Understanding the credit cycle

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Understanding the credit cycle Gene Tannuzzo, CFA, Deputy Global Head of Fixed Income

It's lazy to really say the credit cycle is late or it's early. We have to look deeper than that. A credit cycle is really the dynamic where demand and leverage change and put the borrower at risk. Early in a credit cycle, demand is starting to grow and companies tend to have a lower amount of debt because they're managing their businesses cautiously. Later in the credit cycle, we see companies get more comfortable having a higher debt load and then as demand starts to change, those companies can be very vulnerable. That cycle of change is what we call the credit cycle. I would say there are really three elements in the credit cycle that are diverging in a meaningful way. The first is the traditional corporate sector versus the consumer sector. We see corporate leverage at a pretty high level, although there are some segments of industries that are paying down debt. Corporate leverage on hold is pretty high. Where household leverage mortgage debt, credit card debt is pretty low. So that's divergence number one. Divergence number two would be domestic versus international We're seeing that companies who are more domestically focused and have more than half of their business focused on the U.S. are seeing sales growth in the 4 to 5% range. Where more internationally focused companies are seeing sales contract mid-single digits. So that divergence is very important as well. And then lastly, the divergence between industrial manufacturing companies and those that are more serviceoriented. And what we're seeing now, because of all the pressure on global trade, is that the industrial cycle is truly lagging. But in each of those instances, there are companies, there are industries and there are assets that we can buy that take advantage of better balance sheets and better structures. So it's not an environment where you want to be hiding under the table waiting for the recession to happen. The view s expressed are as of October 2019, may change as market or other conditions change and may differ from view s expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, w hether for its ow n account or on behalf of clients, may not necessarily reflect the view s expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should alw ays be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here w ill continue or that any forecasts are accurate. Investment products are not federally or FDIC-insured, deposits or obligations of or guaranteed by any financial institution and involve risks, including possible loss of principal and fluctuation in value. Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies. ©2019 Columbia Management Investment Advisers, LLC. All rights reserved



Aren’t we late in the credit cycle? It’s not as simple as that, explains Gene Tannuzzo. The credit cycle today is diverging in three significant ways, and that presents opportunities for fixed income investors.

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