Australian credit markets have been well supported by the ‘robust’ economy and there is no ‘imminent threat’ to the current credit cycle, according to Legg Mason’s fixed interest manager, Western Asset.
The manager said the corporate earnings season turned out to be solid, with the slightly more optimistic outlook driven by stronger earnings, while credit quality remained sound with gearing ratios generally towards the lower end of target ranges and debt coverage ratios remaining still healthy.
However, the consumer remained a key risk to the outlook for the corporate treasuries.
Western Asset’s portfolio manager and research analyst, Damon Shinnick, said key risks were in the housing market, particularly given heightened levels of interest-only loans and investor lending.
“Bottom-up analysis remains key, so avoiding companies that have exposure to more cyclical parts of the economy will likely serve portfolios well. This focus on the fundamentals will also continue to drive Western Asset’s tactical positioning across portfolios,” he said.
He noted that historically there had been a strong correlation between US speculative grade default rates and Australian dollar corporate spreads.
“This relationship is no more evident than during the GFC – why did our spreads widen if there was neither a domestic economic recession nor a subprime housing sector?” he added.
“The answer is that global funding markets are interrelated. Australia’s credit markets are global in nature, with about 50 per cent of the value of the Australian corporate bond market issued by global companies.
“Additionally, Australian institutions derive much of their funding from offshore markets, particularly the major banks so when global liquidity seizes up, it flows through to domestic balance sheets.”
