lee ferridge head of macro strategy, the americas ferridge_ apr 2… · zombie companies as % of...

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Working through the phases

Lee Ferridge

Head of Macro Strategy, The Americas

[email protected]

April 2020

Adtrax #: 3066344.1.1.AM. .

https://globalmarkets.statestreet.com/research/myportal/

mailto:[email protected]

2


The Four Phases of the crisisWorking through them

Source: State Street Global Markets, Bloomberg; data as of 4/2420

1. Liquidity

▪ Scramble for dollars

▪ Selling of all assets (both high beta and safe-havens) to raise cash

2. Caution

▪ Traditional risk-off market

▪ High levels of uncertainty, safe havens outperform

3. Repair

▪ Uncertainty begins to clear

▪ Return of idiosyncratic risk taking

4. Recovery

▪ Return to normality

▪ Widespread gains in pro-risk assets

3


The Fed BazookaBalance sheet likely to reach $10tr

And a lot more to come – programs announced so far, US$ bn

Balance sheet rising sharply

Source: State Street Global Markets, Federal Reserve, Bloomberg; data as of 4/24/20

0

1

2

3

4

5

6

7

Jan-06 Jul-09 Feb-13 Sep-16 Apr-20

Fed Balance Sheet, US$ tr

Post-GFC high, $4.52tr Post-QT low $3.76tr

4


We have moved out of the liquidity phaseThe scramble for dollar’s has passed

Safe havens are performing again

Dollar funding pressures have eased

Source: State Street Global Markets, Bloomberg; data as of 4/28/20

90

95

100

105

110

115

22-Jan 4-Feb 17-Feb 1-Mar 14-Mar 27-Mar 9-Apr 22-Apr

Jan 22nd = 100

Gold US Treasuries JPY

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

-

Jul-18 Nov-18 Mar-19 Aug-19 Dec-19 Apr-20

3m

xccy b

asis

sw

ap,

OIS

-OIS

, bps

EUR-USD JPY-USD GBP-USD

5


A very different worldUnprecedented stop in activity

Still not pessimistic enough?

The sharpest plummet we have ever seen


-6

-4

-2

0

2

4

World US G7 UK EUR Japan

GDP growth expectations, %

2019 2020 - Start of year 2020 - now 2009

-12

-8

-4

0

4

8

Jan-08 Jun-10 Nov-12 May-15 Oct-17 Apr-20

NY Fed Weekly Economic Index, %

6


Reality checkWe have never seen anything like this

A lot of economic suffering

Off the charts


-30

-20

-10

0

10

20

1950 1964 1978 1992 2006 2020

US GDP growth, qoq saar, %

0

2

4

6

8

10

12

14

1950 1964 1978 1992 2006 2020

US Unemployment Rate, %

7


Lessons from historyV-shaped recoveries are rare

And so do market recoveries

Recoveries tend to be drawn out


0

10

20

30

40

50

1973 1980 1981 1990 2001 2007

Recession time lines

Peak to trough, months Time to return to peak, months

0

400

800

1200

1600

2000

1966 1968 1973 1980 1987 2000 2007 2020

S&P 500 bear market timelines

Peak to trough (days) Peak to new high (days)

8


House of cardsLoose policy had already made the system fragile

Mortgaging the future

Source: State Street Global Markets, Bloomberg; data as of 4/2920

400

450

500

550

600

650

700

750

1950 1963 1977 1991 2004 2018

US household net worth as % of disposable income

Average, 1950 - 1997

Average, 1998 to date

9


Vulnerabilities were already there - debtGrowth was built increasingly on loose policy and debt

And downgrades were already at 10-yr highs

Corporate debt was already at record levels

Source: State Street Global Markets, St Louis Fed, Bloomberg; data as of 4/24/20

0.0

0.5

1.0

1.5

2.0

2.5

2009 Q1 2011 Q1 2013 Q1 2015 Q1 2017 Q1 2019 Q1

S&P 500 High Yield credit ratings upgrade/downgrade ratio

0

5

10

15

20

38

40

42

44

46

48

Mar-95 Dec-97 Sep-00 Jun-03 Mar-06 Dec-08 Sep-11 May-14 Feb-17 Nov-19

Corp debt/GDP, % HY OAS, % (rhs)

10


Vulnerabilities were already there - equitiesGrowth was built increasingly on loose policy and debt

