Sharing our convictions

It is not clear to us just how much more monetary easing will placate equity investors, and we see a real risk that when we enter the third quarter earnings season next week, company specific data from the bottom up will be more of a shock than the macro picture has been.

Employees are consumers that power the economy. They also represent a large part of valuations worldwide. So why are investors so bad at measuring people impact? Understanding how and why employees add value enables companies to get the most from their staff, delivering better results for savers and society.

"We think the downside to markets is still underappreciated, and thus we would prefer to stay long protection."

In our new audio series, Vontobel Quality Growth Portfolio Managers offer insights on how to navigate volatility. You can listen to our experts’ views on the risks in equity markets today and how they identify companies that are on the right side of long-term structural trends.

The active versus passive management debate is well documented, but with ESG or sustainable investing the debate takes on a new dimension.

The globally operating travel group Thomas Cook entered liquidation this week, after it was unable to reach an agreement between its shareholders, financiers and numerous creditors, leaving hundreds of thousands of travellers stranded. A potential restructuring would likely have resulted in a significant loss for bondholders, but now it looks like the senior unsecured bonds are virtually worthless – Debtwire expects a recovery of 0-10% and the bonds are now trading at around 6 cents.

There has been a bit of nervousness to say the least in US money markets over the last few days. The overnight repo rate in dollars surged to levels not seen since the aftermath of the financial crisis, touching almost 10% on Tuesday. During the financial crisis the high dollar repo rates were a clear sign of trouble in the banking system, so it’s natural that investors might be uneasy about this. We should stress upfront that this is not the case today, the spike in the repo rate is a short term technicality created by a confluence of events, none of which should be worrisome, but in which in aggregate created a shortage of dollar cash in a short space of time and over a very short period.

At TwentyFour we regard ‘momentum’ as one of the most underestimated factors in promoting progress on environmental, social and governance (ESG) issues. Our view is capital markets should support rather than shun a company if it has a credible plan to improve in a key area or areas.

Alongside the usual unveilings at the Frankfurt Motor Show this week, one bit of automotive news that piqued our interest yesterday was Moody’s downgrading Ford to “junk” status, assigning a Ba1 rating to the company’s debt with a stable outlook.

What is the purpose of your company? Not what it does, but its purpose. Its goals. Its compass. A meaningful answer is usually pretty short, understood by a layman, and can provide a light to follow through tough decisions. The pressure for companies to rethink their purpose, and the sharing of rewards across a company’s stakeholders, has risen sharply.

September new issuance has opened with a bang as we expected. Volumes are high and the issuer types are diverse, with a slant towards more frequent borrowers who tend to have their ducks permanently lined up in order to jump on favourable conditions. We expect this trend to continue throughout September as bankers push borrowers to take advantage of what could be one of the best opportunities they might see this cycle.

With Brexit uncertainty having ratcheted up a number of notches since Prime Minister Boris Johnson sought to prorogue parliament, yet again investor attention is focused on what impact a hard Brexit could have on sterling assets, and how to best protect themselves from associated volatility. Since the Brexit referendum in 2016, our view has been that safely capturing the ‘Brexit premium’ priced into many sterling assets was a way to enhance value for investors. However, we have always had a cautious view on what Brexit could ultimately look like, and currently it seems clear that the chance of a hard Brexit has increased significantly.

Yesterday, the Queen approved a request from the Prime Minister, Boris Johnson (‘Bojo’), to suspend Parliament from 10th September to 14th October. This means that when MPs return from summer recess next Tuesday, they could have as few as four days sitting in Parliament before it is suspended again. The Government have argued that this is following procedure – on average a Parliamentary session lasts a year and then is suspended before a Queen’s speech begins a new session – the current parliamentary session has lasted two years. A new session allows the Government to outline its agenda, as well as resetting quotas for certain mechanisms such as Private Members’ Bills.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

Rates risk is not something we concern ourselves with too much in the European ABS market, so normally news of inverted yield curves and 30-year US Treasury yields dropping below 2% would largely wash over us. This is because pretty much all ABS bonds are floating rate, so there is no duration. Or is there?

Today marked the arrival of a long expected event, namely the inversion of the US yield curve between two and 10 years. This is an important event as historically it has been a very reliable indicator of impending recession. History tells us that once the 2s-10s curve inverts, on average a recession is a year to 18 months away.

The current US economic expansion is now the longest in modern history, and investors globally will be seriously contemplating the end of the credit cycle. This late-cycle period could prove particularly challenging. Mark Holman, chief executive of TwentyFour Asset Management presents five tactics for fixed income investing late in the credit cycle.

Get Social, ‘S’ from ESG, wrong and a company stands to lose customers and employee loyalty, and damage value of the business. The priority of owners in how socially responsible investments are made, and the expected returns, are key. Liquid markets can deliver rapid change in ownership. Can the two coexist? Owners are as much part of the solution as part of the problem.

Since the two anti-establishment parties (The League and Five-Star) formed a coalition and took control in Italy, markets have been uncertain on the domestic government policy that was promising many things to many people and ultimately creating considerable friction with the European Commission (EC).

The embers of the European ABS H1 primary pipeline are now cooling down for the summer break. After a slow start to the year driven by the delayed implementation of new regulations, we saw an increasingly busy pipeline as Q2 developed and became the third busiest quarter of issuance post crisis. July saw almost €20bn equiv. of supply, taking the year to date total to €58bn including a record €19bn in CLOs. This accords with our somewhat contrarian view that 2019 issuance would eventually keep pace with 2018 (a post crisis record). July’s total went a long way in achieving this, bringing YTD issuance just 6% short of the 2018 run rate. In late June this was 28%.

August has been a very challenging month so far for risk markets, while in traditional risk off, UST treasuries have seen sharp declines in yield back to the lows last seen in October 2016. We can’t help but think that this sharp adjustment will become more ingrained in August, following 6 months of relatively benign markets.

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

China is relying on consumer spending for growth, with consumption driven by running property prices, rapidly rising incomes and debt. China’s property prices reached 84% of those in the U.S., yet disposable income is just one tenth. As the trade fallout with the U.S. saps demand for jobs – red flags are up.