By every available measure the present world economic boom is the least risky on record. Corporate debt, world-wide, stands at the lowest level in history relative to corporate income. US households are in the best financial shape in a generation. Asset prices are high, but they are high because inflation is restrained, the threat of higher interest rates is small, and profits are rising.
The assets which a year ago looked like systemic risk incarnate are this year’s best performers. China’s H-shares rose more than any other major market, with the Hang Sheng China Enterprises Index up 15% year-to-date. Two-thirds of the jump in market cap came from six large-cap financials, including the big four state banks, CITIC Bank and Ping An insurance. That should tell us something: the specter of China risk that haunted the imaginations of Western risk-managers a year ago has turned out to be the harbinger of a 2018 bonanza.
A few pictures sum up the benign world environment.
The standard gauge of corporate leverage is net debt divided by earnings before interest, taxes, depreciation and amortization. For the MSCI World Index, the most comprehensive measure of traded equities, the ratio has fallen from nearly 6 times EBITDA just before the 2008 global financial crisis to only 1.7 today. The S&P 500’s debt to EBITDA ratio has fallen from over 4 times to 1 time. China’s gearing was extraordinarily low during the mid-2000s—Chinese state-owned companies were net creditors rather than debtors. The ratio rose to nearly 4 during the credit expansion of 2014-2016, but will fall back to about two-and-a-half times EBITDA by 2019, thanks mainly to strong profit growth.
The financial health of US consumers is excellent. The ratio of debt service to disposable income stands at just over 10%, compared to nearly 14% at the peak of the 2007 bubble. The National Association of Realtors’ index of home affordability (based on home prices, household income and mortgage rates) is still much higher than it was during the housing bubble years.