56 Business The EconomistNovember 7th 2020
21stockmarkets”. The market capitalisation
of the five biggest tech giants (Facebook,
Amazon, Apple, Microsoft and Alphabet)
has fallen in recent weeks from its peak of
roughly a quarter of the entire value of the
s&p500 index. Even so, they have generat-
ed returns of 39% for shareholders this year
and without them the 495 others have pro-
duced a return of -1%.
Small and medium-sized firms (smes)
have been crushed. The proportion of them
that are making losses—based on the Rus-
sell 2000, an index of smes—has declined a
bit from its peak of above 40%, but it re-
mains well above 30%. smes are nearly four
times as likely to be losing money as big
firms, a far worse situation than during the
recession of 2001 or the global financial cri-
sis a decade ago.
The mood in the board rooms of small
companies is foul. The latest survey of ex-
ecutives at smes, published by the Wall
Street Journaland Vistage, an executive-
coaching organisation, found sentiment
“stalled in October 2020 due to increased
concerns about an economic slowdown
amid a resurgence in covid-19 infections.”
The gloomy outlook, the most pessimistic
in six years, may be explained by the fact
that 42% of small firms believe they will
run out of cash in under six months.
If the inconsistency of the recovery is
one worry, the other is the state of firms’
balance-sheets. Corporate debt was risingbefore the pandemic, and many firms have
piled on more borrowings in order to cover
the shortfall in revenue they have experi-
enced this year. Edward Altman of nyu
Stern School of Business is worried about
what he calls “the enormous build-up of
non-financial corporate debt.” By his esti-
mation, firms have issued more than
$360bn in high-yield debt (ie, junk bonds)
so far this year, surpassing the previous re-
cord of $345bn in all of 2012. With debt-
earnings ratios reaching critical levels, and
a resurgence in corporate defaults, Mr Alt-
man reckons that 6.5% to 7% of junk bonds,
by dollar value, will default in 2020.
His fears are echoed by s&pGlobal, a
credit-rating agency. It calculates that the
“distress ratio” (distressed credits are junk
bonds with spreads of more than ten per-
centage points relative to usTreasuries) for
American companies had come down to
9.5% in September from its peak of 36% in
March but that it remains above pre-pan-
demic levels. Corporate America already
leads the world in the tally of corporate de-
faults this year, with 127 by the end of Octo-
ber. Nicole Serino of s&pGlobal notes that
corporate credit quality is deteriorating,
with the number of firms rated a lowly
ccc+ or below now 50% higher than at the
end of 2019. For such firms, she worries
that “excess liquidity and low interest rates
are only postponing the inevitable.”
With a large share of firms still makinglosses and given the weakening of balance-
sheets it is far from clear that American
business is in the clear. What happens next
depends on three unknowns. One is the
fallout from this week’s presidential vote. A
prolonged period of post-election uncer-
tainty would weigh on the mood, notes Mr
Levkovich. He points to the 11% fall in the
s&p500 index after the election in 2000
while legal wrangling decided the outcome
of the contest for the presidency between
George W. Bush and Al Gore.
Another unknown is the timing and
size of the next package of fiscal stimulus
from Congress, which at the moment is
frozen by partisan gridlock in Washington,
dc, and which could be limited if the Re-
publicans keep firm control of the Senate.
This matters to companies because, as Mr
Golub puts it, “the government has effec-
tively said, ‘We do not want market forces
to drive firms out of business right now and
so we are going to backstop a large part of
the economy.’ ” Mr Wilson believes that the
number of companies going bankrupt so
far this year has been much lower than oth-
erwise feared because of generous stimu-
lus measures.
The biggest unknown, though, is the
pandemic. Moody’s, a credit-rating agency,
predicts that corporate-debt defaults will
continue to rise until March 2021. The rea-
son it gives is “economic recovery remains
fragile amid risks of another pandemic re-
surgence leading to another round of coun-
trywide lockdowns”. That should serve as a
sober reminder to the next president and
corporate bosses alike that, despite a re-
bound, there may yet be difficult days
ahead for usaInc. 7In recovery?Sources:TheConferenceBoard;Bloomberg;DeutscheBank;Compustat;Moody ’s403020100
201715131109072005Share of firms making a financial loss
%Russell 2000S&P 50 0FinancialcrisisCovid-19
pandemic151050202001 05 10 15 21United States, speculative-grade
corporate default rates, %PessimisticActualForecast
scenariosBaseline
OptimisticUnited States, GDP
January2020=100
Pre-covid-19
pandemic
level105100959085
2019 20 21PessimisticOptimistic
BaselineActualTotal returns
January2nd2020=100
1601401201008060
NOSAJJMAMFJS&P 500S&P 500
(excl. FAMAA)Facebook, Apple, Microsoft,
Amazon and Alphabet (FAMAA)L
ei jun, thefounder and boss of Xiaomi,
a Chinese smartphone-maker, has long
had something of an inferiority complex.
For a decade Xiaomi has played second fid-
dle to Huawei, a rival Chinese producer of
handsets. In a recent live-streamed address
watched more than 30m times, Mr Lei ad-
mitted that his firm is not yet “in the same
league” as Huawei. The audience, compris-
ing mainly “Mi fans” (as devotees of
Xiaomi products are known), booed the
dispiriting assessment. That prompted Mr
Lei to change tack, quickly adding that “you
will find lots of things we do well”.
Investors are not complaining.
Xiaomi’s share price has doubled sinceA Chinese smartphone-maker takes
advantage of a rival’s misfortuneXiaomiMi time