Global Insight s Sector Risk Analysis Which are the Winners and Losers?

Transcription

1 Global Insight s Sector Risk Analysis Which are the Winners and Losers? Mark Killion, CFA World Industry Service Global Insight, Inc. Singapore March 6, 2006

2 Agenda: Which Are the Sector Risk Winners and Losers in Asia? Macro and Industry Benchmarks Inform Credit Risk Analysis and Sector Rotation Strategy WIS Sector Risk Ratings (SRR) Help Quantify the Risk / Return Profile of Sector Based Portfolios Forecast Changes in the Credit Quality Profile of Industries in the Asia-Pacific region Rank Sectors with Best and Worst Credit Profiles, show Expected Improvement / Deterioration Copyright 2006 Global Insight, Inc. 2

3 Introduction to WIS Sector Risk Ratings (SRR) SRR Measure Sector-Based Credit and Operating Risks Unique SRR methodology provides globally consistent, forward-looking benchmarks of credit quality for each sector and country A composite rating from lowest (1) to highest (10) is created for each sector, built up from 40 separate risk factors Comparative metrics for each sector and country, history and forecast Globally consistent sector benchmarks of credit and operating risks Ratings are created from structural and cyclical indicators that conform with standard credit risk frameworks User-friendly tool for risk management and stress testing Scientific, transparent construct, and long track record Top-Down Sector Benchmarks Complement Traditional Bottom-Up Analysis For More Information see Copyright 2006 Global Insight, Inc. 3

4 Composite Risk Ratings Are Created from 40 Individual Risk Factors that Reflect and Predict Changes in Credit Quality Sector risk factors are derived from the standard credit risk framework used in corporate lending and fixed income portfolios Growth Risk Growth in real revenue Growth in sales Volatility, turning points Profitability Risk Pricing strength Operating profitability Free cash flow and variability Return on invested capital Fixed asset turnover Degree of operating leverage Supply Risk Capital intensity Capacity overhang Depreciation cost of sales Sector risk factors show the effect of industry structure, stage in lifecycle, and the sovereign/ macroeconomic environment on industry risk profiles Market Structure Risk Industry structure Dependence on suppliers and customers Dependence on energy and labor Barriers to entry and exit Technology and substitution Economic & Country Risk Sector cyclicality Sector interest rate sensitivity Country-level sovereign risks (From Global Insight s Global Risk Service): Exchange rate Equity markets Regulation policy Tax policy Copyright 2006 Global Insight, Inc. 4

5 WIS Sector Risk Ratings are Highly Correlated with Corporate Bankruptcies in a Variety of Countries Composite Risk Ratings Have Current and Leading Indicator Relationships with Corporate Bankruptcies ( ) Japan Malaysia* US Netherlands Norway Contemporary Correlation between Composite Risk Rating & Corporate Bunkruptcy Year Ahead Correlation between Composite Risk Rating & Corporate Bankruptcy *Note: Malaysia represents correlation with non-performing loans in the banking system All of the data shown are available in Global Insight data bases Copyright 2006 Global Insight, Inc. 5

6 WIS Sector Risk Ratings are Highly Correlated with Industry Level Bankruptcies in Japan Japan Sector Risk Ratings Are Correlated with the Number of Corporate Bankruptcies in Individual Industries, Transportation & Communication Leather M achinery M anufacturing Lumber & Wood Construction Contemporary Correlation between Composite Risk Rating & Corporate Bunkrupt Year Ahead Correlation between Composite Risk Rating & Corporate Bankruptcy All of the data shown are available in Global Insight data bases Copyright 2006 Global Insight, Inc. 6

7 WIS Sector Risk Ratings are Highly Correlated with the Volume (US$) of Bond Defaults in Asia-Pacific 7 WIS SRR & Bond Default Volumes in Asia-Pacific, Historical Data Forecast 8000 Current Year & Year Ahead Correlation Coefficient between WIS Composite Sector Risk Ratings and Annual Default Volume, Asia Pacific WIS Composite Risk Rating Bond Default Volume ($) Current Year Year Ahead Source: World Industry Service; Moody s s Special Comment Default and Recovery Rates of Corporate Bond Issuers, Copyright 2006 Global Insight, Inc. 7

8 Sector Risk Ratings Help Evaluate and Anticipate Changes in Credit Profiles of Industries and Portfolios Which Sectors Have High Risk Profiles? Which Sectors Are Improving or Deteriorating? Change in Risk Measures Sector Risk Levels: Falling Risk Static Risk Rising Risk Low Risk Moderate Risk High Risk Potential Recovery? Yellow Flag Red Flag Monitor Changes in Sector Risk Profiles Drill down to the 40 individual sub-factors to see the drivers for changing risk profiles Compare sector risk factors on a global and country basis, compare risks across sectors Identify correlated industries that improve or deteriorate together Rigorous framework for evaluating diversification and strategy Copyright 2006 Global Insight, Inc. 8

9 Anticipated Changes in Asia-Pacific Credit Profiles Country Summary of All Corporate Sectors in Each Country, and --Summary of the 10 Broad Market Sectors in the Whole Asia-Pacific Region Country All-Sector Summary (All Corporates) - Broad Economic Sectors in Asia-Pacific Region Low Risk Moderate Risk High Risk Falling Risk Static Risk Rising Risk Singapore Hong Kong Health Care Financial Industrial -- Consumer Staples Japan Utilities Taiwan Telecoms South Korea Consumer Discretionary Australia, New Zealand -- India, Thailand, Philippines, Malaysia Basic Materials China, Pakistan, Indonesia Information Technology Copyright 2006 Global Insight, Inc. 9

10 Which are the Winning and Losing Sectors in Asia? Biggest Winning Sectors in What are the 5 sectors with the Largest Improvement in Risk Ratings? Biggest Losing Sectors in What are the 5 sectors with the Worst Deterioration in Risk Ratings? Change in Risk Measures Change in Risk Measures Sector Change in Rating: Improvement/ Deterioration(-) Index* Sector Change in Rating: Improvement/ Deterioration(-) Index* Engines & Turbines % RailRoad Equip. & Ship Building % Utilities % Energy Mining % Diversified Machinery & Equip % Metals Mining % Educational Services % Synthetic Resins % Health Services % Petroleum Refineries % *Expected Level of deterioration or improvement (over ) of the Sector Risk Rating, divided by the 2006 level of the risk rating. The higher the index the higher relative improvement is expected. Copyright 2006 Global Insight, Inc. 10

11 Which High Risk Sectors Will Improve or Deteriorate in Asia? What High Risk sectors expected to Improve in ? What High Risk sectors expected to Deteriorate in ? Change in Risk Measures Change in Risk Measures Sector Change in Rating: Improvement/ Deterioration(-) Index* Utilities (Electricity, Gas & Water) % Sector Non-Ferrous metals, Including Aluminum Change in Rating: Improvement/ Deterioration(-) Index* % Agriculture, Forestry and Fishing % Ship Building & Repairs % Diversified Machinery (i.e. Specialized Pumps, Cranes, Refrigeration, Others) Industrial Machinery for construction, mining, others % Petroleum Refineries % % Iron & Steel % Communication Equipment Including Semi-Conductors % Leasing of Machinery & Equipment % *Expected Level of deterioration or improvement (over ) of the Sector Risk Rating, divided by the 2006 level of the risk rating. The higher the index the higher relative improvement is expected. Copyright 2006 Global Insight, Inc. 11

12 Thank You Mark Killion, CFA Managing Director, World Industry Service