Morgan Stanley Fixed-Global Credit Outlook - September 2024 The Critical Window-110221380

Global Credit Outlook – September 2024The Critical WindowGLOBAL CREDIT RESEARCHAll exhibits as of September 5, 2024 unless otherwise indicated.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.M O R G A N S T A N L E Y R E S E A R C HGlobalMorgan Stanley & Co. International plc+Andrew SheetsStrategistandrew.sheets@morganstanley.com+44 (0)207 677 2905Aron BeckerStrategistaron.becker@morganstanley.com+44 (0)207 677 0754Morgan Stanley & Co. LLCVishwas PatkarStrategistvishwas.patkar@morganstanley.com+1 212 761 0165Morgan Stanley Asia Limited+Kelvin PangStrategistkelvin.pang@morganstanley.com+852 2848 8204•Still a Good 12m Story: Credit loves moderation, and that’s exactly what Morgan Stanley forecasts see over the next 12 months: modest growth, moderating inflation, moderating policy rates. While a larger M&A upcycle is under way, current corporate aggressiveness is modest and demand for bonds is high. Spreads should be tight. •But this a critical window: While rate cuts are coming, they work with a lag. The market remains vulnerable to disappointing growth, fueling concern that policy is “behind the curve” (a problem that faster rate cuts do not fix). Tactically, we expect a choppier September (‘dip’) and then a stronger finish to the year (‘rip’), as rate cuts arrive, growth does hold up, seasonality improves, and the passing of the US election drives risk-taking. We discuss preferred short-term hedges.•Key Credit Views: In the US, we like IG 3-5yr, banks, energy and utilities, and dislike consumer cyclicals. We like low BBBs and a BB/CCC barbell over single-Bs (esp. small single-Bs). In Europe, we like IG 5-7yr, BBBs/BBs, LT2, financials, healthcare, and staples, and dislike autos and discretionary. In Asia, we like Japan IG and long-end China IG vs. other Asia IG. Globally, loans and CLOs remain attractive, with compelling spread relative to HY and attractive all-in yield under our central bank baseline. With peak rates behind us, we prefer US/EU Real Estate > Cyclicals.•Key Forecasts: Our excess return forecasts to mid-2025 remain above the historical average: US IG +160bp, US HY +240bp, US Loans +410bp. US Default Rate 3.5%-3.8%September 6, 2024 03:51 PM GMTM O R G A N S T A N L E Y R E S E A R C H2August 2024Macro Outlook© Morga