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Exacerbating the pain, corporate default spreads rose during the course of 2022: While default spreads rose across ratings classes, the rise was much more pronounced for the lowest ratings classes, part of a bigger story about riskcapital that spilled across markets and asset classes. that was lost last year.
Corporate Bonds: No Shortage of RiskCapital In my last post, I chronicled the movement in the equity riskpremium, i.e. the price of risk in the equity market, during 2021, but the bond market has its own, and more measurable, price of risk in the form of corporate default spreads.
Consider, for instance, an investor who picks stocks based upon price to book ratios, who finds a stock trading at a price to book ratio of 1.5. While some of the companies in this data trace their existence back decades, there is a healthy proportion of younger companies, many in emerging markets and new industries.
These assertions may very well be true, but cheap and expensive, at least in pricing terms, is relative, and looking at the data can help you detect rules of thumb that work from those that do not. Data universe : In my sample, I include all publicly traded firms with marketcapitalizations that exceed zero, traded anywhere in the world.
I do believe that too much is often made of these differences, as it is generally more the rule than the exception that markets, when they are up strongly, get the bulk of that rise from a small sub-set of stocks or sectors. The results are similar if you break stocks down based upon price to book ratios or revenue growth rates.
The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.
Interest Rates and Value As interest rates have risen, the discussion in markets has turned ito the effects that these rates will have on stock prices. Riskpremiums No effect or even a decrease. Risk premia may rise as inflation increases, because higher inflation is almost always more volatile than low inflation.
With individual stocks, that danger gets multiplied, with investors buying stocks that are being sold off to for legitimate reasons (a broken business model, dysfunctional management, financial distress) and waiting for a market correction that never comes. Contrarian Investing: The Psychological Tests!
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