Three big picture stories caught my eye today.
First up, Janus Henderson have just released their newest survey, this time looking at corporate leverage. The headline is salutary – company borrowings around the world surged to a record $8.3 trillion in 2019, up 8.1% year-on-year, the fastest increase in at least 5 years. Debts have risen significantly faster than profits over the last 5 years
Janus Henderson expects “company debts to rise by $1 trillion in 2020. …Volkswagen is the world’s most indebted company, owing almost as much as South Africa though this partly reflects a huge car finance business”. Company debts have grown fastest in the US and Switzerland although German debts are the second highest in the world after the US, thanks to the car manufacturers and their financing businesses. The charts below spell out the story in more detail.
So, corporates are binging on debt. Over in the stockmarkets, investors are binging on a tiny handful of growth stocks. The latest Deutsche Investor Positioning and Flows report, observes that while the S&P 500 has moved sideways, “under the surface, Mega-cap Growth stocks (MCG) have continued to scale new highs, even as the rest as a group (XMCG) remain in the range they have been in for the last 2½ months”. Deutsche analysts report that “XMCG stocks are still significantly below pre-crisis levels, especially the cyclicals. On a relative basis, cyclical sectors like Financials and Industrials are yet to price in any macro rebound and are still commensurate with the depths of a steep recession. “
The chart below spells out this remarkable tale of two markets:
Last but by no means least, its reasonable to expect this increased corporate debt and eye watering valuations to eventually produce some form of market turbulence. Its already worth noting that US equity volatility as measured by the Vix is still above long term averages (29 vs 28), which suggests that investors aren’t entirely care free. But even if volatility does shoot up, that doesn’t necessarily mean the end of the world. Volatility is simply a mechanism for investors to reprice risk – and usually most bouts of volatility are followed by big bounces.
That’s the message coming out of an interesting recent article in FT Adviser HERE by Julia Rees head of portfolio strategy, EMEA and Asia, at Goldman Sachs Asset Management. Her team looked at each period were the VIX was above 50 and then looked at the subsequent 12 month returns on the S&P 500 Index of large US equities.
“You can see that returns were spectacular over the following 12-month periods [in the table below], particularly if you waited to invest until as soon as the VIX dropped back below the 50 mark. “