02.06.17

Snapshots has been listening to the Black Eyed Peas and is wondering “where is the love” in the world?

And is there a quantifiable measure of “love” between human groups that can be analysed and does it follow its own cycle, like the business cycle, the debt cycle or the default cycle?  We will leave that to social scientists and historians to ponder in the new data rich world we inhabit.

The Climate Sceptic versus the Capitalist

After much suspense Trump pulled out of the Paris Climate accord yesterday, stating “I was elected to represent the citizens of Pittsburgh, not Paris”.   The mayor of Pittsburgh responded with “Hillary Clinton received 80% of the vote in Pittsburgh. Pittsburgh stands with the world and will follow the Paris Agreement”.

Cutting through opinion and criticism, it is clear to us that unsubsidised renewables are becoming a major force in the world energy markets, a subject we touched on last week.  We can therefore put politicians (sceptic and green) to one side and rely on good old fashioned capitalism to take charge here.  In fact we are already seeing increasing M&A as some companies sell their fossil fuel assets to focus on renewables.

The Italian Job

In a surprise move over the weekend the major Italian political parties have agreed a new electoral system based on proportional representation. This still needs to be voted through parliament but could trigger an early election in October.  This is ahead of initial market expectations for April next year.  An early election will be complicated by the fact that will coincide with the country’s budget presentation to the EU and tapering of ECB QE.  This is also at the same time the Fed is signalling that it will commence balance sheet normalisation operations so October risk factors are increasing.

Passive Active

Last week an obscure index composition committee used its discretion to decide that IHSMarkit should join the S&P 500. The stock rallied over 10% in the two months before the announcement and almost 5% on the day of the announcement. Where does all that value go?  We know who pays the premium, namely passive index tracking investors.  They can subsidise the premium through cheaper fees achieved by gargantuan economies of scale.  However there has to be a trade off somewhere.  The same phenomenon occurs in the credit markets with bond indices constructed on metrics of rating and debt outstanding and many buyers driven by cost of capital which is also rating driven.  This leaves lots of value for active credit managers.

By Asif Godall
Deputy CIO