Oksana Aronov of JPMorgan Asset Management predicts that credit markets will face a sharp price revision next year.
The mentioned expert justifies his point of view by saying that higher capital expenditures will become a factor of negative impact on borrowers with a low rating level. On Wednesday, December 13, during a conversation with media representatives, Oksana Aronov said that interest rate reckoning took its time to arrive, suggesting that a similar procedure in terms of duration would actuality for the revision of loans. The expert claims that this will be a big risk. She mentioned interest rate risk in this context.
Oksana Aronov argues that the restructuring process will focus on companies that have fundamentally weak balance sheets. JPMorgan managed $2.9 trillion as of September this year. The expert says that the revision of credits will have a widespread impact on corporate debt and provide opportunities for investors.
Growth was recorded in the credit markets this week. The corresponding dynamic is because traders have focused on expectations of a rapid decline in interest rates, which is forecasted for next year. Oksana Aronov does not agree with these sentiments. In her opinion, the Federal Reserve System will not start implementing a monetary policy easing strategy until the end of 2024. She also does not exclude the possibility that there will be no reduction in interest rates at all in the coming year, since the inflation rate is persistently high, especially in the sphere of services.
It is worth noting that some JPMorgan economists predict the beginning of the easing of the Fed’s monetary policy in the first half of 2024. The corresponding expectations are also contained in the revised reports of banks on the most likely trends and processes in the next year.
Oksana Aronov says that there is a significant risk that an increase in the price level will be recorded in 2024. According to her, the probability of this scenario exceeds the prospects for a reduction in interest rates, which many hope for.
The expert has already said this year that there is a prospect of a sharp revision of credit prices. She has long argued that credit spreads are too narrow to compensate investors for fundamental risks. The junk risk premia in the United States is 360 basis points.
The cost of funding currently remains high against the background of the approaching maturity of the debt. Given these circumstances, Oksana Aronov believes that the default rate on high-yield bonds and credits in the United States combined will be more than 10% next year. This figure exceeds consensus estimates by about 5% and is more than twice as high as expected by the end of 2023.
Oksana Aronov expects that situations like the March banking crisis, which caused the collapse of financial sector bonds, especially additional tier 1 debt, will become more frequent. According to the expert, next year there will be more and more such surprises since in this case there is a factor of influence of a higher cost of capital. She notes that with an unreliable liquidity base, there will be drastic changes in the market, which will not necessarily always be due to fundamental reasons.
JPMorgan took advantage of the spring bank failures to buy AT1s. Oksana Aronov still positively evaluates the contingent convertible debt. She also prefers high-grade floating-rate bonds, which make up more than 30% of her portfolio, and individual non-agency mortgages.
Oksana Aronov keeps ample cash on hand. This tactic ensures readiness to take advantage of any market turmoil or forced sales. She noted that JPMorgan’s portfolio has a dry powder, which is an ultra-short and money market type investment that generates income of 5.5% plus.
At the end of November, JPMorgan stock strategists published a gloomy forecast for American stocks for the next year. They expect weak profit growth, significant geopolitical risks, and expensive valuations. Strategists predict a target for 2024 for the benchmark S&P 500 index (.SPX) at 4200, or about 8% below the current level.
As we have reported earlier, JPMorgan CEO Warns of Recession Risk.