Blain's Morning Porridge - Property and Research.. what are they worth?
Blain’s Morning Porridge - June 30th 2017
“And the sun was a demon. The clouds were afraid, one-ten in the shade, and the pavement was steaming…”
Ouch.
I made the mistake of going out with a bunch of property guys last night. I dimly recall explaining to some very successful developers and investors why GBR had not won the America’s cup, and think we created a new product to invest in long-term UK “Private Rental Sector” assets. All I can remember is that it was brilliant, simple and executable and creates superb long term non-correlated returns, but dashed if I can remember what is was. As Frank once said, “That’s life…”
Meanwhile…
Back on planet “went to bed early, and looking forward to a successful Friday”…. The way the market has been playing this week confirms its going to be a tough summer. Long-term non-correlated assets are exactly what is required. Stock markets are as stable as a watery jelly, while the bond markets feel like the very definition of houses built on sand.
The current market instability is a factor of growing uncertainty and doubt across politics, geo-trade and asset-inflation. I remain convinced we are going to get a global market reset later this year – a short, sharp dash of “that will teach you to experiment with monetary policy” - at which point it will be time to apologise, and go for an all-in investment approach.
“Yes”, its going to be a very messy crash of a year, but “No”, it will not be the end of the world. “Brace, Brace, Brace”, as they don’t like to say in the airline business, “it might get bumpy”.
I got involved in a fascinating discussion with a client on MiFID II research costs yesterday. Apparently, he’s got till next week to register MiFID compliance with the FCA and they are still setting a research budget for next year when the new regulations kick in!
As usual whenever old market geezers talk markets, we wondered how much research is actually any good (and isn’t biased to help sell otherwise unsellable products), and how much actually gets read, understood and is acted upon. To be honest, my eyes glaze over at much of the stuff I see..
I’d like to hear from readers. What have you planned for MiFID II research? Good, Bad or Indifferent?
Don’t worry.. I’m not about to ask Porridge subscribers to pay for this drivel by presenting it as “Research.” This is strictly “commentary” – my own views presented free for your delectation and consideration. I don’t prop trades or make recommendations. If I happen to make you think about areas of interest or potential undervalued assets – well lucky you….
The MiFID rules would have financiers of previous eras shaking their heads in disbelief. From January 2018 any firm receiving research must pay for it – separately and unbundled from any other transactional business. The intent is free research should not be an inducement to trade that may not be in investor’s best interest. In the bad old world, any firm producing quality research got compensated by orders in equities, or first dibs on the trade in fixed income.
Unbundling throws up some fascinating scenarios. For instance: I suspect there may only be 3 or 4 people on the whole planet who actually really understand everything about a) the sheer complexity of the global economy and macro factors that move it, or b) the best pearl fishing stock traded on the Hanoi small cap stock index. Making sure you add value to your portfolio by paying one of these 3 or 4 people (and not the other 1000 who know less and are therefore worthless) is the critical call.
What process and analytics will you use to chose whose research you will pay for? How do you differentiate between Good, Bad, and Fugly research? And how do you ensure it’s really unbiased? If you currently use 100 or 200 analyst reports to set portfolio strategy and asset tactics, who are you going to cull? (Amundi was in the press last week saying it had negotiated hard on research prices, but has halved the number of external providers! That’s an awful lot of discredited analysts.) And if you are a fund manager, how are you going to pass that cost down to your clients, your investors? (It would appear most fund managers will simply absorb the research costs themselves.)
What happens to the bank analysts who find themselves on the wrong side of the client cut? Ouch (again).
The current options are to go with your favourite banks or to go with the rapidly expanding independent sector. The first is worrisome because you fear bias in what they recommend. The independents are original thinkers, but you fear they might lack the access to information the big banks have. It’s easy to make the “Vampyre Squid sucking the face off humanity” your first point of research on the basis they pretty much control everything already and some of that might trickle down to you…. (Vampire Squid? – if you don’t know whom I’m talking about… Google it…)
One well known French bank is warning clients “we will automatically remove your access to our research products to avoid any breach of the regulations by providing research for free.” They offer clients access to their web-based Macro, Credit, EM, FX and Rates research as standard for €180k, or direct analyst access for a very limited number of premium subscribers for a mere €450k per annum. Wowser. That sounds like good value (US Readers – Sarcasm Alert.)
Will their research be unbiased? Thinking specifically about Non-Preferred Senior bank debt – something all the French banks are very positive about because they are raising plenty of it. Surprisingly, other (non-French) bank analysts are more suspicious.
The upside of MiFID II is that unbundling research from trading should be good for brokers like us. Get Goldman to tell you a bond is great value and then buy it from me! I’m just wondering how I can tell you aviation bonds are a screaming buy when HY is a yelling sell without it sounding like research.
It’s the Round the Island Race this week – one of the biggest sport participation events in the UK as sailors race the 70 miles around the Isle of Wight. Unfortunately, Batfish 5, (the Blain yacht) isn’t doing the race this year. We’ll be sitting it out, repairing broken winches and sorting out the boat for August’s Fastnet Race. Good luck to all the other competitors and sail safe..
Have a great weekend…
Fastnet Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain
