A Deeper Look into Financial Vulnerabilities

Credit risk has shifted away from banks to asset managers. Mutual funds’ exposure to lower quality debt has climbed, raising the risk of fire sales in case of rating downgrades; additionally, their asset-liabilities liquidity mismatch has widened.

Highlights:

  • Almost ten years of record low interest rates have raised leverage in the non-financial sector as well as investors’ tolerance for riskier and less liquid instruments. As a result, the average quality of corporate debt has worsened.
  • Credit risk has shifted away from banks to asset managers. Mutual funds’ exposure to lower quality debt has climbed, raising the risk of fire sales in case of rating downgrades; additionally, their asset-liabilities liquidity mismatch has widened.
  • At the same time, Private Equity fund managers have fast increased their exposure to direct lending, by sharing credit and illiquidity risks with final investors. Asset managers have then become important players the credit arena and analyzing their behavior can provide early signals of asset price moves.
  • As the cycle turns, the very high share of outstanding securities at risk of turning in to High Yields in case of a downgrade could become problematic. Anticipating rating changes using market-based signals will become even more useful.
  • Tail risks for Financials have decreased, but the low interest rate environment has exacerbated poor profitability.

Read the full publication below.

A DEEPER LOOK INTO FINANCIAL VULNERABILITIES

RELATED INSIGHTS

GLOBAL VIEW – ENJOY SUMMER WHILE IT LASTS
As lockdowns have been lifted and global activity rebounded from the Q2 nadir, hopes of a strong recovery have helped risk assets advance further over July.
Generali Investments among preferred asset managers brands in Europe
Listen to the dedicated Podcast by Vincent Chaigneau, Head of Research, on our view on the economic recovery, new behaviours in the aftermath of the pandemic and the unique opportunities for a European fiscal and political integration.
PODCAST:
LIFE AFTER COVID -
THE LDI VIEW
Listen to the dedicated Podcast by Vincent Chaigneau, Head of Research, on our view on the economic recovery, new behaviours in the aftermath of the pandemic and the unique opportunities for a European fiscal and political integration.