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Global growth is back but towering debt levels are spoiling the party
Let’s get the bad news out of the way first. The world is sitting on a ticking debt time bomb and the chances of a ‘painful crash’ are much bigger than most appreciate. This was one of a series of sobering conclusions reached by Euromoney’s keynote speakers and panellists at the Corporate Financing Forum on September 21st.
Andrew Milligan, head of global strategy at Standard Life Investments, was unequivocal: QE, he said, had distorted markets and made assets expensive. He suggested that investors and issuers alike should heed the warnings from the Bank for International Settlements who, in the summer, said that keeping interest rates too low for too long could raise “financial stability and macroeconomic risks … as debt continues to pile up and risk-taking in financial markets gathers steam.” Markets ignore these warnings at their peril, speakers concluded.
Winding up the unwind
And what of the Great Central Bank Unwind? There’s a good chance it’ll be wound up before it even gets a chance to be unwound. According to Emeric Challier, founder of fund manager Oaks Field Partners – a man with 23 years investment experience - corporate debt leverage is at record levels. “It is hard to see how companies will cope with higher rates and a less accommodative central banks,” he said. “The improving economic outlook is due only to central bank financing incentives.” Risks will continue to rise for investors, he added, and financial stress could return after five years of central bank control. The result? Tightening plans will be cancelled.
There was, however, a slim shaft of sunny optimism amid the gloom. Ian Chisholm – the man responsible for the corporate financial strategy at the world’s biggest miner, BHP Billiton, was sanguine about the impact of QE. He said that, finally, it felt like the extreme measures pursued by central banks were feeding through to the real economy. Could this uptick be sustainable? Yes, he said, there was a good chance it might be. Andrew Milligan also saw green shoots emerging through the bare steppe of the global economy: “The world economy is improving as all three major regions have sources of strength for the first time in years,” he said.
Opinions on Brexit and its impact on the economy and funding were, unsurprisingly, trenchant. Views veered both ways in terms of its positive or negative impact, with most agreeing that a ‘transition period’ is the most important factor for markets. But – in all honesty - it was ‘too early to tell’ to what will be the effect. Though more than one speaker pointed out that Britain’s obsession with Brexit was not shared in Europe. Europe has far better things to do than worry about Brexit, was one view. More important than the UK’s destiny, was what the EU will do next - after its most quarrelsome member leaves – closer integration or EMU crisis?
The rest of the day’s highlights:
Panellists were asked: where will the next financial shock come from? China, QT, inflation (we’ve lost the ability to measure or model it), an exit from ETFs, liquidity crisis.
PANEL II: Funding strategy. Starting with a discussion of the objectives of the treasury function - over and above the most obvious objective of cost minimisation – speakers discussed how to get the right balance of short term and long term funding, the risks and stress scenarios that a funding strategy should be designed for, and some of the individual financing tools available to achieve this. In particular, the panel considered the relative importance of bank and bond funding given recent regulatory developments and the current high levels of liquidity.
PANEL III: The future of green bonds. They won’t have a future unless a way is found to stop banks taking old investments and relabelling them ‘green’- or ‘greenwashing’ as it has become known. The whole point of green bonds is to funnel money towards worthy projects that help to reduce carbon emissions. Rummaging through old investments and reclassifying them, so as to appear greener than you actually are, does not do this.
PANEL IV: The hunt for yield in corporate bonds. It was widely recognised that in current market conditions investors had to take on risks, whether duration, credit or illiquidity in order to achieve their yield targets. The panel considered each of these and whether the risks were currently appropriately priced given possible developments in interest rates and corporate default levels.
PANEL V: Private placements: Can Europe mimic the success of the US? No. And why would it want to do that anyway? The European market is unique, and dominated by Germany’s Schuldschein market. Practitioners of Schuldschein are fiercely proud of their independence and the quality of their lending books. They will fight any kind of Europe-wide harmonisation of ‘private placement’ rules. Schuldschein and PP are apples and oranges.
Who spoke at the event?
· ISSUERS: CFOs and treasurers from the finance departments of some of the world’s biggest issuers, including: BP, BHP Billiton, EDF, SNCF and Lagardere.
· INVESTORS: CIOs, fund managers and heads of DCM from some of Europe and the US’s biggest banks and investment houses, including: LNG Capital, Standard Life and Lazard Asset Management.
· STRATEGISTS: Heads of research and strategy from some of the world’s leading banks and ratings agencies, including: Santander, ING, Standard Life, Moody’s and the University of Cambridge.
Euromoney Conferences would like to thank our sponsors, speakers and delegates for supporting the conference again this year. We look forward to reconvening next year.