Morgan Stanley Likes Investment Grade Credit, Says Valuations 'Rarely Cheaper'

In a new report, Morgan Stanley analyst Adam Richmond discusses the firm’s new bullish take on investment grade (IG) credit. According to Richmond, the a potential for a U.S. recession has already been priced into many IG valuations making them a compelling risk/reward opportunity for investors.
 

“Any way we slice it, valuations are cheap,” Richmond explains. “IG spreads are now just 6bp from the widest point during the 2001 recession.”

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In addition, he notes that leverage-adjusted spreads have only exceeded current levels 12 percent of the time throughout history, and only 5 percent of the time outside of the Financial Crisis. Morgan Stanley currently estimates that spreads are 0.45 percent below long-term fair value.

Looking ahead, the firm is calling for a 0.28 percent tightening in IG spreads within the next year. For now, Morgan Stanley prefers BBB-rated credit to As, non-financials to financials and long-duration IG debt over short-duration debt.

Richmond notes that investors could soon begin a massive rotation into the low-beta IG credit safe haven if the economy heads south.

So far this year the iShares IBoxx $ Invest Grade Corp Bd Fd LQD is down just 0.1 percent while the iShares iBoxx $ High Yid Corp Bond (ETF) HYG is down 5.6 percent.

Disclosure: the author holds no position in the stocks mentioned.