GC2016 - WED 1115AM - Common Sense...
Transcript of GC2016 - WED 1115AM - Common Sense...
Market Volatility
“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
The Royal Bank of Scotland, January 2016
Source:RoyalBankofScotland.
Sovereign Debt Defaults
Sources:ThisTimeisDifferentChartbook:CountryHistoriesonDebt,Default,andFinancialCrises, CarmenM.Reinhart/MilkenInstitute
• 1828• 1898• 1902• 1914• 1931• 1937• 1961• 1964• 1983
• 1826• 1868• 1894• 1900• 1906• 1914• 1929• 1982• 1999• 2008
•1876•1915•1931•1940•1959•1965•1978•1982•2000
• 1826• 1848• 1860• 1865• 1892• 1898• 1983• 1990• 1995• 1998• 2004
Brazil Ecuador• 1839• 1885• 1917• 1918• 1947• 1957• 1991• 1998
Russia•1826•1843•1860•1894•1932•2011•2015
Greece Turkey Venezuela• 1982• 1986• 1992• 2001• 2004
Nigeria
Assets of the 4 Biggest Banks (% of GDP, 2015)279
240 235 225
179 175
112 10277
45
Source:IMFGDPestimates2015,ThomsonReuters(4/07/16).
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A cash current account surplus? Not really…China Balance of Payments (BOP) Current Account vs. SAFE Data on Net Payments (as of December 31, 2015)
Source: CEIC and State Administration of Foreign Exchange of the People’s Republic of China (SAFE).
‐200.0
‐150.0
‐100.0
‐50.0
0.0
50.0
100.0
150.0
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
SAFE Data on Net Payments
China BOP Current Account
USD (Billions)
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• WMPs are more toxic and much larger than western bank asset-backed conduits & SIVs:o China’s WMPs: 9% of total assets and rising at YE2015 o Western bank conduits/SIVs: 2.5% of total assets for western banks in 2008
The Chinese banking system’s H-bomb
2006‐2007: Western Banks
Total SIVs
TotalBank
Assets
SIVs / BankAssets
Citibank1 $147bn $2,187bn 6.7%
ABN AMRO Bank2
€83bn €1,481bn 5.6%
Source: Bloomberg and Company Financials. 1FY 2007. 2FY 2006. 3FY 2015.
• The rapid expansion of Chinese banks’ wealth management products (WMPs) presents a growing threat to financial stability
• WMPs held off-balance sheet are akin to western banks’ conduits/structured investment vehicles (SIVs) in 2008
2015: Chinese BanksTotal SIVs
TotalBank
Assets
SIVs / BankAssets
China MerchantsBank3
¥1,820bn ¥5,208bn 35%
China Everbright Bank Company3
¥876bn ¥3,167bn 28%
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It’s getting harder to find domestic suckersChina corporate credit defaults accelerating
• The 16 defaults YTD (through April 21) have already exceeded defaults for all of 2015 and more telling, 8 of the 16 defaults are related to state-owned enterprises
• While local governments have historically helped support struggling enterprises, there is a limit to support that state sponsors can provide, especially to companies in structurally challenged industries
Source: JP Morgan, Caixin, Quote taken from a Bloomberg News article (April 18, 2016) & company information.
“It shows the government is taking away the implicit guarantee … Now risk awareness is rising, so we
will see which issuers are swimming naked.”
- Quote from the Chief Economist at a Hong Kong Bank
0 0 0 1
9
16
51
0
10
20
30
40
50
60
Number of Corporate Credit Defaults in China
“2016 credit defaults are on pace to more than quintuple 2015 levels
0%
20%
40%
60%
80%
100%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Loan mutual funds, financial and insurance companies Hedge,distressed and high-yield funds CLOs Banks
Institutional Investor Base for Non-investment Grade Loans
Sources:S&PLCD(4/11/16).
Concentration of Three Largest BanksTotalassetsoftop3banksasapercentageofhomecountry’sgrossdomesticproduct
0%
50%
100%
150%
200%
250%
France UnitedStates
CreditAgricole
BNPParibas
Societe Generale
197%ofGDP($4.9trillion)
34%ofGDP($6.2T)
WellsFargoBankofAmerica
J.P.Morgan
Source:Bloomberg(4/20/2016).
What’s changed?
Source:Bloomberg.
