Portrait of the Crisis: Risks and Opportunities for Investors

Transcription

1 Portrait of the Crisis: Risks and Opportunities for Investors Hung Tran IIF, Counsellor and Senior Director of Capital Markets and Emerging Markets Policy Garanti Masters Private Banking Conference Istanbul, Turkey April 17, 29

2 Main Themes 1. Perceived tail risk of economic and financial meltdown has diminished 2. Risk appetite has revived: risk assets have outperformed YTD 3. Most EMs and HG corporates could provide stabilization 4. Weaknesses in key sectors: HY corporates: sharply rising default rates, collapsing recovery rates Households: becoming more leveraged, more pressure to reduce debt Life insurance companies: facing solvency problems Pension funds: seriously underfunded Banks: funding situation and pre-tax/pre-provision earnings improved, but troubled assets/capital adequacy remain serious challenges 5. Key risks: threats to senior bank debt could trigger another spike in risk aversion 2

3 Outperformance of Risk Assets Year-to-date Fixed Income 1-year U.S. Treasury EM local bonds U.S. HG corporates EM HG corporates EM sovereign bonds EM HY corporates U.S. HY corporates -13,1-1,9 3,1 7, 7,1 11,3 16,5 Equities* Mature markets Emerging markets -6,3 percent 12,2 * Returns in US$ terms. 3

4 Equity Market Volatility* percent Oca.7 Haz.7 Kas.7 Nis.8 Eyl.8 Şub.9 * VIX index of implied volatility of S&P 5 index options. 4

5 index, end-27=1 Mature and Emerging Market Equities* Jan 8 Apr 8 Jul 8 Oct 8 Jan 9 Apr 9 * MSCI indices (US$ returns). 5

6 Emerging Market Sovereign and Corporate Bonds spread over U.S. Treasuries, basis points 1, 8 EMBIG (sovereigns) CEMBI Broad (corporates) Oca-7 Haz-7 Kas-7 Nis-8 Eyl-8 Şub-9 6

7 Emerging Market Currency Index index, Jan 2, 27= Oca.7 Haz.7 Kas.7 Nis.8 Eyl.8 Şub.9 7

8 Central & Eastern Europe Currency Peg Countries Current Account Balances percent of GDP Baltics Bulgaria CE-3 average e 29f e = estimate; f = forecast. * IIF estimates and forecasts (where available); otherwise IMF or European Commission estimates and forecasts. 8

9 Selected Central & Eastern Europe Currencies percent change since end May 28* Czech Republic Hungary -3-4 Poland Romania Haz.8 Ağu.8 Eki.8 Ara.8 Şub.9 Nis.9 * Change vis-à-vis euro. 9

10 Global Corporate Bond Issuance US$ billions US$ billions 1. High grade (left axis) High yield (right axis) Q1 27Q1 28Q1 29Q1 Source: Thomson Financial; IIF calculations. 1

11 US$ billions U.S. Nonfarm Nonfinancial Corporate Cash Holdings* percent 1.5 Current dollar value (left axis) 6 Relative to total assets (right axis) * Cash defined as foreign deposits, checkable deposits and currency, time and savings deposits, and money market fund shares. Tangible assets at market value or replacement cost

12 U.S. Household Debt percent of net worth

13 U.S. Household Debt percent of GDP

14 High-yield Bond Annual Recovery Rates percent 7 6 Average,

15 Global High-yield Bond Default Rates and Spreads percent Default rate* (left axis) High-yield spread (right axis) basis points * 12-month issue-weighted, history and forecast (dashed line). 15

16 Solvency Ratios of U.S. Insurance Companies percent Property/casualty (left axis) 1 Monoline (left axis) Life (right axis) percent

17 Global Pension Assets US$ trillions OECD Non-OECD Estimate e e = estimate. 17

18 Term Interbank and Expected Overnight Interest Rates* basis points Dec 12 - coordinated central bank liquidity measures announced Sep 15 - Lehman Brothers files for bankruptcy Mar 17 - Fed approves financing for the purchase of Bear Stearns U.S. U.K. Eurozone Haz.7 Eki.7 Şub.8 Haz.8 Eki.8 Şub.9 * Spread between 3-month Libor/euribor and 3-month overnight index swaps (OIS). 18

