On access to capital markets, what has changed compared to the last quarter?

Jim Cielinski: Well, a lot. Central banks are fighting inflation. Inflation continues to soar, and to arrest that, they must drain liquidity, shrink their balance sheet and raise rates. Moreover, this is global, so it’s not just the Federal Reserve. And as this happens, I think markets will begin to price in higher risk. It’s important to keep in mind that as risks go up, that’s a change, but equally important is the level. And we start from a position of very accommodative policy. Rates are low, real rates are still low, and liquidity is plentiful. It’s just getting worse and that’s what markets often respond to.

What are the biggest risks faced by credit markets?

Well, there are many. I’d say a slowdown is one. Tighter liquidity is another … recession, stagflation. There are all these risks that are combining, I think, to create a lot of uncertainty. And it’s important to understand that it’s often what leads to recession that you have to focus on. Recessions, outside of the pandemic-induced recession in 2020, don’t typically just happen. They often happen because of over-tightening and a policy mistake. In this case, inflation is the likely culprit. So keep an eye on inflation and keep an eye on the risk that central banks are tightening into a slowdown, which exacerbates that risk.

We’re often asked, “Where are we in the credit cycle?” And I think the answer is that the cycle has turned. Now, to really understand that answer, though, you have to know the shape and the pace of deceleration. It’s often a policy mistake, that reaction to overheating, that produces the hard landing. And if you can avoid those and get a soft landing instead, credit can often hold up for far longer and far better than markets expect.

Have you seen any shift in credit fundamentals?

We haven’t yet really seen any deterioration in credit fundamentals, but it’s coming. The last 12 months have seen record improvement, leverage, interest cover – all of these are extraordinarily good. And that’s why credit has held in reasonably well. We just think we’re at the peak.

How can investors navigate this uncertain environment?

Well, first, don’t sell too early. Be careful to try to identify the signposts that accompany the end of a cycle. Is it going to be a hard landing or a soft landing? Keep an eye on those recessionary indicators. Try not to get too caught up as well in predicting the magnitude of moves. Inflection points are often about getting the direction right or getting the turning point right. Magnitude is very hard to predict. So watch the signposts but be nimble, and I think being active at these stages in cycles are often where you can really make or lose money as an investor.

And what I would look for is an opportunity when central banks and policymakers begin to panic. So when they panic, you can step back into markets. And they will panic when they feel like they’ve gone too far. And pulling back is often what I think we would call a dovish pivot and can be a good signpost for getting back involved in credit.