13.07.18

Snapshots is waiting to see how the EU responds to Theresa May’s soft Brexit plan.

Junk Rated Sterling Assets

The plan has cost May the support of two hard Brexit cabinet ministers.  Commentators are suggesting that Theresa May is in a weakened position with the EU and her party with this proposal.  We are not so sure and remember the late Muhammed Ali’s famous rope-a-dope tactic against George Foreman.  The fact that the EU has not yet responded is telling.

Sterling has barely budged this week, the FTSE All-Share Index remains close to record highs and unemployment is at the lowest level since the 1970s.  We also note that despite the woes of the UK retail sector, the Bank of America Merrill Lynch GBP High Yield Index has posted a positive return for the year with CCC bonds in particular returning nearly 6%.

Secondary for Sale and Primary Bargains

This is in stark contrast to the rest of the credit market.  Returns have been mostly negative in every credit asset class we invest in with a few exceptions (loans and ABS).  There are two main drivers to this:  tightening global liquidity and cheap new issues which are re-pricing the secondary markets wider.  This issuance will slow down next month for the cyclical August lull and resume again in September.  However, we think new issues will continue to come cheap.  The recent Credit Suisse Perpetual Non Call 5 year at a healthy 7.5% yield to call is a case in point.

Flattening Curves

While we selectively pick up these new issuance bargains, we are keeping a close eye on the rapidly flattening treasury curve in the US.  The much watched spread between the 10 year and 2 year bonds continues to nose dive towards zero and is a statistically significant recession signal.  Some commentators are saying this time it is different because of short dated treasury supply to support Trump’s fiscal stimulus and long dated treasury demand from insurance companies and pension funds.  We will err on the cautious side for now.

Good luck.

Asif Godall
Co-Chief Investment Officer