Daily Update: October 16, 2020

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“Megadrought” is a scientific term for a drought that lasts two decades or longer. When California achieved this negative milestone in April, the news was lost amidst the noise of the pandemic and associated lockdowns. However, California is far from the only place on earth where an absence of water—partly due to global climate change—has had a devastating impact. The global gap between supply and demand for water is projected to reach 40% by 2030, according to the World Economic Forum.

“Cross-sector dependency on water by households, agriculture, industry, energy, and transport make water scarcity and threats to water quality a significant investment risk,” the WEF said in a June report, totaling the global gap of investment in water at $670 billion.

Markets have struggled to value water or adequately price hedges against water scarcity for people, agriculture, and industry. A recent Financial Times report found that water futures being introduced in California have received a mostly cool reception from investors, given the highly localized nature of water supply and usage.

The S&P Global Water Index, which is designed to track 50 of the largest publicly traded companies involved in water-related business activities, can help investors gain exposure to water and manage water risk, according to S&P Dow Jones Indices.

Because clean, potable water is a necessity for human life and health, the United Nations included access to water among it’s Sustainable Development Goals to “ensure availability and sustainable management of water and sanitation for all.” However, while the SDGs have attracted interest and attention from investors in green bonds, water access and security continues to be underserved in the green bond market.

"There is a lot of funding available, there is a lot of goodwill available, but there are not enough bankable projects, and it takes years to prepare those," Marco Beros, a senior water expert at the European Investment Bank’s water management division, told S&P Global Market Intelligence. "We are really lacking market plans, government plans, feasibility studies, cost benefit analyses."

Beyond humans’ obvious need for water, the resource plays a crucial role for many industries. An analysis of 1,400 mines worldwide by Trucost, part of S&P Global Market Intelligence, found that nearly one-fifth of mines are located in areas of extreme water stress, where water consumption is more than 80% of all available water in the area.

In addition, “27% of mines are located in areas where water risk will increase between now and 2030, under a business-as-usual scenario,” Trucost global head of research and innovation Steven Bullock said in the analyisis. “The water risk of about a third of the gold and copper mines is expected to double by 2030.”

Drought isn’t the only climate-related issue for the mining industry. In areas where floods have become more common, water presents a different type of challenge. The dam collapse at an iron ore mine in Brumadinho, Brazil last January killed 270 people after a tailings dam containing toxic residue from mining practices became water-logged and lost structural integrity.

"If you're looking at water risk, you've got two ends of the spectrum," Stephen Edwards, deputy director of the University College London Hazard Center, told S&P Global Market Intelligence. "One is catastrophic [tailings dam] failure, which obviously is what most of the media actually focuses on, but every day, every minute, you've got tailings facilities causing contamination of air, water and soil just by the passive release of the tailings into the environment."

Today is Friday, October 16, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Emerging Markets Monthly Highlights: Recovery Losing Momentum, Volatility Looms

High-frequency data, such as business surveys and mobility indicators, suggest the recovery’s momentum has slowed in September in several emerging markets (EMs). If the current resurgence in coronavirus cases in EMs and developed markets (DM) intensifies as the winter approaches in the northern hemisphere, it can potentially disrupt the economic recovery. Furthermore, the expected phase-out of stimulus in several Ems could also slow the recovery.

—Read the full report from S&P Global Ratings

U.S. Restaurants Shifted from 'Survival Mode' to Limited Profits in Q3 – Experts

The U.S. restaurant industry's recovery from the initial shock of the pandemic is slowing as most public restaurant companies are expected to report a drop in profits for their most recent quarter while they brace for continued uncertainty about the future. Nine out of the 12 largest U.S. restaurant chains due to report earnings in the coming week are expected to report year-over-year declines in operating profit — several of them at a double-digit pace, according to analysts' estimates compiled by S&P Capital IQ.

—Read the full article from S&P Global Market Intelligence

U.S. Drug Onshoring is More Complex than Trump, Biden Political Pitches – Experts

President Donald Trump and Democratic presidential nominee Joe Biden have each made bringing drug manufacturing back to U.S. shores part of their 2020 campaign pitches to Americans, but the idea is far more complicated than the politicians have laid out in their proposals. Onshoring will take a number of reforms and new types of investments to implement, experts told S&P Global Market Intelligence.

