AM I ALONE in finding the narrative from spooked commentators and panicked market participants on the state of the market – fanned by a media gagging for salacious sound-bites – somewhat bewildering and downright misleading? Probably not but I feel sufficiently moved to comment.
It’s clear that equity, debt and commodity markets have lost their footing and are struggling to find any consensus as to what constitutes fair value. Buy on the dips? Sell on the spikes? When markets are careering around like they are, such advice is futile. It’s just as likely to be the other way round at the drop of a hat.
We do have a (rather bizarre) 90% correlation between oil and credit in play at the moment. Markets have a habit of latching on to and get fixated on correlation no matter how unlikely. Oil is currently being seen by credit investors as shorthand for low growth. I think that’s a bit facile.
Why is everyone overlooking the huge benefits of lower oil prices? As a consumer, I don’t fret for one second about global growth when I’m buying petrol at 98p a litre in London. Nor do I worry about the near-term prospects of heavy energy consumers like the airline or shipping industries, or the economic benefits to big oil importing countries such as India, Japan or South Korea (notwithstanding the bête noire of deflation …)
The intensely short-term focus on what’s happening right now and what’s likely to happen in the next few minutes may play to the market’s collective short attention span, but ultimately what you end up with is baseless fear peddling. The price may be the price but who’s behind the action? On what volume? Are large institutional equity investors offloading in size on those big stock down days? Not really. Are high-frequency trading bots dicking the market around on relatively thin real liquidity? To a point.
I’ve become mightily tired of people conflating the facts and ascribing the same factors to everything. Suggesting that all moves are related to China and oil prices is not just glib; it’s wrong. Sure, markets are inter-linked to a point but just because prices across asset classes are correlated now doesn’t mean it’s right. Fear begets fear in environments like today’s but a lot of developments through the back end of 2015 into this year have been idiosyncratic.
In the grand scheme of things, the brutality of the shift is arresting but as a market move it gets my vote
China wasn’t responsible for Italian regulators bailing in creditors of Banca Etruria, Banca Marche, Carichieti or Carife nor Portuguese regulators moving on Banif or switching those Novo Banco lines; events that have so roiled the senior bank market. The covered bond and bank hybrid markets, by contrast, have been looking okay so far this year.
Oil prices aren’t behind the gossip and chit-chat about coupon stoppers on UniCredit’s Additional Tier 1 lines being tested. Nor are they behind fears about European bank NPLs and their impacts, particularly focused on Banca MPS.
Reports of whole investor segments turning their back on primary debt issuance, or (depending on the borrower) demanding hefty new-issue premiums to take down supply; of issuance being postponed; of issuers paying up; of US high-yield blowing up (the USHY index is heavily weighted towards the commodities space); of leakage of fear into related sectors (metals and mining); of levels of oversubscription in primary debt bookbuilding reducing are all surely too obvious even to merit a mention in dispatches given they’re a natural side-effect of uncertainty.
IN DEBT AND equity markets, what we’re seeing is the brutal unwind of many of the things everyone said was wrong in 2014 and 2015.
Overdone stock valuations; over-bought safe-haven government bond yields as well as investment-grade and high-yield credit spreads (on the back of Fed/ECB/BoJ policy that had forced rates and other buyers to migrate into higher-beta assets) had led to negative yields in some areas or cut returns to zero. That had been the bane of investors’ lives and put a lot of market segments off-limits.
The risk-reward scenario had gone out of the window and led to fierce accusations that central bank policy had done nothing for the real economy but had instead benefited the financial and corporate sectors. Corporates in particular stand accused of doing little to nothing with the mountains of quasi-free money they’d raised to boost the underling economy, preferring instead to launch debt-fuelled (and in many cases tax-driven) M&A adventures or boost management compensation through stock buybacks.
It’s been a borrowers’ market for a long time. If the market rebalances back towards more of an equal contest where investors can garner some decent return instead of being forced to book assets at wholly unrealistic prices, it’s a logical and welcome move. That state of affairs was always unsustainable.
In the grand scheme of things, the brutality of the shift is arresting but as a market move it gets my vote. Will there be casualties as the market shifts and morphs into this new cycle? Alas, yes. The universe of fallen angels will balloon and work-outs will flourish; investors will lose money but stand to gain as return scenarios improve.
If the end result is a more rational market from a valuation/risk-return perspective, casualties are a cost of doing business. Harsh but true. Here’s one kernel of truth to end with: market volatility tends to be a short-run phenomenon so I say: put events into the right context and gather some perspective.
