Large Bank Supervision Forum 2023

Q1 2023 Market Outlook

Fed/Government Policy

Macro Headwinds & Volatility

Loan Fundamentals

Market Technicals

A material reduction in the US inflation rate should allow the US Federal Reserve to pause its rate hikes. Unless the US dips into a deep recession, we don’t expect a rate cut until the labor market rebalances and inflation shows signs of settling below 3%. As we progress toward what may be the end of the interest-rate hiking cycle, we expect interest rate volatility to recede as global central banks move beyond peak hawkishness ― although higher rates will linger, driven by regional differences in growth and inflation. Current rate backdrop is largely a net positive for loans but pockets of market likely to come under stress due to higher-for-longer borrowing costs (low Single-B names). Post-Covid fiscal policy actions of current administration have arguably stoked inflation; however, further stimulus activity appears to be on hold.

Notable macro themes for 2023 include slower global growth with heightened potential for recession, decelerating inflation, less aggressive and less synchronous central bank policies, lower interest rate volatility and continuing geopolitical risks. The cumulative effects of central bank tightening, energy supply disruption and the fading impact of COVID stimulus will push global growth below potential and threaten recession in several key economies.  US expected to fare better than Eurozone.  Renewed fiscal support and gradual relaxation of zero-Covid policies could make China a potential upside counterbalance to global growth. Markets will pivot from pricing interest rate risk to pricing fundamental risk, potentially with recessions scattered around the globe.

Earnings and corporate fundamentals will remain a key focus, as strength of the US consumer gets tested. Thus far, companies have had pricing power and implemented price increases to offset labor/inflationary cost increases.  Given the buildup in inventory levels and expectations for consumers to pull back on spending, we expect corporate margins to decline and earnings growth to slow. Downgrade activities should pose a challenge in 2023, as rating agencies remain focused on issuers with deteriorating credit metrics, including margin pressure from higher input prices, increased financing costs due to rising rates and lower consumer spending due to the drawdown of excess savings. Defaults are expected to increase from still historically low levels but remain below long-term averages, at least in 2023.

Outlook for technicals in the near term remains somewhat challenged. New-issue supply should improve in 2023, although larger volumes may not materialize until the latter part of the year once more clarity on the macro front emerges. CLO market has been impacted recently by a wider liability backdrop and weaker demand from US and Japanese banks.  Q1 2023 issuance will likely be driven by structural/economics levers only available to certain managers. Quantum of outstanding CLO warehouses continue to pose overhang to the market. Market participants will continue to seek creative solutions to partially address warehouse pipeline and avoid any forced liquidations.

Source: Voya IM

For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to the general public.

45

Portfolio Construction Managing the Portfolio

 Portfolio based strategy – set, measured policy parameters  Borrower financial results reviewed at least quarterly against Plan/Budget  Be aware of refi risk  Consult reliable independent news sources  Routine overall portfolio reviewed against approved policy parameters  ALLL impact updated quarterly

 Enterprise Value updated quarterly  Annual independent loan review

For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to the general public.

46

46

Made with FlippingBook - Online Brochure Maker