Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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What companies are set to suffer in a COVID-19 recession?
Peter Garnry
Chief Investment Strategist
Summary: The first bankruptcy in the airline industry happened today with the UK regional airliner Flybe and more pain is coming for the airline industry. In today's equity update we provide investors with lists of the 30 companies in the global equity market with the highest 1-year default rate and the biggest change since COVID-19 was officially acknowledged by China. The worrying conclusion is that European banks dominate the list which makes Europe extremely fragile to a GDP shock from the COVID-19 outbreak.
The ’Biden-bounce’ as yesterday’s rally was called driving technology, health care and energy stocks higher is already dead as the real signals in equity market are flashing stress. Global airliners, restaurants, leisure and hotels stocks were not participating in the bounce and are showing that the COVID-19 outbreak is not easing but worsening.
Global airliner stocks are down 24% from January 17 and 39% from the peak in January 2018. Today, Europe’s largest regional airline Flybe filed for bankruptcy only two month after the UK government announced a rescue plan. According to a press release IATA now estimates that the global passenger aviation industry will lose up to $113bn in revenue in a widespread COVID-19 scenario. While pessimistic IATA shows with their numbers that they are behind the curve on the situation in the US where we believe the outbreak will accelerate significantly over the coming months as testing as been poorly conducted.
In Europe, Norwegian Air Shuttle shares are also suffering down 60% since the COVID-19 outbreak was acknowledged in China and down 92% from the peak in July 2015. It all points to more pain for airliners. On the other side the winners will be fantastic stocks as aviation is critical for a global economy so demand will come soaring back when the COVID-19 virus has ended.
The table shows the 30 companies in the S&P 1200 Global index with the highest current 1-year default rate in bps. and the biggest change since the COVID-19 outbreak was official acknowledged by China. The companies with the highest default rate are concentrated in the metals, airlines, banks and automobiles industries which should not be that big a surprise as these industries have very high sensitivity to the coronavirus.
One of the really big companies that have seen its default rate rise 86 bps. is ThyssenKrupp which is facing headwinds in many of its divisions and has recently announced that it’s looking to divest its elevator business. But this is really a knife into the heartland of the German industrial engine. In general Europe looks weak here with escalating COVID-19 outbreak will most likely put the continent into a recession which could 1) re-ignite the pain trade in banks and 2) put the green deal on the sideline.
What is probably the most scary about our list of companies with the highest default rates is the concentration among European banks. In the last 12 years European policymakers have failed to strengthen the banks and the ECB never paid interest on excess reserve like the Fed so European banking system never really healed. With an impending recession it could get ugly in the European banking industry with potential another round of bailouts, at least in a worst-case scenario. The STOXX 600 Banks index is also close to the lowest levels since 1986 when the index started. That’s 34 years of no return to shareholders excluding dividends.
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