Showing posts with label Markets. Show all posts
Showing posts with label Markets. Show all posts

Tuesday, April 19, 2016

The State of Commercial Real Estate

The NCREIF ODCE Index NOI growth is currently at its lowest point in the past decade (as shown in the graph on the top-right). 

Also known as the NFI-ODCE, the index consists of 30 open-end commingled funds, pursuing a diversified core investment strategy and primarily investing in private equity real estate, with $173.1 billion of gross real estate assets and $133.3 billion of net real estate assets. 

An important criterion for a fund to be considered for the NFI-ODCE index is that at least 80% of market value of real estate net assets must be invested in office, industrial apartment and retail property types. The decrease in net operating income growth is important to note, given that U.S. commercial real estate prices have been rising steadily since 2009 and are only now beginning to plateau; decreasing in some sectors and locations. 

Though one cannot be sure whether this bull market is finally coming to an end, one must consider that it is a possibility. 

According to deal tracker Real Capital Analytics, Inc., $25.1 billion worth of commercial property was exchanged in February compared to $47.3 billion in February 2015; a decrease of approximately 88%.

Commercial real estate valuations have been on the rise since 2009, with retail and apartment properties above 2007 levels. Though not quite as high, industrial and office properties have also surpassed values reported in 2009. 

One of the reasons for the appreciation is the increase in demand for commercial real estate, resulting in some of the lowest vacancy rates in the last 25 years. The apartments sector has the highest vacancy rate, relative to vacancy rates in the respective time period, when compared to the office, retail and industrial real estate sectors. If this data concerns you, you are not alone. 

Last week, Kansas City Fed President Esther George expressed her concern for the commercial real estate market by saying it is a potential asset bubble that “bears watching”. George encouraged the U.S. central bank to stay on the course and gradually raise interest rates. This has been a growing concern for many, with the U.S. central bank acting increasingly dovish in recent times.


Something else to consider is the beginning of the end of SIFI designations. The SIFI designation for non-bank companies and a similar designation for eight of the big banks were established to create safeguards to prevent or minimize the effects of another financial crisis by requiring financial institutions recognized as being too big to fail maintain high levels of capital reserves and liquidity, and be subject to extensive government oversight. However, both MetLife and GE have recently filed to have the SIFI designation removed. If successful, this may mean an increase in capital available. Though the effects may not be immediate, commercial real estate lending might increase for those firms with exposure to the industry.  
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Tuesday, December 8, 2015

Emerging Markets: The Fundamental Divergence

While the US dollar appreciation and sharp drop in commodity prices since mid-2014 have been the reasons for our negative stance on emerging market producers throughout the past year, the second round of commodity price decline experienced during the past quarter, alongside Chinese cyclical weakness, has brought about a more generalized negative sentiment on all emerging economies, regardless of their fundamentals.

In a nutshell
  • The fundamental divide between consumer and commodity producing countries is still in place – favor Asia.
  • India looks particularly well positioned, both structurally and from a cyclical perspective.
  • Brazil’s woes are not just oil-related, and point to a lengthy recession.
The recent contagion should not mask the wide divergences that remain between emerging countries. We hold to our view that caution and selectivity are warranted. Indeed, while Latin American countries and Russia continue to suffer from their dependence to commodity prices, as demonstrated by collapsing currencies and contracting industrial production growth, emerging Asia is faring much better, with industrial production still growing at a healthy pace. In other terms, despite the increased fragility of the emerging world at large, the divide between consumer and commodity producing countries remains. So long, of course, that we are correct in assuming a Chinese stabilisation – within its secular downtrend.

For now, many thus maintain our long-held preference for Asian countries. As a whole, the region still boasts solid fundamentals with an expected 2015 current account surplus of 2% (International Monetary Fund (IMF) data) and controlled inflation levels (except in Indonesia) allowing for pro-growth monetary policies. India’s long-term story also remains extremely positive, as long as supply-side reforms do not disappoint, with a fast growing and young middle class. Cyclically, as a net importer, India is a major beneficiary of the fall in commodity prices, which has also helped control historically high inflation levels, allowing the central bank to adopt an expansionary monetary policy.

On the other side of the spectrum, many remain negative on Russia, South Africa and most Latin American countries. Russia’s dependence on oil has brought about a vicious circle of falling currency, high inflation, tight monetary policy and contracting growth. Although, even though oil broke below $40, most expect oil prices to rebound to our long-held USD 50-70 range, this should not prove enough for Russia to break out of the vicious spiral anytime soon. With a large external deficit, high inflation and falling currency, South Africa remains vulnerable to capital outflows. Finally, within Latin America, indeed emerging economies as a whole, Brazil is our biggest concern. The issues there seem to have intensified rather than stabilized over the past few months. A broader collapse of Brazil, which represents some 3% of world GDP (roughly the size of France or Italy), would be particularly worrisome, not only for the region but also for already fragile global growth.

How concerned should we be about Brazil?

Like Russia, Brazil is trapped in a vicious spiral of collapsing currency, skyrocketing inflation, tight monetary policy and deepening recession. The oil price drop did exacerbate Brazil’s woes, but it is not their underlying cause. The country’s fundamentals had already been eroding for some 10 years, as evidenced by a deteriorating current account and lax fiscal policy – even as commodity prices were booming.

Most see three major risks for Brazil. The first is political: Dilma Rousseff’s growing unpopularity means that she has no capital to drive fiscal reforms. An impeachment could in theory allow for a more credible leader to take the reins, but it would also lead to a period of high uncertainty. The second risk stems from China: Brazil would be severely hurt by a hard landing of its main trading partner. The third risk is fiscal: while sovereign default is unlikely in our view given the low level of US dollar-denominated debt, private debt is also growing fast.

