Two seminal Bank For International Settlements (BIS) U.S. dollar papers form the basis for the research in this Global Alpha Sector Strategy Special Report. The first working paper delved into details on U.S. dollar debt raised outside the United States and the implications on liquidity. The second paper discussed non-financial corporate dollar credit and carry trades at the company-level.
Given the importance of the direction of the dollar, the purpose of this Special Report is to identify trouble spots in equity sectors in specific geographies that could turn into potential minefields were the U.S. dollar to continue climbing.
Our analysis comprises two parts: first we created a two dimensional (2D) picture of sector (ex-financials) indebtedness (using net debt-to-EBITDA on y-axis) and valuation (using EV/EBITDA on x-axis) in order to confirm that basic resources sectors are a potential sore spot. Geographies covered include the world, U.S., Europe, Japan, EM, China, Canada, Australia and the fragile five. Within EMs we focused on the fragile five as they are more vulnerable to a crisis due to their twin deficits.
The second part of the analysis revolved around the financial sector in each region, especially the fragile five in order to gauge if any of the high dollar debt risks are reflected in the respective banking sectors.
For additional analysis on what sectors to avoid and in what geographies you can access the Global Alpha Sector Strategy “The U.S. Dollar Debt Hangover: Sectors And Regions To Avoid”, dated September 25, 2015, available at gss.bcaresearch.com.