July & August 2016 Credit Management magazine

JUST TOO MUCH DEBT
I recently spotted an interesting interview
with the Head of Investment Management
at Newton Fund Managers. He didn’t try to
guess the figures for global growth this year,
nor did he talk about a Chinese hard or soft
landing, or try to single out particular markets
for investment. Instead, he simply pointed
to the debt burden that the entire world is
carrying on its shoulders.
There’s still too much debt, he said, and
the banks are piling up more. Trying to prevent
its repercussions through QE just increases
the amount of credit around, and that’s now
forming a drag on economic growth. He warns
that while many investors see QE as ‘the new
normal,’ it isn’t normal at all – and his funds
are avoiding the banking sector completely.
He’s not calling a crash. But he points out
the global economy is strung up on the horns
of a dilemma. Either the debt gets taken out
with a restructuring – basically, a crash – or
we’re left with years of low growth and low
returns.
Which will it be?
THE END OF CAN-KICKING?
SUCCESSIVE bail-outs appear to have
refloated the euro boat. Greece, Italy, Spain,
Portugal and Ireland have all escaped
perdition – and in Ireland’s case the medicine
has worked, and the patient is well on the way
to full recovery.
But the Greek economy shrank a further
0.4 percent in the first quarter of the year, and
though a better year in tourism should help
the summer months, it’s still likely to contract
for the year as a whole. Debt is pushing the
economy into stagnation, and so the IMF is
now pushing for Greece to be given debt relief
– but that’s set the IMF against Germany and
other eurozone creditors.
It’s becoming urgent, since Greece needs
to repay existing debt in July and a fresh
bail-out has to be agreed by then. Will Greece,
now in its seventh year of bailout, be able
to muddle through – or will we see another
eurozone crisis, or even a Grexit?
Given the coming referendum, you
probably should have hedged your euro
exposure anyway. The Greek situation is just
another reason to do it.
EVERY year brings additions to the Oxford
English Dictionary – it recently added vlog,
bro, and Dad’s Army. Will next year see the
addition of the phrase ‘Helicopter Money’?
Quite a few economists think so. QE isn’t
working, so the idea is that governments
should give money to the private sector to
invest or spend, in order to grow the economy.
HELICOPTER MONEY
It’s almost what Keynes suggested, except
it’s individuals and companies, not the
Government, doing the spending.
If it does happen, watch carefully where
the money is going. Current speculation
is it could focus on major industrial and
infrastructure companies – great news for
capital goods suppliers.
US DISAPPOINTMENTS
THE US earnings season is upon us, and
so far, it’s been disappointing. Despite the
fact that three-quarters of companies beat
forecasts, earnings are still down year-on-year,
making this the first time there have been four
consecutive down quarters since 2009. That’s
a worrying trend.
Also worrying is the fact that only half of all
companies reporting have managed to beat
their sales forecasts. That suggests much of
the earnings growth has come through cost
cuts or share buy-backs rather than organic
growth.
The disappointment’s been widespread
across the stock market, too – it’s not just
the oil and gas and materials companies that
have been hurting. Several of the biggest tech
companies missed their forecasts.
Analysts are divided on where US
companies are going in the rest of the year,
but one thing’s sure; if the Fed hikes rates, it’s
going to make life more difficult.
NEWS IN BRIEF >
BAD THINGS IN LARGE
PACKAGES
The packaging sector isn’t looking too
healthy right now. Euler Hermes warns
that margins are being squeezed as higher
plastics costs (due to chemical plant
closures in Europe) meet supermarkets
competing by shaving each others’ prices.
It’s time to take a closer look at balance
sheets in the sector – and to keep a very
close eye on the payment behaviour of
your customers. If they start paying later,
or not paying at all, you’re going to need to
take action, or risk saying goodbye to your
money.
BUY INSURANCE NOW,
IT’S CHEAP!
YOU’D have thought that with all the
economic and political risk around, it would
be quite expensive to insure against. In fact,
new entrants and greater capacity in the
market have driven the cost of trade credit
insurance down. Even hedge funds and
private equity companies have got into the
act, as low returns elsewhere mean putting
money into insurers is a better bet.
That’s good news for exporters, who can
grow their sales base while insuring against
bad debt – and it’s good news for global
trade, since the engine is at last getting the
lubrication it needs.
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www.cicm.com July / August 2016 31