Investment grade credit: Market view
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Article Type
Insights
Topic
Credit
Published
April 08, 2025
Read time
5 mins
Authors
Norbert King
Sivakumar Rajan
Aegon Asset Management
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The size of President Trump’s tariffs and the ensuing trade war are much greater than the market expected. Contrary to what many believed, these tariffs are likely to be with us for longer, as President Trump attempts to rewrite the global trading playbook. We do not believe that they are simply a negotiating tactic. That said, this is very fluid and subject to change at a moment’s notice.

 

The Street is revising its growth forecasts and, along with that, its credit spread forecast. The move from China last week to implement 34% tariffs on US goods was likely just the first shot. More recent headlines, as of this writing, have suggested that weaker trading partners, such as Vietnam, are attempting to meet President Trump’s demands.

 

While the equity moves have been violent across several names and credit spreads are reacting as well, it’s important to make a distinction between equity and credit impacts.

 

The good news is that we believe that companies are entering this growth slowdown with fundamentals in good shape. Management teams have been relatively disciplined since the Covid crisis—and outside of a few idiosyncratic stories—there hasn’t been a major re-leveraging among investment grade credit issuers. We believe that the investment grade market will be able to weather the storm, with the biggest concern being a more drawn-out recession, rather than a widespread credit deterioration directly related to tariffs.

 

Broadly speaking, we expect spreads to widen further from here. Even if we do not head toward recession, slowing growth and significant uncertainty means the new trading range should be wider.

 

Turning to individual sectors:

 

  • Autos: This sector is the epicenter of these tariff dynamics and we have seen spreads and equities react to it accordingly. In our view we would group this sector into three categories: American, European and Asian. Each one of the groups have unique challenges and advantages. Detroit’s Big 3 automakers are predominantly susceptible to what eventually happens to the United States-Mexico-Canada Agreement waivers, while European entities are prone to double tariffs on the inputs they receive from Europe and the exports to China from the US. The Asian entities are expected to go through a capex expansion as they try to increase the US-made content in their cars. The European and Asian entities are generally higher rated than their US counterparts, giving them some flexibility on their leverage. Overall, in our view, original equipment manufacturers seem to be in a good enough position to get through this and, while margins may get squeezed, we only see marginal credit deterioration.
  • Retailers: Are mostly a very high-quality sector in investment grade. Consumer spending has been resilient, but more recently has been showing signs of restraint. Lower-income consumers have been squeezed and there’s the potential for that to work its way up the income ladder as tariffs will effectively act as an additional tax. Margins are expected to be impacted, since companies might not be able to pass along costs as much as they were able to during the past few years. We expect some dichotomy on the margins based on the type of spending they cater to in this sector i.e., discretionary versus non-discretionary.  
  • Pharmaceuticals/health care: We are expecting more on the tariff front in this area and sub-sectors will likely be impacted to various degrees. While there could be some downward revisions to guidance for individual companies, it may not move the credit quality needle. It’s worth noting that there is a separate pharmaceutical tariff that’s being negotiated, which is expected to be rolled out in May. But it is still unknown, how the intellectual-property rights and the revenues attributed to those will be treated in terms of tariffs, making this sector a ripe candidate for lingering uncertainty. However, in our opinion, the large pharmaceutical companies will have pricing power, and those costs will likely be passed to consumers. Generic pharmaceutical firms, on the other hand, could face greater margin pressures due to the unfavorable economics for reorienting those supply chains to US.
  • Technology: Semiconductors have been excluded from the new tariffs for now. If tariffs were to materialize for this sector, it would have huge implications on the price of everyday gadgets. Companies in this space have high margins and we expect those to get compressed, but it should not result in material changes in the leverage for most entities. Hardware companies are expected to fare worse in terms of the tariffs, but demand is still expected to be strong due to artificial intelligence-related spending. We do not expect credit deterioration in this segment of the market, although spreads will likely reset wider as these firms will face additional capex spending for reorienting their supply chains. For software companies, the concerns will revolve around EU/China retaliation on those firms’ business in certain countries. However, most of these companies are very high quality, so they should be able to manage the changes.
  • Energy: Has not been directly impacted since energy products are exempt from the recent tariffs. However, the broader concern is the potential for an economic slowdown/recession and the sector’s highly cyclical nature. Oil prices have fallen significantly since the start of the year and simultaneously the sector is being impacted by higher inflation and tariffs on equipment input costs such as steel. Regulation is the other topic to monitor as it could have the potential to lower breakevens for the industry. The sector is entering this period from a position of strength, after using the last few years upgrading their balance sheets.
  • Financials: Not directly exposed, but the second-order effects of an economic slowdown will impact the sector. Earnings will likely be guided lower as the outlook for loan growth and credit quality deteriorates. Consumer-focused banks with business models more geared toward unsecured lending will be most at risk as consumer balance sheets come under pressure. We believe banks are entering this from a position of strength with robust capital positions and do not have fundamental concerns. 
Important disclosures

Authors

Norbert King
Head of Investment Grade Credit
Norbert King is head of investment grade credit and is leading our investment solutions team on an interim basis. He serves as a senior portfolio manager on investment grade credit, multi-sector, and LDI portfolios.  
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Sivakumar Rajan
Head of Multi-sector Portfolio Management
Siva Rajan is head of multi-sector portfolio management and manages various strategies across the duration and credit spectrum. He is also a portfolio manager on investment grade credit strategies and government securities mandates.  
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Aegon Asset Management
We are active global investors. In a complex world we think and act across traditional boundaries. We organize our teams globally by asset class, to bring the breadth and depth of our investment and research capabilities together for clients across the world. 
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