EFTA01458269.pdf

1 September 2015 Corporate Credit: Back to school - The edge of normality Back to school - The edge of normality What a summer we've had. Greece has slipped back into the shadows but was Figure I: Federal Reserve Balance at the centre of global financial markets as the market entered holiday season. Sheet (Real Adjusted) since 1915 As we return, China, commodity and EM woes dominate. If that's not enough, in two weeks the Fed will embark on one of their most eagerly anticipated SOX. 1150125. )0113 *Sian 4%0 policy meetings over the last decade. In this note we update our views on 41:011 credit markets and take stock after the holiday season as we go 'back to 1%0 school'. 1010 15C0 LOCO One of the biggest problems we face is that there is no historical template for two 1.0:0 current global market conditions so we're all flying blind to a large degree. 0 Never before have so many of the most important countries in the world *IS 1924 19% 194 II% I** 191$ 13.,5 1914 Z015 2016 printed so much money and left base rates so low for so long. Also never Source Pao* ON* Svc et Laish4 ants, Mew before has the most economically influential country in the world (the US of UP course) tried to start a slow process of reversing said extraordinary policy. We've also not seen a country as big as China see such rapid growth over such a short space of time la few decades) without major busts along the way, Figure 2: EUR HY YTD Total and especially when credit growth has been so extraordinary. So there is no road Excess Returns map for this journey, only educated (hopefully) predictions. We've continued to be bullish European credit (especially HY) even though we've long felt that the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities. Although we probably should have lightened up on occasions this year, Figure 2 shows that HY total returns have been decent and excess returns positive in 2015 which is impressive given the volatility. EUR IG has seen a mild negative total return year, while GBP IG has been slightly positive. Both markets have provided negative excess returns given the small positive total return in Bunds and Gilts, but the under-performance has been relatively mild Non boneNen oda/nog suterre t-50, CIAOWWI MUT Pr MVOS( row fen" and the out-performance strong relative to the USD market. These are shown Sone Dana* 9w 1.44 WOW, for the three currencies in Figure 3. iFigure 3. IG YTD Total and Excess Returns —EUR (left). GBP (middle) and USD (right! 0.5% •Tot& Return a Excess Return 20% 'Total Return • Lass Return •Totai Return tutee, Return 11 1 5% 1%111 .724% c 00% 1 0% 2% 05% asx 0 0% - -1076 -0 5% -3% .1 5% -1 0% -1 5% -20% .-1;t pp # r re ee e 1 HP vs vs vs s „vs vs cip < VP/ 4„,#4 0.40, CP J et ir ve,,eAsysi ip e tp Satc* Clet4serar Bent Net., 0.040 Our view overall is that the global financial system is so fragile, the global economy so lethargic and asset prices generally so high (with exceptions) that it near forces central banks into a continuation of easy monetary conditions. Perhaps even easier over the coming months and years than they currently expect. This fits in with our 'Plate Spinning' analogy that central banks are periodically required to rush to re-spin the plates to prevent them crashing down given the problems beneath the surface that liquidity is covering up. We think this era will last for a number of years to come. So we expect central bank liquidity to remain abundant and credit fundamentals outside of the Commodity sector (mostly a US problem which we expand on in this note) to remain fairly stable. Meanwhile spreads across Page 2 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0118103 CONFIDENTIAL SDNY_GM_00264287 EFTA01458269