This is because renewables are becoming a major force in the world energy markets – a theme we first mentioned in Snapshots on 2 June 2017. A report by the UN Environment Programme states “new renewable sources (…) accounted for 55.3% of all the gigawatts of new power generation added worldwide last year”. According to the International Energy Agency, $316bn was invested in renewable energy last year, almost three times as much as the $117bn in fossil fuel power.
Wind and solar projects are now profitable without government subsidies and are cheaper than fossil fuels. Weak revenues at the power and gas division at General Electric and a reluctance to embrace renewables quickly enough, lead to their profit warning and share price collapse earlier this year.
We think that renewables became a capitalist driven phenomenon in 2017 which will start to destroy and create companies in its wake. We also note that automakers are being driven into a heavy capex cycle on electric and autonomous vehicles late in the current sales cycle.
T-bills at 2%
Snapshot’s former colleague and bond guru Steven Major at HSBC has been talking about a potential USD liquidity squeeze next year as a potential unintended dual consequence of (i) Fed balance sheet reduction and (ii) increased T-bill issuance to finance the deficit.
What really caught our ear was US T-bill yields which currently yield 1.3%. They will soon be above 2% if the third year of rate hikes is followed through by the Fed. There is currently every indication they will follow through with these. How does that bode for relative value in the credit markets next year when you have short duration USD risk free at 2%? For example, how compelling is risky European High Yield duration at 2.7%?
Some of our clients have been rotating out of the high yield markets and into investment grade and private credit strategies. This corresponds with the flows we are seeing in public fund flow data.
The broad high yield market is finishing on a weak footing at a time when equity markets are still rallying. However, total returns for the year have been much stronger than we were expecting.
As we mentioned last week, corporate idiosyncratic risk is rising and the market is punishing some of the more highly leveraged entities. Part of this is also due to jitters in the telecom sector. We warned on debt financed acquisition and technology risk in this sector in Snapshots on 29 September 2017. We expect this broader trend to continue and for there to be more alpha in corporate credit next year. That means even tougher team debates on credit analysis next year!
Use of the Cairn Capital website
The content of this website is subject to copyright with all rights reserved. You may not reproduce (in whole or in part), transmit (by electronic means or otherwise), modify, link into or use for any public or commercial purpose the Cairn Capital website without the prior written permission of Cairn Capital Limited.
Nothing contained herein constitutes an invitation or offer to buy or sell any investment or to enter into any agreement and neither Cairn Capital Limited nor any of its affiliates is soliciting any action based upon the content of this website. Nothing contained herein is intended to provide a basis on which to make an investment decision or constitutes a personal recommendation or takes into account the particular investment objectives, financial situations, or needs of any particular person. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not necessarily indicative of future performance and future returns are not guaranteed.
By clicking on “accept” below you confirm to Cairn Capital Limited and agree that:
The information contained herein has been obtained from sources which Cairn Capital Limited believes to be reliable but Cairn Capital Limited does not represent that it is accurate or complete and it should not be relied upon as such. Neither Cairn Capital Limited nor any of its affiliates shall have any liability, contingent or otherwise, to any party for the accuracy or completeness of such information.
Cairn Capital Limited and its affiliates do not provide accounting, tax or legal advice; such matters should be discussed with your advisors and/or counsel. Any opinions expressed herein reflect the judgement of Cairn Capital Limited at the date and time hereof and are subject to change without notice and Cairn Capital Limited has no obligation to inform any recipient when opinions or information herein change.
Conflicts of Interest
Cairn Capital Limited and/or any of its affiliates and/or any of its or its affiliates’ clients’ accounts and/or persons involved in the preparation of this website may, from time to time, have long or short positions in, and buy or sell, securities, options, derivatives or other instruments and investments identical or related to those mentioned herein. Such positions may be the same as or different from (including opposite to) the economic effect of transactions described herein.
When you access certain links on the Cairn Capital website you may leave the Cairn Capital website. Cairn Capital has not reviewed any of the websites linked to the Cairn Capital website and does not endorse or accept any responsibility for the content of such websites nor the products, services or other items offered through such websites.
The iTraxx® Indices referred to herein are provided to Cairn Capital Group Limited under licence from International Index Company Limited. iTraxx® is a trade mark of the International Index Company Limited and has been licensed for the use by Cairn Capital Group Limited. International Index Company Limited does not approve, endorse or recommend Cairn Capital Group Limited or the iTraxx® Indices. No representation, warranty or condition, express or implied, statutory or otherwise, as to veracity, condition, satisfactory quality, performance, or fitness for purpose are given or assumed by the International Index Company Limited in respect of the iTraxx® Indices or any data included in them or the use by any person or entity of the iTraxx® Indices or that data and all those representations, warranties and conditions are excluded save to the extent that such exclusion is prohibited by law. International Index Company Limited shall have no liability or responsibility to any person or entity for any loss, damages, costs, charges, expenses or other liabilities whether caused by the negligence of the International Index Company Limited or otherwise, arising in connection with the use of the iTraxx® Indices.
The Cairn Capital website is not directed to any person in any jurisdiction where (by reason of that person`s nationality, residence or otherwise) the publication or availability of the Cairn Capital website is prohibited. Persons in respect of whom such prohibitions apply must not access the Cairn Capital website.
Cairn Capital Limited is authorised and regulated by the Financial Conduct Authority. The content of this website is directed exclusively to eligible counterparties and professional clients and is not directed to retail clients (each as defined in the rules of the Financial Conduct Authority). Cairn Capital North America Inc. is an investment adviser registered with the SEC. Cairn Capital Limited is also an investment adviser registered with the SEC and is registered as a commodity pool operator and commodity trading adviser with the US Commodity Futures Trading Commission and is a member of the US National Futures Association.
Accepting this disclaimer will store a cookie in order to remember that you have already accepted the terms and conditions.
Cairn Capital collects certain personal information about you such as your name, address, telephone number, email address details and other information when it is voluntarily submitted to our firm on this website or through other means, including in connection with Cairn Capital’s registration procedures for access to the Client / Investor Portal.
Please click here to read our Privacy Notice which explains how our firm uses and shares personal data of individuals with whom we interact.