Blain’s Morning Porridge – Feb 23 2021: Near and Far – Why to Buy!
“You don’t frighten us English pig dogs. Go boil your bottoms you sons of a silly person..”
Interesting markets as tech wobbles on the perceived inflation threat while bond yields continue to edge upwards. In our regular virtual-office Monday huddle we debated whether the inflation threat is real, immediate or likely to be delayed, and whether this blip is an interruption to the equity market’s inevitable ongoing rise, markets reaching a plateau, or signs something wicked this way comes.
I reckon we’re in a consolidation phase – give the market a few sessions to digest the news and lace up its buying boots. Rates will continue to edge higher, but so will stocks on the basis the future looks rosy, and they still offer tremendous relative value to bonds. However, at the back of everyone’s thinking is the fear of a massive confidence collapse bringing the market down from these levels – which, with rates likely to be held artificially low, will be yet-another massive buying opportunity.
As a pessimistic optimist, I know that markets are never “Heads You Win, Tails I Lose”. There does seem to be a consensus developing that it’s all getting a bit bubblicious. Our commodities guru, Ashley, was saying the $9000 copper price is madness, but he expects it to hold for 6-8 weeks, which parallels what our bond and stock analysts are thinking about this being a final leg higher. Hmmm… some excitement pre-Easter perhaps?
Whatever….
You still have to bat clever to make decent returns. And that means thinking outside the box to pick winners and losers – this morning I’d like to present some ideas on how investment imperatives have to adapt as the underlying narrative changes.
But first.. a brief digression into the nature of time, the universe and everything…
Sometime ago I read a prediction 40% of the current top 500 global firms will have fallen out that top tier or disappeared completely within the next 9-years – overtaken by changing markets, obsolescence or simple Darwinian corporate evolution. That’s an incredibly fast market rollover rate. It’s set to accelerate as new technologies and new opportunities open up whole new vistas and ways of doing business.
Predicting the future is never easy – especially when money is a stake. But that’s what investment managers get paid for. Corporate assets – which are dominated by two fundamental asset themes – face two fundamental questions.
· Equities – Which are the stocks that are going to generate expanding and consistent returns into the future? and
· Credit – Which are the companies which are going to repay their debt?
Speak to any good corporate debt investment manager and they will explain they are shortening duration, and sticking to short maturity corporate debt because; a) they believe inflation is a rising medium/long-term threat b) bond yields are artificially low and will rise (causing a collapse in corporate bond prices), and c) the longer firms exist in an artificially low interest rate environment, the less chance they will survive when rates rise. (There is a growing legion of undead debt zombies – companies that simply will be unable to service their current debt if and when interest rates rise.)
Any good equity investor will tell you they are focused on fundamentals and the future. They understand how the economy will emerge from the current pandemic hiatus by buying the stocks that will re-emerge and provide decent returns. The Future means understanding which of the multiple new technologies from meatless meat, bankless banking, 3D everything, any form of intellingence, big/small/medium data, etc are changing the world, how they are inter-reacting, and how that are likely to spawn the next Apple, Amazon, Tesla or whatever emerges from the gloop of new ideas.
Perversely, while the future is all about getting on board the next New New Thing, the reality is most new things fail and even the successful tech companies still take years to get going. Experience shows it often better to wait and see what emerges from the frothy, hyped competition in the start-up arena. In today’s speculative markets everyone assumes any idea is good one and immediately worth $2 bln… the reality is they often aren’t. It’s a skill picking winners.
The reality is the world is changing, and as it changes, the underlying narrative changes. Accepting change is also a skill. Accepting it’s not all about US Tech stocks is just clever.
Let me illustrate:
Most porridge readers will know I have little time for HSBC – if I was looking for a bank doing banking badly, HSBC ticked every box. Yet, it’s a great illustration of how investment narratives change as the information and ecosystem changes.
10-years ago, HSBC was my top global banking stock – it survived the Global Financial Crisis in one piece, had apparent global survivability and strength written all across it, and looked set to champion east-west commerce. It was dull, boring and predictable with a clear consistent path to remaining profitable and expanding core financial institution.
Over the next few years it’s narrative stalled and deteriorated.
Its claim to be the World’s local bank was quietly ditched. In the wake of avoidable financial scandals caused by a lack of oversight, it was managed to appease regulators rather than customers. It’s retail banking became a lame-duck joke. It squandered financial leadership. It blustered and threatened a move back to Hong Kong, just before China decided to take back the city. Its incestuously conceived leadership stumbled from crisis to crisis. It proved utterly unable to overcome its bloated internal bureaucracy. Over the course of 10-years, the World shifted and the foundations of the bank wobbled because it didn’t move apace. When it finally got around to appointing an outsider chairman, the stock tumbled on a series of botched appointments. The stock’s collapse illustrates how the market lost faith.
