As a credit research team supporting State Street Global Advisors’ Cash business, we are most focused on the universe of credit issuers that are relevant in the high-quality, short-end investment universe. As noted above, the plunge in oil prices could negatively impact the credit profiles of certain major sovereign and corporate issuers. However, the entities most at-risk in the near term are not direct holdings in global money market funds, in material concentrations.
For example, as it relates to the oil price shock, financial stress at the sovereign level is currently concentrated in countries with little direct impact in global money market funds. Further, global prime money market fund exposure (as defined in the categories above) to corporations which primary business operations are highly reliant on the oil industry is approximately 9 basis points (bps) of total assets under management, according to Crane Data as of March 31, 2020.
The global prime money market fund investment universe is heavily concentrated in debt issued by large banks and financial institutions. As such, it is most important for prime money market fund investors to consider the oil price shock in that context. As shown in Figure 1, there are material impacts on manufacturing and capex spending from a decline in oil prices. In addition to output, there are employment considerations. For example, according to the Bureau of Labor Statistics, the United States has 12.85 million manufacturing jobs, which employs 8.5% of the total national workforce.1 Thus, a marked decrease in manufacturing activity has negative consequences for employment levels and consumer spending, more broadly. We’d cite negative impacts on macroeconomic activity as a factor to consider, as banking sectors’ profitability and performance is leveraged to the growth of the economies they do business in. Lower growth, including recessions, leads to lower bank profitability, thus lower organic capital accretion, an increase in non-performing loans on banks’ balance sheets and potentially the erosion of banks’ capital bases. So even before considering direct exposures that banks have to companies and customers in the oil industry, we can conclude that the oil price shock will have a negative impact on bank credit profiles, even if modest.
Still, the most important consideration for our credit research team with regard to the impact that the oil price shock will have on the fundamental credit profiles in the banks in the global prime money market investment universe, is the direct exposure that banks have in their lending activities and capital markets operations. To understand the risk, it is important to outline the concentrations of banking system issuers within the current money market fund investment universe, as defined above.