sp global credit conditions q3 2019 final · global credit conditions q3 2019 ebbing growth, rising...
TRANSCRIPT
October 1, 2019
Alexandra DimitrijevicTerry Chan, CFADavid TesherGareth Williams
Paul GruenwaldJose Perez-GorozpePaul Watters, CFA
Global Credit ConditionsQ3 2019Ebbing Growth, Rising Risks
Overview | Ebbing Growth, Rising Risks
Key Takeaways
– Faltering growth: Economic growth expectations are faltering as political and trade tensions stymie investment plans and erode confidence. Global recession remains unlikely given renewed monetary stimulus, but lower-for-longer rates are heightening financial-sector risks. Credit quality is deteriorating in cyclically-sensitive sectors.
– Tensions: Domestic political tensions – possible impeachment hearings in the U.S.; the Brexitimbroglio; elections and policy uncertainty in Latin America – are eliding with persistent global risks – U.S. and China trade and tech disputes; proxy conflict in the Middle East – to create a confidence-sapping climate of uncertainty. There is little prospect of immediate resolutions.
– Policy response: Central banks have once again reached for the monetary policy playbook with widespread reductions in interest rates and renewed unconventional stimulus. This has helped underpin financing conditions and is likely to mean low interest rates and flatter yield curves persist into 2020-21. Absent further shocks, this is likely to prevent a global recession.
– Risks for the long term: Nevertheless, this renewed stimulus poses longer term risks as it further encourages financial risk-taking through a hunt for yield, undermines financial sector profitability and exacerbates pension liability pressure. There is little sign that the stimulus has boosted investment intensions or confidence.
3
Purchasing Manager Indices
Economic Policy Uncertainty Indices
Global Economy | Down But Not Out
Source: S&P Global Economics, CEIC, Refinitiv
– Global growth continues to slow as the weakness in manufacturing and trade with still-robust household spending persists. The main driver of this slowdown remains uncertainty around the U.S.-China relationship.
– Major central banks have lowered rates to support growth and boost inflation, with actions characterized more as insurance cuts than an easing cycle.
– We forecast a continued moderate pace of activity in the near-term with the balance of risks on the downside; labor market developments - still positive - will be key.
– U.S.: We forecast U.S. growth to approach 2% in 2020-2021, close to its steady-state path. However, our Business Cycle Barometer shows near-term recession risks are rising. We now put the probability at 30-35% —more than twice what it was a year ago.
– Europe: Key parts of the European economy are struggling – Germany, Italy and the U.K. amongst them –bringing renewed monetary easing and restarted QE. Overall, we see European growth slowing to 1.1% in next year, from 1.2% this year.
– China: Activity continues to slow and we expect GDP to expand 6.2% this year. There are some signals that the Chinese authorities could allow growth to slow below 6% next year, which would be a welcome development given years of credit-fueled investment.
48
50
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58
9/16 12/16 3/17 6/17 9/17 12/17 3/18 6/18 9/18 12/18 3/19 6/19
DM Mfg DM non-Mfg EM Mfg EM non-Mfg
0
100
200
300
400
500
600
700
800
8/14 2/15 8/15 2/16 8/16 2/17 8/17 2/18 8/18 2/19 8/19
UK USA CH
1. Political tensions affecting growth 2. Mature markets negative feedback loop
Credit Conditions | Global Top Risks
Risk level Very low Moderate Elevated High Very high
4
Rising political tensions and heightened uncertainty, weighing on business and consumer confidence, risks undermining global growth prospects. The lengthening list of disputes includes the U.S.-China trade-technology war, Brexit, U.S.-Mexico-Canada Agreement delayed ratification, U.S.-Iran tensions, recent attack on Saudi oil facilities, and Japan-Korea technology dispute.
Source: www.policycertainty.com Normalized data values: 100 = average for 2000-2009 for geopolitical risk index and for 1997-2015 for economic policy uncertainty index.
Source: Refinitiv
Risk trend Improving Unchanged Worsening
GDP growth trends (especially of U.S. and China), low inflation, inverted yield curves, and negative interest rates in Europe and Japan are worrying investors. In particular, overvaluation in financial assets and further debt accumulation risks becoming a source of instability, particularly if economic growth slows materially. Indeed, we now estimate the risk of a U.S. recession at 30%- 35%.
