Fisher Investments UK Reviews Corporate Defaults

Based on financial commentary Fisher Investments UK reviews, many analysts argue rising corporate debt defaults signal economic malaise and bear markets (a bear market is a prolonged, fundamentally driven equity market decline of -20% or worse). However, we think higher corporate defaults follow economic and stock market weakness – rather than automatically signaling worse ahead. Market history and corporate default data help illustrate this, in our view.

A corporate debt default is when a company fails to fulfill its obligations on debt issued – either by missing interest payments or failing to repay principal at maturity. Crucially, Fisher Investments UK thinks corporate defaults stem from companies’ encountering business and economic hurdles – including stretches of weak revenue, rising operating costs and difficulty obtaining financing. Whilst we think such issues can arise at any time, we have found they are often associated with recessions (periods of contracting economic output).

Based on our research, these periods wring out economic excess and separate more financially stable firms from those already facing potential difficulties – as many companies must cut back to survive and continue servicing debt. Meanwhile, those that can’t will often default. In Fisher Investments UK’s review, equities weigh economic, political and business cycle factors about 3 – 30 months ahead and, hence, pre-price all of this (preemptively incorporate it into share prices). Therefore, we think defaults are backward-looking – contrary to popular claims we have encountered.

We think data confirm this, based on Fisher Investments UK’s reviews of market history. Consider some of the largest relative spikes in global corporate debt defaults over the past few decades: in 2001 and 2002, corporate defaults totalled 229 and 226, respectively – then the highest levels in 20 years, according to a research report from S&P Global.[i] Both totals were well above global corporate defaults’ annual average of 41.1 from 1981 through 2000, too.[ii] Yet these defaults didn’t arrive before economic or stock market problems – the spikes came approximately one year after the US Tech bubble burst and the global equities’ bear market began in September 2000.[iii] At the time, we observed financial publications and analysts argue higher annual default totals were ahead, alongside plunging equities. Reality? Annual global default counts fell to 119 in 2003 and continued cooling over the next several years.[iv] Moreover, global equities’ bear market bottomed on 12 March 2003 – soon after defaults’ 2002 peak.[v]

2009’s corporate defaults set a new record, totalling 268.[vi] However, that was after global equities’ bear market, which was accompanied by a financial crisis, began in 2007.[vii] Recession was already underway in much of the world in 2009, too – with global economic recovery underway by 2010.[viii] Also in 2010? Only 83 defaults materialised globally, whilst global equities continued the early ascent in their decade-long bull market (period of generally rising equity prices) and global economic growth accelerated.[ix]

2020’s 226 global defaults – whilst below 2009’s record 268 – fanned talk amongst financial commentators we observed at the time of economic malaise, corporate struggles and stock market weakness ahead.[x] The spike, in Fisher Investments UK’s review, stemmed partly from COVID-induced lockdowns, which weighed on economic activity and, thus, firms’ ability to generate revenue and service debt. Yet despite 2020’s brief global bear market and recession, equities and economies recovered quickly.[xi] Defaults? 2021 brought just 72 total (below the long-term average up to that point).[xii]

In all of these cases, most corporate debt defaults clustered in America, but Fisher Investments UK observed the same story play out in Europe and globally: none of these default spikes signalled approaching bear markets or recession. Then, too, we think global corporate debt default spikes in 2015 and 2016 – 113 and 163, respectively – help illustrate why defaults aren’t an effective signal to sell equities.[xiii] An investor selling in 2015 would have missed about five subsequent years of global bull market returns.[xiv]

Fisher Investments UK thinks investors benefit from considering this history when debt default talk flares. As we have detailed, defaults are historically backward-looking – hence, not a signal to sell equities (or bonds). To see this in real time, look at corporate versus government bond yield spreads. We think wider spreads indicate corporate bonds’ higher perceived risk versus government bonds’ – reflecting investors’ demanding higher yields to compensate for higher risk. We have found spreads tend to narrow as markets price in improving conditions and widen as markets price a higher risk of default. Accordingly, wider spreads typically precede higher defaults, according to Fisher Investments UK’s reviews of market history.

Consider US corporate versus 10-year Treasury yield spreads before and after 2009’s corporate default spike: spreads widened throughout 2008 – from 1.84 percentage points (ppts) on 1 January 2008 to 2.14 ppts at Q2’s end and 3.92 ppts at Q3’s end – before hitting a 5.63 ppt peak in December of that year.[xv] In 2009, spreads started the year at 5.23 ppts, yet narrowed over the following months – amidst corporate defaults’ rise – ending 2009 at just 1.07 ppts.[xvi] Whilst this is just one example, Fisher Investments UK’s research finds similar occurrences playing out throughout market history, with spreads moving ahead of default trends.

Yes, we think defaults can weigh on sentiment temporarily. However, in Fisher Investments UK’s review, this helps boost markets higher – by adding a brick in the proverbial wall of worry equity bull markets are often said to climb.

Disclaimer:

This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.