2013 Capital Markets Outlook

June 16, 2017 | Author: Charity Shelton | Category: N/A
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1 Transaction Services 213 Capital Markets Outlook Michael Lavelle, Head of EMEA Capital Markets, Citi2 Table of Content...

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Transaction Services

2013 Capital Markets Outlook Michael Lavelle, Head of EMEA Capital Markets, Citi

Table of Contents

1. What are Citi’s Equity Strategists Saying? 2. What are Citi’s Debt Strategists Saying? 3. What has Happened to Issuance?

1. What are Citi’s Equity Strategists Saying?

Equity Market Outlook

● Macro — de-leveraging, lower growth, 0% & QE to continue ● Market — stay bullish in 2013-14, but reduce risk near-term ● Earnings — analysts on 10%+, strategists on 5% (2013E) ● Valuation — re-rated but never cheaper ● Risk appetite — cult of the bond, rising risk appetites in 2013E ● Themes — Champs, Growth, Income/De-eq, Restructuring ● Risks — Politics, Social Unrest, Re-rating/Re-leveraging

4

Record Low Funding, Discuss… Record low cost of debt funding for corporates; what do CEOs/CFOs do in 2013 (and asset allocators)?

10 IBOXX Euro BBB - Bond Yield Pan European Equities - Dividend YIeld 8

6

4

2

0 99

00

Source: Datastream & Citi Research 5

01

02

03

04

05

06

07

08

09

10

11

12

Market — Risk On in 2012, Further Gains in 2013 Policy actions reduced tail risks in 2012 to drive strong gains for risk assets; stay bullish for next 1-2 years

25

20

15

10

5

0

Source: Datastream 6

Ca sh US

od itie s Co mm

s Bo nd Go v

pA Co r US

S& P

uit ies Eq De v

Eq uit ies EM

eld Yi Hi gh

St ox

x

-5

Earnings — Modest Downgrades Still Ahead Hard to see big upgrades unless economic growth picks up sharply; downgrades to end in mid-13?

40

65

30

60

20 55 10 50

0

-10

45

-20 40 -30 US ISM Index - 6mth Lead (LHS)

35

European PMI - 6 Mth Lead (LHS) -40

12m Fwd Earn - YoY Growth % (RHS) 30 Nov-88

Nov-90

Source: Datastream & Citi Research 7

Nov-92

Nov-94

Nov-96

Nov-98

Nov-00

Nov-02

Nov-04

Nov-06

Nov-08

Nov-10

-50 Nov-12

Investor Flows — Cult of the Bond Bonds never so popular vs equities never so unpopular…we expect flow to return to equities in 2013

1,200

1,000

800

600

400

200

-

(200) 5-Year Rolling Annual Equity Net Inflows (US$bn) (400)

5-Year Rolling Annual Bond Net Inflows (US$bn)

(600) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: ICI 8

2. What are Citi’s Debt Strategists Saying?

Tightening in the face of fundamentals Increasing leverage; falling spreads

Recession no longer priced in

European net debt to EBITDA* vs iBoxx € IG non-fin. Spread (bp)

iBoxx € non-fins. vs Eurozone eco. sentiment indicator, 2000-12

2.5x 2.2x

300 Leverage

IG spread

iBoxx 300

2

y = 0.11x - 25.0x + 1538 2 R = 0.74

250 250

200 1.9x 150

200

2012

150

1.6x 100 1.3x

50

1.0x

0 01

03

06

09

11

Source: Citi Research, Bloomberg, Markit. *: Based on a sample of 290 nonfinancial corporates in the EuroStoxx 600 index.

Current

100 50

Eco. sentiment

0 65

80

95

Source: Citi Research, Markit, Haver Analytics

How long can we go on defying reality? 10

110

125

How to ignore the macro backdrop Recession not reflected in HY defaults

Still upside if defaults stay low?

European HY default rate vs EuroCOIN GDP indicator

European HY default rate vs iTraxx Crossover spread (bp)

European HY EuroCOIN default rate GDP indicator

18% 15%

-1.5 -1.0

European HY default rate

12%

iTraxx Crossover

1200 1000

9%

12% -0.5 9%

800 6%

0.0

600

6% 0.5

3%

1.0

0% 99

02

05

Source: Citi Research, Moody’s, Haver Analytics

08

11

3%

400

0%

200 04

07

10

Source: Citi Research, Moody’s, Markit

Take comfort in the low level of defaults! 11

13

But why are defaults so low? Refinancing has been pushed out

Interest expense remains very low

European lev. loan & HY bond maturity profile, € bn

Interest expense, % of EBITDA*

40 35

Bonds Loans

22% 20%

30

18%

25

16%

20 14%

15

12%

10 5

10%

0

8% 2013 2014 2015 2016 2017 2018 2019

Source: Citi Research, S&P LCD Report Q2 2012, Markit

07

08

10

11

12

Source: Citi Research, Bloomberg. *: Based on a sample of 150 European non-financials (mostly IG) in the EuroStoxx 600 index

