No Autumn chills for Global Investment Grade Corporate fundamentals

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No Autumn chills for Global Investment Grade Corporate fundamentals

Arabella Duckworth
Arabella Duckworth
Senior Credit Analyst
Eyob Abay
Eyob Abay
Associate Analyst

Key Takeaways

  • Investment Grade valuations remain tight, and the market remains focused on whether this is justified by fundamentals. Our bottom-up company analysis shows profitability remains strong and leverage modest
  • We examine emerging trends as we move into 2025 and highlight sectors which will be most impacted
  • Geographically, we believe issuers in the US indices are in a better position than their European-based counterparts going forward

Investment grade (IG) indices remain close to recent tights. Similarly, corporate fundamentals are in an extremely strong position. Our credit work looks to identify where there is a mismatch between the fundamental expectations and valuations of issuers, on a name-by-name basis. We also aggregate the single name expectations each quarter to give a view of the market as a whole. This is based on the detailed, bottom-up forecasting our analysts complete on each of the names they cover and gives a perspective on the health of the largest corporates in the US and Europe, highlighting both winners and losers. 

Figure 1 Spread (OAS) history and long run average
Figure 1 Spread (OAS) history and long run average

Source: ICE indices, as at 27 September 2024

At this point in the year, we can have increasing confidence over how 2024 will turn out and the focus starts to turn to the outlook for 2025. While it is still too early to take a lead from management teams’ official guidance, certain themes are starting to stand out as potential threats and opportunities, which we highlight below.

Overall, from a credit perspective, fundamentals are in a very strong place. Post-Covid-19, the business environment has been very supportive to credit strength, with cost and efficiency measures put in place during the pandemic flowing through to profitability and cash flow.

We are starting to see some differences in the aggregate numbers between US and European-based corporates. Our forecasts for the US show moderate improvements in ’25 for both margins and leverage (the amount of debt a company has relative to earnings – the lower the better), whereas in Europe we see a slight deterioration (Figures 2 and 3). 

Figure 2: EBITDA margins, US (top) and Europe (bottom)
Figure 2 EBITDA margins, US
Figure 2 EBITDA margins, Europe

Source: Columbia Threadneedle Investments’ analysis, as at September 2024

Figure 3: debt and leverage levels, US (top) and Europe (bottom)
Figure 3 Debt and leverage levels, US
Figure 3 Debt and leverage levels, Europe

Source: Columbia Threadneedle Investments’ analysis, as at September 2024

The constituents of the data sets are very different, so these aggregate numbers should be viewed in the context of the sector outlooks below. Common between the two, however, is that balance sheets remain in a good position from a historical perspective. Margins are strong and leverage remains lower than pre-Covid levels, which is supportive for credit spreads.

Going forward

As we look ahead to 2025 there are some themes to note:

The hype around artificial intelligence is real. No matter what your views are on the ultimate applications, the cash being spent on infrastructure and development is significant and growing. We expect this to continue into 2025 and beyond. This will have a huge impact on the technology and telecom sectors globally, both of which are well placed to benefit from these changes.

In industrials, building materials earnings continue to rise, with margins supported by strong pricing and product mix, no Chinese exposure and a strong US market. Capital goods margins also remain high, with demand from secular trends supporting segments like smart infrastructure largely offsetting weakness in robotics and factory automation. We expect these trends to continue. 

The bottleneck in the healthcare system caused by Covid-19 continues to be cleared. Utilisation of medical services remains at an elevated level, which is good for providers and equipment makers but puts pressure on insurance providers. The latter will be pricing 2025 policies with the continuation of these higher utilisation rates in mind, potentially lowering benefits for consumers but improving profitability.

The health of the consumer will remain very much in focus. There is already evidence that the lower end consumer is feeling the economic pressure, while at the other end of the scale some luxury goods names have seen negative revisions due to poor performance in China. At a corporate level, we expect this will lead to a return to the pre-Covid-19 low growth environment for consumer goods names. Companies are, however, in a good financial position to be able to supplement that anaemic growth with acquisitions. We expect more deals in the space in 2025.

Boeing is a large enough name that any changes it makes have an impact on aggregate statistics. We continue to expect the company to recover from its safety issues and the impact of Covid-19, but the timing remains uncertain.1
The biggest change on a sector level has been in autos, which is a larger part of the European numbers and explains much of the difference between the US and European data sets. Here, we have seen downward revisions to expectations for both volumes and margins, with profit warnings coming thick and fast and considerable uncertainty remaining. The impact has been seen most in the Chinese market where softer demand and strong competition has caused pressure on profitability. Auto profitability is highly sensitive to volumes. The growth in battery EV demand has also moderated from higher historic rates and an area to watch closely.2

Conclusion

Given the tight valuations, the market remains hyper focused on any suggestion that corporate fundamentals are not in a place to justify them. Our work would suggest that, overall, the health of the average IG issuer still very much does support a premium valuation. However, if you were to look very closely for the first signs of cracks, autos and the lower end consumer would bear close attention in the coming months. Geographically, we believe US names are in a better position than their European counterparts.

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No Autumn chills for Global Investment Grade Corporate fundamentals

1 Columbia Threadneedle Investments, Boeing bonds bound to bounce back?, 27 September 2024
2 Columbia Threadneedle Investments, Slow-speed crash? Problems for the European auto sector pile up, 7 October 2024

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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