先進国

Highlights Economy – As always, there is no lack of things that could go wrong: COVID-19 could have a resurgence, international softness could be a drag, wage growth could erode profit margins or trigger inflation and households may simply sit on their newly accumulated savings. Markets – High valuations across the board leave stock and bond markets with little margin for error: High valuations make markets more fragile, but they won’t suffer a sharp decline in the absence of a negative catalyst. Strategy – Stay the course but remain vigilant: Investors should game plan for adverse scenarios, commit to shortening holding periods and be prepared to make big changes if an inflection point is closer than we expect. Feature Thus far in the pandemic era, it has been right to be constructive on markets and the economy. The Fed, Congress and the White House succeeded in their efforts to shelter the economy from the virus and investors in equities and spread product have been richly rewarded for betting that they would. So far this year, the combination of potent growth and easy monetary policy has allowed the economy to travel a comfortable path between the slumping and overheating extremes that would upend financial markets’ progress and cloud the expansion’s future. Though our base case calls for benign conditions to persist well into 2022, that scenario is not assured. As we ask ourselves how we could be getting it wrong, we see four primary threats to our view. We do not judge that any of them are worryingly likely in isolation, but we are monitoring all of them while watching for other challenges that may emerge. Testing our assumptions is an established part of our process but we are especially vigilant given the novel conditions imposed by the pandemic and the policy responses to it. The magnitude of the swings in this cycle, and the compressed period over which they’ve occurred, are atypical and do not fit into established templates. Conditions are unusually uncertain and investment strategy needs to account for it. The Pandemic Isn’t Over The foremost threat to our sanguine take is a COVID-19 resurgence. A flare-up of global infections, hospitalizations and deaths would presumably trigger renewed rounds of shutdowns in the hardest-hit countries, crimping local economic activity. If a resurgent pandemic dragged on output in enough places, the post-pandemic revival would be delayed, and global growth would not accelerate as quickly as it otherwise would. Although the US and other countries with high vaccination rates should be largely sheltered from an outbreak, there is no such thing as complete decoupling in a globalized world, even for a comparatively closed economy like the US. The good news is that deaths have plunged with infections (Chart 1), and hospitalizations have, too. Not only are fewer people becoming infected, their cases are becoming increasingly less severe. The phenomenon is not confined to the US; humankind has learned much better ways to treat COVID over the last year-plus. The pandemic is still with us, but its consequences are less severe, even with new, more contagious variants. Chart 1What A Difference A Year Makes Lessened severity could help the US withstand an ongoing slowdown in the pace of vaccinations (Chart 2). A significant proportion of Americans appears to be fiercely opposed to getting vaccinated, and much of the low-hanging blue-state fruit may already have been picked (Chart 3). Vaccinations are not the only route to herd immunity, however, and it is not at all unrealistic to think that an immunization rate around 60-70% might be sufficient to stifle COVID’s spread. Chart 2Vaccination Progress Is Slowing ... Chart 3... As The Most Eager Have Already Gotten Their Doses The Center for Disease Control estimates that less than a quarter of COVID infections have been detected and reported,1 suggesting that 88 million citizens may have been unknowingly infected and are therefore immune. If one-third of those unknowingly infected have not been vaccinated, in line with the currently eligible population, the additional 29 million people would push the US very close to 75% of the 12-and-above population with antibodies against infection. If children under 12 can receive the vaccine in the fall, the end of the pandemic stage in the US may be within sight. Our glass-half-full perspective would be tested if new vaccine-resistant variants were to emerge. However, the evidence so far indicates that the existing vaccines have held firm against all known variants. COVID is new and continually evolving, so we cannot definitively say that the US is out of the woods. We will have to keep watching