A timely look at how ESG principles might factor into sovereign debt analysis; bond investors got some upside news on the U.S. economy; China's latest goals could benefit debtholders.
Sovereign Bonds: The ESG Factor
The analysis begins with an ESG ratings framework which combines scores reflecting macroeconomic and credit quality conditions as well as the quality of a country's overall governance – generating an overall ESG rating.
One key finding: the better a country does on Brandywine’s ESG score, the better its sovereign bonds have done in terms of spread to U.S. Treasuries over a 12-month period.
ESG Scores vs. Sovereign Spreads
*Note: Factors included in the composite ESG score are Brandywine's Governance Score, Real GDP Growth, Inflation, Current Account Balance, Fiscal Balance, External Debt, Import Cover Ratio, and Credit Growth.
On the Rise: U.S. Economic Fundamentals
There was also good news in terms of consumer confidence, as expressed in the willingness to buy on credit. Total credit-card debt hit $870 bn, the largest amount on record, as of December 2018, up by $26 bn from Q3. The December 2018 figure topped the previous record of $866 bn, reached at the end of 2008. While some of the credit card debt in December may have been prompted by strains in government employees' household finances due to the start of the partial government shutdown toward the end of December, overall willingness to finance consumption on credit cards appears steady so far.
As of the end of 2018, credit cards were the fourth-largest portion of consumer debt, after mortgages, student loans and auto debt. The total debt for all four categories added up to $13.5 trillion, a new record.
On the Slide: China’s Growth Target – and Taxes
Observers noted that the plan called upon more use of reduced taxes as economic stimulus than in previous years, which had been characterized by deficit spending on countrywide mega-projects. And to the extent that owners of Chinese corporate bonds have been worried about erosion of credit quality as indebtedness increased, the reduced pressure on corporate cash flow due to tax cuts could be seen as a net positive.
R-squared, or R2 is a statistical measure of how close data series are to a fitted regression line. The definition of R-squared is fairly straight-forward; it is the percentage of the response variable variation that is explained by a linear model.
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