“Well if he gets elected, we will just move to one of our other four homes..”

No matter how hard I try I don’t think I can come up with any coherent arguments on market direction this morning. One report says rumours of a US/China trade deal are bogus, while someone else is whispering in my ear how Trump is planning a really positive trade announcement to kick start markets in 2020.

So many snippets of noise… The French are revolting…  The UK election is on the final furlong, and the main concern of the Conservative Party is to make sure Boris doesn’t do an Andrew Neil interview and chuck his lead away. My local candidate says their party is getting massive support on doorsteps, but I was briefed by a very senior pollster the election is much closer than thought because voter intentions and switching patterns have never been so unclear. The one thing I know… whatever the UK result – it won’t be as bad as you fear…

Buried amongst the noise I was reading something from a Private Bank report: The average wealth per adult around the globe reached $71,000 last year. More than half the population are worth less than $10k. 1% of adults are millionaires and own 44% of global wealth. Somewhere else I read the 6 richest people in the UK own more than the bottom 30%. Why?

UK Property, Liquidity and Risk 

The talk of London markets the last few days has been the run on UK commercial property funds after M&G gated its £2.5 bln property fund. End of the world stuff? Does it mean the imminent economic collapse of the UK? Is it confirmation of the Brexit political disaster? Nope… But there is much tutting about regulatory failure, the unsuitability of daily liquidity funds for retail investors, and shaking of heads at M&G apparently getting it so wrong. There are rumours swirling around other funds, including Threadneedle, Aberdeen and others will be forced to gate property funds.

I don’t see why anyone is particularly surprised…. If there has been failure, it’s yet another example of market doublethink.  Property is a great asset class – but its definitionally chronically illiquid. Deal with it accordingly – which isn’t via daily liquidity..

There are a couple of key points to take away.

The first is liquidity is the lesson here. Liquidity in property is about selling very sticky bricks and mortar – it takes time, which is why funds are gating before they run out of cash holdings. What’s happening in Property in the UK is very specific.  Investors are concerned about the death of the high-street retail sector, shuttered cornerstone lessees in shopping centres, and switching supply and logistics chains. It’s all about who the property is rented to – credit. When funds were gated a few years ago it was because of Brexit fears. There is still an element of that – some £3 bln has been pulled from property funds this year in the UK.

Liquidity could bite in other asset classes if/when we see sentiment flips. The one I’m watching is corporate debt. Volumes in Investment Grade and High Yield markets have ballooned since the last crisis 10-years ago. Then we knew who the names were, and could pretty much trust their annual reports and rely on the numbers (if not the conclusions) in rating reports. Most investment grade corporate debt was comfortably a few notches above junk.

Since then everything has changed. Market making is non-existent due to the capital charges placed on banks. Trading is moving across AI/Algo platforms, while the average credit rating has tumbled to a single notch above junk. If we get a recession or higher rates and a substantial number of investment grades become fallen-angel junk, then there will be a wave of forced sellers – who is going to buy? How will the Algos read a mass surge to the exit?

I’ve been warning for the last 10-years about the corporate debt sector. Leverage has increased dramatically, driven by stock buybacks and more recently a tidal wave of M&A (which by-and-large is value destructive). Yet we know less about the true picture of corporate balance sheets than ever before – concepts like community-adjusted EBITDA (whatever the feck that was) proved bogus at WeWork. You simply can’t rely on EBITDA numbers plucked from company reports or analyst reports – companies quote what they like, secure no one is really checking. You need to look very carefully in the annual report to a find a note buried in the small print explaining how the company has modified EBITDA to reflect issues such as how much they spent developing a new product and expect it to pay back over 20 years…

Or take a look at covenant-lite lending to the private equity owned firms that make up the obligators in CLOs – effectively many allow lenders to become subordinated with no notice.

I could make similar cases about liquidity threats across most markets. The bottom line is that liquidity is what liquidity is – and daily liquidity, from Woodford, Gam and now M&G has to be properly understood.

The second issue the current Property Fund gating theme raises is Risk. Where has risk gone?  When I was young, and dinosaurs roamed the Earth, if a property developer wanted cash, or a company wanted a new logistics warehouse, or there was a shopping centre to be built, they went to a high street bank.  Their commercial property teams were vast, centralised and understood commercial property.

Today banks don’t lend – that would upset the regulators and central banks. They broke (by which I mean they broke deals). Practically every major UK real money account – the Pension Funds, the Insurance Companies and Local Authorities, has become a property lender. All regard it as a desirable real asset producing enhanced non-correlated returns. When I tried to fund a property lender recently, nearly every account I spoke with regarded the issuer as a lending competitor rather than opportunity.

There is nothing unskilled about the property teams at real money accounts – many are highly experienced ex-bankers, but when everyone wants property assets… Its another example of lots of money chasing assets, which causes rates to tumble.. and then when a shock emerges, like Brexit, or M&S pulling out of shopping centres, then its no wonder its exit time..

Meanwhile… Interviews…

It might be the season of joy and goodwill to all, but if there is a common theme to my jumbled thots this morning, it’s how bloody awful some people are during elections.  We all know politicians like the sound of their own voices, but some of the media commentariat are really getting on my wick.

Political interviews are now a combat blood sport. Watching Brek-drek presenting pussy-cats like Charlie Stayt imagine they are political tigers is illuminating. (I’m sure Charlie is actually a very nice chap, he is usually partnered with the marvellous Naga Munchetty.) But he is not a political forensic surgeon. Being rude and aggressive to political guests while shouting loaded questions and not listening to the answers is not interviewing.

A good interview is a conversation.  I’ve only watched one decent interview this whole blasted election.  A perfectly reasonable SNP spokesman answered questions in a calm and friendly manner, stopped to let the interviewer interrupt him, considered his answers carefully, praised the interview for the quality of his questions, and admitted there were some questions to which there are no easy answers.  He was so good I rewound it – it was a masterclass: the chap gave the strong impression of competence and practicality, but actually said almost nothing of note.  Brilliant!

Even though the SNP are generally a loathsome nest of blue-bottomed toerags who are risking Scotsmen’s God-given right to run England, it left a very positive impression! Shame they aren’t standing in Eastleigh!

Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.

Republished from the Morning Porridge by permission.

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