Week of August 7, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
China has packed quite a surprise this year. As the country dropped its COVID restrictions, the world braced for a vibrant China that could have a voracious appetite for everything from consumables to commodities. One of the biggest fears was that China could ignite a surge in activity that would in turn drive inflation higher, complicating the inflation fighting efforts of central banks everywhere. But so far, the reopening has been modest.
China is struggling with low growth and the prospects of deflation. The shock for China’s policymakers is how cautious businesses and consumers continue to be. As the rest of the world shifts its spending from goods to services, China has seen the demand for its manufacturing output drop. The housing market has also cooled as policies to moderate speculation limit transactions.
Nevertheless, the consensus view from economists is that China should deliver on its growth targets this year. Confidence remains high that policymakers will eventually inject more stimulus to revive spending and growth.?
Sources: Bloomberg, Financial Times, 2023.
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Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management
It’s rare for credit rating agencies to be on the tongues of portfolio managers for two weeks in a row, but here we are. Fitch brought us the sequel of the summer last week as it took the United States down a notch from its former AAA rating, 12 years after S&P debuted that particular action. Moody’s, perhaps left out of the billion-dollar barb, instead chose to bring the focus back to U.S. banks on Monday as it downgraded 10 regional banks, placed six regional and trust banks on review for downgrade, and added negative outlooks to a further 11 banks.
Although we do not dispute the tougher funding environment Moody’s cited in its review, we believe the warnings seem a bit late given that related bank spreads widened only modestly on the day of the downgrade and remained over 100 basis points tighter than they had been at the peak of the banking crisis in March. However, despite the generally backward-looking nature of the review, Moody’s also called out a few names that it deemed as representing additional future risk from outsized exposure to commercial real estate.
There are two things to take away from these agency actions. Firstly, while the rating agencies nearly always lag the market significantly, their edicts are still occasionally meaningful due to the need for both the rated entities and the investors to digest the news. As a result, lower ratings and other dynamics – such as the expected negative technicals from capital-enhancing issuance – should prevent full retracement of regional spreads to pre-banking crisis levels. Secondly, we think this is an opportune reminder for investors to ensure that they are not in the position of being forced to alter their portfolio compositions due to the actions of rating agencies vis-à-vis their own investment policies.
Source: Bank of America, 2023.
Andrew Kleeman , Senior Managing Director, Head of Corporate Private Placements
In the investment grade private credit sphere, we have been hearing a lot about “market uncertainty” in our discussions with brokers, but what’s the best gauge of this factor? This year, it’s investor surveys. We typically use agent surveys in January to gauge investor appetite for the upcoming year. However, 2023 is unusual because we have seen a number of agents requesting mid-year surveys from large investors because of what has been described as uncertain investor demand.
The underlying cause of the uncertainty ranges from what we view as lackluster product sales at insurance company investors to large asset managers seeing better value in other asset classes. What investors aren’t looking for is short duration, financials and real estate – all of which have been in strong supply the last three years. What investors are looking for are longer deals in consumer and industrial sectors, and more project finance and infrastructure.
What does all this mean, and how will we find solid credits at strong relative value when investors are seemingly looking for the same opportunities during the rest of 2023? We’ll do it in the same way we approached H1 2023 (a strong period for investment grade private credit) – by maintaining our pricing discipline, leveraging our deal source relationships to identify club deals and by remaining opportunistic. We believe market uncertainty should create additional compelling investment opportunities in 2023.
Source: Private Placement Monitor, 2023.
Kevin Quinlan, MBA , Director, Climate
July saw temperature records shatter around the globe – so much so that scientists could predict July 2023 would be the hottest month on record before it was even over. A month of “global boiling” saw Phoenix, Arizona experience 31 straight days of temperatures at 110 F (43.3 C) or higher. At one point, 110 million Americans were under an extreme heat advisory, spanning southern California to Massachusetts.
The searing heat is making climate adaptation a topic for today, not just for the future. But the capacity to adapt varies considerably. While office workers can crank up the AC and stay inside, that’s not feasible for sectors like agriculture or construction, in which extreme heat reduces labor productivity and endangers workers. The U.S. alone has more than 30 million people who work outdoors. Globally, an estimated US$669 billion was lost in earnings due to labor reductions from extreme heat in 2021; this falls primarily on agriculture, but in advanced economies the impact is skewed toward construction.
As the intensity and frequency of extreme weather events grow, we expect those losses to climb. Historical greenhouse gas emissions already in the atmosphere will continue to heat the planet – raising the urgency of not just slashing climate pollution, but increasing investments in adaptation to protect human health.
Sources: CNBC, Financial Times, The Lancet, The New York Times, 2023.?
The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice.
Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
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