SOC GEN: US corporate debt may be about to join the global risk asset rout

Getty/Mario Tama

Global stock markets, as they have been for much of the past three months, were hammered again last week with the MSCI developed world index and emerging market indices falling by 3.8% and 3.9% respectively.

Cumulative, the market capitalisation of stock markets globally have fallen by a staggering amount. According to Societe Generale’s global quantitative research team, the MSCI all world index has fallen 13%, wiping $5 trillion off the value of global stock. 20% of the decline, $1 trillion, has come from emerging market stocks. When combined with the sharp decline in mainland Chinese “A” shares, global market capitalisation has dropped by around $9 trillion in just the past three months.

To put that into perspective, during the height of the global financial crisis of 2008/09, global stock market capitalisation fell by $12.8 trillion. Staggering!

The comparison between 2008/09 and the more recent selloff is shown in the chart below.

Having seen stocks taken to the cleaners, Soc Gen believes credit markets could be the next asset class to come under some serious selling pressure, particularly in developed markets such as the US. They note that Asia credit markets have already reacted to the selloff in global stocks, something that has not been seen, as yet, in the US.

Essentially, the concerns expressed in US equity markets have yet to be replicated in US corporate debt.

Here’s why Soc Gen are concerned:

“Why are we so concerned about US corporate debt? Well, as we highlighted last week, EV/EBITDA ratios are particularly elevated in the US, due in large part to the additional US$2trn of debt now on non-financial US balance sheets compared to 2009 (data available on request). And even once we exclude the sizeable cash pile, net debt is over US$1trn higher than in 2009. US corporates also have an insatiable appetite for more debt, with non-financials raising a further $450bn over the past year, according to their latest report and accounts. Why do they need to borrow so much? Well to buy back their own market capitalisation of course”.

Corporates issuing debt to buy back stock that has been falling in value, right before the US Federal Reserve is on the cusp of tightening monetary policy for the first time in over nine years. What could possible could go wrong?

If the Fed does begin normalising monetary policy – either at its September meeting or later – and the selloff in stocks continues, markets could well be about to find out the answer.

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