JPMorgan Sees Credit Risks Rising as Trade War Bites
Mar 27, 2025
auto_awesome
Lisa Coleman, head of global investment-grade corporate credit at JPMorgan Asset Management, shares her insights on rising credit risks amid escalating trade wars. Managing $73 billion in assets, she highlights the deteriorating technicals in credit markets and emphasizes the need for higher returns due to uncertainty. Interesting discussions include the shifting landscape for U.S. companies, investment opportunities in healthcare and consumer sectors, and the evolving sentiment around different asset classes as recession fears loom.
Economic uncertainty from escalating trade wars is increasing credit risks, prompting a demand for higher compensation for investment risks.
The analysis reveals a cautious outlook for corporate earnings growth, with estimated EBITDA growth decreasing amidst pressures from potential tariffs.
Deep dives
Current Market Conditions and Economic Outlook
Economic uncertainty is creating tension in global markets, exacerbated by recession fears and inconsistent US policymaking. Despite the volatility, credit spreads remain tight, indicating a prevailing optimism about the long-term trajectory of the US economy. Market players are optimistic that the new administration will bolster the economy, even as consumer spending declines and businesses hesitate on investments. Bond and loan markets are reflecting low recession probabilities, suggesting an underlying confidence in high-grade borrower stability amidst growing concerns.
Earnings Growth and Corporate Financial Health
The analysis of corporate earnings, particularly EBITDA growth, reveals a cautious outlook as firms adjust forecasts for 2025. Current predictions estimate a 3% growth in EBITDA, down from the previous prediction of 5%, showing signs of vulnerability amid economic pressures. Stress testing indicates that additional tariffs would negatively impact these earnings further, raising concerns over corporate debt leverage. This outlook emphasizes the need for careful assessments of both individual company performance and broader economic indicators.
Technical Outlook and Investment Strategies
The technical fundamentals of the credit market are showing mixed signs, with robust foreign investor activity from Europe but declining interest from Japan. As mutual fund flows stabilize but trend downward, a cautious approach is warranted for new investments in fixed income assets. Current market conditions favor a focus on high-quality assets, particularly within the banking sector, which remains strong. Given the stable operating margins and financial health of investment-grade companies, there’s potential for better portfolio returns by prioritizing quality over riskier ventures.
Sector-Specific Insights and Tariff Implications
The impact of potential tariffs varies significantly across sectors, with retail facing acute pressure due to high import dependencies, which could severely affect EBITDA. Conversely, the pharmaceutical sector seems better positioned, as high margins afford them some flexibility to absorb costs without substantial harm. As companies within sensitive sectors adapt by reshaping their supply chains and adjusting pricing strategies, the outcome for each sector will depend on their ability to manage these changes effectively. This analysis highlights a critical divergence in resilience among industries, necessitating tailored investment strategies.
Fundamental and technical pressures on credit markets are growing as trade wars escalate, according to JPMorgan Asset Management. “We just need to be paid a little bit more for the uncertainty risk now in the market,” says Lisa Coleman, the firm’s head of global investment-grade corporate credit. “The technicals from where we were at the beginning of the year have deteriorated,” Coleman, who manages $73 billion in assets, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jody Lurie in the latest Credit Edge podcast. Coleman and Lurie also discuss the earnings outlook for US companies, opportunities in consumer, health care and bank debt and fund flows.