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We cannot be sure about any thoughts/projections on how the changes hitting economies and businesses will play out in a world awash with fear about Covid-19 – there are just too many uncertainties.
However, we can look at the words of well-informed and experienced people who might flag-up potential scenarios and probabilities.
With that in mind, I’ve put together some salient sentences from various copies of the FT and from this weekend’s Economist in the hope that it might help us form a view on reasonably realistic outturns.
When reading this (strikingly negative set of news and opinion) bear in mind that if you hold shares in good companies with low debt, operating in sectors of the economy less sensitive to the supply and demand shocks then your VALUE may not have decreased much at all – taking a ten year view – even though you are witnessing Mr Market’s large PRICE adjustments.
John Plender, FT, Thursday:
The shock that coronavirus has wrought on markets across the world coincides with a dangerous financial backdrop marked by spiralling global debt…the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent…
…much of the debt build-up since the global financial crisis of 2007-08 has been in the non-bank corporate sector where the current disruption to supply chains and reduced global growth imply lower earnings and greater difficulty in servicing debt…
…A comparison of today’s circumstances with the period before the financial crisis is instructive. As well as a big post-crisis increase in government debt, an important difference now is that the debt focus in the private sector is not on property and mortgage lending, but on loans to the corporate sector.
A recent OECD report says that at the end of December 2019 the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5tn, double the level in real terms against December 2008.
The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year.
Given that Google parent Alphabet, Apple, Facebook and Microsoft alone held net cash at the end of last year of $328bn, this suggests that much of the debt is concentrated in old economy sectors where many companies are less cash generative than Big Tech. Debt servicing is thus more burdensome.
Increased defaults on banks’ loans together with shrinkage in the value of collateral in the banking system…asset prices could be vulnerable even after the coronavirus scare because the central banks’ asset purchases drove investors to search for yield regardless of the dangers. As a result, risk is still systematically mispriced around the financial system.
In a downturn, some of the disproportionately large recent issuance of BBB bonds — the lowest investment grade category — could end up being downgraded. That would lead to big increases in borrowing costs because many investors are constrained by regulation or self-imposed restrictions from investing in non-investment grade bonds. {one-half of al “investment grade” bonds recently issued are rated just above junk levels. If they fall in to junk ratings then many institutions are forced to sell them]
Much of this debt has financed mergers and acquisitions and stock buybacks. Executives have a powerful incentive to engage in buybacks despite very full valuations in the equity market because they boost earnings per share by shrinking the company’s equity capital and thus inflate performance related pay [a major prop to the markets in recent years]. Yet this financial engineering is a recipe for systematically weakening corporate balance sheets.
The IMF’s latest global financial stability report – a simulation showing that a recession half as severe as 2009 would result in companies with $19tn of outstanding debt having insufficient profits to service that debt.
The potentially unsustainable accumulation of public sector debt and of debt in the non-financial corporate sector highlights serious vulnerabilities, notably in China and other emerging markets, but also in the US and UK. And the continental European banking system is conspicuously weaker than that of the US.
The Economist
[It’s] important to get people to come forward for testing…in America 28m people are without health coverage and many more have to pay for a large slug of their own treatment…people cannot afford to miss work…a quarter of employees have no access to paid sick leave…
In China, manufacturing activity in February shrank to the lowest level in since managers were first surveyed in 2004.
No amount of cheap credit can stop people falling ill, repair broken supply chains or tempt anxious people into venturing out.
In America the response [to Covid-19] has been a shambolic missed opportunity…American bungling…letting the disease spread much further and faster than it might have…test kits were faulty.
By March 1st, when S Korea had run 100,000 tests for the virus, America – which saw its first case on Jan 23rd – had run fewer than 500.
In America, both the health-care
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