The value in Credit Markets Victor Shohet 2009 Outlook Deutsche Bank.
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Transcript of The value in Credit Markets Victor Shohet 2009 Outlook Deutsche Bank.
The value in Credit MarketsVictor Shohet
2009 Outlook
Deutsche Bank
Page – 2
US debt to GDP back to 1929 – A big pyramid scheme?
Source: Deutsche Bank, Federal Reserve, The Statistical History of the United States, From Colonial Times to the Present. By Ben Wattenberg
0%
50%
100%
150%
200%
250%
300%
350%
400%
1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Government GSE/Agency Financial ABS Household Corporate
Page – 3
Debt to GDP – International comparisons
0
200
400
600
800
1,000
1,200
1,400
1,600
1979 1983 1987 1991 1995 1999 2003 2007
Corporate Government
Household/Non Profit Financial
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
1987 1990 1993 1996 1999 2002 2005 2008
Govt Fins Non-Fins HouseHolds
Japan UK
Source: Deutsche Bank, Japanese Ministry of Finance, Office of National Statistics
Page – 4
Global 35-54yr Dependency Ratios
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
US UK European J apan
Source: Deutsche Bank, UN Population Division.
Page – 5
Japanese 35-54yr Dependency Ratio vs. the Nikkei (left) and US 35-54yr Dependency Ratio vs. S&P 500 P/E Ratio (right)
Source: Deutsche Bank, Irrational Exuberance (second edition) Robert Shiller, S&P, UN Population Division
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1970 1977 1984 1991 1998 2005
0.50
0.55
0.60
0.65
0.70
0.75
0.80Nikkei (LHS)
35-54yr Dependency Ratio (RHS)
0
5
10
15
20
25
30
35
40
45
50
1950196519801995201020252040
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80P/E Ratio (LHS)
35-54yr Dependency Ratio (RHS)
Page – 6
35-54yr Dependency Ratios for Different Global Regions
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Global North America & Europe (inc. UK) BRIC
Source: Deutsche Bank, UN Population Division.
Page – 7
Real S&P price since 1900 – US equities now back to 1995/96 levels and close to the long-term trend
Source: Deutsche Bank, Bloomberg, Irrational Exuberance (second edition) (Robert Shiller)
0
200
400
600
800
1,000
1,200
1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004
Actual Trend (1900-2008) Pre-Bubble Trend (1900-1994)
Page – 8
US profits and nominal GDP – US financials, a trillion dollar mean reversion?
Source: Bureau of Economic Analysis
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Nominal GDP
Financial Profits
Non-Financial Profits
Page – 9
Spreads now at levels last seen during the Great Depression but yields still someway of the highs
Source: Deutsche Bank, Bloomberg, Moody’s
0
2
4
6
8
10
12
14
16
18
20
1919 1933 1947 1961 1975 1989 2003
BBB Yield
0
100
200
300
400
500
600
700
800
1919 1933 1947 1961 1975 1989 2003
BBB Spread
Page – 10
5yr cumulative default rates: implied vs. actual
Spread Implied Default Rate Actual Default Rate (since 1970)Average 5yr
SpreadAverage
RecoveryZero Recovery Worst Average
iBoxx Euro Corporate 445 33% 20% 2.4% 0.9% Non-Financial 280 22% 13% N/A N/A Financial 713 49% 31% N/A N/A AA 255 20% 12% 1.8% 0.2% A 442 31% 19% 2.6% 0.6% BBB 640 44% 28% 5.8% 1.8%iBoxx Dollar Corporate 550 39% 24% 2.4% 0.9%
Non-Financial 400 30% 18% N/A N/AFinancial 718 46% 30% N/A N/AAA 360 28% 17% 1.8% 0.2%A 531 37% 23% 2.6% 0.6%BBB 743 47% 31% 5.8% 1.8%
iBoxx Sterling Corporate 771 50% 33% 2.4% 0.9% Non-Financial 348 26% 16% N/A N/A Financial 1,084 64% 43% N/A N/A AA 616 44% 27% 1.8% 0.2% A 713 45% 29% 2.6% 0.6% BBB 995 60% 40% 5.8% 1.8%High Yield USD HY 1,264 59% 44% 31.0% 19.3%
EUR HY 2,027 79% 63% 31.0% 19.3%iTraxx CDS Main 154 13% 7% 2.4% 0.9% Crossover 857 48% 34% 31.0% 19.3%CDX CDS Main 187 15% 9% 2.4% 0.9%
HY 1,262 62% 46% 31.0% 19.3%
Source: Deutsche Bank. (Average recovery levels: IG 44%, HY 38%)
Page – 11
Spreads required to compensate for default based on 5yr cumulative default rates by cohort (1 of 2)
Source: Deutsche Bank.
