S&P Global — 1 Oct, 2020

Daily Update: October 1, 2020

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Evidence of diverging economic recoveries is starting to surface around the world, with many larger, developed countries faring better than their smaller, emerging counterparts.

“While there is a tremendous variance of recovery prospects across different corporate sectors, we continue to believe it will take until well into 2022 or, in some cases, 2023 and beyond for many sectors to recover credit metrics,” S&P Global Ratings said in its updated COVID-19 sector recovery expectations this week. “The return to pre-crisis levels of operations and credit metrics is unlikely to be smooth or swift, and will depend on how governments, businesses, and consumers behave.”

Across the Asia-Pacific region, the worst of the pandemic’s economic effects have passed, making for a “K-shaped” recovery, according to S&P Global Ratings’ APAC Credit Conditions Committee. The public health emergency remains a primary risk while economic activities in the region are gradually regaining traction.

The U.S. economy has shown signs of resilience, apparent in the fact that credit conditions are largely favorable for many nonfinancial corporate borrowers due to the Federal Reserve’s ample monetary policy, according to S&P Global Ratings. Still, risk is compounding for state and local governments as budget pressures build and revenues decline.

The unprecedented bond issuance that played a role in lifting U.S. companies’ cash holdings to record levels in the second quarter dwindled in the third quarter, according to S&P Global Market Intelligence. This appears to mark an end to the “dash for cash” propelled by the coronavirus crisis.

Meanwhile, the world’s biggest economy has rebounded better than many observers expected.

“Federal fiscal stimulus has spurred consumer spending, which accounts for about 70% of the U.S.’s $21 trillion GDP, and the housing market is strong, as historically low interest rates entice buyers. Moreover, waves of new COVID-19 outbreaks in some states haven’t hampered economic activity as much as we’d expected,” S&P Global Ratings’ Chief U.S. Economist Beth Ann Bovino said. “That said, there are signs that activity will slow as the country transitions to autumn, particularly as the U.S. enters flu season with no COVID-19 vaccine. And the recovery may face more hurdles now that extended federal unemployment benefits have expired and job gains have slowed.”

Elsewhere in North America, Canada’s economy is unlikely to return to pre-pandemic levels before 2022, according to S&P Global Ratings’ Senior Economist Satyam Panday, who forecasts a 5.6% contraction for the country this year.

“Assuming any subsequent waves of infection aren’t overwhelming, we continue to expect an economic recovery tested by several factors following a near-term bounce in aggregate demand and employment as lockdowns ease,” Mr. Panday said. “Lingering scars in the form of virus fears, bankruptcies, and social distancing will limit capacity utilization and growth for one-third of the economy. The unusual nature of this service-centric shock makes the recovery more uncertain than usual.”

Latin America’s challenges regarding economic growth won’t subside when the pandemic is contained in the region, according to S&P Global Ratings’ Latin America Senior Economist Elijah Oliveros-Rosen.

“We now see the region contracting 8.5% this year and expanding 4.5% in 2021, versus down 7.7% and up 3.9%, respectively, in our previous quarterly update,” Mr. Oliveros-Rosen said. “An important downside risk to growth across the region will be the potential for bouts of social instability with implications to investment due to the outsized impact of the pandemic downturn on lower-income households in an already polarized political environment in most Latin American countries.”

Emerging markets face similar uncertainties and are likely to endure a fragile, uneven recovery. S&P Global Ratings now forecasts growth across such emerging markets, excluding China, to decline 6.4% this year, with a 6.2% rebound next year.

“Credit conditions in emerging markets continue showing a gradual improvement stemming from supportive financing conditions, the gradual economic recovery, and the likelihood that a COVID-19 vaccine will be available soon,” S&P Global Ratings’ Emerging Markets Regional Credit Conditions Chair Jose M. Perez-Gorozpe said. “A key developing risk is the phase out of credit forbearance and fiscal stimulus. As these measures are lifted, some of the pandemic's consequences will surface, which could especially stress banks given a potentially rapid deterioration of asset quality, absent additional measures.”

