George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.
First, corporate bond issuance in the United States has sharply risen over the past few years from US$5-trillion in 2006 to US$9.1-trillion in 2018. The U.S. corporate debt as a percentage of GDP now stands at close to 47 per cent, a new record high versus the previous peak of 45 per cent in 2008. A lot of this debt is rated BBB, although more than 50 per cent of it would be rated as junk according to leading fixed-income investor Jeff Gundlach.
Sixth, the world is flushed with liquidity, and capital flows are driving valuations irrespective of fundamentals. For example, many mergers today are taking place at 12 to 14 times EBITDA, or earnings before interest, taxes, depreciation and amortization, well above the typical 11 times EBITDA. Portfolio managers’ own agendas and their efforts to maximize their own benefits lead them to rebalance portfolios and window dress in a predictable way throughout the year.
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