All told, many expect Brazil to remain in recession for some time and its currency to stay weak, which will eventually become a support. In terms of our global economic scenario, assuming that China, the US dollar and commodity prices do stabilize, Brazilian issues should not have a systemic impact.

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Wednesday, November 18, 2015

Monthly Economic Commentary

Economic and market highlights

Economics

The US Federal Reserve left the federal funds rate unchanged in October but adopted a more hawkish tone in its press release, removing references to global financial and economic risks. The implication being that the chances of a December rate rise have increased. The target band remains 0 to 25 basis points. We forecast that the first Federal Reserve interest rate rise for the new tightening cycle will occur in December 2015, which is in line with market consensus.

The Chinese Caixin Flash Purchasing Managers Index (PMI) shows manufacturing activity continues to slow, although the reading was fractionally stronger than anticipated at 48.3, up from 47.2 the previous month. In the eurozone, PMI readings have been relatively robust for most of the year, with October’s registering at 52.3 while after some strong data in the US over the past year, things are looking a little more subdued with the PMI at 50.1 with purchasing managers surveyed citing the strong dollar and energy markets as headwinds.



Source: MWM Research, Caixin, ISM, Markit, November 2015

Deflation in Europe remains a concern with Germany's Harmonised Index of Consumer Prices (HICP) registering a 0.2% fall year-on-year, while import prices fell 3.1%. The Euro area HICP is -0.1% year-on-year with core inflation running at 0.9%.

The latest real GDP figures from China show a 6.9% growth year-on-year, with the announcement after the 5th Plenum reiterating the goal to double China's GDP between 2010 and 2020, implying an average growth rate of 6.5% per year over the next five years.

Canada entered a technical recession in the first half of the year but is expected to return to growth in the third quarter. Australia was sailing close to the wind with a 0.2% quarter-on-quarter growth rate in the June quarter, although we expect a rebound for the third and fourth quarters of 2015 with a pickup in manufacturing output and strong retail trade.

Bonds

The downward trajectory of US 10-year note yields over the last few months looks to be reversing with the latest statements from the Federal Reserve conspicuously removing warnings about global financial and economic risks. Fixed income markets are pricing in a greater chance of a December rate hike after what was perceived to be relatively more hawkish statements. Yields in the United Kingdom, also close to a new rate hike cycle, followed suit. In Europe, while 10-year rates moved, there was very little response at the short end, which remain relatively stable near or below zero due to quantitative easing.

Equities

Equities were broadly stronger in October as they began to shrug off the volatility of August and September. In local currency terms, the strongest developed markets were Germany and Japan, up 11.8 and 10.9% respectively. The US gained 8.1% while Australia lagged, adding only 4.2%. Emerging market equities underperformed developed markets with China rallying 9.1% while the MSCI Emerging Market Index recovered 5.3 percent, dragged down by Brazil, India and Russia.

The S&P500 has staged a dramatic recovery, rallying 11.6% from its September lows and now rests just 1.4% away from new highs.

Currencies

The Canadian dollar and Swiss franc gained 2.4% while the British pound was up a fraction less at 2.0%. The Australian dollar has strengthened 1.6% over the course of October. The Quantitative Easing currencies euro and yen lost 1.0 and 0.8% respectively.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Monday, November 16, 2015

10 Charts That Show The U.S. Economy Is Still Underestimated

According to Macquarie analysts David Doyle and Brendan Livingstone there is more to U.S. economy than meets the eye.

"Despite a strong employment report for October, doubts persist in some corners about the resilience of the U.S. economic expansion," they wrote. "We remain confident in the outlook and believe strength should continue in equities with disproportionate exposure to the U.S. economy."

Macquarie is often correct in projecting global and macroeconomic trends. The firm has succeeded as the foremost infrastructure investor, globally, in part by seeing well the big picture.

To this end, Macquarie analysts compiled a list of 10 reasons why the American economy is better than you think.

1. The U.S. manufacturing renaissance is alive

You wouldn't know it from the widely-cited ISM manufacturing purchasing managers' index, which suggests that the secondary sector is barely eking out any growth, but structures investment in this segment is booming:



"Nominal investment in this area is up over 60 percent year-over-year and has more than doubled since 2012," the analysts wrote. "Manufacturers are increasingly building new plants and making improvements to existing plants.

2. Air travel is taking off

Cheap fuel, the lofty U.S. dollar, and an improving economy have served as tailwinds for miles flown domestically and abroad to surge:



"Enplanement growth is accelerating and has reached its fastest pace of growth in five years," wrote Doyle and Livingstone.

3. People are going to restaurants

Another clear beneficiary of the plunge in gas prices: restaurateurs. Nine readings into 2015, the average annual growth is running at roughly its peak rate during the previous cycle:




4. Consumers are increasingly optimistic

A sub-component of the University of Michigan consumer sentiment survey shows that the net percentage of respondents who expect their financial situation to be better in a year has hit its highest level since 2007:




This bodes well for future spending growth, according to the analysts.

5. Workforce entrants come with caps and gowns

"Over the past two years, a net 3.5 million workers with bachelor degrees or higher have entered the labor force, while a net 1.1 million workers with less than this level of education have departed from it," wrote Doyle and Livingstone.




The negative impact that the slowing in labor force additions has on gross domestic product growth may be somewhat offset by higher productivity from these better-educated employees. An environment in which well-educated workers drive labor force growth also augurs well for a reduction in income inequality, as those offering jobs that require fewer prerequisites find that the pool of available workers has shrunk, at least in relative terms.