Risk level Very low Moderate Elevated High Very high
Risk trend Improving Unchanged Worsening
0
50
100
150
200
250
300
350
98 00 02 04 06 08 10 12 14 16 18
Global Economic Policy Uncertainty Index Geopolitical Risk Index
6 Month Moving Average
-1
0
1
2
3
4
5
6
2007 2009 2011 2013 2015 2017 2019
JGBs USTs Bunds GiltsPer cent
Near-term Event Risk Stage Of Cycle Risk
Economic and geopolitical policy uncertainty indices 10-Year government bond yields
3. Trade and politics threaten Emerging Markets 4. China’s leverage hampering rebalancing
Credit Conditions | Global Top Risks
Risk level Very low Moderate Elevated High Very high
5
Continued trade tensions between the U.S. and China, geopolitical and domestic policy uncertainty in many EMs have weighed on confidence and are hampering investment. A significant slowdown or outright reversal in capital flows to Emerging Markets would further weaken their economic outlook.
Source: Institute of International Finance Source: Bank for International Settlements
Risk trend Improving Unchanged Worsening
China contributes at least a third of global GDP growth. The debt overhang there remains an impediment to a rebalancing of the economy. The Chinese government’s intent to deleverage the system is challenged by its desire to keep GDP growth up although the desire is showing signs of moderating.
Risk level Very low Moderate Elevated High Very high
Risk trend Improving Unchanged Worsening
-30-20-10
01020304050607080
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
$ bi
llion
Debt China EquityEM ex-China Equity Total Portfolio FlowsTotal Flows, average 2010-2014
0%
50%
100%
150%
200%
250%
2013 2014 2015 2016 2017 2018 2019 Q1
Household credit-to-GDP Corporate credit-to-GDP Government credit-to-GDP
Stage Of Cycle Risk Stage Of Cycle Risk
Non-resident portfolio flows into emerging markets China debt-ratio trajectory
5. Climate change impact on economies 6. Cybersecurity threats to business activity
Credit Conditions | Global Top Risks
Risk level Very low Moderate Elevated High Very high
6
Environmental risk factors related to greenhouse emissions, water, waste have become more urgent global issues. The challenge from a credit viewpoint is how to manage the asymmetric risks and related costs attached to climate change and regulation.
Source: Munich Re NatCatSERVICEAccounted events have caused at least one fatality and/or produced normalised losses >= US$ 100k, 300k, 1m, or 3m (depending on the assigned World Bank income group of the affected country).
Source: Cyence
Risk trend Improving Unchanged Worsening
Increasing technological dependency, global interconnectedness and rapid technological change means that cyber risk has systemic dimensions.
Risk level Very low Moderate Elevated High Very high
Risk trend Improving Unchanged Worsening
Secular Risk Secular Risk
16%
12%
11%
10%10%
9%
9%
9%
9%5%
Manufacturing
Software andtechnology servicesWholesale trade
Education and research
Retail trade
Utilities
Business services
Financial services
Licensed professionalservicesHealthcare
0
100
200
300
400
500
600
700
800
900
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Geophysical events Meteorological events
Hydrological events Climatological events
Number of relevant natural loss events worldwide 1985-2018 Widespread cloud usage across sectors highlights systemic dimension of cyber threat
NEW
Regional Highlights
Asia-Pacific | China Slows, Trade Tensions Blow
Key Takeaways
– Overall: Credit conditions are expected to be bumpy. Despite looser monetary policy, China's slowdown and U.S.-China trade tensions are adversely affecting sentiment. This is hurting revenue and profit growth and intensifying refinancing risk.
– What's changed: Investor sentiment is becoming more cautious amid heightened geopolitical stress and slower economic growth.
– Risks and imbalances: The greatest near-term risk is the strategic conflict between the U.S. and China, with its attendant market impact. Other top risks include corporate refinancing and market liquidity, property repricing, and China's debt.
– Financing conditions: Headwinds have returned. Should investor sentiment sour interest spreads could rise, despite lower official rates.
– Macroeconomic conditions: U.S.-China trade-tech tensions have intensified and regional growth has come in below our expectations.
– Sector themes: Idiosyncratic factors are driving the continuing dichotomy in ratings bias trend between corporates (negative) and financials and governments (positive).
8
1. U.S.-China Strategic Confrontation 2. China credit spread trends
Asia-Pacific Credit | Top Risks
9
Chart 1. Source: U.S. International Trade Commission Dataweb. Chart 2. Source: CEIC. Chart 3. SAR--Special Administrative Region. Source: Bank for International Settlements. Chart 4. Source: Bank for International Settlements.
