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Saturday, 16 December 2017

On Chinese horses (elephants) and syndicates

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Anthony Peters looks at Chinese investment prospects in the new year.

Gong Hei Fat Choi – neither the Year of the Bull or the Year of the Bear so we can expect little guidance from the Chinese calendar with respect to market direction and the Year of the Horse is probably only really auspicious if you’re a maker of beef lasagne.

Enough of the frivolity although a decent joke might cheer up what has been a pretty dire week for many investors and traders – although the risk rally of yesterday was, I thought, fairly predictable. I’d not be at all surprised to see a further easing of tensions today.

There was no notable sign of difficulty or risk aversion in the Italian five-year bond auction which traded at a yield of 2.43%, down from 2.71% at the last sale of the maturity in December. Observers were particularly excited by the high bid/cover ration of 1.49. It might all be St Mario and his mantra of “whatever it takes…” which continues to push yields and risk premia lower… but we have been here before.

By all existing rules, China should be on the cusp of a financial crisis but if there is one thing we should have learnt over the past twenty or so years, it is that existing rules do not necessarily apply there

Steve Beck of Banco Santander here in London and guvvie bond market veteran with a pedigree longer than Man United’s wage bill watched the feeding frenzy at the recent Kingdom of Spain 10-year auction and commented wryly: “I’m minded of the Greek syndication in March 2010 when the syndicate book size (€16bn of bids for a €5bn deal) was gushed of in the press as a sign that the worst was behind us, only for the bond to plummet 35 points in less than two months. My point being that the book size of a syndicated deal should not be used as a gauge of the health of an economy, merely a good guide to positions and consensus thinking ….”

I would add to that that the Greeks, at the time, committed the fatal error of trying to squeeze the hedge funds out of the deal, only to find that real money had puffed its orders and when allocated in full could do nothing but sell. There proved to be no bid behind and the Greek crisis was up and running. Not, I hasten to add, by the making of the hedge funds but by the making of the treasury. The bond market is a complex beast and one which the authorities find very difficult to understand.

But let’s face it, if I sometimes struggle after having spent half my life doing nothing else, what chance the rest?

The Chinese elephant

As we won’t be seeing much of the Chinese until this time next week, it will be interesting to see how the rest of the world trades. Economic numbers there remain mixed which is of itself not a major problem but the elephant in the room remains the rather opaque world of the Chinese banking and above all shadow banking. Alas, this is not the Year of the Elephant either.

By all existing rules, China should be on the cusp of a financial crisis but if there is one thing we should have learnt over the past twenty or so years, it is that existing rules do not necessarily apply there. This makes a pending China crisis impossible to position. As investors are here to invest, the default position is to remain long. When everybody remains long, no crisis can develop….geddit? Spot the Spanish and the Italian bond markets?

Today sees the conclusion of the first month of the year and I guess, despite the ructions in the emerging markets which have mad it a pretty horrid place to be, it will most likely be seen as something of a no score draw. Both bulls and bears have valid arguments but bringing them together in order to sort out what is what seems as impossible as creating a single, unified law of physics. 

Personally, I still struggle to see what we are doing better this time than we were in the run-up to 2007/2008 with investors chasing the kind of yields which don’t exist at the risk levels which they believe they are entering into. More scarily, there is no end to the number of players who know that the risk/reward profile sucks but who still deceive themselves into believing that they are smart enough to get out before the next “éclat”. A continuation of yesterday’s risk rally will help them prove this point to themselves as month-end valuations will look a darned sight better than if it were January which ended after 28 days rather than February.

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Alas, it’s that time of the week again and all that remains for me is to wish you and yours a happy and peaceful week-end. The world returns to order tomorrow as the Six Nations rugby season kicks off. Our boys are off to Paris for the opener and both sides have chosen to field a number of previously uncapped players. Just as the wobbles in emerging markets has separated the men from the boys in the markets this week, the cauldron of the Stade de France will quickly do the same for the international virgins. Let us hope, for the spectacle’s sake, than not as many of them come up wanting.

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