Stocks were elevated by buybacks (funded with debt)

Source: State Street Global Markets, St Louis Fed, Banerjee and Hoffman (2018), Bloomberg; data as of 4/20/20

Capital was misallocated Which led to distortions

50

55

60

65

70

75

80

85

90

0

2

4

6

8

10

12

14

1987 1991 1995 1999 2003 2007 2011 2015

Zombie companies as % of total listed non-financial firms

Probability of remaining a zombie next year (rhs)

0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

2000

2500

3000

3500

Mar-47 Nov-61 Jun-76 Jan-91 Aug-05 Mar-20

S&P 500 Corporate profits (before tax with IVA and CCAdj, USDbn, saar), rhs

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Jan-96 Sep-00 Jun-05 Feb-10 Nov-14 Jul-19

S&P Growth/Value Index, Jan 1 1996 = 1

11


Uncertainty remains extremely highEarnings disagreement the highest on record

Our recession indicator is still at its highs

Analysts just can’t agree


0%

20%

40%

60%

80%

100%

May-56 Mar-69 Jan-82 Oct-94 Aug-07 May-20

Recession KKT Index

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec-94 Jan-00 Feb-05 Mar-10 Mar-15 Apr-20

Standard deviation of earnings estimates - MSCI World

75th percentile (last 10-years)

12


Real money investors cautious but not panickedFOMO is still a powerful driver

Cash holdings have risen but below 2008 levels

Overall sentiment has held up surprisingly well, now back to positive


But dispersion is close to record highs

0%

10%

20%

30%

40%

50%

60%

70%

Feb-98 Apr-02 Jun-06 Aug-10 Nov-14 Jan-19

hold

ings (

port

folio

weig

ht)

Stocks Bonds Cash

10%

15%

20%

25%

30%

35%

40%

Feb-03 Jul-06 Dec-09 May-13 Oct-16 Mar-20

standard deviation in BRS %iles

-10

-5

0

5

10

15

Jan-18 Jun-18 Nov-18 May-19 Oct-19 Mar-20

behavio

ura

l risk s

core

Flows Holdings

selling / underweight risk

buying / overweight risk

13


Home bias and weak price pressuresReal money are moving money home and online prices are falling

Lowest price pressures in PriceStats history

Real money home bias is strong


99

100

101

102

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

Days from Jan 1

PriceStats Developed Markets with Historic Range

2020 2011-2019 average

-40

-20

0

20

40

Oct-08 Aug-11 Jun-14 Apr-17 Mar-20

Total cross-border flows (20d MA, bps of debt outstanding)

Sovereign bond

14


Levels hard to justifyForward PE the highest in 14 years

Tough to justify

Source: State Street Global Markets, Bloomberg: data as of 4/27/20

5

10

15

20

25

30

Feb-90 Feb-96 Mar-02 Mar-08 Apr-14 Apr-20

S&P 500 Forward PE

15


Caution to RepairStill more work to be done; and Recovery phase still a way off

Systemic Risk is still rising


Healing but not yet compelling

Still rising Peaking but elevated

10%

15%

20%

25%

30%

35%

40%

Feb-03 Jul-06 Dec-09 May-13 Oct-16 Mar-20

standard deviation in BRS %iles

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec-94 Jan-00 Feb-05 Mar-10 Mar-15 Apr-20

Standard deviation of earnings estimates - MSCI World

75th percentile (last 10-years)

20

30

40

50

60

70

80

90

100

Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20

Implied vol on 80% moneyness SPX options

50% below March 16th peak

-4

0

4

8

12

0.70

0.75

0.80

0.85

0.90

0.95

May-17 Dec-17 Jul-18 Feb-19 Sep-19 Apr-20

SRI SRI Standardised Shift (rhs)

16


What does it mean for markets

17


AA decisions: Overweight goldQE and the demise of fiat currencies

The search for hard assets


1100

1150

1200

1250

1300

1350

1400

1450

1500

1550

1600

1650

1700

175080

85

90

95

100

105

Jun-16 Feb-17 Nov-17 Aug-18 May-19 Jan-20

DXY Index Gold (rhs, inverted)

18


AA decisions: Favour sovereignsYields are low but still the safe option

Plenty of underweights to choose from The trend is still your friend


0%

25%

50%

75%

100%

EM US JP EZ AU UK USTIPS

CA

Sovereign bond holdings (duration unweighted)

