Investment

Quarterly Investment Review

by James Macpherson

‘It’s ludicrous that a government can borrow at a negative interest rate and doesn’t take advantage of that.’ Sajid Javid, UK Chancellor, 7.12.19

At the peak in 2019 $17 trillion of global bonds carried a negative yield. One shouldn’t lose sight of the fact of how odd it is to pay for owning bonds. When the German 10-year Bund yield fell to -0.7% it meant an investor would receive €93 in 10 years’ time for the €100 invested today. By comparison in previous periods of financial stress bund yields had fallen to -0.1% in 2016, 1.2% in 2012 and 3% in 2008. It is confounding that these negative yields occurred during a period of economic expansion and employment growth, plus now the promise of coordinated fiscal expansion globally, all of which could see the competition for funding drive up the cost of money. Even Greek debt carries a negative yield. In 2012 the markets were closed to lending to Greece at any price, but now lenders pay for the privilege to lend their money for maturities under six months. Elsewhere in November Angola issued $3 billion of debt for 10 and 30 year maturities that was three times oversubscribed, despite a four year recession which has led to its debt to GDP jumping to 100%, a tumbling currency and the largest credit facility that the IMF has extended to an African country.

These historically low yields derive from Central Banks attempts to revive growth through reducing the cost of debt. However there is increasing evidence that rather than persuading people to spend, negative interest rates are persuading them to do the opposite, to save. Likewise the effectiveness of this debt is diminishing, generating about half as much GDP growth per unit of debt in the last decade as it did in the one before that. Instead the liquidity has flowed into financial assets. For example in the first quarter of 2019 the Eurozone’s 3 largest economies of Germany, France and Italy added just €6 billion of growth, compared to their stock market capitalisations increasing by €516 billion. We seem to have reached the point of policy impotence with the monetary policies of the last decade. Hence governments are looking increasingly to fiscal stimulus measures, which are not bond friendly. As the quote at the top of the page shows populist politicians have spotted the opportunity to gorge on these historically low borrowing costs in order to finance the promises that helped get them elected. Austerity has failed in political terms, for example, in the US the deficit for 2020 is estimated at $1.2 trillion, which is less than the $1.4 trillion in 2009, but that was a year of crisis. Such a deficit extending into prosperous times suggests that it is structural, and will be very hard to reduce. Entering 2020 the US will have significant monetary and fiscal stimulus at a time of full employment as President Trump seeks to turbo charge the economy for his re-election campaign. This twin stimulus is occurring at a time when both core and median consumer prices are at decade highs. Elsewhere the Japanese government announced a $120 billion spending package, and across Europe governments are starting to accept the need for similar efforts. As debt issuance soars and growth slows common sense suggests that inflation will pay this money back eventually. The internet and globalisation have led to a long period of disinflation, but tight employment and populist support for increasing the minimum wage puts pressure on wages, and prices are starting to creep up in some areas. For example the prices of the fifty most sold items by Wal Mart rose 5.2%. Migration controls and trade conflicts are also potentially inflationary. A change in sentiment would affect all markets. At the end of 2018 when interest rates started to rise and liquidity tightened it created an extremely challenging environment for investors. The ingredients for a repeat of this situation remain.

Sentiment over the trade war between the US and China has fluctuated over the year. The final outcome of the negotiations were not clear at year end but even if a settlement is reached concerns will linger. When it started in early 2018 there were hopes that the issues would be settled quickly, but what first appeared to be a spat over the trade deficit has now revealed itself to be a confrontation across many issues including military influence, technological capacity, financial access as well as trade imbalances. Short term the uncertainty is likely to be compounded by the upcoming Presidential election in the US, but longer term it is shaping up to be a multi-year problem. To underlie the seriousness of this situation one has to consider that in passing the Hong Kong Act Republicans and Democrats, who can hardly bear to be in the same building together, came together in near total unanimity and speed, to pass the Act which is a direct insult to China. Trade disputes inject deep uncertainty into the business outlook. To the extent that this one threatens globalisation it is stagflationary because it lowers long term global growth potential, and introduces inefficiencies and costs as decisions are taken more from political than economic motives. On China’s side they will accept slower growth in so far as it is consistent with social stability, but that growth will be focused more on their domestic economy, and therefore less of a boost to global activity.

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Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

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Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

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