2022 Securitized Credit Outlook: Views on the Consumer, Commercial Real Estate and Opportunity
1. What’s your view of securitized credit in 2022? Do you expect any impact from rising rates?
Overall, we have a positive view of securitized credit in 2022. We believe fundamentals and valuations are favorable in most areas of the securitized credit universe. Despite a broad rally in many sectors during 2021, certain areas of securitized credit have lagged and present potentially attractive entry points for investors.
We believe three characteristics of structured credit make it attractive in a rising rate environment.
- Duration: The sector’s duration, which tends to be around the three- to four-years, should benefit securitized assets relative to corporates, which typically have much longer duration. Securitized assets also currently enjoy a carry advantage relative to similarly rated corporates.
- Cash flows: Securitized assets tend to generate significant cash flows (through amortization) that can be reinvested at higher rates.
- Inflation protection: Most securitized credit sectors are either a) invested in real assets, such as real estate, that have a long history as inflation hedges, or b) backed by consumers, who are supported by wage inflation. So whether inflation and higher rates are temporary or here to stay, the combination of these factors can make structured credit attractive in uncertain markets.
In terms of risks, we acknowledge that uncertainty and heightened volatility could persist in the near term as monetary and fiscal support wanes and as the global economy grapples with COVID-19 variants. Higher inflation and, ultimately, higher interest rates could put additional strain on the consumer if wage growth does not keep pace. We believe careful subsector allocation and security selection will remain of key importance in navigating the market in 2022.