Could rising Chinese debt ruffle some feathers in 2017?

Even as we mark the beginning of the year of the rooster we believe China’s rising debt burden could ruffle some economic feathers in 2017. The consensus opinion remains that the leaders of the centrally controlled economy will continue to manage to ‘pull the right levers’ to keep GDP ticking along. Under the surface though, China’s sovereign balance sheet continues to deteriorate at an alarming rate.

The rate of credit expansion in recent years in China exceeds that of Spain and Ireland in the run up to their bubble peak in 2008, as well as that of the US during its mortgage boom and the increase in indebtedness in Japan during the 1980s. And although the starting point is very different from these earlier examples, at US$32tn, banking assets in China are now twice those in the US, despite the economy being 40% smaller. Furthermore, the misallocation of capital that has occurred is evidenced by the fact that continued strong increases in the use of credit have had less and less impact on growth – total social financing rose 11% year-on-year to November in US-dollar terms, but nominal GDP (measured in US dollars) increased by just 2% year-on-year in the 12 months to the end of Q3. We believe the contribution to world growth that has come from China means the potential for a greater slowdown matters not just for the Asian region but to economies and markets globally.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

Iain Stewart – Newton, a BNY Mellon company

Even as we mark the beginning of the year of the rooster we believe China’s rising debt burden could ruffle some economic feathers in 2017. The consensus opinion remains that the leaders of the centrally controlled economy will continue to manage to ‘pull the right levers’ to keep GDP ticking along. Under the surface though, China’s sovereign balance sheet continues … read more

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2016’s best and worst performers

The past year has presented something of an up-and-down ride for investors.

Despite a China-led sell-off at the start of 2016, equities over the course of the year benefited from a combination of central bank support and reduced volatility. A November/December rally was driven largely by events in the US and the perceived pro-corporate policies of President Trump. A lot of this optimism has now been priced in, especially for financials and the energy sector. Nevertheless, we retain a generally positive outlook for global equities on the assumption that central banks can continue to maintain the current stable policy environment. In the US this means slow but steady increases in the interest rate rather than sudden moves in either direction.

In commodities, there were two significant factors at play in 2016. In China, the ability of the Chinese Communist Party to engineer stability even in the face of decelerating growth was a crucial tailwind for demand. On the supply side, OPEC’s tentative agreement to curb production helped oil return to the US$50-a-barrel range, a level of support we expect to extend into 2017 assuming output can be curtailed.

In debt markets, a post-US election government bond sell-off was interpreted by some as part of a “great rotation” into higher risk assets. Nonetheless, we would note the sell-off was largely restricted to sovereign debt while niche areas such as inflation-linked bonds actually performed well. Looking forward, we would highlight long-term structural factors such as pension deficits and global ageing that argue for sustained demand for fixed income products.

Meanwhile, political risk remains key – with uncertainty over everything from US trade policy to rising Chinese capital outflows, European elections to the need for continued reform in emerging market economies.

Raman Srivastava – Standish, a BNY Mellon company

The past year has presented something of an up-and-down ride for investors. Despite a China-led sell-off at the start of 2016, equities over the course of the year benefited from a combination of central bank support and reduced volatility. A November/December rally was driven largely by events in the US and the perceived pro-corporate policies of President Trump. A lot … read more

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Why the time may be right for US financials

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in Financials.

President-elect Trump could add additional fuel to the fire. If he deregulates the Financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and would benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US Financials are fundamentally stronger, undervalued and poised for a comeback.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

John Bailer – The Boston company, a BNY Mellon company

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. … read more

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M&A: boon or burden?

One important challenge for corporate bond investors in 2017 will likely be a continuing rise in idiosyncratic credit risks in investment grade markets. A significant contributor is a wave of M&A activity, which often benefits a company’s shareholders at the expense of its bondholders. In a low growth environment, management teams struggle to deliver shareholder growth organically and so M&A or shareholder buybacks become a natural solution. However, this usually leads to an uptick in leverage ratios, which is a risk for credit investors.

Issues surrounding corporate governance are another factor. Examples include last year’s Volkswagen scandal and this year’s controversy surrounding Deutsche Bank and the US Department of Justice.

That said, we do expect stable, positive economic growth across the US and Europe next year and this should create a supportive environment for credit. At the same time, some of the tailwinds that drove the asset class in 2016, notably the ECB’s corporate bond purchase programme, are likely to fade away, and we are mindful of that.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

Lucy Speake – Insight, a BNY Mellon company

One important challenge for corporate bond investors in 2017 will likely be a continuing rise in idiosyncratic credit risks in investment grade markets. A significant contributor is a wave of M&A activity, which often benefits a company’s shareholders at the expense of its bondholders. In a low growth environment, management teams struggle to deliver shareholder growth organically and so M&A … read more

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