Q3 2022

Capital Markets Outlook

July 2022





  • Growth outlook has deteriorated meaningfully

  • Recession is not in our base case but the risks have risen
  • Central banks are tightening monetary policy to fight inflation

  • We see value in Australia, Germany and covered bonds over periphery
  • Investment-grade credit valuations are reasonable based on fundamentals

  • High yield: valuations have become more compelling as spreads have widened and yields have risen
Emerging-Market Debt (EMD)
  • Most EM countries have not completed their projected rate hikes for this cycle

  • Emerging markets corporates help to enhance yield and offer attractive risk adjusted returns
  • Earnings expectations have not yet adjusted to slowdown scenario

  • Slower economic and earnings growth calls for a quality bias
  1. Rates
  2. Credit
  3. EMD
  4. Equity


A Potential US Recession Would Likely Be Shallow in Comparison to Past Recessions

Corporate Leverage Is Low
US high yield net leverage (debt/EBITDA)

As of June 30, 2022
Source: Bloomberg, Morgan Stanley Research, US Federal Reserve and AB

US Unemployment Is at Multi Decade Lows
US unemployment rate

As of June 30, 2022
Source: Bloomberg, Morgan Stanley Research, US Federal Reserve and AB

The US Consumer Is in Strong Financial Shape
US household savings rate and US debt service as percent of disposable income

As of June 30, 2022
Source: Bloomberg, Morgan Stanley Research, US Federal Reserve and AB

Current analysis does not guarantee future results. 


The Markets Are Pricing in Front-Loaded Hikes That Should Slow Inflation 

The Markets Have Priced in over 90% of Fed Rate Forecasts
Fed funds rate (basis points)

Through July 15, 2022
Source: Bloomberg, Bureau of Economic Analysis and AB

The US 10-Year Yield Has Already Reacted to a More Aggressive Fed
December 31, 2021–June 30, 2022

Through June 30, 2022
Source: Bloomberg and AB

Current analysis and forecasts do not guarantee future results.
CPI: Consumer Price Index


IG Credit Valuations Are Reasonable Based on Fundamentals

Valuations Have Improved Significantly During the Recent Spread Widening
OAS (basis points)

As of June 30, 2022
Source: Bloomberg, Morgan Stanley and AB

Fundamentals Are Strong
IG net leverage

Through March 31, 2022.
Source: Bloomberg, Morgan Stanley and AB

Past performance does not guarantee future results.
Euro IG Credit: Bloomberg’s Pan-European Aggregate Index: Corporate; US IG Credit: Bloomberg’s US Corporate Investment Grade Index
IG: investment-grade; OAS: option-adjusted spreads 


Navigating the Challenges in Emerging Markets

EM Landscape

  • Cautious stance on EM given macro volatility / uncertainty
  • Central banks willing to sacrifice growth to fight inflation; aggressive tightening in EM and DM
  • With DM central banks stepping up tightening, EM central banks might be forced to extend their tightening cycles to maintain healthy interest rate buffers
  • Valuations across EM are very attractive

EM Recommendations

  • EM corporates: attractive risk / adjusted returns
  • EM sovereigns: reduced risk / exposure
  • EM local: waiting for a better entry point (peaking inflation, more advanced hiking cycle, and better yield premium vs. US yields)
Most EM Countries Have Not Completed Their Projected Rate Hikes for This Cycle

As of June 30, 2022
Source: Bloomberg, Haver Analytics and AB

Current analysis and forecasts do not guarantee future results.
EM HY Sovereign is represented by the subcomponent of the J.P. Morgan EMBI Global Diversified Index. EM sovereign is J.P. Morgan EMBIGD HY strip spread.
*Weighted average policy rate, including Brazil, Chile, Colombia, Czech Republic, Dominican Republic, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, Serbia, South Africa, Thailand, Turkey and Uruguay 


How Does the Market Respond to Recession?

S&P 500 Price Return in US Recessions Since 1937

As of June 30, 2022
Source: Bloomberg, National Bureau of Economic Research and AB

Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized.
Range of returns composed of S&P 500 price return over the 14 recessions beginning: May 1937, February 1945, November 1948, July 1953, August 1957, April 1960, December 1969, November 1973, January 1980, July 1981, July 1999, March 2001, December 2007, February 2020. The February 1945 recession is not included in days between start of recession and market/peak trough table.