infection counts and looking out for evidence of vaccine-resistant strains, but for now the weight of the available evidence suggests that a COVID resurgence is not likely to pull the rug out from under the US economy. Global Softness Our Chinese Investment Strategy service expects that Chinese growth will decelerate over the rest of the year as total social financing growth slows (Chart 4). With the major developing economies recovering as they catch up to China in terms of stifling the virus and Chinese consumption growing nicely, officials can advance their deleveraging aims without materially pressuring the domestic economy. The upshot is that Chinese growth will downshift a bit and its import appetite will wane. Chart 4China Is Poised To Decelerate In The Second Half Of The Year   China’s imports are its trading partners’ exports and they are the channel by which it most directly impacts the global economy. Slowing Chinese import demand means slowing global growth, all else equal. Although the US is not a big exporter to China, the multinationals that dominate the S&P 500 will feel a bit of a drag from reduced Chinese demand. As COVID’s threat diminishes, however, the major developed economies should have enough momentum to overcome a slight Chinese downshift. Cost Pressures Wages account for the largest proportion of most businesses’ costs and a rapid rise could squeeze profit margins. Wage negotiations ultimately turn on the balance of labor supply and demand and management’s and labor’s recourse to substitutes for workers or jobs. Presently, demand for low-skilled workers far exceeds supply, and those workers are much more able to find alternative jobs than management can conjure up substitutes for servers, bartenders, bellhops, front-desk staff and gate agents. Even if employers were able to raise prices enough to protect their margins, the emergence of cost-push inflation pressures would ultimately hurt financial assets. Labor also has the upper hand, at least directionally, in terms of three other key leverage drivers (Figure 1). A trend toward increasing economic concentration has favored employers for decades, but antipathy for the largest technology companies is one of the only things Republican and Democratic lawmakers seem to share. The regulatory and legal trends that have favored employers in labor-management relations since the Reagan administration will shift under Biden’s direction and even if the midterm elections strip the Democrats of their control of Capitol Hill, the ESG movement and a shrinking working-age population (Chart 5) will likely bring down the curtain on four decades of one-sided support for employers. The labor-management rubber band,2 a link illustrating the symbiosis between workers and businesses, has stretched nearly to the breaking point and both parties must respond to constituents who want to see labor recover some of its lost income share. Figure 1Workers Can Look Forward To A More Friendly Environment Chart 5You're Gonna Miss Me When I'm Gone Despite labor’s growing clout, however, the main compensation series show that wage growth is decelerating. A large part of the issue is that the unskilled workers with the most leverage make the least money. Their gains do not move the needle nearly as much as highly skilled knowledge workers whose positions may have become more tenuous amidst the pandemic shift to remote work as businesses rethink how many white-collar workers are needed. We also continue to expect labor supply concerns to recede once schools reopen and unemployment insurance benefit supplements expire, easing potential upward pressure on wages. What If The Savings Aren’t Spent? We estimate that US households have accumulated about $2.4 trillion in excess savings since March 2020. The excess cash gives them plenty of dry powder to direct to the services they have not been able to consume freely over the last year-plus. Households are also on a better footing after having paid down about 6% of their outstanding credit card balances and 4% of their outstanding mortgage principal. Thanks to rock-bottom interest rates, servicing the debt they still have is far less burdensome than it used to be (Chart 6). Households are flush and if just half of their extra savings are directed to consumption, the economy will have a powerful tailwind through 2022. Chart 6A Decade Of Low Rates Has Helped Main Street, Too The year-over-year change in the 4-quarter moving average of real disposable income has grown at its fastest rate since 1951 (Chart 7). Before the pandemic, changes in real disposable income explained two-thirds of the variability in real consumption (Chart 8, top panel). Over