Credit Investors vs Equity investors – According to a January 19th report from Goldman Sachs Options Research, there has been a sea change in the financial markets over the last week or so. In their report, Goldman Sachs analysts John Marshall and Katherine Fogertey highlight that credit has notably underperformed equity over the last few trading sessions and offer a brief discussion of the implications of this development.
They also note that investor sentiment and positioning are clearly more bearish in credit both over the short-term and the long-term when compared to equities of companies in the CDX, IG or HYG. Moreover, this is a major change from the last few months of 2015 when credit and equity traded with a very high correlation.
Credit investors are more bearish in the current environment
Marshall and Fogertey offer a reasonable explanation for the recent trading action: “The high correlation of IG credit and IG equity in Fall-2015 suggests credit and equity investors were incorporating a view of increased risk in a similar way for large seasoned issuers. The disproportionate sell-off in credit in recent days suggests credit investors are translating recent events more bearishly.”
Goldman Sachs says credit dropping due to increased energy sector hedging costs
It is becoming increasingly evident that the plunging price of crude oil and natural gas is having a slew of impacts outside of the energy sector. The Goldman Sachs analysts suggest that the costs of hedging in the beleaguered energy sector have risen so high that it is deflating sentiment among credit investors.
Marshall and Fogertey describe the dynamic that has led to this significant impact on financial markets: “we believe credit sentiment has been disproportionately affected by the recent rise in the cost of hedging oil exposure. WTI options prices jumped to a new multi-year high this week. It is possible credit investors are disproportionately pricing the negatives of low oil for energy, without yet pricing the benefits for the consumer.”