3. Property Valuation Correction 4. China’s Leverage
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Mineral ProductsHide and skins
Transportation equipmentAnimal products
Prepared foodstuffs
ChemicalsMiscellaneous
Fuel
MetalsWood products
Plastics and rubber
Vegetable productsMachinery
Stone and glass
Electronics and electrical machineryTextiles and clothing
Footwear
Toys and sports equipment As of Sep23, 2018List 4A (Sep1, 2019)List 4B (Dec15, 2019)Not covered
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Jun-
15
Aug
-15
Oct
-15
Dec
-15
Feb-
16
Apr
-16
Jun-
16
Aug
-16
Oct
-16
Dec
-16
Feb-
17
Apr
-17
Jun-
17
Aug
-17
Oct
-17
Dec
-17
Feb-
18
Apr
-18
Jun-
18
Aug
-18
Oct
-18
Dec
-18
Feb-
19
Apr
-19
Yield gap between 5-yr Chinese government bonds and medium term notes rated AA-
50
70
90
110
130
150
170
190
210
Inde
x va
lue
Australia China Hong Kong SAR India
Japan Korea Malaysia Singapore
Phillipines New Zealand Thailand Indonesia
0%50%
100%150%200%250%300%
2013 2014 2015 2016 2017 2018 2019 Q1
Household Credit-to-GDP Corporate Credit-to-GDP
Government Credit-to-GDP
Asia-Pacific's Investment-Led Slowdown APAC And EM Asia Inflation Slowing
Asia-Pacific Economics | Collateral Damage To Confidence
10
Note: PPP GDP-weighted excluding China and Vietnam due to data availability. Source: CEIC and S&P Global Economics.
Source: CEIC and S&P Global Economics
0
2
4
6
8
10
12
Mar
-11
Jul-
11
Nov
-11
Mar
-12
Jul-
12
Nov
-12
Mar
-13
Jul-
13
Nov
-13
Mar
-14
Jul-
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Nov
-14
Mar
-15
Jul-
15
Nov
-15
Mar
-16
Jul-
16
Nov
-16
Mar
-17
Jul-
17
Nov
-17
Mar
-18
Jul-
18
Nov
-18
Mar
-19
% y
/y
Real GDP Growth Year Over Year
GDP Investment
0
1
2
3
4
5
6
7
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Aug
-14
Dec
-14
Apr
-15
Aug
-15
Dec
-15
Apr
-16
Aug
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Dec
-16
Apr
-17
Aug
-17
Dec
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Apr
-18
Aug
-18
Dec
-18
Apr
-19
Aug
-19
% y
/y
EM Asia CPI excluding China and India APAC CPI excluding China and India
Steel Supporting Manufacturing Growth in China China’s Financial Conditions Index Peaked
Asia-Pacific Economics | China Slowing
11
Note: ppts = percentage points. Source: CEIC and S&P Global Economics.Note: Average of first two components from principal component analysis of 41 variables. Quarterly data interpolated using the EM algorithm." Source: People's Bank of China, CEIC and S&P Global Economics."
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
z-sc
ore
(0 =
neu
tral)
Financial Conditions Index
-2
0
2
4
6
8
10
y/y
ppts
, 3 m
onth
ave
rage
Contribution To Real Manufacturing Growth
Autos Consumer goods Electronics
Other machinery Metals
Europe | Lingering in the Lowzone
Key Takeaways
– Overall: Weakening economic growth, political and trade tensions and ongoing tech disruption are pressuring credit quality. Renewed monetary policy efforts are likely to prevent a broader recession, but persistently low interest rates pose serious risks for financials and corporate pension liabilities.
– What's changed: The ECB has gone ‘all-in’ to shore up growth and underpin inflation. While the Eurozone should avoid technical recession, it is acutely vulnerable to external shocks (trade, oil).
– Risks and imbalances: Political risks remain at the fore, particularly global trade tensions and the increasingly vitriolic Brexit imbroglio. Greater market volatility is a growing global risk as credit risk premiums tighten in a low for longer rate environment.
– Financing conditions: Monetary policy appears close to the point where lower-for-longer near zero rates provides minimal stimulus, but raise downside risks for financial sector profitability.
– Macroeconomic conditions: Growth prospects continue to be scaled back as the manufacturing recession spreads to services and construction peaks, particularly in Germany.
– Sector themes: The main areas of concern are around the impact of low rates (banks, insurance), Brexit (U.K. public sector entities in particular) and slowing global growth (corporates).
