US Consumers Never Looked So Good

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Why US consumers have never looked so good?

1. Household debt service ratio as % of disposable income is lowest since 1980 
2. Household net worth is at its highest since 1990

What Effects The Fed's Expected Interest Rate Increase May Have on Small-Business Lending

With the Federal Reserve set to raise interest rates for the first time in seven years, there’s been lots of talk about its impact on investors and home-buyers. But any increase will also affect entrepreneurs who are trying to finance operations or expand to new areas.

What will an increase in rates mean for business owners? 

The obvious answer is that interest rates on small-business loans should go up. But the Fed’s move to increase rates after keeping borrowing near zero since the financial crisis is expected to be slow and easy, perhaps just 25 basis points this week, meaning that any impact on business borrowing costs should be minimal at first. Then, too, banks – which pulled back from small business lending during the financial crisis – might increase their lending to small businesses if the economy improves. That would be especially welcome as bank loans are cheaper than most other sources of capital.

The Bigger Question.

The bigger question over time – and one that hasn’t been tested in previous market cycles – is what will happen to the marketplace lenders that rely on algorithms and higher rates to fill the gap left by banks for small-business loans. These marketplace lenders have relied on money from hedge funds and private-equity firms who have been searching for yield in a low interest-rate environment. Whether that liquidity remains or not as rates rise depends what happens to the spread between marketplace loans and corporate debt over time – and how much risk investors are willing to take in a credit environment that’s become increasingly concerned about risk.

Fed policy is only one factor in small-business loan rates, as anyone who’s tried to get financing the past few years and been offered a loan at 40% or higher despite historically low interest rates knows. Whether banks truly return to small-business lending, how lenders are able to use technology to improve their underwriting, and whether the economy is on better footing will all be factors going forward. In the meantime, if you’re looking to start a business or get financing now, there are other things to worry about than the Fed’s decision.

To prepare for the coming change please contact Redmount Capital Partners or learn more about our capabilities.

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Emerging Markets: The Fundamental Divergence

While the US dollar appreciation and sharp drop in commodity prices since mid-2014 have been the reasons for our negative stance on emerging market producers throughout the past year, the second round of commodity price decline experienced during the past quarter, alongside Chinese cyclical weakness, has brought about a more generalized negative sentiment on all emerging economies, regardless of their fundamentals.

In a nutshell

• The fundamental divide between consumer and commodity producing countries is still in place – favor Asia.
• India looks particularly well positioned, both structurally and from a cyclical perspective.
• Brazil’s woes are not just oil-related, and point to a lengthy recession.

The recent contagion should not mask the wide divergences that remain between emerging countries. We hold to our view that caution and selectivity are warranted. Indeed, while Latin American countries and Russia continue to suffer from their dependence to commodity prices, as demonstrated by collapsing currencies and contracting industrial production growth, emerging Asia is faring much better, with industrial production still growing at a healthy pace. In other terms, despite the increased fragility of the emerging world at large, the divide between consumer and commodity producing countries remains. So long, of course, that we are correct in assuming a Chinese stabilisation – within its secular downtrend.

For now, many thus maintain our long-held preference for Asian countries. As a whole, the region still boasts solid fundamentals with an expected 2015 current account surplus of 2% (International Monetary Fund (IMF) data) and controlled inflation levels (except in Indonesia) allowing for pro-growth monetary policies. India’s long-term story also remains extremely positive, as long as supply-side reforms do not disappoint, with a fast growing and young middle class. Cyclically, as a net importer, India is a major beneficiary of the fall in commodity prices, which has also helped control historically high inflation levels, allowing the central bank to adopt an expansionary monetary policy.

On the other side of the spectrum, many remain negative on Russia, South Africa and most Latin American countries. Russia’s dependence on oil has brought about a vicious circle of falling currency, high inflation, tight monetary policy and contracting growth. Although, even though oil broke below $40, most expect oil prices to rebound to our long-held USD 50-70 range, this should not prove enough for Russia to break out of the vicious spiral anytime soon. With a large external deficit, high inflation and falling currency, South Africa remains vulnerable to capital outflows. Finally, within Latin America, indeed emerging economies as a whole, Brazil is our biggest concern. The issues there seem to have intensified rather than stabilized over the past few months. A broader collapse of Brazil, which represents some 3% of world GDP (roughly the size of France or Italy), would be particularly worrisome, not only for the region but also for already fragile global growth.

How concerned should we be about Brazil?

Like Russia, Brazil is trapped in a vicious spiral of collapsing currency, skyrocketing inflation, tight monetary policy and deepening recession. The oil price drop did exacerbate Brazil’s woes, but it is not their underlying cause. The country’s fundamentals had already been eroding for some 10 years, as evidenced by a deteriorating current account and lax fiscal policy – even as commodity prices were booming.

Most see three major risks for Brazil. The first is political: Dilma Rousseff’s growing unpopularity means that she has no capital to drive fiscal reforms. An impeachment could in theory allow for a more credible leader to take the reins, but it would also lead to a period of high uncertainty. The second risk stems from China: Brazil would be severely hurt by a hard landing of its main trading partner. The third risk is fiscal: while sovereign default is unlikely in our view given the low level of US dollar-denominated debt, private debt is also growing fast.

All told, many expect Brazil to remain in recession for some time and its currency to stay weak, which will eventually become a support. In terms of our global economic scenario, assuming that China, the US dollar and commodity prices do stabilize, Brazilian issues should not have a systemic impact.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.