A rolled loan gathers no loss 12

09

Investment in decline Profits no longer invested in the business

“Corporate margin improvement”

Borrowing and use of capital, US non-fin corp, % profits, 5y avg

Margins vs sales/assets

120

Investment

'95

13%

Asia ex Japan

100

'10

'10

11% EU + US

80

'95

Capital returned

60

9%

7% 40

'10

5%

20

Japan

Borrowing

0

'95 3%

60

70

80

90

Source: Federal Reserve Flow of Funds, Haver Analytics.

00

10

0.6

0.7

0.8

0.9

Source: Citi Research. See Margins Migrate West, Sales Migrate East, H. Tevfik & R. Buckland, Mar 2012. See also Asset-light over capex-heavy, A. Cattley, Apr 2012.

Cash is being returned to shareholders at a record rate 13

1

Meanwhile, the political balancing act continues Policy inconsistencies are obvious

Systemic risks linger

Key policy questions for 2013

Rating transitions, 2011-2012

● Austerity vs. growth

1 AAA

● Direct ESM bank recaps?

MDY S&P Fitch

AA-4

● SSM – how fast, how comprehensive? A- 7

● Greek OSI? ● OMT purchases ● OMT pari passu vs ‘no monetary financing’ ● Growth assumptions in Spanish budget ● Regional fracturing

Source: Citi Research

10 BBB13 BB16

Jan '11 Now Spain

Jan '11 Now Italy

Source: Citi Research

Any missteps prone to cause a fall in markets 14

As voter patience runs thin … People want growth!

Austerity doesn’t get you re-elected

2011 growth vs “trust in government” polls

Incumbent approval ratings, %

10%

80 China Argentina

India

Indonesia

Hong Kong

Russia

4% 2% 0%

Kenny

60

6%

Singapore S. Korea Malaysia Poland Sweden Mexico UAE Brazil Canada Germany Australia U.S. France Spain Netherlands Italy U.K. Ireland

-2% 20%

30%

40%

Source:Edelman Trust Barometer, Haver Analytics.

50%

60%

70%

80%

40 30

Sarkozy Samaras

Zapatero

20

0 Jun-09

Cowen

Jun-10

Socrates

Jun-11

Source: Citi Research, national press, polling agencies

… political room to manoeuvre dwindles 15

Hollande

Berlusconi

10

Japan 10%

50

Monti

Papandreou

70

8%

Papademos

Rajoy Coelho

Jun-12

From QE to asset prices – the “demand effect” The lower the yield, the more we crave it…

… in Europe and in the US

Net US mutual fund inflows, annual, $bn

US weekly mutual fund inflows into corp. credit ($ bn) vs reported inflows among € investors in Citi’s credit survey

120

7 HY IG

100

1.2

6

Govt

80

3.0

Avg corp yield

5

Europe 2.0

0.8

1.0

0.4

60 4 40 3 20 2

0 -20

1

-40

0

0.0

0.0 US

-1.0 2008

2009

2010

Source: ICI, Haver Analytics. “Govt” excludes MBS.

2011

-0.4 06

07

08

09

2012YTD Source: Citi Research, EPFR

Money being forced into risky assets 16

10

11

12

From QE to asset prices – the “supply effect” CBs constraining supply of new securities

€ credit market is still shrinking

Net iss. of new securities vs CB* interventions, 12m rolling, $ tr

Outstanding in € IG corp. credit, € tr

5

3.0

Fin. bonds

4

2.5

3

Shares

Net

2 1

Non-fin bonds

2.0

Govt.

1.5

Non-financials Financials

0 1.0

-1 -2

0.5 CB interventions

-3 06

08

10

Source: Citi Research, Haver. *: Federal Reserve & ECB

12

0.0 1999

2002

2005

2008

Source: Citi Research, Dealogic. For more details see More bonds, please, J. Faith, 2 Jan 2013.

Central banks shrinking the investible universe 17

2011

Hey presto! QE is still propping up US markets

CB liquidity propping up global markets

Fed’s holdings of securities (5yr+ maturity) vs S&P 500

MSCI World vs CB liquidity injections ($bn), 3m chg.