6. The labor force is tight ...

A survey of Human Resource executives shows companies are having trouble finding new prospects:



Slack in the services sector, by far the dominant portion of the American economy, is particularly scarce, compared to the previous cycle.

7. So new hires are getting pay raises

Unsurprisingly, the dearth of good talent has resulted in new hires getting pay raises "well above the average from 2005 to 2007, yet another sign of a tight labor market," the analysts wrote.



8. Private sector credit growth pushing higher

"While headline consumer credit has been stable at 7 percent year-over-year, this masks firming fundamentals," wrote Doyle and Livingstone. "Credit growth from the federal government and not for profits has been decelerating, while credit growth from private sector for profit lenders has been rising steadily."




9. Robust investment in innovation

The growth in research and development expenditures has eclipsed its pre-recession pace, moving steadily higher since 2012:



10. Producer price inflation is hotter under the hood

While market-based measures of inflation compensation suggest that fears about deflation can remain elevated, producer prices tell a different story. Excluding food and energy, the core producer price index is up a healthy 2.1 percent, year-over-year, Macquarie observes:



Source: Macquarie, Bloomberg

Note: Information contained herein has been obtained from sources believed to be reliable, but Redmount accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy of such information. The projections shown are provided for informational purposes only and should not be construed as investment advice or providing any assurance or guarantee as to returns that may be realized in the future from your private equity commitments. Projections and expected returns are subject to high levels of uncertainty regarding future economic and market factors that may affect future performance.Accordingly, such projections/expectations should be viewed as only one possibility out of a broad range of possible outcomes.
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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Monday, November 9, 2015

3Q 2015 Private Equity Environment

Global equity markets fell sharply in the third quarter, driven by concerns over slowing global growth, particularly in China, and uncertainty over the U.S. Federal Reserve’s monetary policy. The MSCI World Index declined by 8.3% in the third quarter, the index’s worst quarterly performance since the third quarter of 2011. Nearly every single-country equity index posted a loss, led by the Shanghai Composite, which declined by 27.9% during the quarter despite a raft of measures undertaken by the Chinese government to stem the sell-off. Other emerging markets and commodities also declined significantly, weighted down by fears of contagion and the knock-on effects of a slowdown in China. The S&P GSCI index, which measures a basket of 24 different commodities, declined by 19.3% in the third quarter, which brought the index to its lowest level since 1999.

Highlights
  • Equity market volatility adversely impacted IPO issuance during the quarter. Global IPO issuance in 3Q15 totaled $13.6 billion, a 76.8% decline from 3Q14 and the lowest quarterly total since 1Q12. 
  • Global buyout investment activity has increased only moderately over the past few years, and 2015 is on track to continue the trend. YTD 3Q15 buyout transaction activity totaled $289.8 billion, an increase of 2.7% over YTD 3Q14
  • PE firms worldwide raised $58.1 billion in 3Q15, a 43% decrease from the prior quarter and a 31% decrease from 3Q14. The decrease was driven by buyout- and U.S.-focused fundraising activity
Private Equity Investment Activity
U.S. Buyout Investment Activity


U.S. buyout investment activity totaled $55.8 billion during the third quarter of 2015, down approximately 14% from both the prior quarter and the same period in 2014, according to data from
Thomson Reuters. This brought total U.S. buyout investment activity for the first three quarters
of the year to $190 billion, a decline of 5% from the same period in 2014. The year-over-year decline in investment activity is reflective of the increasing wariness of many general partners in the face of rising valuations in a competitive market environment. Many general partners are setting a high bar for new investments, which is restraining overall investment activity. The average purchase-price-to-EBITDA multiple (across all transaction sizes) for new buyout
investments was 10.3x for the first three quarters of 2015, up from 9.7x for all of 2014, according to S&P LCD. Although average purchase-price multiples are increasing, general partners continue to be disciplined and are structuring their transactions conservatively: the average equity contribution
rate for a buyout transaction completed so far this year is 40.8%, and the average debt-to-EBITDA multiple is 5.6x; the corresponding rate and multiple for all of 2014 are 37.0%
and 5.7x, respectively (see table 3).

Non-investment-grade debt markets were not immune to financial market volatility during the third quarter. The BofA Merrill Lynch High Yield Master II index generated a –4.9% return in the third
quarter, which drove an increase in its option-adjusted spread to 662 basis points over U.S. Treasuries—its highest level since June 2012. U.S. leveraged loan issuance totaled $115 billion in the third quarter, a decline of 14.8% from the year-ago period. Year-to-date 2015, U.S. leveraged loan issuance totaled $341 billion, a 24.3% decline from the same period in 2014. The decline in leveraged
loan issuance was due to a number of factors, including the slowdown in buyout investment activity in recent quarters, a shift toward more-conservative financing structures (which occurred as a result of the banking industry’s new leveraged lending guidelines), and the recent increase in credit spreads (which is tempering issuer appetites).
The largest announced U.S.-based buyout transaction during the quarter was the $12.6 billion acquisition of Oncor, a Texas-based electric transmission company, by a syndicate of investors including the Hunt Group, Avenue Capital, Centerbridge Capital, and GSO Partners. If completed, this would also be the largest buyout transaction of the year thus far. The investor group is acquiring Oncor from Energy Future Holdings, which is currently in bankruptcy court, eight years after its record-setting buyout led by KKR and TPG. Other notable buyout transactions announced during the
quarter include the $8.0 billion carve-out of Veritas from Symantec, led by Carlyle Group, and the $6.5 billion take-private of insurance software provider Solera, led by Vista Equity Partners.

