巴黎银行-全球-信贷策略-2019年6月巴黎银行月度信贷会议：本年度最大的风险事件-20190621-28页.pdf

CORPORATE&INSTITUTIONAL BANKING June 2019 BNPP Monthly Credit Call June 2019The Biggest Risk Event This Year Viktor Hjort Credit Strategy:Trade and the Credit market outlook Dominique Toublan US Credit Strategy:Trade scenarios,market views Luigi Speranza Global Economics:The trade conflict and its impact VIKTOR HJORT,DOMINIQUE TOUBLAN,LUIGI SPERANZA CREDIT STRATEGY AND TRADING DESK ANALYSTS THIS IS MARKETING MATERIAL FROM THE CREDIT STRATEGY&TRADING DESK ANALYST TEAM AND IS NOT RESEARCH Global Economics:Sensitive to the trade outlook 2 Global:Services vs.manufacturing While manufacturing activity has slowed considerably,services have held up relatively well overall with surveys remaining firmly in the expansionary area This dichotomy reflects the contrast between slumping export demand and resilient domestic conditions Sources:Eurostat,Macrobond,BNP Paribas Sources:IHS Markit,Macrobond,BNP Paribas Decoupling Chart 1:US manufacturing output vs Services PMIs Chart 2:Eurozone manufacturing output vs Services PMIs 3 Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Global:Exports Leading indicators point to further weakness in exports In contraction territory 4 Sources:IHS Markit,BNP Paribas Chart 1:World exports vs manufacturing PMI new export orders(index)Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Global:The tech cycle While some of the most forward looking indicators showed a slight uptick earlier in 2019,the recent escalation of the trade war looks to have curtailed the incipient recovery Renewed trade tensions have weighed on forward-looking indicators 5 Chart 2:Taiwan and South Korea export orders vs.World trade volume Sources:CPB,IHS Markit,Macrobond,BNP Paribas Sources:Federal Reserve San Francisco,Nasdaq OMX,Korea MOTIE,IHS Markit,BNP Paribas Chart 1:Global tech cycle(standardised)Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Trade tensions:Uncertainty&Investment Chart 1:2018 H2 average growth in nominal investment(%y/y)Sources:Bank of England,BNP Paribas Chart 2:Global capex expectations in next six months(diffusion index)Sources:Ifo,Macrobond,BNP Paribas Using Brexit as an example,we see firms that expected a quick resolution have pulled back more on investment.A series of cliff edges is therefore much more damaging than a prolonged period of known uncertainty.This may help to explain why investment intentions are so weak globally,with geopolitics constantly providing cliff edges.Type of uncertainty matters 6-8-4048All20192020+UnknownExpected date of Brexit resolution Brexit in top 3 sources of uncertainty Brexit less important Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Trade tensions:Impact on growth The charts show the estimated impact of a 10%increase in tariffs on all US imports,assuming retaliation.Escalating trade tensions would have a significant impact on US activity and a more moderate one on the eurozone economy.US biggest loser?7 Sources:US Census,BNP Paribas Chart 2:Long-term effects(deviations from current real trade as a percentage)Source:ECB“The economic implications of rising protectionism:a euro area and global perspective”Source:ECB“The economic implications of rising protectionism:a euro area and global perspective”Chart 1:First-year effects(GDP response,deviation from baseline levels;percentages)Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Trade tensions:Impact on growth II Chart 1:2017 gross value added of manufacturing (%GDP)Sources:OECD,BNP Paribas Chart 2:2017 capital goods exports(%total goods exports)Sources:WITS,BNP Paribas Countries highly exposed to trade,especially in investment goods,are likely to pay the highest prices in the short-term.A few winners,many losers 8 0102030405060051015202530Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch 9 US:Chinese imports The SF Fed finds that 34%of the Chinese import contribution to PCE and 42%of the Chinese import contribution to business fixed investment are now subject to tariffs.It estimates an escalation scenario where 25%tariffs are applied to all remaining imports would see consumer price inflation increase by an additional 0.3pp.Sources:San Francisco Fed,BNP Paribas Sources:San Francisco Fed,BNP Paribas Not negligible Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Calculating Chinas short-term pain Sources:China Customs,BNP Paribas 10 Source:BNP Paribas forecasts Impact on GDP Impact on CPI 2019 2020 2019 2020 Base case-0.4-0.2-0.05 0.0 Escalation-0.8-0.5-0.2-0.4 Chinas trade balance with major partners($bn)US imports from China(%y/y)Sources:China Customs,BNP Paribas Sources:US Census,BNP Paribas Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch USEU trade:Negotiating objectives 11 Summary of specific negotiating objectives(January 2019)Trade in goods Reduce trade deficit with the EU Secure duty-free market access for US industrial goods Secure comprehensive market access for US agricultural