Blain's Morning Porridge - Before the Weekend..

Blain’s Morning Porridge – September 15th 2017

“And if I claim to be a wise man, it surely means that I don’t know..”

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…

Did I blink and the Norte Koreans launched another missile? Did I miss it? What’s happened to the headless chicken panic? Missile Fatigue? Provocation or escalation? An expected reaction to new sanctions? Hasn’t even made the front page of the FT. Hmm.. lets see what happens next….

A couple of key events will stick in my mind from this week. The significant financial ones are all about the weight of money driving financial asset markets higher, and how the effects of money desperately chasing returns are clearly spilling across to the “real” asset sector.

Its most obvious in the bond markets where new deals are being bid up to unfeasibly tight spreads, yet we’re still seeing massive demand with deals heavily oversubscribed. I must thank Bloomberg for a story this morning that references the Ukrainian Chicken Farm Moment rule of the new issue market.

But asset price inflation is spreading outside the conventional stock and share markets.

This week we’ve seen UK wind farms granted licences at historically tight subsidy levels – reflecting the confidence and weight of real money prepared to back them. Great news on the ability of the UK to generate renewable power. Just a few years ago it was a very different story across the renewables space – finding investors was a struggle. Now returns on wind farms have dramatically tightened, reflecting the weight of money now looking into the sector.

(There is also the boost coming from cheap sterling attracting inward investment.. and why not, I can attest to any German developer looking to build turbines that the North Coast of Scotland is a great place to find the wind…)

Another area where the weight of money argument is becoming apparent is aviation. Talking to some of the major leasing companies, it’s clear there is more and more money looking to finance new aircraft, meaning it’s become a scramble every time an airline even hints there might be a new plane financing to be done. The appetite for doing deals is causing yields to tighten. Deals we were getting done at 7% last year will be in the 5% range next year, or even tighter!

No doubt some of the investors I sold last year’s deals to will come back and explain their complete disinterest in anything with a 5 handle. Fine. But the market for real assets (Alternatives) is expanding with more and more real money investors now playing in the private placement and direct lending space – its no longer just a game for smart greedy hedge funds!

If you want examples of what deals are out there in primary and secondary markets, give me a shout. We’ve a range of aviation deals on the runway at present, and its always possible to play in the secondary deals which we expect will tighten. After all – what’s not to like about a 7% yield today when you know more and investors are going to be chasing that number!

It’s a sad rule of the market that 5% has become the new 8%...

Meanwhile, interesting play from the Bank of England y’day as the MPC agrees some “withdrawl of monetary stimulus” may be “appropriate”. What is the definition of “coming” months. Looks like a hike is going to happen by Feb – some folk think as early as November, but it rather depends on that data!

Back in the bond markets, there is yet another great story on Bloomberg by Tom Beardsworth about Nationwide’s “Core Capital Deferred Shares” – a building society form of Contingent Capital. They’ve just been successfully reopened at a price of 160! It’s been a screaming success for holders since it was launched in 2013. I do remember writing about them when they were launched, and saying these looked fair and rational compared to the rash of Bank CoCo bonds hitting the market, but were utterly at the mercy of the Building Society’s management. Anyway – I would attach the Bloomberg article, but I can’t find it on the website! (If anyone wants my original note from 2013, happy to send it out!)

If anyone is interested in the Nationwide CCDS let me know.. we had an offer!

Have a great weekend…