The outlook for investment grade (IG) credit is centred around the interplay between the macroeconomic environment and valuations. Yields are still high, meaning IG investors can earn a good level of carry, which helps to mitigate against periods of volatility.

If the economy enters recession and central banks begin easing policy, credit fundamentals will likely weaken from their current high level. However, in this environment, investors could benefit from both the high carry they have locked in and the positive duration impact of falling rates. In many cases, this could offset the negative effect of a widening of credit spreads on returns.

In the near term credit spreads are tight with the potential for some further spread widening, which suggests a cautious approach is appropriate. We think it is important for investors to remain flexible and use security selection to identify opportunities across the fixed income spectrum. Central to such an approach is having a comprehensive understanding of a company’s underlying fundamentals.

In this paper we take a closer look at some of the key fundamentals of investment grade companies including leverage, maturity profiles and interest coverage ratios. Slower economic growth and higher interest costs will lead to a deterioration in these measures. However, we note that this will be happening at a time when company balance sheets are strong and credit metrics high.