goods in the EU by reducing or eliminating tariffs+ease administration and promote greater regulatory compatibility Establish new and enforceable rules to ensure that science-based safety(SPS)measures are implemented in a transparent,predictable way Encourage the use of international conformity assessment systems,avoid conflict of interests Trade in services Establish rules that prohibit discrimination against foreign services suppliers Obtain fairer and more open conditions of financial services trade Establish rules that reduce or eliminate barriers to US investment in all sectors in the EU EU negotiating mandate covered two potential agreements with the US Trade agreement:strictly focused on the removal of tariffs on industrial goods,excluding agricultural products Agreement on conformity assessment:making it easier for companies to prove their products meet technical requirements on both sides of the Atlantic Conditions:Brussels would immediately suspend trade talks if the US imposes Auto tariffs or other measures against the EU US must remove its tariffs on Steel and Aluminium imports from Europe prior to the conclusion of negotiations”Uncompleted Transatlantic Trade and Investment Partnership(TTIP)to be considered obsolete and irrelevant Note:European Parliament did not sign off on the mandate,implying that it might reject any ultimate deal Sources:USTR,European Commission,BNP Paribas Luigi Speranza,Global Economics Markets 360 BNP Paribas London Branch Credit Strategy:What if the Trade Talks do Break Down?And what if they dont?12 Credit Outlook:Range and Carry,but it Relies on Growth 13 Market Outlook:The underlying credit trend is balanced and supportive of carry-strategies in Credit.Flows are balanced:some weakness in asset manager demand offset by strong insurance,pension and Asian demand.Fundamentals are balanced:our leading indicator points to stable leverage in both the US and EU this year.Macro is balanced:sluggish growth offset by moderately dovish central banks.However,all this relies on stable growth and the margin of error is quite thin.Thus,a lot relies on what happens on trade.Viktor Hjort,Dominique Toublan,Luigi Speranza BNP Paribas London Branch Source:Bloomberg,BNP Paribas Spread represents the Bloomberg Barclays US Aggregate Corporate Index.(*)Bloomberg Barclays US Aggregate Corporate Index Bear case:Escalation(+75bp)Base case:Unstable Truce (-10bp)Bull case:Break-through (-25bp)0.50 0.70 0.90 1.10 1.30 1.50 1.70 1.90 2.10Jun-13Mar-15Dec-16Sep-18US Agg Corporate index(OAS)US IG Credit Trade-conflict scenario analysis(next 12mths)Unstable truce:announced measures go ahead but low-intensity talks continue.Sluggish growth/dovish central banks.Credit is a carry trade Break-through:a Deal!Corporate confidence back,reflation.Beta grab.Escalation:the cold war scenario of tariff escalation+extensive non-tariff trade barriers.Central banks ease,but behind the curve.Sell Credit.14 Japanification?30 years without nominal growth shouldnt be positive for Credit assets,should it?BNP Paribas London Branch Source:Markit,BNP Paribas Credit market drivers:needs a bit of growth now Viktor Hjort,Dominique Toublan,Luigi Speranza -1.2-0.8-0.40.00.40.81.2Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19ResidualsCentral BanksGrowthUS Credit SpreadsTighter spread Wider spread Negative Growth(ISM PMI YoY)Hawkish Fed(2YR Real Rates)Positive Growth(ISM PMI YoY)Dovish Fed(2YR Real Rates)Credit spread decomposition into(1)Growth and(2)Central bank policy-2-101234Dec-80Mar-84Jun-87Sep-90Dec-93Mar-97Jun-00Sep-03Dec-06Mar-10Jun-13Sep-16Japan nominal GDP growth(%)Deleveraging is Base Case but Margin of Error is Quite Thin 15 Earnings expectations:no rebound yet US:The leverage is stable but fragile Source:Bloomberg,BNP Paribas EU:The leverage outlook is stable Deleveraging is our base case for 2019 as BBB rated corporates focus on ratings preservation.That requires some growth support and while the slowdown has ended,theres still no evidence of a growth rebound.The market expects US earnings growth to stabilise in 3Q19 and rebound in 4Q19.We need only a bit faster growth for organic deleveraging,probably a 1-2 percentage growth re-acceleration in the US and stability alone in Europe.But the margin of error is thin.With 5ppt slower earnings growth even active attempts to deleverage would be more than offset by a weaker earnings/cashflow outlook.Source:All charts-Bloomberg,BNP Paribas BNP Paribas London Branch Viktor Hjort,Dominique Toublan,Luigi Speranza 020406080100120140-20%-15%-10%-5%0%5%10%15%20%Feb-12Feb-14Feb-16Feb-18US Credit:Leverage delta proxy vs spreads Credit%-Earnings(fwd)chgCDX.IGLeverage falling Leverage rising 020406080100120140-20%-15%-10%-5%0%5%10%15%20%Feb-12Feb-14Feb-16Feb-18EU Credit Leverage delta proxy vs spreads Credit%-EPS(fwd)%ITRX MainLeverage falling Leverage rising-10%-5%0%5%10%15%20%25%Feb-14Feb-15Feb-16Feb-17Feb-18Feb-19Forward earnings expectations(12M