We’re back to writing a preview of the week ahead in the BDC sector after a two week holiday break when not much was happening except wild swings in BDC common stock and bond prices, neither of which do we pretend to have any definitive insights as to their short term behavior. With the new year, though, we’re eager to get back to penciling out what we might expect to be reading about in the days ahead, and what the BDC Reporter might need to tackle in greater depth. In our most recent BDC Common Stocks Market Recap we boldly stated to our Premium subscribers that 2019 promises to be “the most important for the BDC sector in the last 10 years”. Let’s see how that goes, starting right away.
Focus: This week – as in all recent weeks – the focus of most market participants will be on the gyrations of the markets. The week ended December 14, 2018 was not a pretty one for either BDC common stocks or Fixed Income, with both hitting new lows as we expounded on at length in our stock and debt Market Recaps for the BDC Reporter’s now shell-shocked Premium subscribers. BDC common stocks are now in the red in 2018 on a total return basis and at multiple new record lows. The median BDC debt price is now under par – albeit by only $0.05 – for the first time.
Looking ahead for the week ended December 21 – and downward – the next major number to look out for is the price of the UBS Exchange Traded Note with the ticker BDCS – which we use as a quick sector proxy – and which closed Friday December 14 at $18.67. The all-time low for BDCS is $17.31, set in February 2016 following a similar market meltdown. The very fact that the BDCS price would have to drop as much as 7.3% to match that nadir speaks to how relatively well the sector has held up in the current environment – the 10%+ drop from the August 30 2018 BDCS high notwithstanding. However, that sort of implosion would not be uncharacteristic for this highly volatile sector.
Inescapable: We’re going to assume the ups and downs of the major indices – and the corresponding movement in BDC common stock prices – will continue until it doesn’t. Since late August, the turmoil across all asset classes has caused the playbook of BDC fundamentals to be thrown out the window as new low after new low is reached, with a few head fakes along the way. As we write this the Dow Jones index is trading 200 points down in the Monday pre-market, which only means that more of the same is on the cards. Admittedly, this past week, the BDC sector fared less poorly than the 3 major indices (Dow Jones, NASDAQ and S&P 500), but that could reverse itself this week, whether the broader markets go up or down. All we are sure of is that the BDC sector cannot disentangle itself from whatever direction the markets are headed. Here is the chart showing the price of the UBS Exchange Traded Note with the ticker BDCS – which includes most every BDC player – since August 30, 2018, roughly when the market dramas began, compared to the main indices.
Back In Sync: As we expected, in the week ended November 30, 2018 the BDC common stock and the broader indices adjusted to get more in sync. The major markets raced ahead, while the BDC sector – which had performed better the week before – followed behind, up 0.62% in price terms. As this 2018 year-to-date chart comparing BDCS to the Dow Jones, NASDAQ and the S&P 500 shows all four have followed a similar shape even if there are short term divergences. If you adjust for the fact that the BDC sector pays out much higher distributions, even the total return is highly similar.
Market Mayhem: As we discussed at length already in our premium BDC Common Stocks Market Recap, last week was surprising as the BDC sector – and many individual BDCs – fared much better than the main indices and all the main categories from investment grade to “junk”. However, we’d be very surprised if the BDC sector can continue to remain uncorrelated with the broader markets for very much longer. As this chart below shows – comparing the price progress of the Exchange Traded Fund SPY, which is based on the S&P 500, and the exchange traded note with the ticker BDCS,which reflect the BDC sector – the two have moved pretty much in tandem since the decline began in the markets on September 20.
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