APAC Ex-Japan & China Corporates Analyst, Finsights Research

Nandini Vijayaraghavan, CFA

APAC Ex-Japan & China Corporates Analyst

Finsights Research

Our core competencies include counterparty analysis and credit rating of corporates, banks and government linked entities, debt structuring, credit risk management, and penning financial and investment research.

Counterparty & Credit Analysis

Thematic (Sector/Industry)

The period following the Global Financial Crisis of 2007-08 has witnessed general investor optimism. Equity markets, buoyed by mostly soft interest rates, have touched multi-year highs and have delivered super-normal returns to investors. Now since it’s almost a decade since the onset of the GFC, the inevitable discussions of the next downturn have cropped up.When will the next downturn occur? How intense will it be? The answer depends on whom you ask. But the varied responses remind me of the ancient Indian parable of “The Elephant and the Blind Men”. This parable has several versions, but the gist is as follows.“A group of blind men heard that a strange animal, called an elephant, had been brought to the town, but none of them were aware of its shape and form. Out of curiosity, they said, "We must inspect and know it by touch, of which we are capable". So, they sought it out, and when they found it they groped about it. In the case of the first person, whose hand landed on the trunk, said "This being is like a thick snake". For another one whose hand reached its ear, it seemed like a kind of fan. As for another person, whose hand was upon its leg, said, the elephant is a pillar like a tree-trunk. The blind man who placed his hand upon its side said, "Elephant is a wall". Another who felt its tail, described it as a rope. The last felt its tusk, stating the elephant is that which is hard, smooth and like a spear.” While each person was partially correct, none comprehended the whole truth.”Similarly, economists, political, equity and fixed income analysts, derivative traders etc. hold polar views about the onset and intensity of the next downturn. This insight synthesizes the prevailing views and tries to guesstimate the timing of the next downturn. The key observations from analysts, economists and market observers are:<ul class=""><li>The price to earnings ratios of the stock indices of the ten largest economies by GDP – U.S.A., Canada, Japan, Germany, U.K., France, India, Italy, Brazil, and Canada – are well below their historic peaks. Underpinned by strong corporate earnings, stocks have potential to rise.</li><li>With six of the ten largest economies accumulating debt in excess of 300% of their respective GDPs, accelerated accumulation of emerging market debt, 70% of which is denominated in USD, and imminent rate hikes, borrowers debt servicing ability is likely to weaken resulting in a recession.</li><li>Though the bank NPL ratios of the ten largest economies is low to moderate, except those of Italy and India, accelerated debt growth tends to depress this ratio. Further, there are concerns of China understating its bank NPL ratio.</li><li>Decline in derivative trading volumes and low volatility is reminiscent of 2007 prior to the onset of the 2007-08 Global Financial Crisis (GFC).</li><li>The difference between the US 10-year and 2-year treasury is declining. Historically recession lags this spread turning negative by 54 weeks.</li></ul>So when is a recession likely to occur? Details follow.

The period following the Global Financial Crisis of 2007-08 has witnessed general investor optimism. Equity markets, buoyed by mostly soft interest rates, have touched multi-year highs and have delivered super-normal returns to investors. Now since it’s almost a decade since the onset of the GFC, the inevitable discussions of the next downturn have cropped up.When will the next downturn occur? How intense will it be? The answer depends on whom you ask. But the varied responses remind me of the ancient Indian parable of “The Elephant and the Blind Men”. This parable has several versions, but the gist is as follows.“A group of blind men heard that a strange animal, called an elephant, had been brought to the town, but none of them were aware of its shape and form. Out of curiosity, they said, "We must inspect and know it by touch, of which we are capable". So, they sought it out, and when they found it they groped about it. In the case of the first person, whose hand landed on the trunk, said "This being is like a thick snake". For another one whose hand reached its ear, it seemed like a kind of fan. As for another person, whose hand was upon its leg, said, the elephant is a pillar like a tree-trunk. The blind man who placed his hand upon its side said, "Elephant is a wall". Another who felt its tail, described it as a rope. The last felt its tusk, stating the elephant is that which is hard, smooth and like a spear.” While each person was partially correct, none comprehended the whole truth.”Similarly, economists, political, equity and fixed income analysts, derivative traders etc. hold polar views about the onset and intensity of the next downturn. This insight synthesizes the prevailing views and tries to guesstimate the timing of the next downturn. The key observations from analysts, economists and market observers are:The price to earnings ratios of the stock indices of the ten largest economies by GDP – U.S.A., Canada, Japan, Germany, U.K., France, India, Italy, Brazil, and Canada – are well below their historic peaks. Underpinned by strong corporate earnings, stocks have potential to rise.With six of the ten largest economies accumulating debt in excess of 300% of their respective GDPs, accelerated accumulation of emerging market debt, 70% of which is denominated in USD, and imminent rate hikes, borrowers debt servicing ability is likely to weaken resulting in a recession.Though the bank NPL ratios of the ten largest economies is low to moderate, except those of Italy and India, accelerated debt growth tends to depress this ratio. Further, there are concerns of China understating its bank NPL ratio.Decline in derivative trading volumes and low volatility is reminiscent of 2007 prior to the onset of the 2007-08 Global Financial Crisis (GFC).The difference between the US 10-year and 2-year treasury is declining. Historically recession lags this spread turning negative by 54 weeks.So when is a recession likely to occur? Details follow.

Anticipating the Downturn