0

1

2

3

4

5

6

Jan-05 Dec-07 Nov-10 Oct-13 Sep-16 Sep-19

US 10-yr yields

19


G10 FX doing exactly what it should

Safe havens vs the rest

Source: State Street Global Markets, Bloomberg, As of 4/28/20

Set to continue so long as fears remain

-16

-14

-12

-10

-8

-6

-4

-2

0

2

JPY USD CHF EUR SEK GBP CAD AUD NZD NOK

G10 FX performance, ytd, total return, %

20


USD set to suffer in the coming monthsRate premium largely gone and capital flows will remain slow

Deficits are going to be hard to fund

Rate advantage significantly reduced


-5

0

5

10

Switzerland Norway Japan Sweden Eurozone Australia Canada US UK New Zealand

Current Account Balance, % of GDP

70

75

80

85

90

95

100

105

110

-1.5

-0.5

0.5

1.5

2.5

Jan-07 Aug-09 Apr-12 Dec-14 Aug-17 Apr-20

US-G10 2-yr rates (DXY weights) DXY

21


USD: end of an era vs G3Little rate premium, current account deficit and home bias

One ultimate safe-haven

No longer a high yielder


-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

Jan-12 Aug-13 Apr-15 Dec-16 Aug-18 Apr-20

EURUSD EUR - USD 2yr rates

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

80

90

100

110

120

130

Jan-14 Jul-15 Feb-17 Sep-18 Apr-20

USDJPY USD - JPY 2yr rates

22


Real money running significant USD overweights

Neutral positioning in EUR and JPY

Source: State Street Global Markets, Bloomberg, As of 4/28/20

Room for dollar selling

0%

25%

50%

75%

100%

Jan-18 Jun-18 Dec-18 May-19 Nov-19 Apr-20

FX Holdings

EUR JPY USD

23


Looking for dislocations in FXLots of undervalued EM, but maybe still too soon

AUD perhaps a better move for now

Lots of cheap EM


-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

USDJPY EURGBP GBPUSD EURUSD EURJPY AUDUSD

PriceStats PPP - Deviation from fair value

-30%

-25%

-20%

-15%

-10%

-5%

0%

CNH JPY GBP EUR AUD ZAR ARS BRL

PriceStats PPP - Deviation from fair value vs USD

24


China: A fragmented reboundSupply shock fading, But concerns over domestic demand

Higher Pollution Indicates More Factory Resumption Worker Mobility Improving to 80%

Iron Ore Imports Gaining Momentum Biggest Concern is Property Sales

Source: Bloomberg, WeBank, State Street Global Markets. Data reflect most recently available as of 30 April 2020.

12

13

14

15

16

17

Jan Feb Mar Apr MTD

Average Iron Ore Imports from China (million metric tonne)

Last 3 YR AVG 2020

0

1

2

3

1 5 9 13 17 21

Mill

ion S

quare

Metr

es

Week

Major Cities Gross Floor Area Sold*

2017 2018 2019 2020

0

40

80

120

Shanghai Beijing Guagzhou Chengdu Shenyang

Chin

a A

ir P

ollu

tio

n P

M2.5

Last 3YR Avg (Jan) 20-Jan

Last 3YR Avg (Feb) Feb-20

Last 3YR Avg (March) Mar-20

Last 3YR Avg (April) Apr-20

0

10

20

30

40

50

60

70

80

90

100

0 30 60 90

# Days post CNY to resume capacity

2020 2019

25

Believe in China, Believe in Asia? Regional investor confidence is stronger in Asia


China: A fragmented reboundPositive spillovers for EM Asia but what about global demand

-10

-5

0

5

10

15

-10%

0%

10%

20%

30%

Jan-07 Nov-09 Sep-12 Jun-15 Apr-18 Jan-21

KRW, SGD, THB, TWD, AUD Exports (YoY%, 3MMA)

Bloomberg China Credit Impulse (12-month lead, RHS)

-20

-15

-10

-5

0

5

10

US Europe Asia-PacificC

hange in r

egio

nal in

vesto

r confidence in

Mar-

20

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lee ferridge head of macro strategy, the americas ferridge_ apr 2… · zombie companies as % of...

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