If past performance is anything to go buy, then HSBC would almost certainly be one of the 80 stocks likely to disappear in coming years…
But, maybe not.. I’m back on board. HSBC is back on my buy list.
This morning it announced 2020 profits are down 34%, but the stock jumped 5% on the news. Why? The bank is now getting serious about pivoting to Asia – the source of the bulk of its income. It sounds like it’s going to give up the pretence of being a leader in Western retail banking. Shareholder pleasing stock buybacks are on offer. I suspect it’s only a matter of time before CFO Ewan Stevenson, (who gets increased responsibilities from “transformation” and M&A) with his experience of the outside world (from Royal Bank of Scotland – a lesson in how not to do it), is promoted to CEO to speed the change.
Moving to Asia is fraught with risk – the recent experience of Alibaba where ill-chosen words and the wrong political friends cost Jack Ma his shot at being the world’s richest man is a great example of the potential political risks overcoming the market. HSCB is making the decision that the risks of transition as less than becoming an irrelevance in the West. And that’s a good call.
No one would bat an eyelid if HSBC had been a Singapore bank that has made lucky with a global brand. Because it’s a Hong Kong bank now overshadowed by a perceived China challenge – it looks like it’s going to embrace the opportunity. While Hong Kong clearly faces challenge – it’s also highly unlikely the Chinese would give the West a victory by allowing it to crash. By kowtowing to the emperor, HSBC might just make itself investible again.
All that said, I am still exiting and closing all my HSBC accounts in the UK – because its UK offer is unlikely to get any better.
For western investors – Asia is a challenge, but stocks are cheap and growth is higher.
Over to France
Meanwhile.. on a similar theme, the narrative is changing in Europe. As China shows, the investment themes across different domiciles are challenging unless you approach them with a different perspective and an open mind. Over the last few months I’ve been learning all about the French Economy as a part of a deal we’ve been looking at.
As an enlightened Scot, I have the advantage of being able to look at the relationship between France and England with an unprejudiced eye. I am open to the idea the French are actually not half as bad a Nigel and Boris tell us they are. I like their food and wine. I reckon there are more similarities between these two nations than they care to admit, and if we are honest the real reason the EU didn’t work was two Alpha nations bickering – as they have done for over a 1000 years.
When I’ve asked UK equity managers about France, most shake their heads… it’s not an area that excites them much. They will shake their heads about the 30 hour work-week, state-intervention and the overly cosy relationships between firms.
When I dig a little deeper they will have done their research and understand there are more top 500 global companies in France than anywhere else in Europe – across many sectors including aerospace; Airbus, Dassault, Thales, Safran, or consumer goods; LVMH and L’Oreal, industrial; Schneider, Vinci, Saint Gobain, Michelin, health; Sanofi and EssilorLuxottica, or energy; Total, EDG, Engie and Veolia.
They usually understand the French commercial ecosystem; patronage, relationships between enarques from the “right schools” and the state’s intervention in the economy. Since 2017 labour and tax reforms have made the economy more attractive to domestic and foreign investment. Since Brexit, France has reaped the rewards of declining Foreign Direct Investment into the UK, and now exceeds both the UK and Germany.
And, of course, France has not shot itself in the foot re Brexit. UK investors will resent that comment – but it’s nothing to do with anyone else how we voted to leave or remain in Europe, but the brutal reality is 1) overseas investor will continue to discount the UK because of Brexit till UK economic performance demonstrates otherwise, and 2) France is best placed to reap much of the ground the UK has given up in Europe, and might lose globally.
Yet for any UK fund manager to propose looking more closely at French stocks would be a potentially career limiting move. They are missing a trick. France could be on a roll. It has reasons to be. There are over 1 million trained engineers, 13,000 AI researchers and almost 60,000 French PhDs – all of them as dedicated to beating les Rostbifs in business.
Now… as UK investors we might not like the idea of investing in France.. but I think I’ve found a way. The French, naturally, have their own State Investment Bank, which has been running a fund for SWF’s to invest in French corporates. It brings its “inside” knowledge of both the French public and private markets (where it knows every single firm) to the table, picking a small number of key picks for the fund. Its been delivering 16% returns.
Of course, there wont’ be a single London based investor who will have any interest at all in a state-owned French investment bank investing in its own heavily insider based economy.. They will assume something French and vaguely distasteful about the deal, and rather that coat-tail its insider perspective on the French economy, they will pick and choose for themselves.
However, on the basis there are lots of smart Non-English investors who also read the Morning Porridge, and will want to know the details… You know who to contact..
Five Things To Read This Morning
WSJ – Tech Stocks Drop Amid Rising Bond Yields
Straights Times – Bitcoin tanks after Elon Musk hints prices are excessive; Janet Yellen sounds warning
BBerg – Banker Bonuses Always Send A Powerful Message
FT – El-Erian: When is stimulus too much for markets?
FT – Facebook strikes deal with Australia to restore news
Out of time and back to the day job…
Bill Blain
Shard Capital