Fundraising Market

Private equity firms worldwide raised $58.1 billion in the third quarter of 2015, a 43% decrease from the prior quarter and a 31% decrease from the $84.7 billion raised in the year-ago quarter, according to Thomson Reuters. The third quarter figure brought year-to-date worldwide private equity
fundraising to $246 billion, which is just slightly ahead of the $245 billion raised over the same period in 2014.

The quarter-over-quarter decrease in worldwide private equity fundraising was primarily driven by U.S.-focused funds, which raised $31.5 billion in the third quarter—a 58% decrease
from the prior quarter and a 44% decrease from the year-ago quarter. Significant decreases relative to the second quarter of 2015 occurred in each major strategy. After strong starts to the year for both U.S. buyout and venture capital fundraising, the strategies raised just $13.6 billion and $4.6
billion, respectively, which rank 33% and 24% below the average quarterly levels experienced for their strategies over the past five years. Notable U.S.-focused fund closings during the third quarter include American Industrial Partners VI, which raised $1.8 billion, and Insight Venture Partners IX, which held its final closing at $3.3 billion.

Europe-focused funds raised $19.9 billion during the third quarter, flat from the prior quarter but up 8% from the amount raised in the year-ago quarter. The primary driver of the region’s year-over-year increase was the growth in venture capital fundraising: the $3.0 billion raised during the third quarter was the highest quarterly total since the fourth quarter of 2008. Asia-Pacific-focused funds raised $5.9 billion during the quarter, an 83% increase from the measured second quarter; however, the year-to-date total of $14.7 billion raised in 2015 represents less than 50% of the corresponding 2014 total. The largest Asia-Pacific-focused fundraising round held during the third quarter was that of Chinese venture capital fund Shunwei China Internet Fund III, which closed on $1.0 billion. 

During the third quarter, buyout funds raised $30.3 billion, a 43% decrease from the prior quarter (or a decrease of 15% when excluding the $17.0 billion close of Blackstone Capital Partners VII in the second quarter). Fundraising within the segment was broad-based: nine buyout-focused partnerships raised $1.0 billion or greater, highlighted by EQT VII, which closed on $7.4 billion, the largest amount raised during the quarter. Fundraising for venture capital–focused funds remained relatively flat during the third quarter: the $9.9 billion raised worldwide represented a 5% decrease
from the prior quarter and a 5% increase from the year-ago quarter. The aforementioned decline in U.S. venture capital fundraising, combined with a greater than 70% increase in quarter-over-quarter fundraising in every other major global region, resulted in just 46% of the worldwide venture capital
fundraising total being raised in the United States—the lowest percentage raised by the region since the fourth quarter
of 2011.

Energy-focused fundraising experienced a significant slowdown during the third quarter, following three consecutive quarters of record-setting activity. Energy funds raised $5.5 billion, which represents a 27% decrease from the strategy’s 5-year quarterly average of $7.5 billion. Despite the decrease in overall volume, notable firms in the energy private equity space continued to accumulate significant amounts of capital following the downturn in oil and natural gas prices: Ridgewood Energy Oil & Gas III ($1.6 billion), Apollo Natural Resources Partners II ($1.3 billion), and ArcLight Energy Partners VI ($0.9 billion) accounted for 70% of the quarterly energy fundraising total. Fundraising for other private equity strategies (i.e., subordinated debt, infrastructure, and special
situations) represented 21% of the total amount raised during the third quarter.

Source: Pathway Capital, Bloomberg, S&P LCD. 

Note: Information contained herein has been obtained from sources believed to be reliable, but Redmount accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy of such information. The projections shown are provided for informational purposes only and should not be construed as investment advice or providing any assurance or guarantee as to returns that may be realized in the future from your private equity commitments. Projections and expected returns are subject to high levels of uncertainty regarding future economic and market factors that may affect future performance.Accordingly, such projections/expectations should be viewed as only one possibility out of a broad range of possible outcomes.


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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Wednesday, July 15, 2015

Investment strategy - Asset Management, 2nd quarter 2015

Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe.

At a glance
  • Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe. They are the motive behind the ongoing global easing cycle.
  • A stronger US dollar and the resulting foreign exchange market volatility argue for greater differentiation amongst portfolios, in accordance with their reference currency. Hedging has become a must.
  • Euro area investors will benefit from both liquidity injections and the materializing economic recovery – a positive outlook that supports our preference for risky assets over cash.
  • A more balanced approach is required when it comes to US dollar- and Non-US dollar- based portfolios, given the more limited equity market upside.
  • External debt levels and commodity intensity are dividing the emerging economies into two camps: those who can afford to loosen monetary policy (Asia) and those who are forced to keep rates high (Russia, Brazil).
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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Thursday, June 18, 2015

May June 2015 Market Observations

The US equity markets continue their advance 
• The S&P 500 returned 1.3% for the month. Small cap led the advance. 
• Growth outperformed value in the small and large cap segments. Value outperformed growth in the mid cap segment. 
• Health care and technology were the top performing sectors in the small, mid and large cap segments, supporting the growth indices. The energy sector was the worst performing sector with negative returns, dragging down the value indices. 
• Real assets such as MLPs, REITs and infrastructure were negative performers for the month. 
• Price momentum and Growth factors were the best performing. Quality and value factors were weaker but still positive. 