the four pandemic quarters ended in 1Q21, however, consumption has declined despite robust income growth (Chart 8, bottom panel). Is the break in the established relationship temporary, or does it mark an inflection? Chart 7Income Growth Has Taken Off ... Chart 8... And That's Usually Reflected In Spending Our view is that it is temporary, driven by the consumption-dampening impact of stay-at-home orders and social distancing measures as well as the fact that many popular services were unavailable. We do not know for sure, however, as the current situation has no close analogue. Milton Friedman’s permanent income hypothesis posits that households are less prone to spend temporary windfalls than recurring income. Households that didn’t have to spend their economic impact payments upon receipt may view them as one-off windfalls and choose to sit on them. Investment Implications The uncertain macro backdrop coincides with ambitious valuations in debt and equity markets. Corporate bond spreads are near all-time lows (Chart 9) and the S&P 500 is trading at a historically pricey 22 times forward four-quarter earnings. Financial assets have little margin for error at levels that imply investors are pricing in a lot of good news. It will require a negative catalyst to trigger their vulnerability, however, and they are poised to continue along their merry way if the potential threats discussed above do not materialize. Chart 9What Recession? We are not complacent about the potential for trouble and investors shouldn’t be, either. Everyone should adjust their conviction levels lower given the unusual nature of the pandemic-influenced conditions. We continue to recommend that investors remain overweight equities and spread product in multi-asset portfolios, but we also advise shortening expected holding periods and developing a detailed plan of action in the event of significant negative surprises. We expect that the just-right Goldilocks backdrop of strong growth and easy monetary policy will remain in place through 2022, but investors should be prepared to implement an alternative course of action if it doesn’t.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com   Footnotes 1 As of April 14th, the CDC estimates that only 1 of every 4.3 infections between February 2020 and March 2021 were reported. Estimated Disease Burden of COVID-19 | CDC Accessed June 23, 2021. 2 Please see the US Investment Strategy Special Report, “Labor Strikes Back, Part 2: Where Strikes Come From And Who Wins Them”, dated January 20, 2020, available at usis.bcaresearch.com.  

Highlights Euro Area debt loads have increased significantly during the pandemic. Debt loads are not uniform. While Germany and, to a lesser extent, Spain look best, France has a less attractive total debt profile than Italy. Government debt-service ratios are not a problem for Europe. Private sector debt service ratios do not represent an imminent risk, but the French corporate sector is an important source of long-term vulnerability for the region. As a result of this indebtedness, Euro Area bond yields will not rise much and will be capped below 1.5% over this business cycle. For now, Eurozone corporate bonds remain attractive within a European fixed-income portfolio. High-yield bonds are appealing, but investors should avoid the energy sector. Feature Like the US, the Eurozone economy has witnessed a large increase in debt following the COVID-19 crisis. This debt load will have a long legacy that will impact the ability of the European Central Bank to increase interest rates over the coming years. The French corporate sector will be a particularly vulnerable pressure point. Nonetheless, in the short-term, this uptick in indebtedness will not have a major impact on European debt markets. Disparate Debt Loads… Chart 1The Eurozone's Heavy Debt Load After a period of decline in the wake of both the GFC and the European debt crisis, total nonfinancial debt rose by 29% of GDP since the COVID-19 pandemic began (Chart 1). While some of this increase reflects a declining GDP, Euro Area Households and Corporations together added EUR609 billion of debt, while governments accumulated over EUR1 trillion more to their borrowings. The aggregate European picture does not impart the more complex reality. While all countries experienced a marked rise in indebtedness, some major economies are in a much more precarious position than others. The Good Among the largest Eurozone economies, Germany sports the most favorable debt profiles and represents the smallest threat to the Eurozone. Compared with the other major Euro Area countries, Spain shows healthier trends, even if its overall debt load