Podcast Summary: Thoughts on the Market Episode: Tariff Uncertainty Creates Opportunity in Credit
Host: Morgan Stanley
Release Date: April 16, 2025

Introduction

In the April 16, 2025 episode of "Thoughts on the Market," Andrew Sheats, Head of Corporate Credit Research at Morgan Stanley, delves into the complexities of U.S. trade policy and its ramifications for the credit market. The discussion centers around the uncertainty surrounding tariff policies and how this volatility presents both risks and opportunities for investors.

U.S. Trade Policy Uncertainty

Competing Theories of U.S. Tariff Strategy

The episode begins with an exploration of the ongoing debates surrounding the U.S. trade policy, particularly the administration's approach to tariffs. An unnamed analyst outlines two main theories:

1. Negotiation Tactic:
   “Aggressive tariffs are a negotiating tactic, an aggressive opening move designed to be bargained down into something much lower for an ultimate deal.” (00:30)

2. New Industrial Policy:
   “Aggressive tariffs are new industrial policy. Large tariffs for a long period of time are necessary to encourage manufacturers to relocate operations to the US over the long term.” (00:42)

These theories, while both plausible and discussed by senior administration officials, are mutually exclusive, adding to the prevailing uncertainty in the market.

Market Reactions to Tariff Uncertainty

Andrew Sheats highlights how market sentiments have fluctuated in response to shifts in tariff policy perceptions:

• Early Optimism:
  “Market strength back in early February could be linked to optimism that tariffs would be more of that first negotiating tool.” (01:01)

• Signs of Permanence:
  “Weakness in March and April was linked to signs that they would be more permanent.” (01:07)

• Recent Rally:
  “The more recent bounce, including an almost 10% one day rally last week, were linked to hopes that the pendulum was once again swinging back.” (01:20)

This back-and-forth creates a framework where investors interpret signs of aggressive tariffs as negative for the market, while indications of policy flexibility are viewed positively.

Impact on Corporate and Consumer Confidence

A pivotal concern discussed is the lasting impact of tariff uncertainty on corporate and consumer confidence. The analyst poses a critical question:

“Even if all of the tariffs were paused, would companies and consumers believe it? Would they be willing to invest and spend over the coming quarters at similar levels to before?” (01:53)

Andrew Sheats emphasizes that recent volatility isn't merely hypothetical. Soft data from surveys indicate a significant decline in both corporate and consumer confidence:

• Decline in Confidence:
  “Across a wide range of surveys, the so-called soft data, US corporate and consumer confidence has plunged.” (02:09)

• Slowed Merger Activity:
  “Merger activity has slowed sharply.” (02:15)

This erosion of confidence could lead to reduced investment and spending, posing a threat to economic growth.

Credit Market Implications

Risks and Opportunities

Andrew Sheats outlines the dual-edged nature of lower confidence for the credit market:

• Positive Aspect:
  “To some extent it's good keeping companies more conservative and better able to service their debt.” (02:27)

• Negative Aspect:
  “But if it weakens the overall economy.” (02:39)
  Weaker confidence historically correlates with diminished future growth prospects, heightening risks in the credit market.

Despite these challenges, current spread levels remain about average, and valuations are not yet seen as clearly attractive. However, the analyst suggests a potential silver lining.

Long-term Investment Grade Corporate Debt

The discussion shifts to long-term investment-grade corporate debt:

“Long term investment grade corporate debt now yields over 6%. As corporate confidence has soured and these yields have risen, we think companies will find it unattractive to lock in high costs for long term borrowing, fewer bonds for sale and attractive all in yields for investors could help this part of the market outperform in our view.” (02:59 – 03:09)

This scenario presents an opportunity where high yields make long-term corporate debt appealing to investors, potentially leading to outperformance in this segment of the market.

Conclusion

Andrew Sheats concludes by emphasizing the nuanced landscape shaped by tariff uncertainty. While the fluctuating trade policies introduce significant risks, particularly through diminished corporate and consumer confidence, they also unveil opportunities within the credit market, especially in long-term investment-grade debt.

“We do not see valuations as clearly attractive enough to be outright positive yet. But maybe there is one silver lining.” (02:50)

Investors are encouraged to monitor measures of confidence closely in the coming months to navigate this uncertain environment effectively.

Notable Quotes

• Andrew Sheats:
  “We do not see valuations as clearly attractive enough to be outright positive yet.” (02:50)

• Unnamed Analyst:
  “Long term investment grade corporate debt now yields over 6%.” (02:59)

Disclaimer:
The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.

This detailed summary encapsulates the key discussions and insights from the episode, providing a comprehensive overview for those who have not listened to "Thoughts on the Market." It highlights the central debate on U.S. trade policy, its impact on market sentiment, and the resultant effects on corporate confidence and the credit landscape.