Historically, equity momentum has been a strong predictor of credit spreads. There were several core events recently, including a successful challenge to Exxon management to place more climate aligned representatives on the board, Shell losing a court case in the Netherlands and forced toward sharp CO2 reduction targets, Chevron’s board losing out versus a climate activist proposal, and Total seeing off another climate proposal.
Since then, the companies’ equities underperformed by 2-4.5% versus indexes. Amongst the companies, most noticeable was Shell with the main underperformance after the court ruling. On the other hand, fixed income hardly moved at all, in terms of outright spreads as well as curve shapes. There are several reasons for the lack of movement in credit compared with equities. For example, fixed income investors do not believe these new company trajectories are credible, and/or will not affect credit quality even in the long-run.