remains important. At 202%, Germany’s nonfinancial-debt-to-GDP ratio is still below its all-time high of 211% (Chart 2, top panel). During the crisis, household debt rose by EUR296 billion or 4% of GDP, but it still stands well below the 72% registered at the turn of the millennium. In absolute terms, nonfinancial corporate debt has increased to a record, but it remains 5% below its 2003 high (Chart 2, third panel). Despite a 9% rebound to 70% of GDP, government debt still lies nearly 12% below its 2010 summit (Chart 2, bottom panel). In Spain, total nonfinancial debt rose by 45% of GDP since the pandemic started, but remains 12% below its 2013 all-time high of 301%. However, the private sector’s borrowing is well behaved, and it has only risen to 170% of GDP, well below the 227% level recorded in 2010 (Chart 3, top panel). Both the household and corporate sectors have gone a long way toward improving their debt situation, with borrowing 23% and 33%, respectively, below their crisis peaks (Chart 3, second and third panel). Spain’s problem is government debt. The pandemic forced the public sector to borrow EUR316 billion, which pushed its debt load to 120% of GDP (Chart 3, bottom panel). Chart 2Germany Is The Best Student Chart 3Spain's Previous Efforts Have Paid Off The Bad Chart 4Italy Remains Problematic Italian debt remains a troublesome spot for the Eurozone, which sheds some light on the higher interest rate commanded by BTPs. Burdened by tepid GDP growth, Italy’s total nonfinancial debt did not decline much in the years between the European debt crisis and the onset of the pandemic. As a result, overall nonfinancial debt jumped to an all-time high of 276% of GDP in response to COVID-19 (Chart 4, top panel). Private sector nonfinancial credit is high by Italian standards, but at 120% of GDP, it is low compared with other major European or G-10 nations. Italian household debt has hit a record high of 45% of GDP, which also compares well to other countries, while corporate debt rose to 76% of GDP, which is also well below historical highs and other nations (Chart 4, second and third panels). Italy’s perennial problem remains the public sector’s debt, which stands at 156% of GDP, the highest reading among major Eurozone nations. The Ugly The major Eurozone country with the worst debt situation is France, and we expect this country to become an increasingly large hurdle on the ability of the ECB to lift rates in the future. Next week, we will devote a Special Report to the French situation. Chart 5France's Debt Binge France’s nonfinancial debt towers above 350% of GDP, and the private sector nonfinancial debt has also hit an all-time high of 240% of GDP (Chart 5, top panel). No sector is spared. French households have accumulated EUR239 billion of liabilities during the pandemic, which pushed their leverage ratio to an all-time high of nearly 70% of GDP (Chart 5, second panel). Meanwhile, after rising by 21%, nonfinancial corporate credit stands above 170% of GDP (Chart 5, third panel). Finally, at 116% of GDP, public debt may not be as high as in Italy, but it is comparable to that of Spain (Chart 5, bottom panel). Bottom Line: The Eurozone indebtedness has hit a record high, but considering this factor in isolation oversimplifies a complicated picture. Among the major economies, Germany has the cleanest balance sheet, especially in terms of its private sector. Spain continues to sport high leverage, but the private sector remains in much better shape than last decade. Italy has made little progress, but it still looks good compared with France, where both the public and private sector borrowings stand at record highs. … And Debt Servicing Costs With the exception of the French corporate sector, debt-servicing costs do not represent a great risk for Europe. Chart 6Interest Payments Are Not The Government's Problem When it comes to governments, the picture is particularly benign. As Chart 6 illustrates, debt-servicing costs as a percentage of GDP or tax revenues are extremely low in both France and Germany. While these two variables are higher in Italy and Spain, they remain distant from the levels recorded during the European debt crisis. Beyond their low levels, a very accommodative policy environment limits the risk created by Europe’s public debt servicing costs. The ECB has purchased EUR1.3 trillion of government bonds since April 2020, which added to its already large ownership. Moreover, BCA’s Global Fixed Income Strategy service, as well as this publication, anticipates that the ECB will roll the stock of government paper purchased under the PEPP into the PSPP. Beyond the ECB’s actions, the NGEU funds also create the