(Bloomberg) -- A Kamala Harris victory in the US presidential election would boost the bonds of basic industry, capital goods companies and utilities, according to Matthew Mish, head of credit strategy at UBS.
“A lot of that we think is tied to the preservation of the inflation reduction act and support of many of the Biden-era stimulus policies,” Mish said in the latest Credit Edge podcast from Bloomberg Intelligence.
Conversely, a win for Democrats would be a drag on debt in the telecoms, technology, banks and auto sectors, Mish said. Less dealmaking and greater regulatory scrutiny would weigh on the first three, while transition to electric vehicles and softer defense from imports for US manufacturers is a potential negative for carmakers, he added.
Click here to listen to the full interview with Matthew Mish at UBS
Victory for Donald Trump in the Nov. 5 vote would be positive for the debt of energy, aerospace defense and auto borrowers, according to Mish. On the latter, Republicans are seen to support internal combustion engine vehicles, as well as more profitable products like trucks.
“The Trump administration seems to be certainly pro-energy independence,” says Mish. “A rollback in some of the regulations is net positive for the energy sector, particularly the pipeline sector,” he adds.
A polling average shows Harris slightly ahead but the race is considered too close to call.
If there’s a Republican sweep, UBS thinks bonds rated CCC — the lowest tier of junk — would do best given cautious positioning and the likelihood of bigger gains for small cap companies. However, Mish says this month’s rally in CCCs was fueled more by telecom acquisition activity than election — or rate cut — bets.
“A majority of that move in Triple Cs right now is probably more tied to idiosyncratic risk, or what I would call sector-specific risk,” says Mish.
After the Trump-Harris debate on Sept. 10, energy- and auto-sector credit has underperformed, while utilities did better, as support swung towards Democrats, according to Mish.
“The market we believe has kind of separated winners and losers,” said Mish. “Polls are pretty consistent with the way credit is trading.”
More broadly in corporate debt, UBS is worried about private credit as struggling borrowers have to repay loans with more debt, or amend and extend existing financing agreements. Mish anticipates portfolio deterioration over the next 12 months and more private debt defaults.
“You could point to a number of indicators that would be on the more concerning end,” said Mish. “There’s certainly underlying concern that there’s a number of companies that have fairly low interest-coverage ratios.”
Mish doesn’t expect trouble in private credit to spill over to other parts of the corporate debt market or become systemic, unless the US economy slows more significantly than expected, or tips into a recession.
©2024 Bloomberg L.P.