Abigail with attitude: No peace of mind in frontier or mainstream

By:
Abigail Hofman
Published on:

The month of August is supposed to bring peace of mind to busy bankers: the frenetic pace of markets diminishes and the bosses depart for their villas in Tuscany or mansions in the Hamptons.

If you are a she-wolf of Wall Street, August is the time for that discreet liposuction procedure. If you are a he-wolf, time with Junior beckons. The sun is high in the sky, the sea is azure blue and the most stressful decision you have to make is which coloured cocktail to order next.

Most bankers I have spoken to have been remarkably sanguine about the conflict in Ukraine. In early July, I met a savvy investment banker who has considerable experience of emerging capital markets. The savvy one mused about how prescient he had been purchasing Russian stocks and Ukrainian debt when these instruments were reeling from the annexation of Crimea in March. Bottom-picking can be fun and I was a little envious of savvy banker’s wiliness.

However, several days after our encounter, a Malaysian plane was blown out of the sky by Russian separatists and the appetite for Russian financial risk evaporated. I’m pretty sure my contact, who was long Russian and Ukrainian securities, felt an unsettling chill as he sat on his capacious sun-lounger in the south of France.

But nothing chills the spine more than the situation in the Middle East. Hamas rockets and Israeli bombs reignited the old wounds of the Palestinian conflict. The rise of Islamic State is most troubling of all.

And the Ebola outbreak is alarming. The disease is highly contagious with a low recovery rate. And it is occurring in countries afflicted by poverty, ignorance, poor sanitation and porous borders. Remember all that chatter in 2013, about frontier markets and the potential for African investments? This optimism was, perhaps, best encapsulated by Bob Diamond, the former chief executive of Barclays, setting up an Africa-focused investment business, Atlas Mara. The firm raised over $300 million on the London Stock Exchange last December but failed to achieve its target of $400 million in its next round of fund-raising in June 2014.

It’s a horrible reminder that when it comes to Africa, there may be potential but there is always risk. My mind wanders to the former high-flying, oil exploration company Afren, which has substantial African operations. Afren’s shares shrivelled more than 30% during August, after the chief executive and the chief operating officer were suspended for allegedly taking unauthorized payments.

So August didn’t bring much peace of mind, this year, for investors in frontier markets.

Mainstream markets

August was also unsettling for investors in mainstream markets. Each day seemed to bring a record high for the US markets. Commentators ran out of upbeat commentary although the phrases, "low volume" and "low volatility" struck an ominous undertone.

I had lunch at the end of August with a salesman at a top investment bank. "Let’s face it," he sighed, "the markets have got to these levels because of manipulation. Essentially, the central banks have manipulated both the bond and stock markets. The big hedge fund players are extremely worried about what happens when the central banks step back."

Everyone is expecting, and in some cases,
yearning for, a correction

There are so many anomalies. Here’s one that stands out: should 10-year Italian bonds really yield less than 10-year US Treasuries? Asset prices have risen in many western economies yet most people, apart from the wealthy, complain about a falling standard of living. Quantitative easing, which increases the money supply, should bring inflation. But that doesn’t seem to be happening, or is there no inflation because the inflation indices don’t accurately reflect what is occurring?

Everyone is expecting, and in some cases, yearning for, a correction. But perhaps because of this cautious backdrop, markets continue higher. Several years ago, a top hedge fund manager told me: "Bull markets climb a wall of worry." How right he has proved to be.

It is also odd that, with stock markets soaring and growth returning to certain economies, bank stocks aren’t doing better. European banks are mired in uncertainty as we await the outcome of the third round of stress tests and an Asset Quality Review.

Berenberg Bank claims that European banks still need to raise as much as €300 billion in additional capital. Many of the smaller banks have a low return on equity and unrealistic growth aspirations.

How was your month? Please send news and views to Abigail@euromoney.com.