Attractive from a distance, but disappointing close-up… It's such a let-down when – after catching a glimpse of some sparkling earnings – markets were hoping to see some ‘healthy assets’ and a confident outlook. But it wasn’t to be, and the market quickly lost interest in Caterpillar (CAT) yesterday after a flash of favourable earnings was followed by a slightly more muted earnings call. Notably, outgoing Group President and CFO Brad Halverson stated that, “The outlook assumes that first quarter adjusted profit per share will be the high-water mark for the year.”
Citing an increasing debt burden, S&P downgraded China’s long-term rating by one notch to A+ (stable), bringing it in-line with the other two main rating agencies (A1 and A+); this is the rating agency’s first downgrade to the country since 1999. Although Chinese authorities have taken huge steps in reigning in financial risks, particularly within the ‘shadow banking’ sector, debt has continued to grow, albeit at a slower pace more recently. The S&P move was no surprise, as such, market reaction was muted post the announcement, which suggests that asset classes had already priced in the downgrade.
At the end of last week Standard and Poor's downgraded the Sultanate of Oman’s sovereign rating one notch to BB+, citing a reduction in the nation’s net external asset position; as a result of falling oil prices. Oman is still rated investment grade (IG) by the other two main rating agencies, Baa1 (stable) by Moody’s and BBB (stable) by Fitch. As IG indices require a minimum of two IG ratings (from the three main agencies) for bond inclusion, coupled with the fact that Oman’s sovereign curve already trades relatively wide on a rating basis, our positions saw limited price action. Please note however, that we do not look to the IG indices for guidance on holdings, in fact a number of our holdings across the portfolios are not included in such indices; rather we look for relative value, spread cushion and ownership strength.
Some have described S and P’s recent move to downgrade Poland’s long-term foreign currency rating by 1 notch to BBB+ with a negative outlook (and its local currency rating to A- from A) as a ‘shock’ or a ‘surprise’. We would beg to differ: Poland fails our ‘wealthy nation’ test having a concerning level of net foreign liabilities (“NFL”) to GDP (82.2% in 2012 using Stratton Street’s estimates). We avoid investing in countries with NFL / GDP greater than 50%; IMF research indicates levels above this threshold are associated with increasing risk of external crises.
The Kingdom of Bahrain has been a regular issuer in the Eurobond market and recently tapped the market for USD1.5bn by issuing 2 bonds: USD 800m of 7% 26-Jan-2026 and USD700m of 5.875% 26-Jan-2021. While the face value of the coupon may seem tempting at current levels, to us any perceived value looks to be a mirage.
We wrote yesterday about the risk of Brazil being downgraded to junk, and a few hours later rating agency S&P took the market by surprise with the earlier-than-expected announcement, that it cut the country’s rating by one notch to sub-investment grade BB+. S&P have kept a negative outlook saying they believe there is “a greater than one–in–three likelihood of a further downgrade due to a further deterioration of Brazil's fiscal position, potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the president's cabinet, or due to greater economic turmoil than we currently expect.”