23.11.18

Snapshots is amazed at how quickly Black Friday has become a global cultural phenomenon. It has its origins as the unofficial start of the holiday shopping season after Thanksgiving Day in America. Its globalisation has occurred against a backdrop of nationalism and protectionism. We believe it has succeeded because of the power of the internet, the dominance of large internet retail giants such as Amazon and the importance of online influencers for global brands.

It is an example of why we believe globalisation and multiculturalism is a long-term cyclical trend which is here to stay even if it is interrupted by shorter cycles of nationalism and protectionism.

Black Friday Sales

One could be forgiven for wondering if the credit markets have been participating in the Black Friday sales. Bonds continue to be marked down heavily on idiosyncratic news.  The junior mezzanine tranches of European CLOs from one manager printed at the widest levels of the year today.  Returns remain negative for most credit asset classes and outflows are persisting in parts of the credit market.  According to Jim Reid at Deutsche Bank:

“As of the end of October, 89% of assets that we collect data on for our annual long-term study have a negative total return year to date in dollar terms. This is the highest percentage on record based on data back to 1901, eclipsing the 84% in 1920. This is made all the more interesting in light of 2017 being the ‘best’ year ever for markets on this measure.”

We believe the weakness of financial assets this year is a direct result of central bank activity.  In February this year, we wrote: “When the major central banks embarked on QE they said that central bank purchases would work through the “portfolio balance channel”. Ex-Fed chair, Bernanke, explicitly described it as pushing investors into holding other riskier assets. As the major central banks unwind QE, it would be logical to expect a reverse of some of the effects of QE.”

Fundamental Value versus Market Value and G.I. Joe

In the face of outflows and negative returns, we think it is important for investors to fully grasp the notion of fundamental value versus market value.  In buoyant markets, assets can trade at or above fundamental value.  In depressed markets, they can trade below and the discounts can be large.

Eddie Murphy’s character, Billy Ray Valentine, summed this phenomenon up perfectly in the 1983 movie, Trading Places, in a scene where pork belly futures on the commodities exchange are falling:

“They’re saying, “Hey, we’re losing all our…money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip, right?”… “I’d wait until you get to around sixty-four, then I’d buy. You’ll have cleared out all the suckers by then.”

We are not in the business of timing the market but we are actively searching for credit assets where the market value is at a discount to where we calculate fundamental value.

Good luck.

Asif Godall
Co-Chief Investment Officer