—Read the full article from S&P Global Market Intelligence

The Future of Credit

Credit Trends: U.S. Corporate Downgrades Fell to Pre-Pandemic Levels in the Third Quarter

After hitting a record high in the second quarter of 2020, the number of U.S. corporate downgrades fell in the third quarter to its lowest level since fourth-quarter 2018. S&P Global Ratings lowered 107 U.S. corporate issuer credit ratings in the third quarter--74% fewer downgrades than in the second quarter--as upgrades nearly doubled to 43. Downgrades abruptly slowed and upgrades increased as U.S. GDP rebounded in the third quarter.

—Read the full report from S&P Global Ratings

U.S. Public Finance Report Card: The Not-So-Secret Sauce in State Housing Finance Agency Programs' Stability

Contrary to the Great Recession of the not-to-distant past, the housing market appears to be a silver lining amid the severe economic hardships currently facing the country. Various indicators--sales of new and existing homes, pending sales, and building permits--all have shot up to levels last seen 13 or more years ago.

—Read the full report from S&P Global Ratings

Risk, Reward on Rise in European Leveraged Loan Market Since COVID-19

The European leveraged loan market sell-off in March, due to the COVID-19 pandemic, was the first test of the asset class’s resilience since the global financial crisis in 2008/2009. As the fourth quarter gets underway, demand for leveraged loans remains strong, though this supportive backdrop has resulted in rising leverage on credits now being shopped to investors. According to pricing data from LCD, however, investors are being compensated for this risk.

—Read the full article from S&P Global Market Intelligence

Default, Transition, and Recovery: 2019 Annual Asia Corporate Default and Rating Transition Study

In 2019, 10 companies rated by S&P Global Ratings, including seven confidential issuers, defaulted in Asia, up from three corporate defaults in 2018. The total number of rated issuers in Asia increased to 911 in 2019 from 831 in 2018. The newly rated issuers in the region decreased by over 39% to 87 in 2019 from 143 in 2018, amid growing concerns about the potential for a turning credit cycle, curb in economic growth, or rise in interest rates.

—Read the full report from S&P Global Ratings

China Macro & Metals: Tighter Credit Conditions will Weigh on Metals Markets

Sentiment in China’s metals markets was buoyant in July and August on easy credit conditions and expectations of further stimulus flowing to infrastructure. But September saw a distinct change of tone as cash flows tightened, demand waned and metals prices came under pressure, leaving the market hoping for better after China’s Golden Week holiday.

—Read the full article from S&P Global Platts

Banking Sector Under Pressure

Jane Fraser is Joining a Very Small Club

When Citigroup Inc. named Jane Fraser its next CEO in September, she became the first woman ever appointed to run one of the Big Four U.S. banks — a group that includes peers JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., all with over $1 trillion in assets. She will also become the 15th member of a small club that is growing slowly: female CEOs of billion-dollar banks. In a year when investors are highly focused on gender and race diversity, observers expect more C-suite appointments of women and minorities will follow.

—Read the full article from S&P Global Market Intelligence

Brazil's Top Banks have Highest Loan Exposures to Vulnerable SME Segment

Three major Brazilian banks have some of the largest loan portfolio allocations to small and midsize enterprises, a segment widely considered to be among the most vulnerable during the COVID-19 pandemic, data collected by S&P Global Market Intelligence shows. Banco Bradesco SA has the greatest exposure to SMEs among a sample of regional heavyweights, with 24.0% of its loan book allocated to the segment.

—Read the full article from S&P Global Market Intelligence

UK Banks may Avoid HK sanctions, but Little Relief Expected After U.S. Election

Foreign banks with large international operations in China, such as HSBC Holdings PLC, are likely to escape the worst potential fallout from U.S. sanctions connected to China's new security law in Hong Kong, according to industry experts. But political pressure from the U.S. over the new law, along with Sino-American trade tensions, are likely to continue even if Democratic nominee Joe Biden wins the U.S. presidential election in November, the experts told S&P Global Market Intelligence.

