Effects likely to be focused on weaker, low-rated issuers.

Recent turmoil in global stock markets may shake confidence, but the impact on credit quality is likely to be minimal, says Morningstar DBRS.

Growing fears of weakness in the U.S. economy sparked a sharp spike in market volatility last week, led by the largest one-day drop for Japan’s Nikkei index since the Black Monday crash of 1987, and accompanied by increased stress in numerous other global markets.

In a new report, the rating agency said that, while the increased volatility may weigh on business confidence, consumer activity and access to capital, the credit effects are expected to be limited and largely confined to smaller, low-rated companies that are already feeling credit strains.

Consumer spending may be pressured by deteriorating labour market conditions and declining wealth effects, as equity markets retreat from recent historic highs, DBRS noted.

“We expect these macroeconomic headwinds to continue to drive meaningful changes in consumer behaviour and curtail overall consumer spending in the near term, resulting in a more prolonged recovery for certain consumer sectors,” it said.

“We expect these pressures to be somewhat offset by gradually easing inflationary pressure and interest rate cuts that are likely to occur later in the year,” DBRS said.

Certain issuers may have a tougher time accessing capital, it noted, as investors tend to shift to safer investment-grade debt when uncertainty rises.

Nevertheless, DBRS said its “cautiously optimistic” macroeconomic outlooks for North America and Europe are little changed, and its credit rating outlooks also remain “generally stable.”

“While the current macroeconomic environment continues to pose notable challenges for corporate issuers, we believe that these challenges are largely balanced by considerable mitigants both on individual company … and sector-specific levels,” it said.

In particular, investment-grade corporate issuers with robust capital and liquidity positions will continue to benefit from “geographic diversification, economies of scale and market positions,” it said. These issuers typically have plenty of capacity to withstand a weaker trading environment.

Sector-specific conditions may also mitigate the effects of heightened market volatility, it said, noting that companies in more stable sectors, such as utilities, telecommunications, pipelines and food retail, “are better positioned to withstand such market headwinds.”

Conversely, companies in more cyclical or discretionary sectors — such as retail — may be more impacted by weaker consumer spending, it said.