26.10.18

Snapshots is trying to avoid the “tape bombs” hitting our trading screens and focus on the bigger picture. The terminology of tape bombs presumably dates back to old physical ticker tapes that used to deliver news that caused share prices to move. Recent tape bombs include WPP, Valeo, Volkswagen, Lafarge, HeidelbergCement, Texas Instruments and STMicro. Share price moves in each of these companies have been down and by very large amounts in some cases.

The broader markets are also suffering and have turned into a “sea of red” with almost all the major equity markets now down on the year.  This is a remarkable reversal from the picture just a few months ago.  Credit spreads have been following suit and some credit indices are approaching two- year highs.

JOMO and the Joy of Missing Out

We talked about growing risks in a maturing credit cycle in Snapshots at the end of last year (So what? 29 September 2017, JOMO 13 October 2017 and Self-certified EBITDA 1 December 2017).  At the time, we started to tighten our underwriting processes.  This was helped by a Co-CIO who starts every Investment Committee by flicking to the middle of an investment paper and focusing on cash flow before he even considers any of the other merits in the investment case.  We hope these actions will help us avoid some of the idiosyncratic risk that are now becoming more acute.

From a sectoral basis, we have been (i) avoiding cyclicals and focusing on defensive names, (ii) focusing on credits with a clear deleveraging path and (iii) avoiding unsecured consumer credit risk and focusing on secured consumer credit risk.  Time will tell if we have been cautious and disciplined enough.  We hope it will allow us to become aggressive when compelling buying opportunities arise as they are starting to do now.


China

We note that China’s growth rate has slowed to the weakest pace since early 2009.  China is rotating its economy from fixed asset investment to consumption.  It is also trying to crack down on its shadow banking system and engineer a soft landing after a decade of growth financed with credit expansion.  China makes up 15% of the world’s GDP and is a large export destination for many European credits we monitor and invest in.  We continue to monitor developments in China closely.

Good luck.

Asif Godall
Co-Chief Investment Officer