The number of indebted companies has risen sharply around the world. Between 2009 and 2018, companies borrowed an average of $1,800 billion per year on the markets. This is almost double the average annual level before 2009 (see
chart 2). As a result, the global outstanding debt in the form of corporate bonds issued by non-financial companies has reached its highest level: $12,950 billion (see chart 1). And this amount does not include loans negotiated with banks or
other public or private institutions.
In Europe, growth has slowed sharply since the beginning of 2018 and inflationary pressures are non-existent. Recently, the European Central Bank (ECB) took note of this difficult economic situation by drastically lowering its forecasts for
2019. It also decided to keep its key interest rates in negative territory for several quarters, to continue its monetary creation by buying bonds and to offer new credit lines to banks at their request. All these decisions are aimed at easing
the monetary policy of the Euro Area (see Weekly Investment Focus of March 11, 2019). The ECB could go even further, by implementing a second Quantitative Easing (QE2), if the slowdown were more severe than expected or if deflation
risks became prevalent.
The latest economic publications from the Old World confirm the slowdown in activity. Gross Domestic Product (GDP) grew by 0.1% and 0.2% in the third and fourth quarters of 2018, a sharp decline compared to previous quarters. Annual
GDP growth has thus risen from 2.8% to 1.1% since its previous peak (see chart 2). The outlook for the next quarters is poor. In previous publications, we have detailed the marked decline in leading indicators: PMIs, IFO, confidence indices compiled by the European Commission, etc. Investors are confirming this expectation, believing that growth will continue to weaken (see chart 3).
The United States is the last bastion where economic activity is growing vigorously, at an annual rate of 3%. The American giant will publish its Gross Domestic Product (GDP) for the fourth quarter of 2018 on Thursday, February 28. It is expected to increase by 2.5% compared to the previous annualized quarter. A figure below this level, as we expect, would be negatively perceived by investors, reflecting recent economic signals received from both sides of the globe. Indeed, global growth is slowing down in an increasingly visible way. The Baltic Dry Index, which provides an average estimate of tariffs on 20 bulk dry cargo routes (ores, coal, metals, cereals, etc.), has reached its lowest level in two and a
half years (see chart 2). It is a sign that world trade is slowing down in a cyclical way, regardless of the outcome of discussions between Washington and Beijing about their trade war. This message is corroborated by the increasingly
rapidly deteriorating order books (see chart 3). The rate of contraction in the goods-producing sector is expected to worsen in the coming months.
The fourth-quarter earnings season is slowly tapering off, and performing better than expected. Two-thirds of the S&P500 companies have reported, and about 71% of them have topped expectations. The average earnings growth rate
year-on-year for the fourth quarter is 14% (see chart 2), beating expectations of 11%, which was revised downward from 12% in early December. This picture is encouraging and justifies the significant rebound in stock markets over the past
month and a half.
The majority of investors expected the volume of money in the global financial system to decline this year. This anticipation of a tightening of monetary policies by the world’s major central banks has been modified. The high point of this reversal of perception came from the recent speech of the American Federal Reserve (see previous Weekly Investment Focus). After selling part of the government bonds it held in its balance sheet at a sustained pace, the Fed now wants to reduce outstanding liquidity much less quickly. Similarly, the European Central Bank, which has stopped buying bonds, is considering which tool it will use to support its convalescent banking system. As for the Bank of Japan,
the economic situation in the archipelago is so fragile, it has not even had time to consider tightening its monetary policy. It will continue to contribute to the inflow of new money into the financial system through the purchase of government
Future on Dividends ▪ European companies try to safeguard the payment of their dividends ▪ Typically, dividend futures trade at a discount of their estimated fair value ▪ This implies that there is an opportunity to capture a premium ▪ The timing of the entry point remains predominant AFG-Future-Dividends-en
Last week’s meeting of the U.S. Federal Reserve (Fed) was of an exceptional nature. The central bank had to give a clear vision of its economic outlook for the United States and, ultimately, its monetary policy in 2019. Investors will have been satisfied as the institution has clearly announced that it will not raise its key rates this year. As we expected, the cycle of rate increases that began in December 2015 will therefore have ended three years later. The key rates will have been raised nine times, from 0.25% to 2.50% over the period (see chart 2). Jerome Powell justified his decision by explaining that the economic environment is slowing down, and that inflation remains modest (see chart 3). Proof among many others, the Fed’s real rates have never been so high since the subprime crisis 10 years ago.
Since January 1st, economic and financial news has been getting worse and worse, while stock market indices have rebounded higher and higher. They are still a long way from their previous summits, but the recent rebound is not negligible (see chart 2). Should we conclude that the bad news was all in the stock price indices on December 31st last year or, on the contrary, that this bear market rally is a classic bull trap? Our analyses lead us directly to the latter conclusion.
The effect of inflation can be destructive on performance. Imagine a bond portfolio with an annual yield of 4% and an inflation rate of 2.5%. The annual improvement in the investor’s purchasing power, i. e. the real return on this portfolio, also known as the yield minus the inflation rate, would be 1.5%. Worse still, if the investment offered a yield below the inflation rate of 2.5%, the most basic objective, namely maintaining the quality of life, would not even be achieved.