12
1. New Car Registrations (3mma YoY%) 2. Weakening Sentiment Spreading From Industry
Eurozone Economics | Manufacturing Recession Spreading to Services Dampening Inflation
13
Chart 1. Source: Refinitiv. Chart 2. Source: Refinitiv, SPGR. Chart 3. Source: Refinitiv. Chart 4. Source: ECB, BIS, SPGR
3. China Leading Producer Prices Lower Globally 4. Eurozone Govt Debt Securities Not Held by ECB
-30
-20
-10
0
10
20
30
40
13 14 15 16 17 18 19
Italy UK France Germany
-40
-30
-20
-10
0
10
20
30
99 01 03 05 07 09 11 13 15 17 19
Industry Services Construction
-20
-15
-10
-5
0
5
10
15
20
00 02 04 06 08 10 12 14 16 18 20
U.S. Japan China Germany
5,750
6,000
6,250
6,500
6,750
7,000
7,250
7,500
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
Jun-15 Jun-16 Jun-17 Jun-18
Bil.
€
Bil.
€
Germany Eurozone excl. Ger. (rhs)
Eurozone | Growth Flatlining; LT Yields Grounded
0.5
1.0
1.5
2.0
2.5
3.0
Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
GD
P (Y
oY %
)
Actual Dec-17 Jun-18
Dec-18 Jun-19 Sep-19
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-2110
yr E
uroz
one
Bon
d Yi
eld
(%)
Actual Dec-17 Jun-18
Dec-18 Jun-19 Sep-19
14
Source: S&P Global Ratings
2020 Eurozone GDP Forecasts Revised Lower …10yr Bund Yields Staying Low for Longer
No-deal Brexit Geopolitical Risk
Credit Conditions | EMEA Top Risks
Risk level Very low Moderate Elevated High Very high
15
Our base case is that the U.K. will not leave the EU without a deal. Even so, given the government’s intention to leave the EU, a no-deal Brexit remains a meaningful likelihood, though more likely in 2020 than in 2019. A no-deal Brexit would likely push the UK economy into a recession next year and create further rating headwinds, particularly for more cyclical sectors.
Source: ONS, S&P Global Ratings Source: Refinitiv, S&P Global Ratings. Data as of Sept. 16, 2019
Risk trend Improving Unchanged Worsening
Tensions between Iran and the U.S. as well as its regional allies are on the rise. While we continue to exclude direct military conflict in our base case scenario or significant disruption to global oil supply, these risks are non-negligible. In the unlikely scenario of a blockage of the Strait of Hormuz or military conflict, the ratings on sovereigns and banks in the Gulf Cooperation Council could come under significant pressure.
Risk level Very low Moderate Elevated High Very high
Near-term Event Risk Near-term Event Risk
Threat of No-deal Brexit Distorting National Income Components Oil – Spot Prices Faded After Saudi Attack; Futures Calm
-6
-4
-2
0
2
4
Sep-17 Mar-18 Sep-18 Mar-19
Qua
rter
ly c
ontr
ibut
ion
to G
DP
gr
owth
(%
)
Net Acq. of Valuables* Net ExportsGovt Consumption StockbuildingFixed Investment Priv. Consumption GDP
Risk trend Improving Unchanged Worsening
40
50
60
70
80
90
01/17 01/19 01/21
Crude Oil - Brent - Spot Price
Crude Oil - Brent - Futures Strip (ICE)
Crude Oil - Brent - S&P Ratings ForecastUSD/BBL
Latin America | Policy Uncertainty Undermines Growth Prospects
16
Key Takeaways
– Overall: Growth prospects continue to weaken as policy uncertainty in the region's largest countries increases. We have consequently lowered our growth expectations for 2019 and 2020. Although looser U.S. monetary policy helps, external conditions remain challenging.
– What's changed: Investment continues to slump in the largest economies as policy uncertainty prevails. Upcoming elections in Argentina, delays in key reforms in Brazil, and lack of clarity and polemic decisions in Mexico are acting as a drag on already fragile investor confidence.
– Risks and imbalances: Domestic political challenges continue intensifying and are the main drag on investor confidence and economic growth in the region. External conditions all remain difficult given U.S.-China trade tensions and friction in the Middle East.
– Financing conditions: U.S. monetary easing has improved regional financing conditions by enabling policy rate cuts. Not all have benefitted; appetite for lower-rated issuers remains limited.
– Macroeconomic conditions: We have lowered our 2019 and 2020 growth expectations for major regional economies. This is due to ongoing weakness in domestic demand, adverse domestic political dynamics, and volatile external conditions.
– Sector themes: Weaker growth is likely to dent corporations’ profits and bank’s asset quality.
