Tariff Uncertainty Creates Opportunity in Credit

Summary

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

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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.

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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.

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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.

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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)

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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.

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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.

Transcript

[Andrew Sheats]

Welcome to Thoughts on the Market. I'm Andrew Sheats, head of Corporate Credit research at Morgan Stanley. Today I'm going to talk about how high uncertainty can be a risk for credit and also an opportunity. It's Wednesday, April 16th at 9:00am in New York. Markets year to date have been dominated.

[Unnamed Analyst]

By questions of U.S. trade policy.

[Andrew Sheats]

@ the center of this debate is a puzzle what exactly the goal of this policy is.

[Unnamed Analyst]

Currently, there are two competing theories of what the US Administration is trying to achieve in one, aggressive tariffs are a negotiating tactic, an aggressive opening move designed to be bargained down into something much.

[Andrew Sheats]

Much lower for an ultimate deal.

[Unnamed Analyst]

And in the other interpretation, aggressive tariffs are new industrial policy. Large tariffs for a long period of time are necessary to encourage manufacturers to.

[Andrew Sheats]

Relocate operations to to the US over the long term. Both of these theories are plausible.

[Unnamed Analyst]

Both have been discussed by senior US Administration officials, but they are also mutually exclusive.

[Andrew Sheats]

They can't both prevail.

[Unnamed Analyst]

The uncertainty of which of these camps.

[Andrew Sheats]

Wins out is not new.

[Unnamed Analyst]

Market strength back in early February could be linked to optimism that tariffs would.

[Andrew Sheats]

Be more of that first negotiating tool.

[Unnamed Analyst]

Weakness in March and April was linked to signs that they would be more permanent. And 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.

[Andrew Sheats]

This back and forth is uncertain, but.

[Unnamed Analyst]

In some sense it gives investors a rubric. Signs of more aggressive tariffs will be more challenging to the market.

[Andrew Sheats]

Signs of more flexibility more positive.

[Unnamed Analyst]

But is it that simple? Do signs of a more lasting tariff.

[Andrew Sheats]

Pause solve the story? The important question, we think is whether.

[Unnamed Analyst]

All of that back and forth has done lasting damage to corporate and consumer confidence. 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?

[Andrew Sheats]

Given all of the recent volatility, this.

[Unnamed Analyst]

Question is more than hypothetical. Across a wide range of surveys, the.

[Andrew Sheats]

So called soft data, US corporate and.

[Unnamed Analyst]

Consumer confidence has plunged. Merger activity has slowed sharply. We expect intense investor focus on these measures of confidence over the coming months.

[Andrew Sheats]

For credit, lower confidence is a double edged sword. To some extent it's good keeping companies more conservative and better able to service their debt. But if it weakens the overall economy.

[Unnamed Analyst]

And historically weaker confidence surveys like we've seen recently have indicated much weaker growth in the future.

[Andrew Sheats]

That's a risk. With overall spread levels about average, we.

[Unnamed Analyst]

Do not see valuations as clearly attractive.

[Andrew Sheats]

Enough to be outright positive yet. But maybe there is one silver lining.

[Unnamed Analyst]

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.

[Andrew Sheats]

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. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[Unnamed Disclaimer Speaker]

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.