embryo of fiscal risk sharing in the EU, which limits how far yields (and thus debt servicing costs) will rise in the Italy or Spain. For the private sector, the picture is more nuanced. In Germany, household debt-servicing costs are low, both historically and compared with other nations. Meanwhile, BIS data highlights that the nonfinancial corporate debt services consume a larger share of operating cash flows than at any point over the past 20 years, but they remain low by international standards (Chart 7, top panel). Meanwhile, in Spain and Italy, both the household and nonfinancial corporate sectors sport historically low debt servicing costs (Chart 7, second and third panels), which also compare well to other OECD nations. Once again, France stands out. Its household debt servicing costs are historically elevated, even if they are not particularly demanding at a global level. However, the corporate sector spends a substantial share of its cash flow on debt, both compared with its own history and internationally (Chart 7, bottom panel). Chart 7Debt Servicing Costs Across Europe Bottom Line: Generally, the debt-service picture in Europe does not represent a major threat for now. While risks are particularly well contained on the government front, the French corporate sector creates danger for the private sector. Investment Implications The elevated debt load in the Euro Area, especially in the corporate sector, constitutes a crucial limiting factor for interest rates in Europe over the coming business cycle. Compared with global economies, the Eurozone corporate sector sports elevated debt ratios. As Chart 8 illustrates, the Eurozone’s net debt-to-equity ratio is higher than that of the US across most sectors, and even surpasses that of Canada, another country with a heavily indebted corporate sector, for telecommunication firms and financials. The picture is even worse when looking at the net debt-to-EBITDA ratio. Except for energy and utilities, the Eurozone carries poorer numbers than both the US and Canada (Chart 9). Chart 8Debt-To-Equity Ratio Comparison Chart 9Net Debt-To-EBITDA Comparison The picture for debt service payments is even more damning. Despite the very low European corporate bond rates, Eurozone corporations generally have poorer interest rate coverage ratios than both the US and Canada (Chart 10). This indicates that, unless the subpar European profitability is resolved, significantly higher interest rates will cause significant damage to the European corporate sector. Chart 10Interest Coverage Lags In Europe Chart 11The French Corporate Sector And Dutch Households Will Limit The ECB On this front, the French corporate sector once again stands out as the most likely place for an accident. As the top panel of Chart 11 shows, French firms are positioned especially poorly, with both their debt-to-GDP and debt-servicing costs among the highest in advanced economies. Meanwhile, in the household sectors, only the Netherlands represents a potential risk (Chart 11, bottom panel). The level of corporate debt in the Eurozone and in France in particular suggests that the current level of yields in Canada may represent a cap on European long-term rates. Thus, it will be difficult for German yields to move beyond the 1% to 1.5% zone this cycle. For now, despite the elevated debt loads of the European corporate sector, we continue to overweight corporate bonds within European fixed-income portfolios. The ECB will maintain very accommodative monetary conditions for the next 24 months, at least. Moreover, the European recovery, especially in the service sector, will improve the operating cash flows of the corporate sector, and thus, increase the tolerance of the private sector for higher yields in the near terms. Finally, the strength in the Euro anticipated by BCA’s Foreign Exchange strategists will limit the upside to Eurozone inflation, and thus, to yields in the region. Nonetheless, investors should avoid certain sectors (see next section). Market Focus: How To Play Euro Area High Yield Bonds? Chart 12Valuations Are Getting Expensive We have argued that investors should continue to favor investment grade corporate bonds within European fixed-income portfolios over high-yield corporate bonds. Eurozone investment grade credit still offered enough value to delay a move down in quality (Chart 12). However, this value cushion is thinning and spreads are only 10 bps from their 2018 lows. BCA Research’s Global Fixed-Income strategists have recently increased their allocation to Euro Area high-yield to overweight, with a focus on the Ba-rated credit tier, while maintaining a neutral weighting in IG credit.  