“If last year was all about interest rates, this year, people are increasingly focusing on currencies. But, I think people need to be focus on the credit cycle too,” she said.
The reason for the increased focus, Kongargues is that the world is now in the sixth year of an economic expansion following the global financial crisis.
“Typically, credit cycles tend to be between eight and 10 years long, from peak to peak or trough to trough. But, it is not a perfect sine wave, the first six to seven years tend to be fairly steady before there is a big entrenchment and default rates spike,” she added.
“And, now we are beginning to see some of these things that lead to turns in the credit cycle, over-inventory and increasing leverage for example. We have been able to elongate the cycle because of global quantitative easing and the balance sheet repair. Corporates have been reluctant to overinvest. But, the reality is that catalysts like the fall in oil prices have caused major issues in some markets.”
Maarten-Jan Bakkum, senior strategist, multi-asset, responsible for Emerging Markets at ING Investment Management agrees, pointing out in a recent note that there has been a gradual easing of lending standards on the back of the improving quality of bank balance sheets, while, at the same time, lending rates are responding more and more to the low level of sovereign yields.
“It is good news that both the hard data and the surveys show that the credit cycle in developed markets has taken a turn for the better. The change in flow of new credit is clearly pointing to a pick-up in domestic demand growth,” he said, but pointed out that the situation is very different in emerging markets.
“Even though the pace of EM bank credit growth has declined from a high point of nearly 20% year on year in early 2012 to around 12% year on year in late 2014, the stock of bank loans as a percentage of GDP continues to rise,” he said.
“The EM credit boom was sparked by a very strong monetary policy response, particularly so in China. As a result, there was a lot of malinvestment which is reflected on EM bank balance sheets which has been compounded by a substantial fall in corporate profitability.
Adding: “It seems that the dichotomy between accelerating growth in DM space and sluggish domestic demand growth in EM space will persist. The essential driver of this divergence is the fact that these regions are at different stages of their credit cycles.”
