit have improved, and the segment has “a larger cushion against defaults.”

“Since June, markets have been captivated by the prospect of lower rates in the face of a growth slowdown,” BlackRock says. “This has resulted in a drop in yields, boosting IG performance and triggering a 10%-plus equities rally. We still like IG credit at these levels.”

At the same time, balance sheets in the segment are strong, and refinancing risks are “moderate,” the money manager says. According to data from S&P, the number of defaults in 2022 is the lowest since 2014.

Amongst IG companies, debt servicing levels are low, and leverage has been declining.

Meanwhile, “trends in the corporate bond market also support our overweight on credit.”

For instance, supply is low due to a slowdown in corporate bond issuances as companies seemingly wait to see whether financing conditions will improve. And refinancing needs “don’t look pressing” after a surge in issuances last year.

On the other hand, in the face of an economic slowdown, equity valuations and earnings estimates “are still optimistic.”

“We see activity stalling, underpinning our underweight to most developed market equities,” BlackRock says. “Rising input costs also pose a risk to elevated corporate profit margins.”

“When would we turn positive on equities again? Our signpost is a dovish pivot by central banks when faced with a big growth slowdown, a definite sign they will live with inflation.”