The Twilight of Credit Markets? Paul Crawford April 2020 Agenda - - PowerPoint PPT Presentation

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

Source: Bloomberg, ranked monthly data from Q4 2006

3

Performance Review to End December 2019

Splendid……

Source: Bloomberg, to end March 2020

4

Performance Review to End January 2020

Blah, blah, blah….. Buy the dips

Source: Bloomberg, to end March 2020

5

Performance Review to End February 2020

You see I told you, bonds are a great diversifier of risk

Source: Bloomberg, to end March 2020

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Performance Review to End March 2020

Efficient Market theory is a lot of rubbish…….

Source: Bloomberg, to end March 2020

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STeFI 255,05 Income Plus 328,66 All Bond Index 257,50 TOP40TR 263,12

Performance Review to end March 2020

Let’s not focus on the short run numbers………

Source: Bloomberg, to end March 2020

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Performance Review to end March 2020

Longer dated performance encouraging. Correlation matrix stable.

Source: Bloomberg, January 2007 to end March 2020

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Response of clients…. BCI Total Market Value

Outflows during March have taken us back to mid December levels

Source: BCI, Maitland to end March 2020

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BCI Income Plus

Well diversified and high levels of liquidity

Source: BCI, Maitland, internal fund as at 31 March 2020

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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

Source: Bloomberg,

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iTraxx Crossover…… the new global risk benchmark

Spreads savaged on a year to date basis

Source: Bloomberg,

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iTraxx Crossover…… the new global risk benchmark

Total Returns have been bludgeoned lower……. but some “green shoots”

Source: Bloomberg,

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iTraxx: 5 Worst spread movements in history

Spreads savaged

Source: Bloomberg,

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iTraxx: 5 Worst Daily Return Days

Indices savaged

Source: Bloomberg,

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iTraxx Crossover from Spread movement to Return

Daily Spread Movement and Daily Index Return

Source: Bloomberg,

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iTraxx Crossover from Spread movement to Return

Daily Spread Movement and Daily Index Return

Source: Bloomberg,

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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%

• 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

iTraxx Crossover: 75 Equally weighted names

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iTraxx Crossover Default Experience

Number of defaults per series

Source: Bloomberg,

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Just how good is iTraxx at predicting defaults?

Using matured series S1-S23, versus the spread of the index at launch

Source: Bloomberg,

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Just how good is iTraxx at predicting defaults?

Using matured series S1-S23, versus the spread of the index at launch

Source: Bloomberg,

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𝐸𝑓𝑔𝑏𝑣𝑚𝑢 𝐹𝑦𝑞𝑓𝑠𝑗𝑓𝑜𝑑𝑓 = 0,37 ∗ 𝑇𝑞𝑠𝑓𝑏𝑒 % + 5,27% R-squared =2,95%

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

Source: Bloomberg,

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Who cares about Global Credit Spreads?

Normalising the data…….. Scary results…….

Source: Bloomberg,

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Who cares about Global Credit Spreads?

Looking at local R186’s….. Our SAGB bench

Source: Bloomberg,

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Who cares about Global Credit Spreads?

Looking at local R186’s….. Our SAGB bench

Source: Bloomberg,

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• 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

Government Bailouts

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SA Government Gross Debt to GDP Ratio

Not too comforting…….

Source: Bloomberg,

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SA Government Gross Debt to GDP Ratio

Not too comforting…….

Source: Bloomberg,

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Agenda

March 2020: Blunt Force Trauma Taking the pulse of global credit markets…. South African Debt Metrics

Concl clusi usions ns

• 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
• ff 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

Conclusions

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