BCI Income Plus The Twilight of Credit Markets? Paul Crawford April 2020
Agenda March h 2020: Blunt t Force e Trauma ma Taking the pulse of global credit markets…. South African Debt Metrics Conclusions
March 2020: Blunt Force Trauma Indices savaged 3 Source: Bloomberg, ranked monthly data from Q4 2006
Performance Review to End December 2019 Splendid…… 4 Source: Bloomberg, to end March 2020
Performance Review to End January 2020 Blah, blah, blah….. Buy the dips 5 Source: Bloomberg, to end March 2020
Performance Review to End February 2020 You see I told you, bonds are a great diversifier of risk 6 Source: Bloomberg, to end March 2020
Performance Review to End March 2020 Efficient Market theory is a lot of rubbish……. STeFI 255,05 Income Plus 328,66 All Bond Index 257,50 TOP40TR 263,12 7 Source: Bloomberg, to end March 2020
Performance Review to end March 2020 Let’s not focus on the short run numbers……… 8 Source: Bloomberg, to end March 2020
Performance Review to end March 2020 Longer dated performance encouraging. Correlation matrix stable. 9 Source: Bloomberg, January 2007 to end March 2020
Response of clients…. BCI Total Market Value Outflows during March have taken us back to mid December levels 10 Source: BCI, Maitland to end March 2020
BCI Income Plus Well diversified and high levels of liquidity 11 Source: BCI, Maitland, internal fund as at 31 March 2020
Agenda March 2020: Blunt Force Trauma Taking the pulse of global credit markets…. South African Debt Metrics Conclusions
iTraxx Crossover…… the new global risk benchmark Spreads savaged 13 Source: Bloomberg,
iTraxx Crossover…… the new global risk benchmark Spreads savaged on a year to date basis 14 Source: Bloomberg,
iTraxx Crossover…… the new global risk benchmark Total Returns have been bludgeoned lower……. but some “green shoots” 15 Source: Bloomberg,
iTraxx: 5 Worst spread movements in history Spreads savaged 16 Source: Bloomberg,
iTraxx: 5 Worst Daily Return Days Indices savaged 17 Source: Bloomberg,
iTraxx Crossover from Spread movement to Return Daily Spread Movement and Daily Index Return 18 Source: Bloomberg,
iTraxx Crossover from Spread movement to Return Daily Spread Movement and Daily Index Return For every y 100 bps sell l off the credit it index x loses ses 3,3% of value. e. It has a SPREA READ D MODIF IFIED IED DURATION TION of 3,30% 19 Source: Bloomberg,
iTraxx Crossover: 75 Equally weighted names Current iTraxx Crossover Spread is at 530 bps • Can withstand 530/3,3 = 160 bps sell off on a 1 year basis to lose money • The Spread also implies a probability of default of 31,1% • Or 31% of the names in the fund are priced to default over the 5 year period • 31% of 75 names = 23 names es are priced d to defau fault • How likely is this? • Let’s look at the historic experience • Series 1 launched in March 2004, new series launched every 6 months • Currently iTraxx XOver is on Series 33 • 20
iTraxx Crossover Default Experience Number of defaults per series 21 Source: Bloomberg,
Just how good is iTraxx at predicting defaults? Using matured series S1-S23, versus the spread of the index at launch 22 Source: Bloomberg,
Just how good is iTraxx at predicting defaults? Using matured series S1-S23, versus the spread of the index at launch 𝐸𝑓𝑔𝑏𝑣𝑚𝑢 𝐹𝑦𝑞𝑓𝑠𝑗𝑓𝑜𝑑𝑓 = 0,37 ∗ 𝑇𝑞𝑠𝑓𝑏𝑒 % + 5,27% R-squared =2,95% 23 Source: Bloomberg,
Agenda March 2020: Blunt Force Trauma Taking the pulse of global credit markets…. South h African an Debt t Met etrics ics Conclusions
Who cares about Global Credit Spreads? SA 5 Year CDS 25 Source: Bloomberg,
Who cares about Global Credit Spreads? Normalising the data…….. Scary results……. 26 Source: Bloomberg,
Who cares about Global Credit Spreads? Looking at local R186’s….. Our SAGB bench 27 Source: Bloomberg,
Who cares about Global Credit Spreads? Looking at local R186’s….. Our SAGB bench 28 Source: Bloomberg,
Government Bailouts Global Government response to COVID-19: Lockdown and bailout • Socially the correct thing to do • UK GBP350 billion package to help SME and labour force • US debating an additional USD 600 or so billion on top of USD 2 trillion announced in March • Europe EUR540 billion on top of the ECB’s EUR 750 asset purchasing program • Relaxation of stringent banking risk supervision metrics • Banks must lend companies money damn it !!!!! • How does SA stand…… • SA Debt to GDP and debt service costs might be prohibitive • 29
SA Government Gross Debt to GDP Ratio Not too comforting……. 30 Source: Bloomberg,
SA Government Gross Debt to GDP Ratio Not too comforting……. 31 Source: Bloomberg,
Agenda March 2020: Blunt Force Trauma Taking the pulse of global credit markets…. South African Debt Metrics Concl clusi usions ns
Conclusions Investors will probably be scarred completely by March 2020 • Risk correlation went to 1 – with nowhere to hide • BCI Income Plus had it’s worst month in history • Investors have sold fund but fund has handled the redemptions rather well • Everything in life is relative……. • Credit markets are now predicting calamitous events in European markets….. • Take note that South Africa is a sub investment grade credit….. Sell offs will see local bond yields selling • off in response South Africa might be a bit hamstrung on bailout front Govt Gross Debt to GDP ratios at highs in living • memory Be careful in what you think, you might be forced to eat some humble pie later • 33
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