2500

1500

1200

40% CB liquidity

Fed security holdings (5yr+)

2000

MSCI Global 30%

1300

800 20%

1500 1100

400

10%

1000 S&P 500

0% 900

500

+37%

+10% +15% -3% -11%

-10%

0

700 09

Source: Citi Research, Haver

10

0

11

12

13

-400

-20% 09

10

11

13

Source: Citi Research, Haver. Note: Global liquidity captures the sum of Fed, ECB, BoJ and BoE asset purchase schemes and the LTROs for the ECB

Artificially boosted asset prices 18

12

Yields to Grind Tighter Still Modest tightening on more stimulus… Citi Credit modal forecasts for 2013

Current

Total return

iBoxx € Corp

145bp

125bp

2.5%

iBoxx € HY

480bp

415bp

5.0%

iTraxx Main

103bp

105bp

iTraxx Xover

424bp

430bp

Source: Citi Research

19

End-'13F

3. What Has Happened To Issuance?

What to Expect in the Corporate Bond Market in 2013 Key Issuance Themes for 2013

Corporate Bond Yields Remain Near All-Time Lows 17

15

13

Yield (%)

11

9

7

5

3

1 2003

2005

2007

2009

2011

iBoxx € Non-Financials AA iBoxx € Non-Financials A iBoxx € Non-Financials BBB iBoxx € High Yield Non-Financials BB Source: Markit as of 11 March 2013

21

2013

DCM Corporate, FIG and SAS Issuance 2012 IGD European Corporate Bond Issuance 70

55 45

43 37

40

37

35 30

30

30

28 19

20

Total 2012: ~€500bn equiv.

92

90

13

10

Issuance EURbn equivalent

Issuance EURbn equivalent

100

Total 2012: ~€380bn equiv.

60 50

2012 European FIG Bond Issuance

10

75

80

Covered Bonds

73

Sub/Senior

Other*

70 60

50

49

50 40 26

30

25

29

30

30

29

15

20 10

0

123 Issuance EURbn equivalent

93 75

80

68 61

60

Dec12

Nov12

Oct-12

Sep12

Aug12

Jul-12

Jun-12

May12

Apr-12

Mar-12



As in 2012, Euro corporate issuance is likely to remain relatively strong with a slight decline forecasted in 2013 to €185bn



Citi’s forecast is for Corporate US$ Yankee bond volumes to increase by 10% to $218bn in 2013



Niche and local currently funding is also expected to grow, as issuers may increasingly look to fund projects locally in order to minimize the costs of cross currency swaps



FIG forecast volumes for 2013 are €480m across the spectrum of security types



SAS issuance in 2013 is likely to stay approximately in line with 2012 levels of roughly €690bn equivalent

51

50

48

Feb-12

In 2012, the corporate market saw the highest overall volume for Euro and Sterling gross issuance since the record in 2009

Total 2012: ~€690bn equiv.

120 100



Corporates

140

FIG

Forecast Issuance for 2013

SAS

2012 IGD SAS Bond Issuance

Jan-12

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

0

43 34

40

33

20

10

Note: SAS Bond Issuance excludes US Agencies *Other includes ABS, RMBS, Money Market, Short Term debt, Non-US Agency Source: Dealogic , Citi Research

Dec12

Nov12

Oct12

Sep12

Aug12

Jul-12

Jun12

May12

Apr12

Mar12

Feb12

Jan12

0

EMEA Loan Volumes 2012 After the pressures of late 2010 and 2011 a degree of stabilisation occurred in 2012 amongst European banks with capital, asset and dollar funding strains easing. EMEA Volumes (2007 – 2012) Western Europe

(bn) $2,500

2,797

CEEMEA

Other 13%

3,000

2,664 2,406

2,500 2,000

$1,472

$422

$1,080

$263

$1,354

$1,051

$786

$966

1,500

$287 $933

$294

$1,758

$500

$1,229

$222

1,000

$712

500

$1,067

$0

Telecoms 6%

2008

2009

2010

2011

Industrials 7% Construction 7%

2012

GCP/Refinancing Volumes and Maturities by Year1

Consumer 8%

M&M 7%

Food & Beverage 7%

Volume ($m)

1

UK

142,747

2

Germany

110,092

3

France

93,004

4

Switzerland

66,365

5

Spain

56,501

6

Russia

52,407

7

Netherlands

41,788

8

Italy

39,197

9

Belgium

28,731

10

Turkey

23,898

Market Outlook for 2013

Volume in US$bn 900

• Despite ongoing macroeconomic uncertainty in the Eurozone we expect refinancing to pick up in 2013

800

• Event driven volumes are recovering but remain subdued compared to the peaks of 2007 and 2008

