News of the week summary - 10/15/2023

EU will discountinue the shiping industry's exemption from antitrust laws

The European Union has dealt a significant blow to the shipping industry by discontinuing its long-standing exemption from competition laws. This decision, announced by the European Commission, represents a fundamental shift in the regulatory landscape for the shipping sector. For years, the exemption allowed shipping lines to share vessels and place containers on each other's ships, fostering cooperation and cost-sharing within the industry. However, the Commission now views this exemption as no longer "fit for its purpose" and has decided not to renew it when it expires in April.

While the discontinuation of this exemption won't immediately terminate collaboration between shipping groups, it does have the potential to disrupt the way global trade operates. Over the years, the global shipping industry has increasingly come under the control of a small number of powerful container shipping companies, who have formed alliances to coordinate their operations and maintain control over the market.

This decision reflects a broader trend of increased regulatory scrutiny on the shipping industry. Due to its international nature, the shipping sector has historically proven challenging to regulate effectively. The Commission's action comes at a critical juncture for container carriers, whose earnings have experienced significant fluctuations. During the COVID-19 pandemic, a surge in online shopping combined with port congestion led to a surge in demand, resulting in bumper profits for the industry. However, as freight rates soared to record highs, customers were left frustrated by severe delays in importing and exporting goods due to congested ports.

Over the past decade, the world's nine largest container shipping lines have formed three separate alliances. These alliances allowed them to exert greater control over the supply chain and maintain a level of price stability during periods of low earnings. However, the pandemic's extraordinary profits drew the attention of customers who experienced significant disruptions in their supply chains.

The Commission's decision to revisit the Consortium Block Exemption Regulation (CBER), which had previously granted the shipping industry an exemption from EU antitrust rules, reflects the profound structural changes that have occurred within the shipping industry, including the consolidation of carriers, the formation of global alliances, and vertical integration. 

Economists forecast a more positive outlook for the US economy

There is a shift in the consensus among economists regarding the US economy. According to the latest quarterly survey by The Wall Street Journal, economists are becoming more optimistic about the economic outlook. They have reduced the probability of a recession occurring within the next year from an average of 54% in July to a more positive 48%. This is the first time the probability has fallen below 50% since the middle of the previous year.

Several factors contribute to this growing optimism. One key factor is the continuing decline in inflation, which is expected to ease. The Federal Reserve is also believed to have completed its cycle of interest rate increases, with short-term borrowing costs reaching a 22-year high in July. Additionally, a strong labor market and better-than-expected economic growth have played a role in bolstering confidence in the U.S. economy.

Economists now anticipate an upward revision in GDP growth, predicting a 2.2% increase in the fourth quarter of 2023 compared to the previous year, which is a significant improvement from the 1% growth forecast in the previous survey.

While there has been a slight reduction in GDP growth expectations for next year (from 1.3% to 1%), economists still anticipate overall economic growth in 2024 and 2025. The unemployment rate is also expected to rise but remain just above 4%, a historically low level.

However, it's worth noting that there are some concerns on the economic horizon. Economists anticipate weaker economic growth and job creation in the first half of 2024. It is expected that the first quarter will see GDP increase at a slow annual rate of 0.35%, and the second quarter at 0.6%. Job growth is also predicted to slow down during this period.

Regarding the Federal Reserve's actions, approximately 60% of economists believe that the Fed has completed its cycle of interest rate increases, with around 23% expecting the final increase in November and 11% in December. Roughly half of the economists anticipate that the Fed will start cutting rates in the second quarter of the following year as economic growth cools.

Nonetheless, there are concerns about potential challenges ahead, such as the impact of external factors like geopolitical conflicts on energy prices and increased bond yields affecting the U.S. economy's prospects. While the economic picture is overall positive, there are still potential risks that need to be monitored.

 

Private credit's share of corporate lending grows

As traditional banks face challenges due to high-interest rates and regulatory changes, private credit's share grows in corporate lending. This trend has been developing for over a decade, with alternative investment firms, including hedge funds and private equity funds, taking on a more prominent role in corporate loans. The recent shift in the balance of power and risk has accelerated, making private credit a significant player in the corporate lending landscape.

High-interest rates, driven by the Federal Reserve's policy, have led to challenges for traditional banks, resulting in banks like Credit Suisse and Silicon Valley Bank facing difficulties. These challenges have created opportunities for private-credit fund managers, who have stepped in to provide financing to American corporations. This shift is part of a broader trend where alternative investment firms have been siphoning money and talent away from traditional banks since the 2008-09 financial crisis. 

The loans provided by private-credit firms are often more expensive than traditional bank loans, but for many companies, they are the only viable option. These firms are now expanding their reach, venturing into asset-backed debt for real estate, consumer loans, and infrastructure projects. Private equity firms use the revenue generated from these loans to fund leveraged buyouts, which can result in companies becoming more indebted and potentially ending up under the control of private equity firms.

Regulators have started to address the increased influence of private fund managers and their dealings with the insurance industry, as concerns mount over the lack of transparency and potential risks associated with this trend. Private-credit firms have attracted investments from a range of sources, including pensions, insurers, and individual investors. These investors have been drawn to private credit due to high returns in a low-yield environment, with average returns of 9% over the past decade.

This shift has had implications for traditional banks and credit ratings firms, as revenue from new corporate loans has decreased, and their stocks have lagged behind those of private-credit managers. Private credit has become a significant driver of growth for alternative fund managers like Blackstone, which recently became the first such manager to be included in the S&P 500, primarily due to its credit business.

Despite the potential benefits, there are concerns about private credit taking over the loan market. The concentration of economic activity in the hands of a small number of large, opaque asset managers has raised concerns about risk bubbles. Additionally, high-interest rates increase the likelihood of corporate borrowers defaulting on loans, and managers are making larger loans for multibillion-dollar deals. Experience and expertise are expected to play a crucial role in navigating these challenges.

Last week the Bank of England announced it was opening a permanent lending facility to non-bank financial insitutions (a category which include private creditors) : Last week news summary