09.03.18

Snapshots was delighted to celebrate International Women’s Day yesterday. The benefits of diversity are obvious when you are the only man in a mixed-race household of four. They haven’t been obvious to the broader asset management industry yet but we are pleased to see multiple initiatives that are addressing this. We think this is not just a moral imperative but a profit seeking imperative as well. This is because a good investment process benefits from the input of a diverse set of opinions.

Structural reforms

Last week’s Italian elections have resulted in a hung parliament as the public voted for populist parties. There has been a rise in Italian sovereign risk premium but it has remained very well contained. It is clear the broad political thrust in Europe is towards tighter immigration and looser fiscal policies. If this remains the direction of political travel, the EU needs to start implementing structural reforms such as the harmonisation of tax policies, minimum wages and eventually the mutualisation of debt.

These reforms are needed because the ECB’s Quantitative Easing programme ends in September.  Strong global growth will provide some support in the absence of QE but without structural reforms we can expect the return of sovereign volatility in the EU. This fits in with our broader theme of rising volatility and dispersion in the credit markets in 2018.

Legal risk

Credit investing is a process of making fundamental assessments on the ability of borrowers to pay, macroeconomic assessments on factors that could impair the ability of borrowers to pay and the legal requirement of borrowers to pay.

There have been a number of cases recently where the legal requirement has been the overriding driver for the borrower. Aviva announced that they can cancel “irredeemable” preference shares that were issued with high coupons during the early 1990s. On the face of it, irredeemable should mean just that, but Aviva may be able to get away with it on a technical legal argument or settle on some sort of compromise.

At the end of last year, Hovnanian was able to trigger a credit event as a condition for cheap financing from a lender who had spotted a legal loophole in CDS documentation. There is also an ongoing legal battle in the ABS market over the control of the underlying mortgage collateral between the originator of the deal and a hedge fund.

Good luck.

Asif Godall
Co-Chief Investment Officer