Having spent a week in surprisingly bright and sunny London, ConvergEx's Nick Colas reports that the consensus opinion in this global financial hub is that equities are where the sun shines the brightest. Public companies are intent on tapping those better days with more aggressive global investor outreach, and asset managers/brokers of all stripes feel that the developed economy bull market has a few more years to run. At the same time, everyone agrees that the near term feels a bit damp and acknowledges that the low levels of actual volatility are worrisome for their artificial “Keep calm and carry on” sentiment. Other heard/seen observations: London is no longer a British city, the surge in foreign buyers is creating a world-class property bubble. His conclusion, as long as humans are humans there will always be financial bubbles, either due to groupthink over real estate prices or financial assets. Just as surely as there will always be an England.
Via ConvergEx's Nick Colas,
Walk around London these days, and you’ll quickly see the immense amount of wealth the city enjoys. Landmark double decker busses are now modern and sleek, even if the aero-package seems lost on a vehicle that never goes past 30 miles an hour. Ferraris jostle with McLarens, Rolls Royces with Range Rovers. The streets in central London are clean, building cranes regularly dot the landscape, and most of the older structures look like they are exceptionally well maintained. London probably hasn’t looked this good since it was the center of the empire upon which the sun never set.
Ask the locals what’s going on, and the answer is quite uniform: the whole world, it seems, wants to live in London. Wealthy Russians – not just oligarchs, but those with just a extra few million in their pockets – are one example. Middle Eastern oil sheiks, French business people, eastern Europeans… Come one, come all. By some accounts, London property prices are already up 10% in 2014, with further gains on tap for the back half of the year. And by other measures, only 30-40% of Londoners now hold a British passport. It has become a modern day Casablanca, only the residents are happy to stay on and drink at Rick’s and listen to Sam play until well into the night.
I’ve been here since Monday, speaking at events, meeting with clients and prospects and hearing what our local staff and managers have to say about the global investment scene. The commentary was actually pretty uniform, and not just about worries over a local property bubble. Most Londoners I met are actually cheering that one higher, which is fair enough. Even if a 20-something City professional probably shouldn’t carry a half million pound mortgage…
The following is my summary of the items of interest I heard in my travels. They follow the same “Postcard” format of brief descriptions I have used in other travelogue notes.
Postcard #1: Equities are the place to be. Coming from the skeptical, market neutral world of the New York investment scene, I was surprised to hear many times that equities are the consensus trade in many circles here. That’s not to say that everyone necessarily agrees, but the baseline assumptions is that equities will outperform bonds by a handy margin over the next few years. Everyone agrees that the recent lack of volatility is a bit eerie, but that’s not a strong enough reason to avoid putting money to work.
This confidence extends to public companies from the UK and the rest of Europe, who are interested in tapping international investors to expand their shareholder rolls. Money managers echo the sentiment, and both constituents believe that money flows globally support this bullishness. They are surprised to hear, for example, that U.S. pension funds are actually selling equities since they are now fully funded and bonds provide the guaranteed returns they seek to offset their liabilities.
Postcard #2: Hedge funds set the price of stocks over the near term. I heard this both from the investor relations professionals at public European companies as well as brokers and investment managers in the City. Market structure is different across much of Europe from the U.S., so you don’t hear much griping about high frequency trading here. Instead, the popular perception is that marginal price is set by fast money hedge funds. A recent selloff in European small caps, for example, stemmed from chatter of a liquidation/team dismissal at one London based hedgie.
This narrative is especially popular among public companies. While they look for stable long-only money to comprise their core shareholder base, they also recognize that hedge funds will set the near-term price action in their stock. They aren’t entirely comfortable with that paradigm, to say the least. They fear that a meeting with a hedge fund will lead to a short position or, worse yet, a bear raid by several funds. At the same time, they recognize that hedge funds often know a lot about their business and are quick to find positive catalysts to justify an aggressive (and market moving) buildup of a new long position.
Postcard #3: No one pays for management access. There are some fresh new rules in the London market, courtesy of the Financial Conduct Authority, about the allowable uses of trading commissions. The most notable one for many public companies, brokers, and money managers is the prohibition on money managers paying brokers for management meetings. This is a common practice in the U.S., of course. By some estimates it accounts for +50% of all discretionary commissions. So this is kind of a big deal…
This topic came up both at a client/prospect dinner and at a large Investor Relations conference the next day. The bottom line is that no one in the business really knows how this change will alter the very popular research practice of money managers speaking to the companies in which they invest, in person and in their office. Some very large managers already have their own in-house facilitators to arrange for such meetings directly with public companies. Others are sufficiently large that their commission flow will continue to engender interest from the broker community, even if they no longer allocate commission for management meetings. And large public companies tend to have large enough IR staffs to perform critical investor outreach functions.
Where things get a bit more nebulous is in the small-mid cap arena. These are companies than often pay for something called “Corporate broking” in the UK, a service which resembles what U.S. investment bankers do for free: provide advice about positioning, investor targeting and the like. Except in the UK companies pay the investment bank for this service, and investment managers pay the same broker for the convenience of seeing the company in their offices. With that second revenue stream now off the table, money managers may see fewer small to mid cap companies unless those enterprises now pay more to cover the logistics costs previously borne by the buy-side. These are all guesses at the moment – the change is too new for even the most seasoned hands – several of whom I spoke to on this trip – to opine about how things will change.
In short, I learned two things during my trip to London. One, if you are involved in a traffic accident as a pedestrian the offending party will either be on a bicycle or a in an Italian/British/German supercar. Those two forms of transit seem to have similarly inattentive operators, and are about equally common on the streets of London. Second: as long as humans are humans there will always be financial bubbles, either due to groupthink over real estate prices or financial assets. Just as surely as there will always be an England.