17
2. Increasing trade tensions undermine investment and global growth expectations
1. Regional Political Challenges are the main drag for domestic investor’s confidence
3. Lower interest rates in advanced economies provided some room for monetary easing
4. Commodity prices remain volatile, lower prices could hurt growth prospects
Latin America | Policy Uncertainty Prevails
Chart 1. Source: S&P Global Economics. Chart 2. Source: World Bank. Chart 3. Source: Central Banks. Chart 4. Source: Bloomberg
02468
10121416
2011 2012 2013 2014 2015 2016 2017 2018 2019
Brazil Chile Colombia Mexico Peru
-4.0 -3.0 -2.0 -1.0 0.0 1.0
ArgentinaBrazilChile
ColombiaMexico
PanamaPeru
UruguayLatAm 6
Changes in baseline GDP forecast from 2Q 2019
2019 2020
40
60
80
100
120
140
160
180
1/15 6/15 11/15 4/16 9/16 2/17 7/17 12/17 5/18 10/18 3/19 8/19
Brent Copper Iron Ore Softs Grains
0%5%
10%15%20%25%30%35%40%
Total Exports Exports to the U.S. Exports to China
Share of exports to U.S. or China from Latin American Countries (% of GDP)
North America | Rising Recession RiskAdds To Trade, Rate Uncertainty
18
Key Takeaways
– Overall: As U.S.-China trade tensions fuel fears of a recession, American consumers have so far propped up the world’s biggest economy. Also, U.S. financing conditions have generally improved over the course of the year.
– What's changed: The chance that the U.S. will slip into recession is increasing. Of the 10 leading indicators of near-term U.S. GDP growth we look at, three are now negative.
– Risks and imbalances: Trade and geopolitical tensions are leading to more frequent and intense bouts of market volatility.
– Financing conditions: Borrowing conditions remain broadly supportive, but there has been a divergence between conditions for investment- and speculative-grade borrowers.
– Macroeconomic conditions: While the U.S. expansion is now the longest in history, the economy is showing signs of slowing. Our assessment puts the risk of a recession starting in the next 12 months at 30%-35%—more than twice what it was a year ago.
– Sector themes: Stalemate in trade negotiations has hurt business confidence, as evidenced by slumping capital expenditure growth and a contraction in manufacturing. Meanwhile, declining borrowing costs are pressuring lenders’ net interest margins and weighing on profitability.
Source: S&P Global Ratings
19
U.S. & China Trade Dispute
Quarterly Changes
Negative Stable to Negative Stable Stable to Positive Positive
Tobacco Timeshares; Small business; Transportation
CLO
Structured Credit
Negative Stable to Negative Stable Stable to Positive Positive
Healthcare services; Retail; Pharmaceutical; Consumer Durables
Aerospace and Defense; REITs; Transportation; Unregulated (merchant) power; Building materials; Oil Refineries; Homebuilders; Midstream Energy
Chemicals; Capital Goods, Technology; Oil and Gas; Leisure and Sports; Metals and Mining
North America Corporate Sector Trends – U.S.
Telecom; Media and entertainment; Regulated Utilities; Consumer non-durables; Forest Products
Auto OEMs and Auto suppliers
Related Research
– Credit Conditions Asia-Pacific: China Slows, Trade Tensions Blow, Sept. 30, 2019
– Credit Conditions EMEA: Lingering in the Lowzone, Sept. 30, 2019
– Credit Conditions Latin America: Policy Uncertainty Undermines Growth Prospects, Sept. 30, 2019
– Credit Conditions North America: Rising Recession Risk Adds To Trade, Rate Uncertainty, Sept. 30, 2019
– Asia Pacific Economic Quarterly: Confidence Is Shaken But Policy Is Stirred, Oct. 1, 2019
– Economic Research: Will Trade Be The Fumble That Ends The U.S.'s Record Run?, Sept. 30, 2019
– Economic Research: Low Growth And Lower Rates: The Eurozone In 2020, Sept. 26, 2019
– China Credit Spotlight: The Great Game And An Inescapable Slowdown, Aug. 29, 2019
21
Analytical Contacts
22
Paul GruenwaldAlexandra DimitrijevicGlobal Head of Research
London
Jose Perez-GorozpeTerry Chan, CFA
Chief Global Economist
New York
Head of Credit Research, APAC
Melbourne
Head of Credit Research, Emerging Markets
Mexico City
Paul Watters, CFADavid TesherHead of Credit Research, North America
New York
Head of Credit Research, EMEA
London
Gareth WilliamsGlobal Head of Digital Research Strategy
London
23
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