The fallout from the bubble has yet to work its way out of the system. This year is likely to be ch...
The fallout from the bubble has yet to work its way out of the system. This year is likely to be characterised by another period of corporate restructuring as companies repair balance sheets and take steps to enhance liquidity.
Economic growth may not be startling but neither is it likely to be negative. Although consumer spending may soften somewhat, I do not expect a significant fall. Mild economic growth should be sufficient to help companies adjust to the post-bubble environment and build more stability in their finances.
The restructuring mantra is becoming all pervading and even the most stubborn of businesses are finally admitting their hubris. Recent moves to tackle the mountain of debt at France Telecom have been encouraging.
Although the deal to reduce debt looks to be a typical French solution, it was reassuring to see moves are afoot to lower its gearing. The market signalled its growing confidence by positively receiving major bond issues before and after Christmas.
I am increasingly confident the default rate has peaked. Ratings agencies have become somewhat skittish, no longer giving companies the benefit of the doubt. However, in the summer of 2002, investors had more than discounted these moves.
This means in recent months, investors have begun to reassess the value in corporate bonds, moving away from extreme pessimism to a point at which they increasingly have faith in the restructuring story.
One of the major differences in 2003 will be the rise in the supply of government debt. Following several years of budget surplus, both the UK and the US have moved into deficit. This is necessitating a new wave of gilt and US Treasuries issuance. Governments will increasingly have to compete for funds in the market, which will cause upward pressure on their bond yields.
Further outperformance from government bonds, in the face of rising supply, is becoming more difficult. That is not to say there will not be more supply of corporate bonds. Many of the companies that deferred their offerings in the weak markets around the summer of 2002 may approach the market sooner rather than later.
This could dampen performance slightly but the overall appetite for corporate bonds should be sufficiently strong to meet any new supply.
Interest rates are already at low levels following global loosening of monetary policy so the ability to fall lower is growing more limited.
This ought to be a positive for the lower-rated corporate bonds and high-yield bonds, whose more competitive yields and shorter durations offer some protection from interest rate risk.
In the near term, the geopolitical tension surrounding Iraq is likely to keep markets nervous and may shake consumer confidence. Increased public spending will take some of the strain off the consumer.
Although a softening of consumer spending is not too concerning, any serious deterioration would be unwelcome for the capital markets.
There may be near-term tension but the structural changes afoot look increasingly positive. With the market still more pessimistic than the ratings agencies, there is room for corporate bonds to manoeuvre and deliver strong performance when spreads begin to narrow.
Restructuring aids balance sheets.
Modest growth positive for bonds.
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