Weak performance in international and emerging markets for the month 
• International equities, as reflected by the MSCI EAFE Index, finished the month with a return of -0.5% in USD terms, underperforming the US market. Japan outperformed Europe as per the MSCI Japan Index return of 5.0% versus the MSCI Europe Index which returned -0.8% in USD terms. 
• Emerging markets, as reflected by MSCI EM Index, returned -4.0% for the month in USD terms. EM Eastern Europe and Latin America were the worst performing EM regions. 
• The energy sector was the weakest performing in both non-US developed and emerging markets. 
• Price momentum was clearly the top performing factor in developed markets. Quality was the top performing factor in emerging markets. The weakest performing factors were value in both developed and emerging markets. 

High yield credit was lone bright spot in fixed income 
• High yield credit was the best performing fixed income segment for the month. Only high yield, leveraged loans and short duration Treasuries posted positive returns (with the exception of CCC-rated credit, which was slightly down for the month). 
• Long duration Treasuries was the worst performing fixed income segment followed by investment grade credit. 
• Most major currencies depreciated relative to the US dollar during the month. The main exception was the Renminbi. 
• Currency depreciation hurt the performance of non-dollar bonds after a strong month in April.

Market information source: Bloomberg.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Wednesday, June 17, 2015

Are high-yield bonds and floating-rate loans at risk?

The constant pursuit of yield in this low interest rate environment might have pushed the demand for high-yield bonds and floating-rate loans high enough to impact judgement of banks underwriting and backing new issues.

Banks are frantically underwriting high-yield bonds and financing syndicated floating-rate loans, counting on investors to absorb everything coming to markets.

Interest rates for new bond and loan issues have dropped, prompting borrowers do more acquisitions, buybacks. etc.

Private equity fund operators are some of the largest biggest users of high-yield bonds to arrange leveraged and management buyouts. Floating-rate loans are used in buyout deals as well.

Low interest rates, willingness of banks to underwrite bonds and loans, and readiness of investors to acquire bonds and invest in loans have pushed mergers & acquisitions and buyout activities to new highs. Valuations of companies being snapped up in auction style sales are breaking records after records, reminiscent of 2007.

The illustration to the left, a deal tombstone published in the Dow Jones Private Equity News, speaks to it. In this case, a large private equity and LBO operator borrowed $1.75 billion to supplements its own funds to acquire more companies. Keep in mind that acquisitions are done by issuing high-yield bonds, to add to the equity. As such, banks are lending loans to add to the equity of the buyer, all while still lending more via high-yield bonds. More leverage to execute more purchases. All loans and bonds will end up in investor accounts, through mutual funds and ETFs, in a very short order.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Tuesday, May 12, 2015

U.S. cash balances remain high


Investors are continuing to hoard cash and keep more and more capital in short-term assets.

Source: Investment Company Institute data, Federal Reserve, and Bloomberg. *Total cash and short-term assets include money market assets (ICI), large time deposits, all commercial banks, NSA (not seasonally adjusted), savings deposits, and small time deposits.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.









Thursday, May 7, 2015

FAQs on Greek debt default

Today European Central Bank gave Greece another week to make a deal or tighter liquidity rules will be imposed on its banks. And this is just a start.

The summer of 2015 will bring renewed drama around Greek debt and potential default, Greece has to come up with about 4 billion euros ($4.5 billion) by the end of May for debt payments. Then there’s the 1.5 billion-euro monthly tab for salaries and pensions.

As Prime Minister Alexis Tsipras’s government in Athens haggles over the details of its reforms and leans on its banks to keep buying Treasury bills, the question inevitably looms: what happens if the cash runs out?

Not all creditors are created equal. For example, the International Monetary Fund is more equal than others, first in the repayment queue.

We found the Q&A session conducted by Bloomberg View Columnist Mark Gilbert with Mizuho International Chief European Economist Riccardo Barbieri to be of great value for frequently asked questions (FAQs) related to Greek debt, its potential default, and the probable processes triggered by a default.

Here are the key Q&As for your review.

Q: What is a default?
A: Investopedia.com defines default as “the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.”

Q: How much debt does Greece have?
A: The Greek government has about 313 billion euros of debt outstanding, most due after 2021. Add companies and banks and the total is closer to half a trillion. Given that Greek banks are likely to refinance most of the maturing Treasury bills without protest -- with pension funds and local governments making up the shortfall -- the important near-term deadlines are May 6 and May 12, when the IMF is due to receive almost 1 billion euros in total. The real crunch comes midyear, when almost 7 billion euros of bonds held by the European Central Bank mature in July and August.

Q: What happens if the IMF isn’t paid?
A: A missed payment date starts the clock ticking. Two weeks after the initial due date and a cable from Washington urging immediate payment, the fund sends another cable stressing the “seriousness of the failure to meet obligations” and again urges prompt settlement. Two weeks after that, the managing director informs the Executive Board that an obligation is overdue. For Greece, that’s when the serious consequences kick in. These are known as cross-default and cross-acceleration.

Q: What are cross-default and cross-acceleration?
A: Failure to pay the IMF would entitle some of Greece’s other creditors, including the European bailout fund, to declare a default. They would then have the option to demand immediate repayment of all their loans, a process known as acceleration. Other lenders could then follow suit. While calling a default preserves creditors’ claims, acceleration -- the bit that hurts -- isn’t automatic. Each creditor decides on its own. To varying degrees the debt is linked in a web of cross-default and cross-acceleration clauses that make it safe to assume that one default and acceleration would trigger demands for repayment on most, if not all, of the rest. Greek debt features a variety of structures, with different terms and conditions and governed principally by Greek and English law. The obligations include bonds whose holders voted not to take part in a 2012 restructuring; notes issued in that restructuring; bonds held by the ECB; a series of loans from Europe’s bailout fund, including one used to sweeten the restructuring pill; notes issued last year; the 2010 Greek Loan Facility; and the IMF loans.

