WWRR Vol.2.015

Thursday, 22 November 2018 Page 1
For important disclosures please refer to page 15.
Christopher Wood christopher.wood@clsa.com +852 2600 8516
Identity theft and private equity
London
”An asset-deflation cycle remains the biggest risk to the American and world economy after the
surge in asset prices from ten years of ultra-easy monetary policy”. So wrote GREED & fear in one of
the bullet points in the most recent Asia Maxima quarterly (see Asia Maxima – Crossroads, 4Q18).
GREED & fear says this not in the spirit of “I told you so”. But rather to note that the current state of
affairs is the opposite of what is taught in economic textbooks (i.e. asset prices and financial markets
will drive the economy and not the other way round). This is a point worth highlighting again given
the renewed weakness of Wall Street-correlated world stock markets despite GREED & fear’s
continuing hopes of a trade deal between America and China in the G20 Summit in Buenos Aires on
30 November. The MSCI AC World Index is now down 7.2% in US dollar terms year-to-date and the
American stock market is no longer “the last man standing” as it was at the end of last quarter (see
Figure 1). The S&P500 is down 0.9% year-to-date while the Nasdaq is up only 1%. But more
interestingly, three of the four FANG stocks have now suffered the dreaded “death cross” in the
sense that the 50-day moving average has fallen below the 200-day moving average (see Figure 2).
Amazon is the exception.
Figure 1
S&P500 and MSCI AC World Index
18 (%YTD)
15
12
9
6
3
0
-3
Nasdaq Composite
-6
S&P500
-9
MSCI AC World Index
-12
MSCI AC World ex-US
-15
Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18
Source: CLSA, Datastream
Still GREED & fear also noted in the above mentioned bullet point that for that asset-deflation cycle
really to happen requires “a financial shock triggered by rising credit spreads and forced selling”. So
far credit spreads remain relatively well behaved. Still there is no doubt where the risk in credit is in
the US. It is in corporate debt where the deterioration in quality is best shown by the huge growth in
triple-B debt as a percentage of the aggregate of corporate debt issued. US BBB-rated corporate
bond outstanding has risen from US$670bn or 33% of total US investment-grade corporate bonds at
the end of 2008 to US$2.5tn or 50% of the total at present, based on constituents in the
Bloomberg-Barclays US Corporate Bond Index (see Figure 3).