19 Fed s Central Bank U.S. Dollar Liquidity Swap Lines US$ billions Ara.7 Mar.8 Haz.8 Eyl.8 Ara.8 Mar.9 19

20 Losses and Capital Raised by Financial Institutions US$ billions Asia 35,7 Losses* US$ billions Asia 69,5 Capital Raised** Europe 389,3 Americas 869,8 Europe 396,4 Americas 646,2 Total: $1,295 bn Total: $1,112 bn * Since beginning of 27; includes writedowns and credit losses. ** Since July 27. 2

21 US$ trillions U.S. and European Debt Outstanding and Estimated Losses Total potential mark-to-market or loan losses Balance of outstandings U.S. securitized assets and corporate bonds* U.S. financial sector loans** Eurozone corporate debt European securitized assets Exposure of BIS reporting banks to developing countries * Includes ABS, ABS CDOs, prime MBS, CMBS, corporate debt and CLOs. ** Includes subprime and prime mortgages, and consumer, corporate and leveraged loans. 21

22 basis points U.S. Fixed-rate Credit Card ABS Spreads* 2.5 AAA A BBB Haz.7 Eki.7 Şub.8 Haz.8 Eki.8 Şub.9 * 5-year bonds; spread to swaps. 22

23 basis points U.S. AAA-rated Student Loan ABS Spreads* 4 3 year 5 year 1 year Haz.7 Eki.7 Şub.8 Haz.8 Eki.8 Şub.9 * Spread to Libor. 23

24 U.S. AAA-rated Fixed-rate Auto ABS Spreads* basis points Prime Near-prime 4 2 Haz.7 Eki.7 Şub.8 Haz.8 Eki.8 Şub.9 * 3-year bonds; spread to swaps. 24

25 U.S. Mortgage Delinquencies* percent of loans outstanding 4 All Prime 3 Alt-A Subprime * Includes only non-agency mortgages; 3+ days delinquent, bank owned, or in foreclosure. 25

26 percentage of par Cost of Protection Against Default on U.S. Home Equity ABS* 1 8 AAA AA A Haz.7 Eki.7 Şub.8 Haz.8 Eki.8 Şub.9 * ABX.HE 27-1 indices. 26

27 Commercial Real Estate Lending and Core Capital at U.S. Banks and Thrifts US$ trillions 1,6 Commercial real estate loans Tier 1 capital 1,2,8,4,

28 Cost of Protection Against Default on U.S. CMBS* basis points AAA AA BBB Haz.7 Kas.7 Nis.8 Eyl.8 Şub.9 * CMBX.NA.3 index spreads. 28

29 percent Capital Ratios of U.S. Commercial Banks* Tier 1 Capital Ratio percent 12 8, Common Equity to Assets ,5 7, 6,5 6, 5, * Asset-weighted average for sample of 12 U.S. commercial banks. 29

30 percent Capital Ratios of U.K. and European Banks* Tier 1 Capital Ratio percent 1, 4,5 Common Equity to Assets 9,5 9, 8,5 8, 7, , 3,5 3, 2,5 2, * Asset-weighted average for sample of 12 U.K. and European commercial banks. 3

31 Cost of Protection Against Default on Large Banks* basis points Spread** (right axis) Subordinated debt (left axis) Senior debt (left axis) basis points Oca.7 Haz.7 Kas.7 Nis.8 Eyl.8 Şub.9 * Asset-weighted average of 5-year CDS spreads for a selection of 14 U.S., U.K., European and Japanese banks. ** Subordinated debt less senior debt. 31

32 Portrait of the Crisis: Risks and Opportunities for Investors Hung Tran IIF, Counsellor and Senior Director of Capital Markets and Emerging Markets Policy Garanti Masters Private Banking Conference Istanbul, Turkey April 17, 29