Q: What about credit-default swaps?
A: The determinations committee of the International Swaps & Derivatives Association, the trade association that administers derivative contracts, must first receive a request for a ruling on what should happen to CDS contracts. It then makes a binding decision on whether a “credit event” has occurred, which may trigger the contracts. There are now 622 contracts open, covering a net $592 million, according to Depository Trust & Clearing Corp., which runs a data warehouse. In 2012, the contracts paid out after the country’s debt restructuring, which was the biggest ever.

Q: What would default do to Greek banks?
A: That depends on the attitude of the ECB and on the default itself. With lenders losing deposits, only a drip-feed of Emergency Liquidity Assistance supplied by the Bank of Greece against deteriorating collateral is keeping them afloat. While ECB President Mario Draghi indicated last week that ELA would continue as long as the lenders are solvent and have adequate collateral, bank solvency, especially of lenders using ELA, is very much a judgement call, says Gabriel Sterne, head of global macro research at Oxford Economics in London. Failure to repay the ECB in July and August would probably result in the suspension of ELA, according to Chris Attfield, a strategist at HSBC Holdings Plc in London. Any interruption in ELA would almost certainly trigger a fully fledged bank run, forcing the imposition of capital controls. If the banks themselves are victims of the default after, say, a failed Treasury bill auction, then their insolvency would probably ensue and ELA would end.

Q: How would capital controls work?
A: In Greece, not so well. Unlike the island of Cyprus, which this year lifted controls implemented two years ago, Greece has porous borders and mobile citizens. While controls would stop capital flight via the banks, there is still the cash residents have withdrawn.

Q: We hear a lot about Target2. What’s that?
A: It’s the payment system established by the ECB that allows euros created by each national central bank to flow freely in the 19-nation currency bloc. In 2013, an average 1.9 trillion euros of transactions per day were processed, according to the ECB website. It also keeps track of who owes what to whom and at the end of March, Greece was in the hole to its partners for 96 billion euros, or more than 40 percent of economic output, according to the Bank of Greece. Courtesy of Target2, money created in Athens is circulating in Paris and Berlin after paying for Peugeot cars and Bayer AG’s asprin. As long as Greece remains officially in the euro zone -- even if a parallel currency circulates -- the nation’s Target2 liabilities are a political concern, not a financial one. However, loss of access to Target2 “would crystallize the liability,” said John Whittaker, a fellow of Lancaster University Management School who has published on European payment systems. “The other central banks would then have losses in proportion to their share of the ECB’s capital.”

Q: What about Greek companies?
A: A sovereign default would probably be followed by corporate defaults. Greek assets overseas would be fair game for creditors, though there aren’t many to grab. The former Coca-Cola Hellenic Bottling Co., the world’s second-largest Coca-Cola bottler, for example, is now called Coca-Cola HBC AG and is headquartered in Switzerland. Also, capital controls would probably be accompanied by other measures, such as orders for companies to repatriate euros held overseas and prohibitions on dividend payments. The government might also introduce IOUs to substitute the missing euros -- in 2010 it slashed the price it would pay drug suppliers and then paid them with bonds.

Q: Could Greece default and remain in the euro?
A: Exiting the euro would only be possible if Greece left the European Union, according to Yannis Manuelides at Allen & Overy. “The euro is an integral part of the union and it’s meant to be a one-way street,” he said. “There is no way to expel a member and to allow or force an exit would be very bad for the EU. They will do everything they can to avoid it.” That may not be enough: According to Benedict James, a banking partner at Linklaters, capital controls would be “a staging post to an exit.” James agrees that the only way for Greece to leave the euro would be to exit the EU altogether. In sum, Greece leaving the euro is likely to be messy, lengthy and painful for all concerned, with the Greeks suffering more than their partners and the lawyers profiting. The real deadline is in June, when national parliaments start to head off for the summer break, said Zsolt Darvas, a fellow at the Bruegel think tank in Brussels who reckons that Greece will be able to scrape by for now.

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Thursday, April 30, 2015

Is the Corporate M&A Bubble in Trouble?

We think its not...yet. The current level of activity suggests that corporate managers will continue to buy rather than build.

In a recent CNBC poll, some 56% of companies said that they plan an acquisition in the coming year, up from 40% last October and the first time since 2010 that more than half plan to do something. But even if such plans were to generate a surge later this year, it would make a bullish argument for equities, not the bearish one accompanying much of this recent buzz.

M&A, quite simply, is a vote of confidence in market values and the future generally. Companies buy each other when they see a reason to expand and when other firms look attractively cheap. The same goes for private equity, which is no less in the acquisition business than corporations. If these decision makers saw stocks as expensive, they would pursue their expansion with direct investments in new equipment, premises, and in a hiring program. Since they are buying these days and doing relatively little building, they have effectively announced that stock values still make a purchase the more attractive way to expand.

Table 1. M&A Activity (monthly rates)
Period
Number of Deals
Value ($ in bil.)
2013 4Q
817
$79.6
2014 1Q
959
$108.7
         2Q
1,000
 154.8
         3Q
1,003
 108.1
October
1,123
 96.5
November
1,006
 194.0
December
983
 103.6
2015 January
995
$78.4
        February
938
114.3

Source: FactSet

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Tuesday, April 28, 2015

Top geopolitical risks to watch for

Synopsis of Eurasia Group's Top Risks 2015 

1 - The Politics of Europe
Europe's economics are in substantially better shape than at the height of the Eurozone crisis. But the politics is now much worse. That's true on three different levels: bottom-up, intra-EU, and outside-in.

