Saturday, 21 July 2018

Strategy and the vagaries of markets

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  • Keith Mullin 475px June 2014
Keith Mullin, IFR Editor-in-chief, says investors have cash to put to work, and ECM could benefit

THERE WAS A lot of chatter on the back of UBS’s fourth-quarter and full-year results around whether the strategy adopted by Sergio Ermotti, to scale back fixed-income and push wealth management to the fore with a smaller equities-led investment bank, has wrong-footed the group vis-à-vis its ability to take full advantage of market conditions that prevailed in the fourth quarter as well as potential evolving market conditions.

I’m talking specifically about the coming normalization of the fixed-income yield curve – with the US leading the charge – and the return of investors’ preparedness to trade as the rate structure moves off the bottom.

The latter phenomenon supercharged US bank earnings in Q4, of course, and created an air of expectation for the coming year, and was partly behind the rapid run-up in bank shares.

Given the degree of differentiation between the make-up of the Swiss bank’s Q4 earnings with those of the major US banks that reported earlier in the month, it would be easy to start calling – as I have been alluding to recently – the beginning of the great US/European bank inverse performance correlation.

But I’m going to resist the temptation and hold fire. It’s certainly too early to make any firm judgements on transatlantic earnings divergence on the basis of where we are in the European reporting cycle.


ON STRATEGY – AND UBS is no exception – banks are always going to be held hostage to the vagaries of markets.

But I don’t imagine the UBS board is going to be sitting around a table to discuss with any urgency whether they made the right call on the way forward. Boards and senior management aren’t supposed to do this stuff in order to benefit quarterly trading patterns.

Sure, returns were squeezed last year and in Q4. But on the basis that UBS cut back fixed-income when it did because it admitted it just wasn’t very good at it and the group doesn’t have the same sort of exposure in the US as the domestic behemoths (even while being overexposed to Asia-Pacific), it’s a bit of a stretch to suggest the bank should be penalized for taking what at the time were pretty reasonable decisions that may still come good over a longer timeframe.

I think it was pretty clear that UBS management had gone into 2016 with its eyes wide open as to the risks of underperforming against its peers, given the prospect of certain market conditions emerging.

On the flip-side, a record adjusted profit before tax for the year in wealth management Americas and industry outperformance in equities shouldn’t be ignored.


ON THE STATE of the market, sure, the exuberance at play in the debt markets is hard to ignore. Levels of oversubscription in the primary credit market for issuers of all hues from public finance through to the corporate and FIG sectors have been extraordinary.

Investors clearly have a lot of cash to put to work. Reactions to Australia’s record-breaking long five-year syndicated bond issue, the UK’s due 2057 offering, France’s massive 20-year Green bond, the swathe of EM sovereign bonds, and solid supranational supply confirm that buyers are out in force and one senses the return of a vestige of animal spirits.

Away from SSA, Deutsche Bank’s senior unsecured euro outing, Santander’s non-preferred senior offering (with its contractual clause to account for the fact the asset-class doesn’t yet exist in Spain), BPCE’s senior non-preferred Samurai, and DBS’s debut euro covered bond point to a willingness among buyside accounts to take on challenging structures (within acceptable limits). And with pricing premiums that from the issuers’ perspectives don’t look prohibitive.

Syndication tactics that entice accounts to put bids in early in return for better allocations are working well alongside decent technicals to propel the bond market.


BUT IT’S NOT all about bonds. Mark Hantho’s prediction of 1,000 IPOs this year and next was a big call from Deutsche Bank’s head of ECM. And while he reckons two-thirds of that will be out of the US in terms of deal flow, there will be big volumes out of Asia and Europe, he said at the start of the year.

The record-breaking performances of the DJIA, Nasdaq and S&P 500 look likely to be supported by a solid corporate earnings cycle – 70% of US companies that have reported have exceeded earnings expectations. That will help drive the rotation back into equities.

And for those looking to do deals, even though IPO activity in the past year was pitiful, performance was actually very good. And slower activity in 2016 will only serve to fill up the 2017 and 2018 pipelines. I reckon that bodes well for ECM fees this year. We’ll see.

The big question of the moment is whether the positives out there outweigh the negatives. We still don’t know what to make of President Trump. And we still don’t know what to make of Brexit. My guess would be that concrete outcomes from Trump’s meeting with UK Prime Minister Theresa May will be few and far between.

Finally, I was intrigued to see the other great rotation – that of human capital out of London into places such as Frankfurt as the UK loses access to the single market – could yet be derailed by the German government’s insistence on pursuing a financial transactions tax. That supports maintenance of the status quo.

I say buy the positives: 2017 could turn out to be a stand-out year.


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