BlackRock head of macro credit research says not shying away from credit risk is the right call

Corporates have showcased resilience in navigating policy shifts, according to Amanda Lynam, Head of Macro Credit Research within the Portfolio Management Group at BlackRock, on the latest edition of the ‘Credit Exchange’ podcast with Lisa Lee.Lynam also noted the surprising resilience of corporates to navigating a higher cost of capital.But she advises monitoring the very important feedback loop – the link between corporate margins, the labour market, consumer spending, and overall economic activity and growth. “Right now, we are pretty constructive. Would characterise it as cautiously optimistic, but that could change very quickly – just like we’ve seen in other episodes,” Lynam said.To effectively monitor that feedback loop, investors should focus on the high-frequency commentary coming from corporate management teams. “That was instructive during the pandemic, about the true length of supply chain disruptions, which was actually much longer than many market participants and economists expected,” she said. “And I think it will be informative in this environment as well, both positively and negatively, about how corporates can navigate this environment. So that’s the one thing that we are watching.”Lynam makes a bit of an out-of-consensus call – selectively move down in credit quality in spite of the policy uncertainty and the residual overhang from that. Oftentimes, in an environment like this one, the automatic reflex action is to generically move up the ladder in quality. “Actually, that may not be the right call this time around,” she said.At the same time, she doesn’t advise chasing all the way down the risk spectrum, into those pockets of the market that were already under pressure. “We wouldn’t be chasing all the way down to triple Cs,” she said. “But, for example, investors that are concentrated on the investment-grade market, we like moving down into the triple B pocket of that market – because, in our view, that’s an opportunity to pick up some additional spread, some additional risk premium, but not compromise too much on credit quality.”“I actually think being a bit more opportunistic and not shying away from credit risk, but taking it in a selective way, is the right call,” she observed.Investors can also capture some pretty attractive all-in yields in European corporate credit, she added, while the European corporate credit market also has some pretty favourable technicals.But with that said, Lynam doesn’t see a wholesale reallocation from US dollar-denominated assets into Europe. “The case for American economic growth, productivity, the private markets in the US, for example, funding innovation – I think that’s a really compelling story.”