2 - Russia
Last year, we highlighted Russia as one of the top risks to global security--that was before Moscow carried out the most brazen redrawing of European borders since World War II, and then fell into a severe currency crisis. The conflict with the West over Ukraine has crystallized a newly aggressive and explicitly anti-Western Russian foreign policy. Western sanctions, a sagging oil price, economic stagnation, and the ruble's plunge are weakening Russia economically and financially, though not driving it to the point of crisis. 

3 - The Effects of China Slowdown
We're quite optimistic about China this coming year. President Xi Jinping has consolidated an extraordinary amount of power since ascending to the presidency. He has launched policies long overdue to rebalance the economy, pushing ahead on improving air quality, pursuing a series of measures aimed at making state-owned enterprises more efficient and spearheading a massive anticorruption campaign within the Communist Party.

4 - Weaponization of Finance
The United States remains the world's only superpower, but Washington is now using its influence in important new ways. After World War II, American dominance was established by the forging of us-led alliances such as NATO and multilateral institutions such as the IMF and the World Bank that enshrined US-authored rules and standards.

5 - ISIS, Beyond Iraq and Syria

In 2015, ISIS faces setbacks in its core bases in Iraq and Syria, but its military power remains significant, and its ideological reach will spread throughout the Middle East and North Africa. It will grow organically by setting up new units in Yemen, Jordan, and Saudi Arabia, and it will inspire many jihadist organizations to join its ranks. Ansar Bayt al Maqdas in Egypt and Islamists in the Libyan city of Derna have already pledged allegiance to ISIS leader Abu Bakr al Baghdadi.

6 - Weak Incumbents
Political risk stemming from weak incumbents who recently won reelection will weigh on key markets in 2015. With the important exceptions of India and Indonesia, the wave of emerging market elections in 2014 saw incumbents win underwhelming victories. Sluggish growth and mounting popular demands were not enough to displace ruling party candidates in Brazil, Colombia, South Africa, and Turkey, and are unlikely to do so in Nigeria in 2015.

7 - The Rise of Strategic Sectors
In 2015, success and failure for business will depend increasingly on governments. For decades, the perception was that multinational companies were developing greater autonomy from policymakers, both in their home governments and in the countries where they operate, eroding state authority to regulate the flow of goods and services around the world. Instead, government influence is expanding, focused more on political stability than on economic growth.

8 - Saudi Arabia vs. Iran
Saudi-Iran tensions will spike during 2015, worsening the Sunni-Shia sectarian rift across the region.
The relationship will be especially volatile this year because: 1) there will be an unprecedented number of theaters of proxy conflict 2) domestic politics in both countries will enhance conflict and 3) the evolution of diplomacy on Iran's nuclear program, regardless of the outcome, will provoke more strife between Riyadh and Tehran. 

9 - Taiwan/China
Relations between China and Taiwan will deteriorate sharply in 2015 following the opposition Democratic Progressive Party's (DPP's) landslide victory over the ruling nationalist party in November's local elections. Taiwan's political class will focus overwhelmingly this year on throwing elbows at one another ahead of the 2016 presidential election. President Ma Ying-Jeou is already a lame duck, and we expect no progress toward an agreement with China on any form of trade liberalization.

10 - Turkey
For the second year in a row, Turkey makes our list. Lower oil prices have been good news for this country, but that's about all that's going well. Heavy-handed rule, short-sighted political decisions, and bad foreign policy bets will all conspire against Turkey. At home, Erdogan has used election victories in 2014 to ensure decisive defeat of his political enemies (of which there are many) while remaking the country's political system to tighten his hold on power.

Red Hearing 1 - Asia Nationalism
Red Hearing 2 - The Islamic State
Red Hearing 3 - Petrostates
Red Hearing 4 - Mexico

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Thursday, April 16, 2015

The effects of bulging corporate purses.


High cash levels, accumulated by S&P 500 corporations, are being put to work. Above charts are showing growing levels of capital expenditures, M&A activities, dividends, and stock buybacks by the nation's largest corporations.

If sustainable, this will benefit the economy. Capital expenditures can add to the industrial growth. Dividends and stock buybacks will probably add to consumer spending and housing sector strength. Corporate mergers and acquisition activities may strengthen equity markets.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.












Monday, April 13, 2015

Factors shaping investment markets. April 2015.


Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe. They are the motive behind the ongoing global easing cycle.

A stronger U.S. dollar and the resulting foreign exchange market volatility argue for greater differentiation amongst portfolios, in accordance with their reference currency. Hedging has become a must.

Euro markets will benefit from both liquidity injections and the materializing economic recovery – a positive outlook that supports our preference for risky assets over cash.

A more balanced approach is required when it comes to U.S. dollar- and Swiss franc-based portfolios, given the more limited equity market upside.

External debt levels and commodity intensity are dividing the emerging economies into two camps: those who can afford to loosen monetary policy (Asia) and those who are forced to keep rates high (Russia, Brazil).

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Friday, March 20, 2015

The Secrets to Valuing Hot Tech Companies.

This week Bloomberg Business shed some light on on this.

The opinion was built around a photo-messaging app raising cash at a $15 billion valuation. Bloomberg Business doubts that this company is actually worth more than Clorox or Campbell Soup and was curious where did investors come up with that enormous headline number?

Here's the secret, Bloomberg thinks, to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they'll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round's valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet. 

Our own opinion? The above is not exactly a great confidence builder.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Monday, March 2, 2015

Is the deleveraging over?


Economic growth may go into higher gear if U.S. households are finally done deleveraging  There may still be room for more deleveraging as well. These processes may impact inflation, interest rates, commodities, retail and housing activities, equity markets, debt markets, etc.

