IFR Editor-at-large Keith Mullin
RISK IS THE new risk-aversion, as all segments of the institutional and wholesale investment universe respond to the wonky and unintended effects of monetary stimulus. A failure of transmission into the real economy has led to free money for financial speculation, prompting inflationary and potentially fragile capital flows to emerging markets and other areas.
Despite poor macro data, many investors have thrown caution to the wind and loaded up on anything they can lay their hands on at dumb-ass prices with little in the way of proper risk analysis.
We’ve been here before and there wasn’t a good ending. The prevailing psychology is worrisome. Accounts are not necessarily buying because they believe in the fundamentals. It’s because everyone else is and they don’t want to be left behind as the gathering herd heads to the nether regions of the markets across the spectrum of debt, currencies, equities, real estate and increasingly into non-traditional asset classes.
The problem is that being a me-too player in a frothy market ultimately morphs into a job preservation exercise for fund managers trapped in a world of benchmarking and comparative analysis. To me, it doesn’t feel like we’ve entered the execution phase of an investment cycle driven by well thought-out fundamental propositions; it feels more like policy-induced psychosis that’s creating an opium effect of record high after record high for key stock indexes or forcing ramp-ups of bubble proportions in credit markets. Still, market professionals refuse to utter the word “bubble”.
We’ve been here before and there wasn’t a good ending
I MODERATED A very lively seminar the other day on the outlook for eurozone government bonds. It was a fun event with a international flavour. We ended up having a fascinating and wide-ranging debate with a fabulous panel of experts from the credit and rates worlds (predominantly economists and strategists) – not one of them remotely psychotic by the way – on central bank and political policy choices, policy execution; and policy impacts, including prospects for growth, and on market choices.
The nature is for these types of events to veer into the realm of platitudinous generality, but I can report that we had little, if any, of that.
[Shout-out, though, at this point and on this point to Christopher Marks, global head of debt capital markets at BNP Paribas who graced the panel at our event. Christopher was a fabulous panellist with some well-articulated and very insightful thoughts. But after he’d made a particularly poignant comment, instead of my intended meaning of “that is definitely a theme worth pondering”, it came out, alas, as something more akin to: “that’s pretty ponderous”, which of course means something quite different. I think he was a little stung by my inadvertent lexicographical mangling, but no harm was intended, Christopher!]
Anyway, the idea behind the event was to see how much unanimity there was around some of the key issues of the day. I confess to being a little disappointed in some ways that there was so much agreement and such a feelgood factor in evidence. I ended the session by re-inventing myself as an investor with €1bn to spend in an open European fixed-income mandate.
BACK TO MY basic point, three of the panellists put me into naked 10-year Greek government bond positions; others put me variously into deeply subordinated hybrid European bank paper, eurozone peripherals, and into private infrastructure assets. That’s a pretty punchy portfolio. To be fair, my panel’s optimism is no more than a mirror of what’s going on out there.
With various positive factors such as Japanese institutional buying of foreign bonds, the ECB talking openly about buying peripheral SME loans either for securitisation purposes or as outright purchases, expectations that the Fed will taper bond purchases later than expected, and exuberant buying of equities, we’ve had a number of examples, I think, of the market getting ahead of itself.
Spain printing due 2026 paper at an average yield of 4.336% on a good bid-to-cover ratio; Portugal thinking of resuming regular bond auctions following its sellout €3bn 10-year benchmark that went at a reoffer yield of 5.67% to a solid institutional allocation; high-yield and peripheral corporates galore on the new-issue docket printing through guidance; debut borrowers queueing up; unrated undated deeply subordinated corporate hybrids not even turning a hair … it’s all impressive, yet at the same time worrisome.
I’m hearing a lot about infrastructure coming firmly onto the radar screens of institutional fund managers. Altius Associates put out a report a week or so ago entitled ‘Infrastructure as part of a global investment portfolio’ which postulates that over the next 10 years, the institutional portfolio allocation to infrastructure will rise from 1% to a staggering 5%.
Working off a static number of US$80trn of institutional assets under management globally, achieving that target evidences a constant shift of around US$320bn per year for a decade into a complex asset class that is difficult to model and which has traditionally been funded by banks.
Of course, as banks start to move away from long-dated lending because it gets hammered by Basel III capital rules, infrastructure and other forms of specialised bank lending will start to shift into the capital markets. Playing into the yield-at-all-costs theme and on the basis that depending on which piece of the capital structure you play in, you can achieve IRRs of 8%–10% net to upwards of 15%, you can see the attraction. That said, I think the shift will happen much more slowly than Altius or the banks suggest.
My basic point in all of this is that taken in the round, though, I think we’re moving too far too fast in a world far from having resolved many of its fundamental economic problems. Whatever happened to that “never again” mantra from post-2008?