—Read the full article from S&P Global Market Intelligence

StreetTalk – Episode 69: Banks Left with Pockets Full of Cash and Few Places to Go

Deposits have flooded into the banking system, leaving bank managers with questions about the stability of the liquidity and few attractive options to put the cash to work. Scott Hildenbrand, head of balance sheet analysis and strategy in the financial services group at Piper Sandler Cos., said in the latest "Street Talk" podcast that banks have more cash today than they probably ever expected.

—Listen and subscribe to Street Talk, a podcast from S&P Global Market Intelligence

Technology & Innovation

Chinese Livestreaming Merger to Strengthen Tencent's Gaming Dominance

The proposed merger of the two Twitch-like livestreaming platforms in China, DouYu International Holdings Ltd. and HUYA Inc., will see lower content acquisition cost and strengthen Tencent Holdings Ltd.'s dominance in the online gaming sector in China, analysts said. Tencent will hold 67.5% on a fully diluted basis in the combined company, making it the largest shareholder. It currently owns a 37% stake in Huya and a 38% stake in Douyu.

—Read the full article from S&P Global Market Intelligence

Nokia's 5G Missteps could Hinder Growth Beyond Europe – Analysts

As Nokia Corp. prepares for its first earnings update under CEO Pekka Lundmark, any excitement about the company's fresh start could be overshadowed by gains made by rivals Ericsson and Samsung Electronics Co. Ltd. The Finnish network equipment manufacturer said in 2018 it was unprepared for the advent of next-generation wireless technology 5G, and has since worked on reducing its product costs, most recently by increasing its pool of chip suppliers. While Nokia's new leadership continues to overhaul the company's 5G equipment strategy, Ericsson and Samsung have a head start outside of Europe, analysts told S&P Global Market Intelligence.

—Read the full article from S&P Global Market Intelligence

Video Supply-Side Platforms Hurt by Q2'20 Fall in Video Ads, Rebounding in 2021

COVID-19 caused advertisers in many segments to pull back in the second quarter of 2020, which resulted in less revenue flowing through video supply-side platforms, or SSPs. Kagan is therefore expecting video SSP vendor revenue to show only a slight increase in 2020 of 4% to reach $1.1 billion. Vendors reported that ad spend picked up toward the end of the second quarter of 2020.

—Read the full article from S&P Global Market Intelligence

Mobilitas' Launch gets Boost from Partnership with Lyft

Mobilitas, a new commercial insurance company covering businesses and individuals involved in the ridesharing industry, has partnered with Lyft to provide coverage for its drivers in 11 states. The CSAA Insurance Exchange subsidiary has developed mileage-based policies that cover Lyft Inc. drivers in Colorado, Idaho, Montana, Minnesota, Nebraska, North Dakota, Oregon, South Dakota, Wisconsin, Washington and Wyoming.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

The Case for Investing in Water

Water is essential to the production and delivery of nearly all goods and services. Many businesses are reliant on a sufficient flow of clean water to operate and realize their growth ambitions. Overconsumption of water, water pollution, environmental degradation, and changing climatic conditions are making clean water an increasingly scarce resource. As the world population grows and competition for water resources between industry sectors intensifies, nations are set to experience a 40% shortfall in water by 2030.

—Read the full article from S&P Dow Jones Indices

Climate Action May Take Backseat Even if Democrats Win Senate

Sweeping climate legislation is not guaranteed to get top billing in 2021, even if Democrats were to take both the US Senate and the White House, according to market observers. Coronavirus recovery packages could feature green incentives, experts said, but legislation that focuses on the pandemic and the economy will be front and center in the year ahead. Democrats, including presidential nominee and former Vice President Joe Biden, have outlined aggressive climate and clean energy proposals and highlighted climate change mitigation as a focus for the party.

—Read the full article from S&P Global Platts

Democrats Probe U.S. Supreme Court Pick's Climate Stance, Legal Philosophy

After fielding just a few questions on climate change early in her confirmation hearing, U.S. Supreme Court nominee Amy Coney Barrett appeared to signal skepticism about whether a scientific consensus exists that human activities are significantly contributing to global warming. Barrett made the comments on the third day of hearings on her nomination before the U.S. Senate Judiciary Committee.