Notably, Europe has bounced back better than many other regions from the debilitating declines it suffered during lockdowns in the spring, but remaining risks include “a resurgence in the virus as winter approaches without a vaccine, the ongoing threat to solvency for companies with weak credit fundamentals, increasing global trade tensions, extended uncertainty inhibiting consumer demand, as well as increasing doubts about whether a U.K.-EU trade deal can be concluded before year-end,” S&P Global Ratings European Regional Credit Conditions Chair Paul Watters said.

Continuing private sector job losses show that the economic pain of the pandemic is nowhere close to healing at the onset of the fourth quarter.

Five major multinationals announced within the 24-hour period ended Sept. 30 that they will cut at least 70,000 jobs combined due to the current crisis’ constraints on their business. In the U.S., Walt Disney Co. said it will lay off 28,000 workers in its resort, experiences, and consumer products divisions, and auto insurer Allstate will terminate 3,800 employees. Wall Street will see Goldman Sachs reduce its workforce by 400 jobs. In the energy sector, the Michigan-headquartered chemical giant Dow said it will slash its global workforce by 6%, but didn’t disclose how many jobs that will entail, and Netherlands-based oil conglomerate Royal Dutch Shell will make redundant as many as 9,000 jobs within the next two years.

“We have to be a simpler, more streamlined, more competitive organization,” Shell CEO Ben van Beurden said in a Sept. 30 statement. “In many places, we have too many layers in the company: too many levels between me, as the CEO, and the operators and technicians at our locations.”

Today is Thursday, October 1, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Turning Over a New Lease: COVID-19 Hastens Shift to New Retail Leasing Model

Retail property was once a simple business — how times have changed. The COVID-19 pandemic has overturned much of what retail landlords and their tenants have long taken for granted. Turnover leases — or percentage leases — have become increasingly common in many developed markets as the rapid growth of e-commerce, particularly in the U.S. and U.K., chipped away at the revenues of brick-and-mortar retailers, killing off many.

—Read the full article from S&P Global Market Intelligence

Chinese Developers Tread with Caution After Incomes Skid to a 3-year Low in H1

Major Chinese developers may choose to prioritize debt reduction over land purchases and expansion this year amid economic uncertainties due to the coronavirus pandemic that plunged their first-half earnings to a three-year low. Although property sales started to recover in the second quarter, the aggregate net income of the 10 property companies with the largest exposure in mainland China dropped 11.23% to 134.4 billion yuan in the January-to-June period, from 151.4 billion yuan a year ago.

—Read the full article from S&P Global Market Intelligence

Market Volatility

Stock Volatility Set to Remain Elevated Through U.S. Elections – Risk Monitor

Volatility is expected to be a feature in U.S. equities for the duration of the U.S. presidential campaign as investors weigh up the possibilities of a second term for President Donald Trump or a victory for Democrat nominee Joe Biden. The CBOE volatility index, or VIX, has been at historically high levels for much of the time since the coronavirus sent shockwaves through financial markets in March.

—Read the full article from S&P Global Market Intelligence

The Future of Credit

Listen: Fixed Income in 15 – Episode 12

On this episode of Fixed Income in 15, Joe Cass is joined by Gerard O’Reilly, co-CEO at Dimensional Fund Advisors and S&P Global Ratings Global Head of Research Alexandra Dimitrijevic. Discussion included a high level outlook for markets, credit default risks and the scale of rating downgrades thus far in 2020. There was also time for Alexandra and Gerard to discuss how they have adapted to working from home and the unique academic culture at Dimensional.

—Listen and subscribe to Fixed Income in 15, a podcast from S&P Global Ratings

COVID-19- and Oil Price-Related Public Rating Actions on Corporations, Sovereigns, and Project Finance to Date

Rating actions have declined considerably since the highs in late March and early April. In fact, the tally of negative actions related to the COVID-19 pandemic and the oil-price dislocation declined to 19 this week--roughly 7% the peak weekly amount. Most of the more recent negative rating actions have been downgrades, and most of these downgrades affected companies that had either negative outlooks or ratings on CreditWatch negative.