46.9% Recovery Rate 40.4% Recovery Rate
AAA AA A BBB IG BB B CCC-C SG
1990 0 0 0 7 2 264 676 446
1991 0 3 0 3 2 134 567 815 325
1992 0 3 0 0 1 32 417 649 195
1993 0 0 0 6 2 57 272 818 153
1994 0 0 0 8 2 64 228 330 138
1995 0 0 0 15 4 90 232 573 180
1996 0 0 1 15 5 105 246 845 211
1997 0 0 4 29 10 158 365 1,255 304
1998 0 0 6 37 14 184 529 1,192 414
1999 0 0 8 36 16 144 590 1,230 474
2000 0 0 9 35 16 82 547 1,467 466
2001 0 0 8 33 15 78 493 1,550 434
2002 0 0 4 25 10 81 256 1,265 305
2003 0 0 0 4 1 39 135 825 185
2004 0 2 14 3 7 45 114 486 135
Current Euro 135 282 480 589 442 1,356 1,958 4,962 1,743
Current Dollar 156 344 504 679 521 761 1,195 2,529 1,275
Current Sterling 182 429 681 960 670
2007 Tight Euro 17 28 49 62 48 154 261 468 218
2007 Tight Dollar 48 54 77 109 82 163 229 408 245
2007 Tight Sterling 52 60 89 109 85
Page – 12
Spreads required to compensate for default based on 5yr cumulative default rates by cohort (2 of 2)
Source: Deutsche Bank.
46.9% Recovery Rate 40.4% Recovery Rate
AAA AA A BBB IG BB B CCC-C SG
1970 0 0 5 16 10 99 376 197
1971 0 0 8 12 9 50 52 77
1972 0 0 4 17 10 38 101 67
1973 0 0 0 23 11 42 53 61
1974 0 0 0 20 10 53 103 65
1975 0 0 0 9 4 52 135 69
1976 0 0 0 11 4 50 53 56
1977 0 0 0 7 3 38 208 66
1978 0 9 0 16 7 58 317 97
1979 0 9 6 23 12 77 241 99
1980 0 0 9 20 11 106 424 164
1981 0 0 3 39 15 150 433 186
1982 0 0 13 29 15 250 389 299
1983 28 5 3 44 16 183 416 286
1984 18 20 17 20 19 246 406 304
1985 0 9 29 32 23 251 490 328
1986 0 14 21 68 28 281 549 370
1987 0 4 19 57 23 317 627 424
1988 0 4 14 46 18 324 643 443
1989 0 0 7 38 12 340 707 490
Page – 13
Dispersion of spread performance
Market Value Weighted Asset Swap Spread Single Bond Performance
Tier Sector 03-Dec-08 Current Change Largest Widening
Largest Tightening
Average
All Corporates 347 366 19 2,464 -588 88
All Non-Fin 294 238 -56 354 -588 -55
Senior Basic Materials 340 301 -39 354 -404 -67
Consumer Goods 305 254 -51 110 -204 -48
Consumer Services 363 273 -90 170 -271 -80
Health Care 185 146 -39 31 -137 -41
Industrials 334 282 -51 254 -251 -43
Oil & Gas 400 293 -107 75 -588 -156
Technology 337 287 -51 -29 -83 -50
Telecommunications
299 207 -92 97 -265 -83
Utilities 192 173 -20 75 -242 -17
Sub Basic Materials 642 703 61 159 18 74
Consumer Goods 651 785 134 134 134 134
Industrials 655 719 64 73 59 66
Utilities 513 587 74 112 36 74
All Financials 393 492 99 2,464 -519 222
Senior Financials 277 289 12 1,575 -519 39
LT2 Financials 399 695 296 1,793 -151 360
UT2 Financials 711 914 203 1,609 -90 310
T1 Financials 991 1,476 484 2,464 -50 523
Sub Financials 712 1,043 331 1,739 -78 398
Note: All calculations based on index asset swap spread levels.Source: Deutsche Bank
Page – 14
CDS to Bond Basis – The opportunityon a pro-forma portfolio of Investment Grade bonds
Page – 15
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