08.12.17

Snapshots has been saying for some time that 2017 will mark the end of ultra-loose central bank monetary policy. This has coincided with jitters around some highly leveraged corporate entities

Snapshots has been saying for some time that 2017 will mark the end of ultra-loose central bank monetary policy. This has coincided with jitters around some highly leveraged corporate entities.

Steinhoff

Interest rates have not moved enough to cause broad interest coverage issues and the capital markets remain very open for refinancing. However, the market is becoming more wary of leveraged entities that don’t have a clear deleveraging plan.

Steinhoff is the latest casualty. It marks the end of a highly acquisitive debt financed spending spree for the retailer. Analysts were already questioning the return on capital on Steinhoff’s acquisitions versus their cost of capital. What makes this case worse is that accounting fraud may have been involved. Steinhoff follows on the wheels of worry about Altice’s highly leveraged capital structure, which was also acquired during a multi-year spree of debt financed acquisitions.

Trump’s fiscal nitroglycerin

US stock markets hit record highs after the Senate passed the Tax Cuts and Jobs Act over the weekend. It will cost $1.5trillion over the next decade excluding potential gains from increased growth. We are concerned that these tax cuts are coming at a time when unemployment and spare capacity are low and the US is over eight years into an (albeit anaemic) economic expansion. We think inflation is the biggest risk facing the US economy next year and could cause a very sharp divergence with Europe.

The bank regulation pendulum

2017 is a watershed moment for another piece of post-crisis policy making. The finalisation of Basel 4 was published yesterday.  In our opinion this is the end of era of increasing risk weights (capital) for banks. There is no Basel 5 on the agenda and we will now have a decade of regulatory clarity according to the team at Autonomous research. As banks start to focus on return on capital in their core operations we think we are entering a new world of risk transfer between the banking and non-banking markets. As we head into 2018 we are armed with our copies of Basel 4 and its implementation via the Capital Requirements Directive, and will be hunting in the savanna of bank regulatory capital. At the same time we have been bullish on bank capital securities and remain bullish on a relative value basis.

 

Asif Godall
Co-Chief Investment Officer