However, European high-yield is also becoming expensive. The yield on the overall index is a meagre 44 bps away from its lows of 2018. Moreover, the breakeven spreads of European junk bonds have only been more expensive 11% of the time since 2000 (Chart 12, bottom panel). Despite these observations, high-yield credit is not a uniform block. Caa-rated debt still offers decent value, with a breakeven spread historical percentile standing at 27%. The stretched level of valuation suggests that investors should become more selective in the high-yield space, in order to avoid the industries with the worst risk profiles. To assess the sectors most at risk of experiencing significant spread widening or default occurrences in the coming quarters, we evaluate how the 10 main high-yield industry groups, as defined by Bloomberg Barclays, perform on the following credit metrics: Risk profile The share of firms rated Caa Growth in value of debt outstanding over the past 10 years Change in net debt-to-EBITDA ratio over the past 10 years Risk Profile Chart 13Risk Profile Of HY Sectors We look at the duration-times-spread (DTS) ratio to determine the risk profile of each sector (Chart 13). The DTS is a simple measure that correlates closely with excess return volatility for corporate bonds. The ratio of an issue’s, or sector’s DTS, to that of the benchmark index is loosely equivalent to the beta of a stock or industry to the equity benchmark. A DTS ratio above 1.0 signals that the sector is cyclical (or “high beta”); a DTS ratio below 1.0 indicates that the sector is defensive (or “low beta”). Cyclical sectors are expected to outperform (underperform) the benchmark when spreads are narrowing (widening), while the opposite is expected of defensive sectors. In Europe, only three sectors sport a high DTS. Within these cyclical sectors, energy clearly stands out as essentially being the one most at risk of underperforming during the next episode of spread widening. Meanwhile, materials, healthcare, and utilities display the lowest DTS ratios and should trade defensively relative to the high-yield benchmark index. Share of Caa-rated debt Chart 14High Share Of Caa-Rated Debt Implies Higher Risk Of Default The bulk of defaults happens in the Caa-rated space and below. Hence, evaluating sector risk starts by assessing the share of Caa-rated (and below) debt sported by each industry (Chart 14). Sectors bearing a larger share of low-rated debt should display higher spreads. Consumer non-cyclicals and healthcare have the highest instance of low-rated debt, 16% and 13% respectively, and yet their spreads do not adequately compensate investors for this threat. The energy sector also stands out: spreads are wide because, despite the low percentage of Caa-rated debt, this sector has amassed considerable debt and has seen a meaningful deterioration in net debt-to-EBITDA (see below). Meanwhile, utilities shine under this metric, as they have not issued debt rated Caa or lower. Debt Growth Chart 15Debt Growth Justify Spread Levels The speed and amount of debt accumulated during economic recoveries are other important determinants of future spread volatility, because the sectors that have rapidly levered-up are more likely to experience defaults. Chart 15 shows that, if we ignore the outlying utilities, then there is a robust positive linear relationship between this metric and spreads. Utilities, energy, and the tech sectors have added the most debt, while debt accumulation in the basic materials and health care sectors has lagged over the past 10 years. Crucially, tech and communications spreads trade below what their debt growth implies. Net Debt-To-EBITDA Chart 16Only Financials Have Improved Their Net Debt-To-EBITDA A rapid debt accumulation is not a concern, as long as earnings are rising more rapidly or at least at the same pace. From this case, we infer that companies are using the new debt issued efficiently, for CAPEX or to pursue projects exceeding their IRR. In this light, wide spreads are justified for the energy, consumer cyclical, and consumer non-cyclical sectors (Chart 16). Conversely, financials have seen improvement. Bottom Line: After surveying Euro area high-yield corporate sectors based on four credit metrics, it appears that the sectors most at risk are energy and consumer non-cyclical. By contrast, basic materials seem to be a good sector in which to hide.   Mathieu Savary, Chief European Investment Strategist Mathieu@bcaresearch.com Jeremie Peloso, Associate Editor JeremieP@bcaresearch.com Currency Performance Fixed Income Performance Government Bonds Corporate Bonds Equity Performance Major Stock Indices Geographic Performance Sector Performance