The charts above (click to enlarge) look at the current state of consumer finances. The chart on the left shows the makeup of the household "balance sheet" and the top right chart shows what percentage of disposable income is spent on debt service, highlighting the consumer deleveraging we have observed over the past few years. The chart on the bottom right looks at household net worth, which is the sum of all assets, including home equity, less all liabilities.

Chart: Market Insights. 1Q 2015. JP Morgan Asset Management

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Wednesday, February 18, 2015

Is the fiscal situation in Greece a global threat?

In reality the fiscal situation in Greece is not a global economic threat. Greece is only going through a debt crisis.

To evaluate the matter, it is important to differentiate between the stock of debt and the flow of new debt.

We should not be complacent about the stock of debt: it is high and probably unsustainable at 180% of GDP. Even with higher growth of economy this level of debt would be a challenge. Greece's growth is very low, demographics are unsupportive, productivity is very week. However, we should not forget that Greek debt has already been significantly restructured in such a way that it is manageable in the short-term. Altogether, current high level of Greek debt is a threat to Greece. It will probably impact its creditors as well.

On the other hand, Greek debt flows fundamentals have exceptionally improved, and have been strong. What Greeks did is almost unprecedented. Within five years, they turned their government primary balance to a surplus. Similarly, their current account, over the same period, went from a deficit of 115 to a surplus of over 1%.

So, we have a country that runs a primary budget surplus and a current account surplus, but where, partly because of austerity, there is no growth possible. Hence, the stock of debt crisis only. It can add to market volatility. If poorly handled by Eurozone powers, it can result in Euro weakness. This will hardly result in global economic threat.

Monday, February 9, 2015

Asset allocation of endowments

Endowments and sovereign wealth funds are expected to invest with the longest time horizon and view.

The chart sums up latest disclosures of investment holdings by endowments and Corporate Pension Funds.

The first observable fact: low level of lack of fixed income in endowment portfolios, 9.00%.

Second, 53.7% of endowment holdings are in "alternative" classes: hedge funds, private equity, and real estate.

Equities are only 27.00% of endowment portfolios.

Alternatives investments, offering lower liquidity and lower volatility, are not so "alternative" for endowments, who are assuming that returns will be better from hedge funds, private equity, and real estate.

As a result, almost 99% of endowments expect better than 7% annualized returns over the long run, while only 66% of pension funds expect the same.

Source: Market Insights. 1Q 2015. JP Morgan Asset Management.

Saturday, January 31, 2015

Lower oil prices: good news or bad?

The past months have been marked by weaker oil prices, with the WTI breaking below $44/barrel, and now sitting below a record 5-year low. With the lack of agreement among OPEC members to cut output, and subdued demand in a low potential growth environment, investors should probably factor in durably lower oil prices than they have been used to over the past 3 years. Is this good news or bad news?

Let’s consider the largest consumer in the world: the US economy. Although lower oil prices have historically been generally positive, not all periods of falling oil prices have led to an accelerating economy. Indeed, while lower prices coming from rising supply with resilient demand are good, declining demand is worrying. So, which is it today? Despite a small seasonal down-tick in world demand in October, rising supply has clearly been the prevailing factor driving prices down over the past few months. As long as this is the case, lower oil prices are positive for energy consumers. As to the U.S. industrial sectors exposed to capital equipment, a slowdown may be on the way since oil companies will inevitably reduce capital expenditures.

What about the rest of the world? Who are the winners, who are the losers? Net oil exporters will obviously suffer, while net oil importers will benefit.Not surprisingly, the Middle East will be the largest loser, although the region is immunized by its large fiscal surpluses. The situation in Russia is far more problematic, and the collapse in oil prices will certainly accelerate the country’s fall into recession. That said, the majority of the world economies are net oil importers/consumers and will therefore benefit from the slump in oil prices. As such, a further step towards discerning the prime winners is to look at the share of energy in their consumer price indices: the larger, the better. Turkey should also welcome lower oil prices as a means to reduce its large current account deficit and to better control inflationary pressures. Finally, Eastern Europe (Poland, Hungary, Czech Republic) as well as some core European countries (Spain, Germany) will get a nice boost from cheaper oil.

So, all considered, lower oil prices are a net positive for the global World economy. What opportunities on the investment side? Lower energy prices support consumers’ purchasing power. In the US, periods of negative oil returns have historically been associated with periods of out-performance of the MSCI Consumer Discretionary and Staples equity indices over the MSCI US equity index. An exposure to the US Consumer therefore appears to be a direct way to benefit from lower oil prices in USD.

Saturday, January 24, 2015

Markets at a Glance, January 2015

With U.S. consumer confidence reaching 11-year high in January the consensus is pointing to an estimated 3% GDP growth in the US, with a possibility that for the 1st time in many years US economy will contribute more to global growth than China.

We believe more volatility should be expected in 2015 as the Fed begins to normalize rates. This has several ramifications for capital markets and investment portfolios. Low oil prices and higher rates may impact industrial and energy sector capex.

Many commentators blame current market turbulence on the plunging oil price. We believe it is more about lingering geopolitical issues and a pending Federal Reserve (Fed) rate hike. 

First, we expect volatility to be elevated compared to the levels witnessed from 2012 to 2014. 

Second, we continue endorsing tactical stand within fixed income. Two- to five-year bonds are likely to prove the most vulnerable to higher rates. 

Although volatile, equity markets are expected to perform, although marginally, positive, benefited by the stronger dollar and growing US economy. 

Since we are cautious about downside risks in the equity markets we endorse measured and disciplined execution of equity strategies within portfolios.