fwd)US(SPX)Europe(SXXP)Credit Flows are Moderating,but Not Fading 16 Viktor Hjort,Pierre-Yves Bretonniere,Paola Lamedica BNP Paribas London Branch Source:BNP Paribas Investor type Outlook Rational UNITED STATES Asset Managers Neutral Cash balances are below historical averages and the potential return remains low due to tighter spreads.Fund inflows have also slowed down recently.Pension Funds Positive An improved funding ratio will drive more assets towards Fixed Income securities.Current yield levels are not particularly attractive but they will be likely to buy-the-dip if all-in yields increase.Life insurers Positive Being currently underinvested,likely to increase Credit investment,especially if yields increase.Asian investors Positive/Neutral Japan(Positive):The need for asset growth and the relative yields on offer compare to local yields(even after accounting for hedging cost)will keep supporting inflows into$.Taiwan/South Korea(Neutral):flows rebounded this year on the back of 1)the Feds pause and 2)the continued growth in foreign-bond ETFs.EUROPE Asset Managers Neutral Cash balances remain low and the positive momentum of inflows is slowing down.Insurance companies Positive High net inflows(France in particular)and relatively high cash balances.Cross-border Less Negative The funds repatriation to-Debt securities continues supported by a favourable hedging cost and the ECBs exit from the market.Asian investors Positive/Neutral Japanese(Positive):As for the US market the relative yield on offer remains attractive.Moreover,the yield after hedging is relatively more attractive in than in$.The Trade Conflict:How it would impact Credit Markets 17 BNP Paribas London Branch Scenario Breakthrough Unstable Truce Escalation Likelihood 30%50%20%Description A deal is agreed,albeit short of full removal of tariffs Implementation of announced measures but no further escalation More tariffs from US and retaliation from China Economy Late-cycle rebound Soft late-cycle growth Significant recession risk Central Banks Neutral Dovish Very dovish,but behind-the-curve risk Credit View EU IG Cash 90bp(-30bp)110bp(-10bp)225bp(+105bp)US IG Cash 100bp(-25bp)115bp(-10bp)200bp(+75bp)Relative value Buy Cyclicals,growth companies,HY and BBB.Risk:increasing leverage and issuance Buy safer issuers,focus on carry.Distressed sector underperforms as late-cycle idiosyncratic defaults increase Sell Credit.Central Banks actions are too little too late.Recession fears Note:US and EU IG forecasts based on Bloomberg Barclays Corporate Indices Source BNP Paribas Viktor Hjort,Dominique Toublan,Luigi Speranza Why the Trade Scenarios are so Important for the Markets 18 Bear case:in Recessions the CBs are always behind the curve Bull case:Reflation means Cyclicals rip tighter Base case:Sluggish-but-Dovish with high idiosync risks The base case of no-Deal/no-Escalation can be quite constructive for Credit markets in that the drag on growth is sufficiently slow to allow Central Banks to stay ahead of the curve,easing enough to make High Grade Credit an attractive Fixed Income carry trade,even as idiosyncratic risks remain and defaults continue to happen.The bear case of Escalation may be underestimated.Rapid growth deterioration usually leaves Central Banks behind the curve in early-stage Recessions,which is why spreads widen even against rate cuts.The bull case of a Deal would extend the cycle and Cyclicals,still quite cheap,would rip tighter.Over time late-cycle releveraging risks would reappear.Source:All charts-Bloomberg,BNP Paribas BNP Paribas London Branch Viktor Hjort,Dominique Toublan,Luigi Speranza -25-20-15-10-50510152030507090110130Feb-15Sep-15Apr-16Nov-16Jun-17Jan-18Aug-18Mar-19bp Cyclicals-Non-Cyclicals(R.H.S.)CyclicalsNon-CyclicalsHigh Cyclical risk premium Low Cyclical risk premium Trade sensitive companies across regions 19 BNP Paribas London Branch Table 1:Trade sensitive companies across regions Company Sector Rational Analyst UNITED STATES Whirlpool Consumer products Sensitive to input prices which can be impacted by tariffs,as well as its products often being subject to tariffs Rich Edelman Freeport McMoRan Metals Copper sensitive,initially should expect to sell off and would expect China to step up stimulus if no deal Aamer Adamjee Alcoa Metals Negative impact Aamer Adamjee United States Steel Corp,AK Steel Holding Steel Meant to be protected by 232 tariffs but stock and credit wider on auto fears and new capacity announced since tariffs Aamer Adamjee Olin Corp,Tronox Holding,Chemours HY Chemicals Many Chemicals names will be impacted to different degrees Aamer Adamjee Dow Inc,DowDuPont,Huntsman,Eastman Chems,LyondellBasell,Westlake Chemical IG Chemicals Many Chemicals names will be impacted to different degrees Aamer Adamjee Ford,General Motors IG Autos High China exposure;F has already been struggling in China Aamer Adamjee Tenneco,Adient,Delphi tech HY Autos JV partnerings or manufacturing operations in Chi