The rise and rise of direct lending

Changing banking attitudes to risk and a reduction in lending to medium-sized companies have created a shortage of capital in a European loans market heavily dependent on the banking sector.

According to S&P figures[1], for example, mid-market companies in Europe will need somewhere between €2.7-€3 trillion over the next five years for refinancing and to fund growth.

While the alternative lending market was once dogged by negative headlines about ‘shadow banking’, we believe it has gained in credibility as it has grown from a low base. In the first couple of years there was some concern about the credibility of lenders but as more deals were undertaken, alternative lenders have very much established themselves and competition is growing.

Graeme Delaney-Smith – Alcentra, a BNY Mellon company

[1]S&P Banking Disintermediation in Europe 15 October 2015.

Changing banking attitudes to risk and a reduction in lending to medium-sized companies have created a shortage of capital in a European loans market heavily dependent on the banking sector. According to S&P figures[1], for example, mid-market companies in Europe will need somewhere between €2.7-€3 trillion over the next five years for refinancing and to fund growth. While the alternative … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Population dynamics in action: Japan’s inconvenient truth

Abenomics was launched in late 2012 by Japanese Prime Minister Shinzo Abe and trumpeted a 2% per annum increase in consumer prices within 2 years. But the rate of increase in the Consumer Price Index (CPI) has been near 0% per annum over the past 12 months. Even excluding food and energy prices, the rate is currently only 0.5% per annum, while the growth in real GDP has averaged just 0.5% year-on-year for the past two years. In addition, export volumes have risen by less than 5% from their levels in 2012, despite the benefit of significant currency depreciation.

It seems to us that deflation is not, in itself, ‘the problem’, but rather a direct symptom of structural and societal factors affecting not just Japan, but most developed economies.  Japan’s demographic challenges are, however, particularly acute. It is hardly surprising that an economy that is seeing contraction in not just the working population, but also in the total population, is struggling to grow. This, allied with widespread domestic overcapacity (not to mention a global lack of pricing power), goes a long way to explaining why mild deflation has been an issue in Japan for two decades or so. Moreover, with relatively stagnant wage growth, some deflation in households’ costs has kept real incomes positive (in stark contrast to the US).

Abenomics, as originally conceived, may have been a reasonable idea: implement painful structural reforms, and offset the discomfort with loose fiscal and monetary policy. The problem is that, in practice, little structural reform has been achieved; monetary policy, via the Bank of Japan (BoJ), has been the main lever.

Iain Stewart – Newton, a BNY Mellon company

Abenomics was launched in late 2012 by Japanese Prime Minister Shinzo Abe and trumpeted a 2% per annum increase in consumer prices within 2 years. But the rate of increase in the Consumer Price Index (CPI) has been near 0% per annum over the past 12 months. Even excluding food and energy prices, the rate is currently only 0.5% per … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Argentinian sovereign debt: oversubscribed and overrated?

We feel the market’s response to the Argentinian sovereign debt offer has perhaps been somewhat overenthusiastic. While we applaud the achievements made thus far, Argentina remains a B- rated country and therefore heavily sub-investment grade. At the same time, there remains a lot to be done and [the country] must continue with a package of severe fiscal consolidation.

This will take place against a backdrop of weak global growth, and with Argentina’s largest trading partner Brazil in the middle of its own crisis. In addition, around two thirds of Argentinian debt is denominated in US dollars; therefore any further weakening of the Argentinian peso will impact the ability to service its current debt and the new issuance.

Although macro headwinds have turned to tailwinds for the time being, the growth backdrop for many emerging markets remains challenging, and it keeps us mindful that the improvement in fundamentals has not been commensurate with the extent of the rally that we’ve seen in recent weeks. We’ll be looking for potential softness in the market – perhaps from congestion related to the extensive issuance that we’re expecting imminently; perhaps from the UK/European Union referendum (which poses considerable risk for the EU convergence story in central Europe); or perhaps a refocussing on the possibility of a June Fed rate hike – before adding further exposure from here.

Carl Shepherd – Newton, a BNY Mellon company

We feel the market’s response to the Argentinian sovereign debt offer has perhaps been somewhat overenthusiastic. While we applaud the achievements made thus far, Argentina remains a B- rated country and therefore heavily sub-investment grade. At the same time, there remains a lot to be done and [the country] must continue with a package of severe fiscal consolidation. This will … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Can Q2 earnings reinstate the customary “surprise”?

Revisions to quarterly S&P 500 earnings forecasts have followed a familiar pattern every quarter for a number of years, until the two most recent quarters.

Previously, in the year leading up to the beginning of the quarter, the forecast is reduced an average of 6%. Then during the quarter and right up to the report date, earnings are cut an additional 4%. Subsequently, when actual earnings are announced there is a positive “surprise” of around 3%.

This pattern comes from analysts and the companies they follow doing a quarterly ‘kabuki dance’. Nobody wants a negative earnings surprise since it would embarrass the analysts, company management and stockholders. Instead they would rather under promise and over deliver.

In the fourth quarter of 2015 the 5% cut during the quarter was a bit larger than normal and we were well set up for the usual “surprise”. This time, however, the surprise didn’t arrive.

During Q1 2016 earnings forecasts were cut a lot, by around 10%, which came mostly from energy and financial stocks and should have left plenty of room for a positive “surprise”. So far, with 74% of companies reported, actual earnings have been only 2.6% above the forecast, so the positive “surprise” pattern has returned, but only because the forecast was drastically reduced.

The first quarter is usually the worst seasonally for earnings and the US economy. Despite the grim result in Q1, spring typically brings higher hopes, and so far analysts are optimistic for better results for the rest of the year.

Jeffrey Ricker – Mellon Capital, a BNY Mellon company

Revisions to quarterly S&P 500 earnings forecasts have followed a familiar pattern every quarter for a number of years, until the two most recent quarters. Previously, in the year leading up to the beginning of the quarter, the forecast is reduced an average of 6%. Then during the quarter and right up to the report date, earnings are cut an … read more

  • Download
  • Print
0 comments | Join the conversation, comment now