Snapshots has been told that today is International Beer Day. According to Wikipedia participants are encouraged to “step out of their domestic/locally brewed comfort zone and sample a beer from another culture”. We’ll cheers to that!

Zero balance transfers and stoozing

We have mentioned UK consumer leverage as an idiosyncratic concern in the current credit cycle.  One practice that demands scrutiny is EIR (Effective Interest Rate) modelling of credit card balances that are transferred at 0% for up to 49 months.  Banks assume an average balance, maturity and EIR for the life of the transaction based on an internal model and then present value some of this income.  These are some very complicated variables to model, and we all know that present valuing derivative transactions in the past has caused numerous scandals.

We think banks are doing this to pay for the expensive RWAs they generate over the zero interest period as they win market share (credit cards are capital heavy but profitable assets).  According to the PRA, any unexpected changes in customer behaviour will “lead to volatility in net interest income including potentially the reversal of previously recognised interest income”. What happened to good old fashioned accrual accounting? Despite this idiosyncratic issue we remain very constructive on bank capital.

We also note that 0% credit cards are spawning a practice dubbed “stoozing” which is the art of earning interest on 0% borrowings in higher interest bank accounts or depositing the borrowing in an offset mortgage account.  It’s good to see some consumers making the most of this opportunity.

Warning bugles being sounded

A number of very high profile investors have been sounding the warning bugle. They cite a number of concerns, including valuations, low volatility, changing central bank policy, momentum and blind faith in passive investing, Trump impeachment and geopolitics.

Since the beginning of the year we have been saying that broad valuations in the liquid market have been falling and some sectors are at the point where you are not being compensated for the risk.  We also note that dispersion is very low.  One thing we are sure of is that idiosyncratic risk is rising which should result in more alpha opportunities and perhaps less beta opportunities than we have seen recently.  We may not be blowing the bugle but we are definitely warming up our harmonica.

Finally, having spent the last year studying the relationship between fertility rates and economic growth please note Snapshots is on paternity leave next week to put theory to practice.

By Asif Godall
Deputy CIO