Too quick to PIK?

Too quick to PIK?

The deals set to haunt European high yield

Project Neptune rising…

Project Neptune rising…

… amid renewed liquidity concerns

July 2013

Email a Friend

  • All fields are compulsory


Please enter a maximum of 5 recipients. Use ; to separate more than one email address.




Add Your Comment


  • All fields are compulsory
  • All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.









Against the tide: Upsetting the apple cart

The immediate actions of key financial strategists have a direct impact on the markets. But what of the trends that are beyond these leaders’ control?


Financial asset markets are mostly concerned about immediate issues: whether or not central banks will continue to pump in liquidity; the risk of a new eurozone crisis; the impact of Abenomics in Japan; the prospects for faster growth in the US; and the danger of slower growth in China and other emerging economies. A few words from Federal Reserve chairman Ben Bernanke on how soon the tapering of the Fed’s asset purchase programme might begin has a sharp impact on global bond yields, equity prices and currencies.

But there are other events that might upset the financial applecart over the medium term. I’m not saying these are likely, but they are possible.

Accidents

At first glance, the danger of a war between China and one of its neighbours (particularly Japan, but maybe also India, Vietnam or the Philippines) appears remote. The disparity between what resources the Chinese can muster and what their neighbours have is so huge. And China does not want to do anything that would upset its peaceful economic growth.


However, regardless of its desire to avoid war, China is determined to assert itself as the regional hegemonic power. It has embarked on a high-risk strategy of inserting troops or ships in contested territories. The risk is not of a premeditated war, but of a conflict that grows from an incident nobody can control, such as a clash between a Japanese and a Chinese warship, leading to the accidental sinking of the Chinese ship and heavy loss of life; or Indian soldiers opening fire on encroaching Chinese troops in the Himalayas; or a Vietnamese fighter shooting down Chinese aircraft over the Bay of Tonkin.

Such confrontations would not spell the start of Armageddon or a new world war, but they might spur a new arms race that would profoundly change the strategic map of Asia.

And then, of course, there is North Korea. Despite all their blood-curdling threats, the North Koreans are only too aware of their vulnerabilities and know that they don’t have enough nuclear weapons to take on the US. Dictatorial, paranoid regimes are not necessarily totally mad: such regimes often make fairly rational calculations when it comes to their own survival and are surprisingly flexible in pursuit of this objective.

But nobody has any idea how the North Korean decision-making mechanism works. It is not known if Pyongyang understands the concept of escalation – if the North Koreans are capable of ratcheting up their involvement without an all-out-war. Again, the chances of a deliberate, pre-planned war remain slim, but those of an accidental confrontation that ends up in serious conflict can be very high indeed.

The unexpected

Then there are the risks of surprise political explosions started and sustained by new forms of communication. The Arab Spring was fostered by social networks; the recent outbursts in Turkey and Brazil have also been fuelled this way. For the first time, national borders no longer matter for the flow of ideas. Elections have become less predictable and voters will become more volatile.

The worldwide web is not just a source of surprise and political upheaval. It is also changing the landscape of human capital. The provision of online university education is a phenomenon that has been present for some time. Now the big established universities are jumping on the bandwagon. Technology has developed enough to deliver stable internet connections, and enough of the developing world is now online for this purpose.

The knowledge

This will mean a big expansion in knowledge for people who have the desire to learn but not the funds. It will erase, at least up to a point, the distinction between developed and developing worlds in formal knowledge. It gives a similar advantage to small as well as big countries and to new as well as old universities. A new university with a good online teaching programme or course will have just as much chance of a breakthrough as, say, Oxford. It will, however, increase the political tensions and perhaps violence in the Third World; educated people will demand working opportunities that are not yet there.

The investment landscape will not be changed just by the statements of Ben Bernanke, European Central Bank president Mario Draghi or Japanese prime minister Shinzo Abe, but also by events and trends totally beyond their control.



David Roche is president of Independent Strategy Ltd, a London-based research firm. www.instrategy.com