M12 BARRON’S March9,2020
Libor Lift Presages Credit Risk
Economic and Financial Analysis
by ING
ing.com
March6:Few spend time looking at Libor
[London interbank offered rate.] We don’t
blame you.
It’s old school, and it will be replaced
by new risk-free rates after 2021. Also,
Libor is more about where banks can print
commercial paper these days than a mea-
sure of risk attached to interbank lending
(as there is virtually no volume there). But
when it spikes, as it has been doing in the
past couple of days, we need to sit up and
pay attention. This is, in fact, reminiscent
of the beginnings of the extremes we saw
during the financial crisis.
We aren’t expecting to see those ex-
tremes ahead; we view the financial sys-
tem as better capitalized with access to ex-
ceptional liquidity provision. The Federal
Reserve has been rebuilding its balance
sheet through Treasury-bill purchases and
has also been making liquidity available to
the Street through repo operations.
Providing liquidity is one thing, but get-
ting access to it is another. One of the risks
we are running is a scenario where, for ex-
ample, some high-yield players flip from
running in the black to the red, requiring
then a stopgap, but finding that access to
credit isn’t easy. Access to the bond market
for stressed players would prove tricky as
the primary market stalls. And as default
risks rise, discussions with banks for lines
of credit could prove difficult, especially as
rating agencies are already making noises
on heightened credit risk.
—PADHRAICGARVEY
Private Markets Offer Bargains
UBS House View
by UBS
ubs.com
March 5:Private markets haven’t been
immune to the impact of the coronavirus
outbreak on financial markets. Equity-
market volatility has prompted some
private-equity groups to delay public exits.
And venture-capital deal activity in China
has fallen by 60% in the past six weeks
compared with the same period last year,
according to Pitchbook data.
With travel restrictions in place, due
diligence, on-site visits, and other deal-
sourcing activities are being delayed. As
with previous episodes of financial-market
dislocations, some repricing of private-
equity valuations could be expected in line
with public equities, albeit at a lag. But
this is not a bad thing. As we see limited
risk of a material long-term negative
impact on the global economy, we view the
current situation as an attractive opportu-
nity for investors.
• Historically, the best vintages for
private-equity firms have often coincided
with dislocations in public equity markets—
for example, in the years 2001 and 2008.
• The current disruption may present
opportunities to gain exposure to Asian
companies at more attractive valuation
levels. Longer term, we are bullish on the
region, given powerful secular drivers.
• Opportunities for funds specializing
in turnaround and distressed situations
are likely to increase the longer the dis-
ruption continues.
• If market disruption persists, falling
public equity markets may leave some
institutional investors with a higher-than-
desired allocation to private markets,
forcing them to rebalance. Secondary
funds may be presented with opportuni-
ties to buy at discounted values from
institutions looking to reduce their pri-
vate market exposure.
—MARKHAEFELE
Bullish on International Stocks
Global Investment Strategy
by BCA Research
bcaresearch.com
March 5:Investors should overweight
global equities over both a three-month
and 12-month horizon. Bond yields will rise
modestly from current levels. While the
Federal Reserve is highly likely to cut in-
terest rates a further 25 basis points [a
quarter of a percentage point] later this
month, we doubt that rates will stay as low
for as long as markets currently anticipate.
U.S. yields will increase more than
yields abroad, which should take some
pressure off the dollar. Nevertheless, as a
countercyclical currency, the greenback
will probably trade lower over the remain-
der of the year as global growth begins to
reaccelerate.
The combination of stronger growth
and a weaker dollar will lift commodity
prices, while also giving cyclical stocks and
financials a boost. Cyclicals and financials
are overrepresented in non-U.S. indexes,
which implies that international stocks will
outperform their U.S. peers.
—PETERBEREZIN
Biden Win Buoys Stocks
Trends
by BMO Harris
bmoharris.com
March4:Though elections are always fluid
situations, the Democratic primary now
appears to be Joe Biden’s to lose. Barring
a collapse over the coming weeks, he is
bound to either win more delegates than
Bernie Sanders or enter a contested con-
vention with a strong claim to the Demo-
cratic nomination. Biden’s strength in
states where he wasn’t expected to do
well, particularly Maine and Massachu-
setts, adds to our conviction on this point.
Whereas an overwhelming Sanders win
would have probably been negative for
risk assets, we view the latest develop-
ments as positive for markets. Biden has
a long track record of centrist market-
friendly policies, in stark contrast to Sand-
ers’ advocacy of substantial government
control of key economic sectors, such as
health care and energy. A potential Biden
presidency would also reduce the likeli-
hood of future trade tensions with Europe.
The Biden ascendancy—and Sanders
flagging—removes some policy tail risk out
of the market, but larger market reactions
will probably come as the general election
heats up over the summer.
—MICHAELSTRITCH,YUNG-YUMA
China Jet-Fuel Demand Revives
Global Energy Strategy
by RBC Capital Markets
rbccm.com
March3:Our real-time flight tracker has
suggested a marked rebound in Chinese
activity over recent days, just as cancella-
tions begin to mount in other regions.
Cancellations left Chinese flight activity
some 75% below normal for much of Feb-
ruary, but flights picked up meaningfully
over recent days universally across all
major Chinese airports outside of Wuhan.
Activity has improved to some 55% below
normal levels. Even if international
flights are slow to return, we anticipate
that the path to recouping nearly all of
the lost Chinese jet-fuel demand is poten-
tially plausible in the coming weeks,
given that 80% of total Chinese flights
are domestic....
The resurrection of Chinese jet-fuel
demand is meaningful, given that China
makes up 13% of global jet-fuel demand
and is undisputedly one of the major driv-
ers of global oil demand growth. For com-
parison’s sake, Chinese jet demand is
larger than the four largest European
countries combined. Demand from the
United Kingdom, France, Germany, and
Italy totals 12% of the global pie. Put an-
other way, panic may ensue in the market
if those major European countries experi-
ence a widespread halting in aviation
activity near 75%, but the true impact to
jet-fuel demand in such a case will be less
than what was experienced in China over
recent weeks. —MICHAELTRAN
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“WhenLiborspikes,asithasbeendoinginthepastcoupleofdays,weneedtositupandpay
attention.Thisisreminiscentofthebeginningsoftheextremeswesawduringthefinancialcrisis.”
—PADHRAICGARVEY,ING Economic and Financial Analysis
MarketView
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