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500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
‐
5
10
15
20
25Ap
r‐00
Apr‐01
Apr‐02
Apr‐03
Apr‐04
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Apr‐09
Apr‐10
Apr‐11
Apr‐12
Apr‐13
Apr‐14
Apr‐15
S&P 500 Inde
x &
Fed Ba
lance Sheet ($b
ns)
High Yield YTW &
10‐YR UST Rate (%
)
HYYTW
FedBalanceSheet
S&P500
10‐YrUST
Levels: Pre- & Post-CrisisFACTORS Common Uncommon
GEO‐POLITICAL‐Middle East‐ Brexit‐ China / Russia
‐ Zika: Impact of a Pandemic‐ Japan: Long‐term Negative Growth‐ Petro‐politics
REGULATORY
‐ Shrinking Broker‐Dealer balance sheets
‐Market volatility‐ Bank lending standards
‐ Increased demand for private capital‐More barriers for managers‐ Growth in exogenous risks‐Mutual fund liquidity rules
CAPITAL MARKETS
‐ Near end of credit cycle‐ Greater price volatility‐ Continued low rates despite end of QE
‐ Extra innings for this credit cycle‐ New “Gap Up/Down” world‐ PE ratio / debt issuance‐ “Kicking the can” on fiscal policy
Source:Crescent.
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Defensive Stocks are Trading atSignificant Premium to Cyclical StocksMSCI World Index, January 2000 – March 2016
43%
‐80%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: The “Forward P/E” of a stock is its price divided by the consensus EPS estimate for the next twelve months. “Premium/Discount” is themedian forward P/E ratio of the most defensive quintile divided by the median forward P/E ratio of the most cyclical quintile, less 100%. Thecyclicality of a stock is calculated as its 60-month beta to the monthly performance spread between the Russell Global Dynamic and RussellGlobal Defensive indices. Universe consists of the constituents of the MSCI World Index.
‐60%
‐40%
20%
0%
‐20%
40%
60%
80%
100% Defensive Stocks at Premium
Defensive Stocks at Discount
Source: FactSet, MSCI, Russell Investment Indices
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MSCI World Value vs. MSCI World GrowthRelative Ratio of 12-month Rolling Returns, March 1992 – March 2016
Valu
eO
utpe
rform
ance
Gro
wth
Out
perfo
rman
ce
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
12/1/199
16/1/19
9212
/1/199
26/1/19
9312
/1/199
36/1/19
9412
/1/199
46/1/19
9512
/1/199
56/1/19
9612
/1/199
66/1/19
9712
/1/199
76/1/19
9812
/1/199
86/1/19
9912
/1/199
96/1/20
0012
/1/200
06/1/20
0112
/1/200
16/1/20
0212
/1/200
26/1/20
0312
/1/200
36/1/20
0412
/1/200
46/1/20
0512
/1/200
56/1/20
0612
/1/200
66/1/20
0712
/1/200
76/1/20
0812
/1/200
86/1/20
0912
/1/200
96/1/20
1012
/1/201
06/1/20
1112
/1/201
16/1/20
1212
/1/201
26/1/20
1312
/1/201
36/1/20
1412
/1/201
46/1/20
1512
/1/201
5
Source: FactSet.
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Financials are Not Participating in 2016 Value RallyYTD Local Currency performance of Value Factor Components MSCI WorldUniverse – as of April 19, 2016
10.0%
7.5%
5.0%
2.5%
0.0%
‐2.5%
‐5.0%
Div Yield B/P (WORLD) B/P (EAFE) E/P E/P NTM
ex‐Financials Full Universe
Source: Bloomberg.
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Valuation Gaps amongst SectorsMSCI World Book-to-Price Intra-sector Valuation Dispersion (current relative to history)December 1999 – March 2016
1.5
1
0.5
0
‐0.5
‐1
‐1.5
‐2
Standard
Deviations
Source: FactSet, Causeway Analytics.
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$2,391,102,204,613,620,000,000,000,000,000,000,000,000,000
The beauty of compounding…
5%: 2.4 x1042
2%: 1.6 x1017
Stars in the universe 1 x 1024
$1 Invested Since 1AD at 5%
Source: CQS analysis, as at 31 March 2016.
Are Return Expectations Realistic?
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Regulatory danger to derivatives market
Source: BIS, Global OTC Derivatives Market notional amounts outstanding (6/10/2015).
0
100
200
300
400
500
600
700
800US$ trillions
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Why very low interest rates may stick around
Source: New York Times (12/2015) and Global Finance Group.
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Long‐term interest rates
US Civil War World War I World War II Global Financial Crisis
Britain
U.S.
15%
10%
5%
0%
20%In the long arc of history, high interest rates from 1970 to 2007 look like the aberration, not the norm