700 600 500

• Broadly pricing has stabilised and even softened for GIIPS. Overall, Basel III pressure means banks will be challenged on non-investment grade and longer tenor deals

400 300 200

• Banks are focussed on conserving capital in the face of a changing regulatory environment resulting in continued rationalisation of credit

100 0 2007

2008

2009

2010

2011 Signed

2012

2013

2014

2015

Maturing

Source: Dealogic Note1: Does not take into account deals refinanced / taken out early

23

Utilities 9%

Transport 7%

0

2007 Source: Dealogic

Country

Oil & Gas 9%

Healthcare 4%

1,950

Top 10 Country Volumes (2012)

Finance 13%

Chemicals 3%

2,381

$369

$1,500 $1,000

Number of Deals

2,651

$2,127

$2,000

Industry Split (2012)

2016

2017

2018

• The secondary market remains well bid due to a lack of primary issuance. The hunt for yield has pushed buyers towards second tier banks and in to emerging markets

Current & Historical Yield Environment Historical High Yield Secondary Trading Levels (Yield to Worst %) CCC Index 20-Yr. Avg: Current: High: Low:

35%

14.58% 9.16% 29.49% 8.99%

B Index 20-Yr. Avg: Current: High: Low:

10.07% 5.69% 20.93% 5.57%

BB Index 20-Yr. Avg: Current: High: Low:

8.13% 4.37% 14.61% 4.22%

30%

25%

20%

15%

10%

5%

0% 1992

1993

1994

1995

1996

1997

1998

1999

Yield to Worst, All BB Rated

Source: Citi Yield Book 24

2000

2001

2002

2003

2004

Yield to Worst, All B Rated

2005

2006

2007

2008

2009

Yield to Worst, All CCC Rated

2010

2011

2012

2013

25

$3.1

1996

20

Source: Citi, LCD Note: Volumes include European companies issuing in the US Dollar market

2013

$26.6

$79.3

(USD equivalent, split by currency)

2012

$67.6

$66.1

70

2011

$41.1

80

2010

2009

2008 $0.0

$26.4

$38.6

Non $ Denominated

2007

$21.3

50

2006

2005

$24.8

$17.3

40

2004

$4.1

$6.7

$13.5

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

$ 1.3

$ 3.7

$ 3.7

$ 2.9

$ 3.1

$ 1.3

3

2003

2002

2001

2000

$17.7

1999

30

$15.6

$ 3.3

6

1998

60 Apr-12

Mar-12

Feb-12

$ 7.2

$ 8.0

$ 12.3

$ 13.8

$ 11.5

$ 10.7

$ 12.5

$ 10.4

12

$6.2

$3.3

1995

Jan-12

15

1997

$1.0

0 1994

10 $0.5

US Dollars in billions 9

1993

US Dollars in billions

2012 & Historical High Yield Issuance 2012 European Market High Yield Issuance

(USD equivalent)

0

Historical European Market High Yield Issuance

Dollar Denominated

EMEA Equity Issuance Evolution In the first half of 2012, EMEA equity issuance was driven by follow-ons. Since H2 2012, we have seen a resurgence of IPOs and converts with FIG leading the issuances as the positive sentiment returns to the equity markets. Others 17%

Others Consumer 10% 4% Metals & Mining 4%

FIG 28%

Consumer 9% Metals & Mining 5% Industrials 10%

Telecom 10% IT 9%

14.0

49

IT 2% Energy 9%

Energy 12%

H1 2012 0.1

Telecom 11%

Energy 11%

1.2 4.4

60

50

46

2.2

4.5 39

1.0 40 5.2

29 8.0 2.9

30 0.2

30 7.1

7.5

10.8

0.6

9.4 20

0.1

0.2 7.8

8.4

14

12

6.0

12 5.6

31 30

26

13.4 22

23

8.9

4.4

5.0

2.0

5.0 12 0.4 10

4.5

0.3 2.2

0.0

IT 10%

H1 2013

32

4.0

Telecom 9%

0.2

0.2

Jan-12

Feb-12

Mar-12

0.5

0.6

1.7 0.1

Apr-12

May-12

Jun-12 IPOs

Source: Dealogic.

3.2 2.0 0.3

0.2

0.4

Jul-12

Aug-12

Sep-12

Follow-on

Converts

Oct-12 No. of Deals

Nov-12

1.4

1.2

Dec-12

Jan-13

2.0 0.1 Feb-13

Mar-13

0

No. of Deals

Total Issuance (€bn)

Metals & Mining 17% Industrials 5%

10.0

6.0

FIG 24%

Consumer 4%

H2 2012

0.3

26

FIG 39%

Industrials 21%

16.0

12.0

Others 20%

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