The Federal Reserve has moved decisively in the last few weeks, rolling out a number of new programs aimed at stabilizing the fixed income markets, and, potentially, preventing the epidemic shutdowns from turning into a full-blown credit crisis. As a side note, recently we have enjoyed the in-depth analyses of the Fed moves on this independent Substack.
What are we seeing post-Fed moves? A very serious bounce in credit, and in income securities, more broadly. We saw serious drawdowns and quick bounces across a wide range of “income” sectors. Displayed below are several ETFs representing what we think is a wide universe. Senior loans (SRLN) did the best during the drawdown. Mortgage REITs (ticker REM) and MLPs (ticker AMLP) did the worst, and have not had much of a bounce. Each has its own vastly different issues, with AMLP’s problems unlikely to be resolved any time soon. We are also seeing BDCs staying deeply in the red (ticker BIZD). US real estate equities (ticker VNQ) has bounced back. Both IG and HY credit (LQD and JNK respectively) responded quickly to the Fed as well, with the IG new issue market being fairly open. Finally, closed-end funds (CEFs, here using PCEF as an ETF proxy) are also rebounding: we saw underlying CEF discounts to NAV of upwards of 40% two weeks ago, something extremely rare and indicative of serious credit stress. As always, we have a public chart viewer for the chart below.
Sectors and Global Equities
Now with the dust settling, we can see that within the US sectors defensives (utilities and staples) had shallow drawdowns while energy is worst hit. We are using the 11 State Street SPDR Sector ETFs to visualize the shockwave. Clients can see a version of this chart at the bottom of the Coronavirus Macro dashboard we dropped for our users. Public chart viewer.
A similar dynamic is observable in the YTD numbers of US (SPY) vs developed markets (EFA) vs. emerging markets (EEM) vs. frontier markets (FM). Public chart viewer.
Gold has been very interesting to us. It is a hybrid currency and commodity that has done an outstanding job as a diversifier during the recent turmoil. Curiously, it is not an asset that is a liability for someone else. We are looking at a few things around gold.
- Gold is at all-time highs in a number of the world’s currencies. This is very bullish.
- Gold prices move with real rates: it is very likely that real rates stay low for the foreseeable future. Public chart viewer.
- Gold volatility has spiked. We are looking at the GLD ETF volatility versus the ratio of GLD to SPY. Gold volatility is great for GLD outperformance based on what we see in 2009, 2012, and now. Public chart viewer.
What Has “Worked”: Discover Your Own Factors
There is an abundance of “standard” factors products for both individual equities and portfolios. Our platform enables rapid iterations not just of static metrics but also changes in these metrics. For the examples below, we are using the components of the XLP Consumer Staples ETF. This is a pretty broad group (from food retail to food producers to cosmetics to protein producers). We can see that even in this fairly broad group, higher leverage was associated with lower stock price YTD returns.
Again in the same group, we can do something else: we can look at NTM EV/EBITDA on January 6th 2020 (first “full day” back after the New Year), and plot that against stock price YTD return again. We can see that higher multiple names held up better, perhaps indicating a quality factor premium in this set of stocks.
In the final scatter plot with XLP components, we have extracted the Household and Personal Care names (Procter & Gamble, Estee Lauder, Colgate, Kimberly Clark, Clorox, Church and Dwight, and Coty). On the X- axis we have FY1 EV/EBITDA-FY2 EV/EBITDA, on the Y axis again we have YTD returns. A larger drop in “out year” valuation was associated with weaker YTD performance.
We can also apply a custom “size” factor to entire groups: for example, we can see that size has been a very dominant factor in the performance of US restaurant stocks, with larger cap names (again as of January 6th, 2020) doing drastically better YTD versus their small cap peers (the big cluster in the lower left).
We highlighted the dramatically widened spreads in a number of merger arbitrage situations on the blog two weeks ago. The YUM-HABT deal closed as we were writing the piece, and, since then, aircraft lessor AYR did close as well.
Take a look at the situations that we highlighted one by one in our public chart viewer: click on any data series to show/hide.
Broad allocation stress-testing
The recent volatility is also a good opportunity to look at different broadly allocated portfolios. For this simple example, we are looking at one-year returns of an equally weighted portfolio consisting of S&P 500 (SPY), 7-10 year Treasury (IEF), gold (GLD), listed US real estate (VNQ) and merger arbitrage (MNA). The speed and depth of the drawdown is remarkable even for a relatively diversified portfolio like this one. Public chart viewer.
Major credit and governance changes happening fast
Using our industry-leading Document Search, we have been “ahead” on a number of topics (including the spike in “work from home” mentions and the reaction in the relevant stocks on February 24th, 2020, and CEO comments indicating a recession on March 8, 2020)
We were also ahead of the curve on the revolver drawdowns: our March 19th tweet was our top tweet for the month until recently. It has become headline news since then. (Make sure you have saved search alerts via email, mobile or desktop for these topics.)
Our head of research was interviewed at CorpGov regarding emerging issues with corporate governance: we are seeing in-person shareholder meetings being canceled wholesale, and we are also seeing an increase in “poison pill” adoptions across industries. We mentioned OXY, WMB, CHEF, and PLAY in the interview but more have come in since.
Who is doing buybacks?
Buyback program cancellations are old news already. Politically visible and demonstrably pro-cyclical, there is a deluge of buyback program cancellations every day.
So the more interesting question here is, who is playing offense now?
Within the US (where disclosures around buybacks are relatively lax), we see TGH, FLOW, SBUX, SEIC, KFRC among others, based on press release searches for increased authorizations.
Outside of the US, in certain jurisdictions, companies have to disclose buyback market activity details with greater frequency.
We are seeing Canadian REITs (Melcor and SmartCentres) and Hong Fok Ltd in Singapore with recent filings or releases.
This Thursday, April 2 I’ll be participating in a CorpGov and Vinson & Elkins LLP Host Webinar: Best Corporate Governance Practices During the Coronavirus Crisis and Beyond with John Jannarone Editor-in-Chief at CorpGov, Chris Young, Global Head of Contested Situation, Jefferies, and Lawrence Elbaum, Partner and Co-head of Shareholder Activism, Vinson & Elkins LLP. You can read more and register here.
To learn more about Sentieo’s full platform capabilities, please get in touch with us, or watch the webinars.