Snapshots thinks Emmanuel Macron’s global call to “Make the planet great again” is politically and economically clever.


Clean Capitalism

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%?

Asset Allocation

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!

Asif Godall
Co-Chief Investment Officer