The entire financial world has been fixated on two things since last Friday, Greece and, to a lesser extent, China’s collapsing equity bubble.
Admittedly, it’s been almost impossible to turn away from the slow motion trainwreck-turned high-speed, head-on collision that is the Greek tragicomedy.
On Sunday, the world woke up to the fact that a Greek default has very real consequences. As surreal images began to circulate on social media showing [13] ATM lines, empty grocery store shelves [14], and long queues at gas stations, it became apparent that Greece does in fact matter, and once capital controls were announced, the flight to safety was on and global stock markets proceeded to plunge.
This was precisely what the PBoC did not need after moving to support its flagging stock market by cutting [15] both the benchmark lending rate and the RRR rate on Saturday (the first time the two policy rates have been cut on the same day since 2008).
Fast forward to Wednesday and capital markets are still transfixed with Greece and China, and while we’ll be the first to say that both Grexit and the collapse of China’s margin-fueled equity bubble pose very real threats to global financial markets, Soc Gen is out warning investors not to lose track of the ‘real’ problems that threaten to undermine economic growth and keep a lid on gains going forward. Here’s more:
The situation in Greece, whilst serious and concerning, is distracting us from far bigger and mounting problems elsewhere. The China A-shares market for example has seen around US$2trn wiped off its market capitalisation in a matter of weeks, and whilst the climb was equally dramatic, the excessive use of leverage always means the ride down is more painful.
MSCI World profits are also declining at around 5% per annum and consensus 2015 exfinancial EPS growth is currently forecast to be flat; and while US pro-forma profits are now down 5% from their peak, GAAP profits are down a remarkable 20%! The slowing global economy is the elephant in the room.
There is also plenty of the evidence that insiders are rushing for the exits. According to Bloomberg, buyout firms conducted more stock offerings in Q2 than in any previous quarter and during Q2 over US220bn of IPOs were announced, way above any prior quarter over the past 10 years. And whilst announced US share repurchases continue to hit new highs, actual executed share repurchases as viewed from company cash flow statements are on a downward trend.
The Bloomberg reference there is to an article published earlier today [16] which says that two years after Leon Black’s “sell everything” call, his counterparts — who are "astute" when it comes to "timing their exits" — are following him out the door.
Via Bloomberg [16]:
Firms including Blackstone Group LP and TPG Capital Management have been capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period, according to data compiled by Bloomberg.
Since Black made his comments in April 2013, the MSCI World Index has gained 18 percent, stretching valuations even higher. Headwinds that threaten to rattle global equities are everywhere -- from the Greek and Puerto Rican debt crises to an eventual increase in U.S. interest rates.
“It’s clear that we are currently in an environment of frothy valuations,” said Lise Buyer, founder of IPO advisory firm Class V Group. “The insiders -- those with the most knowledge -- are finding this a very good time to take some money off the table.”
This year, private-equity firms sold $73 billion of their buyouts to the public, a record amount over a six month period, Bloomberg data show.
“It’s been a lot more about harvesting public positions than creating new ones through IPOs,” said Cully Davis, co-head of equity capital markets for the Americas at Credit Suisse Group AG. “The markets are open and the financial sponsors are pretty astute about timing their exits.”
Soc Gen goes on to note that "global sovereign bonds had their worst calendar quarter since the initial Fed Tapering shock in Q2 2013, [which] ranks almost as badly as the bond sell-off in Q1 1994!"
Why? Not because investors are adopting a risk-off mentality based a perception of fundamental strength in the global economy, but rather because these assets had simply overshot to the upside:
Now although economic data has proved less disappointing in recent weeks...we doubt the abandonment of sovereign bonds and their associated equity bond proxies was down to a renewed enthusiasm for economic growth, rather simply a function of these markets having gone too far too quickly.
So with global trade "in the doldrums [17]" (to quote BofAML) and with central banks having run out of ideas (and assets to buy) in terms of boosting aggregate demand with freshly-minted fiat currency, what does Soc Gen recommend? Simple: try not lose too much money:
So in brief investors are losing money, which strikes us as largely inevitable with asset prices where they are and economic growth and profits on a downward trajectory. Losing the least amount of money may be the best source of success this year.
