Euromoney meets the chief executive of a specialist financial services firm recently bought out by management. Such deals are rare in a sector where most participants are inherently leveraged through their day-to-day operations. Is the firm’s capital structure not now rather strained? Not at all, says the CEO. It could ask its backers or other third parties for more money tomorrow and get as much as it wanted. Raising money isn’t the problem. Almost anyone can get funding right now. Identifying the right investments to build the business – that’s the tough part.
It’s the challenge the entire financial world faces today. Abundant global liquidity has supported all asset classes, boosting almost any investment offering a bit of yield. Commodities, equities, credit, anything and everything in emerging markets, flaky currencies, real estate, even the US dollar, have all been doing well – simultaneously.
It makes no sense, unless you are among the few who actually believe in new paradigms. Every investor, every trader, every margin lender is nervous, all ready to jump at the merest hint of the flashing red warning – a sell-off in the Icelandic króna, a correction in Gulf equities – that might mark the start of the great carry-trade unwind. All fear the contagion when leveraged buyers have to sell their good positions to meet margin and cover losses on their bad positions.
When that sell-off does start, no one will be able to say they weren’t warned. All the strategists and commentators worth their salt have warned for months that the tide of liquidity that has floated all ships must soon ebb and leave most of them on the rocks. It’s today’s most laboured metaphor.
That’s part of the problem. The warnings are so commonsensical that they are almost entirely redundant and unhelpful.
No, it doesn’t make much sense that the EMBI+ has dipped under 200 basis points at a time of growing geopolitical risk and rising protectionism. Yes, it looks odd that B rated petrochemicals group Ineos should attract A9 billion for a high-yield bond, with a 7.875% yield, what Statoil paid not long ago.
It’s not entirely logical that lenders and credit investors should be falling over themselves to hand acquisitive corporates the huge sums to fund deals that will impair their credit ratios and – if recent goodwill writedowns from acquisitions in the last boom are any guide – do nothing to boost shareholder value. But when money is cheap, it’s surprising how easy it becomes to justify that low-return, high-risk investment – if you don’t go for it, the competition will. As corporate executives think, so do investors.
When so much of the available investment universe appears so correlated and so fully valued, where should fund managers put your money? This is where it gets tricky.
A bond fund manager greets the news that a respected credit strategist is now recommending a substantial underweight. The strategist made the same call a year ago. If the manager had followed it, he would have missed out on a year’s performance. He agrees with the view. But that’s not material.
Central banks have been tightening for months now – although the end of quantitative easing in Japan might still leave room for negative real rates for a while. Going short too early is just as much of a risk as staying long too late. It’s not easy to leave the trough and maybe now’s not the right time. But if it is, remember you heard the warning here – for the umpteenth time.
So at a time when leading investment banks are posting record earnings, where does the CEO see the best place to invest: advisory, prop trading, structured capital?
Actually, he fancies asset management.