—Read the full article from S&P Global Market Intelligence

Evolving Conservative Views Prompt Optimism for Advancing Green Policies

Heavy-handed approaches targeting a fast-tracked path to deep decarbonization continue to be a tough sale in rural America. But power sector observers said they are increasingly seeing conservatives embrace clean energy and even climate-friendly policies as droughts, floods and extreme weather take their toll on rural communities. "Rural America sees climate as a problem," though they are more likely to refer to it as disturbing weather patterns than climate change, former Democratic Senator Heidi Heitkamp of North Dakota said at a recent event held by the think tank Third Way.

—Read the full article from S&P Global Market Intelligence

Virginia Utilities Move Ahead with Energy Storage, Offshore Wind Efforts

As Virginia's largest utilities continue to grow their renewable portfolios, they have partnered with some nonprofits and government entities to expand renewable energy storage in Southwest Virginia. Dominion Energy said in an October 14 statement that it plans to use the permitting, design, installation and operations experience from a 12-MW pilot project -- now supplying power to the grid, but not on a commercial basis -- to its proposed 2.6-GW offshore Coastal Virginia Offshore Wind project, with construction to start in 2024.

—Read the full article from S&P Global Platts

Sweet Spots in the C-Suite: Executive Best Practices for Shareholder Friendly Firms

Good corporate managers strike a balance between profitability and growth. Companies that grow assets too quickly underperform, while low-to-moderate asset growth companies outperform. Large M&A deals negatively affect fundamentals and returns, often for years following an acquisition. Stock deals severely underperform. Strategies that return cash to shareholders are rewarded by investors, while over-reliance on the capital markets is punished.

—Read the full article from S&P Global Market Intelligence

The Future of Energy & Commodities

Libya’s Fragile Oil Return Complicates Market Outlook

Light sweet Libyan crude is starting to trickle through after an eight-month hiatus as rival groups agreed a tentative truce. The prospect of over 1 million b/d hitting the market in the coming months coincides with an uncertain demand outlook amid a second-wave of coronavirus infections. Libya's crude output is poised to rise to over 500,000 b/d in the next few weeks following the restart of the 300,000 b/d Sharara field.

—Read the full article from S&P Global Platts

'Consolidation Makes Sense': COVID-19 Fallout Spurs M&A Across U.S. Oil Patch

Soft oil prices, strained balance sheets and a lack of support from outside funding sources have left many U.S. independent oil and gas companies close to bankruptcy. For some, joining forces may be a way to stay solvent. Most independent producers entered 2020 on unstable footing. The record oil price crash and the collapse in demand as a result of the COVID-19 pandemic drastically worsened their predicament, and a slow economic recovery has left many facing massive financial and operational cuts well into 2021.

—Read the full article from S&P Global Market Intelligence

Humbled U.S. Shale Sector on Recovery Path with Disciplined Approach: Executives

The U.S. shale sector could be on a path to recovery after a destructive boom-bust period, with plentiful opportunities still available, but a more disciplined approach is needed, executives from U.S. upstream companies ConocoPhillips and Parsley Energy said October 15. Speaking at the Energy Intelligence Forum, ConocoPhillips chief technical officer Greg Leveille struck a contrite note on behalf of the shale sector, saying it had out-run demand levels ahead of this year's crisis, and had now to focus on low-cost, high quality prospects, coupled with technological improvement.

—Read the full article from S&P Global Platts

Listen: Signs of Resilience in the African Downstream Markets

For the first time, the African Refiners and Distributors Week was held virtually in the week commencing Oct. 5, discussing the challenges of the downstream sector in the region, but also the strong signs of resilience in the continent in the midst of the Coronavirus pandemic. Platts editors Eklavya Gupte, Joseph Mcdonnell and Virginie Malicier discuss with Francesco Di Salvo key takeaways from the conference as well as the latest views on oil fundamentals in the continent.

—Listen and subscribe to the Oil Markets Podcast, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.