Man Group: Credit Cycle May Be Entering Its Later Stages

U.S. High-Yield Spread at Historic Lows
Multiple Indicators Suggest Credit Cycle Entering Late Stage
European High-Yield Opportunities in Real Estate, Financials, and Energy

Global alternative investment asset manager Man Group stated in its Q3 credit market outlook report on July 18 that the credit cycle may be entering its later stages.

The report suggested that as the second half of the year begins, the credit cycle could be shifting from the late expansion phase to the early downturn phase. Among major U.S. indicators, the report cited the prolonged high interest rates, weakened consumer sentiment, increased leverage in the high-yield and leveraged loan markets, rising delinquency rates in commercial real estate, and a sharp surge in household debt as the reasons for this outlook.

One of the causes of the credit cycle transition identified in the report was protectionist policies that slow global growth. Amid increased uncertainty in corporate investment plans and global supply chains due to tariffs, the International Monetary Fund (IMF) significantly lowered its GDP growth forecasts for major advanced economies in January of this year.

If growth slows, the U.S. Federal Reserve (Fed) may move to cut rates. The potential for tariffs to trigger stagflation is threatening the Fed's dual mandate of price stability and maximum employment. The expansion of the U.S. government's fiscal deficit is adding pressure to the bond market. The report also anticipated that the prolonged high interest rate environment will increase interest expense burdens for companies that need to refinance their debt in the coming quarters.

The report noted that despite strong corporate earnings, market sentiment has weakened. U.S. capital expenditure expectations have fallen to their lowest level since April 2020, and both business and consumer confidence in the U.S. have recently deteriorated. Companies have reduced hiring and investment plans. Man Group expects this weakness in business and consumer confidence to persist in the short term.

Man Group emphasized that while companies are showing better financial fundamentals compared to the past, there are signs of downside risk, such as increased leverage in the U.S. high-yield bond and leveraged loan markets. In contrast, European companies have stronger debt cushions.

The report assessed that as leverage expansion intensifies due to prolonged high interest rates, companies may resort to liability management exercises (LME) or dispose of distressed assets to alleviate their overall debt burden.

According to the report, in Q3, the U.S. faced two challenges: the possibility of a recession and trade policies that have caused supply chain disruptions, putting pressure on growth and inflation. However, the report presented an optimistic outlook for the European credit market, as GDP growth is expected in Europe, supported by monetary easing policies and Germany's fiscal stimulus measures.

Man Group analyzed that while total returns in the credit market remain attractive, recession risks are not yet fully priced in. Investment-grade credit spreads, which temporarily widened after "U.S. Liberation Day," have narrowed to the bottom 25% range. The U.S. high-yield spread, a leading indicator of recession, also remains at a historically low level.

The report highlighted global high-yield bonds and expressed a positive outlook for European real estate, financials, food manufacturing, and energy sectors. In contrast, sectors such as autos, U.S. regional banks, and some U.S. homebuilders are viewed as weak and less attractive for investment. While some key U.S. indicators, such as default rates, have begun to show signs of weakness, the report assessed that overall fundamentals in other markets remain sound.

Man Group emphasized the importance of a fundamentals-based, selective investment strategy to respond to the current market environment. The report added that as growth slows and the gap between markets widens, along with a rising likelihood of investing in distressed assets, the role of active managers is expected to expand.