Corporate America’s Shift in Priorities
As the Federal Reserve continues to raise interest rates, a significant shift is taking place in the priorities of blue-chip US companies. Gone are the days of debt reduction; instead, these companies are now focusing on shareholder payouts and capital expenditure growth.
A Change in Strategy
According to Barclays strategists, companies with BBB ratings have boosted their share buybacks and accelerated their capital expenditure growth, marking a significant change in strategy. This shift is accompanied by rising interest expenses, which are outpacing earnings growth. As a result, companies are becoming more friendly to shareholders and less so to bondholders.
The Credit Cycle
The fundamental picture is likely past its peak for this credit cycle, with weaker investment-grade companies shifting away from prudent balance sheet management and toward shareholder payouts and accelerating capital expenditure. Corporate-bond investors have been snapping up debt all year, sending valuations to near multi-decade highs and leaving spreads on investment-grade corporate bonds close to their tightest since the 1990s.
Market Pricing vs. Fundamental Credit Picture
The Barclays analysis highlights the growing disconnect between market pricing and the fundamental credit picture. While earnings are still relatively strong, companies’ financial condition would need to deteriorate further, and demand for corporate bonds would need to drop materially, for a significant selloff to occur.
Catalyst Needed for Valuation Reset
Seamus Ryan, director of credit research at GW&K Investment Management, believes that a catalyst is needed for a valuation reset. With valuations already high, particularly for less liquid corporate bonds, it makes sense for investors to switch into either more liquid corporates or less liquid private credit.
Artificial Intelligence and Mergers and Acquisitions
The upswing in capital expenditure can be attributed, in part, to the huge investment required by utility and energy firms in artificial intelligence. Additionally, the expected pickup in mergers and acquisitions, driven by the incoming US President’s business agenda, is likely to increase companies’ leverage.
Signs of Animal Spirits
The signs of animal spirits turning higher are already present, according to Barclays strategists. With next year setting up to further these trends, investors would do well to take note of the shifting priorities of corporate America.
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