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Euro Debt Crisis
There have been some countries in the Euro, the most publicised being Greece, which have been guilty of spending more that they make. This escalated last week when the ratings agency Standard and Poor’s slashed their sovereign debt rating to just above “junk” status saying investors would be lucky to get 30-50% of their investment back. This saw the cost of Greece debt escalate through the roof which in turns means they would be struggling to pay their interest bill yet alone reduce the level of debt.
On April 11th the IMF and Euro countries announced a €45 Billion fund to renegotiate all debts maturing this year at “kinder” interest rates. However what about subsequent years? On 2nd May the euro-zone governments and the IMF set out the terms of a €110 billion rescue for Greece which depended on Greece accepting harsh austerity measures which resulted in riots and unfortunately a loss of life in Greece. This was not enough to settle investors’ nerves.
The main concern for investors “globally” is the risk of contagion that such fears would spread to other Euro countries such as Portugal, Spain, Italy and Ireland. This would result in their bond markets freezing up and we would be faced with similar scenario as to the credit crunch the global economy has spent the last 18 months pulling itself out of. The interests of “Euro” investors is a little more obvious. Of the estimated €164 Billion of Greek debt around 72% of this is held by Euro nations with Germany holding about 32% of total debt. This on top of the fact they all have the same currency, The Euro, this means pragmatically that any bailout is really bailing themselves out. The reason it has taken so long has been a number of issues including political posturing as Germany had an provincial election last week and the German people were very anti the Greek bailout.
European policy makers have now unveiled an unprecedented loan package worth nearly €1 trillion and a program of bond purchases in an attempt to stop a sovereign debt crisis that threatened to shatter confidence in the euro. Under the loan package, euro governments pledged €440 billion in loans or guarantees, with €60 billion more in loans from the EU’s budget and as much as €250 billion from the International Monetary Fund. As EU rules don’t allow direct central bank lending to governments, the European Central Bank said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will smooth markets and the cost of funds but they won’t increase the overall money supply in the financial system.
This new package could also be applied to other countries in the Euro should they experience difficulty but given the coordinated effort from the Euro nations and the IMF this should go a long way to thwarting potential speculators trying to instigate further “excessive” action in these debt markets.
Markets can then move onto their next point of “interest”.
On April 11th the IMF and Euro countries announced a €45 Billion fund to renegotiate all debts maturing this year at “kinder” interest rates. However what about subsequent years? On 2nd May the euro-zone governments and the IMF set out the terms of a €110 billion rescue for Greece which depended on Greece accepting harsh austerity measures which resulted in riots and unfortunately a loss of life in Greece. This was not enough to settle investors’ nerves.
The main concern for investors “globally” is the risk of contagion that such fears would spread to other Euro countries such as Portugal, Spain, Italy and Ireland. This would result in their bond markets freezing up and we would be faced with similar scenario as to the credit crunch the global economy has spent the last 18 months pulling itself out of. The interests of “Euro” investors is a little more obvious. Of the estimated €164 Billion of Greek debt around 72% of this is held by Euro nations with Germany holding about 32% of total debt. This on top of the fact they all have the same currency, The Euro, this means pragmatically that any bailout is really bailing themselves out. The reason it has taken so long has been a number of issues including political posturing as Germany had an provincial election last week and the German people were very anti the Greek bailout.
European policy makers have now unveiled an unprecedented loan package worth nearly €1 trillion and a program of bond purchases in an attempt to stop a sovereign debt crisis that threatened to shatter confidence in the euro. Under the loan package, euro governments pledged €440 billion in loans or guarantees, with €60 billion more in loans from the EU’s budget and as much as €250 billion from the International Monetary Fund. As EU rules don’t allow direct central bank lending to governments, the European Central Bank said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will smooth markets and the cost of funds but they won’t increase the overall money supply in the financial system.
This new package could also be applied to other countries in the Euro should they experience difficulty but given the coordinated effort from the Euro nations and the IMF this should go a long way to thwarting potential speculators trying to instigate further “excessive” action in these debt markets.
Markets can then move onto their next point of “interest”.
Markets Sell Off – Is This a Case of Here We Go Again?
Obviously the concerns in Greece and the concerns they have over debt and the possibility of spilling over to over European countries has been the focus of the market’s attention for the last 2 weeks. This attention has overshadowed the economic and company specific news coming out of the US which has been very positive. This has resulted in investors selling down a range of assets due to these concerns. Whilst this matter is one that needs to be resolved, and I believe it will, this event whilst serious will be handled and not be a cataclysmic event. Keep in mind the worlds global economy was faced with inhalation not so long ago and we survived that. I will talk more about Euro debt crisis in next week’s blog due to be released on Tuesday.
In regards to the bigger picture markets have had a strong rally off their lows in March 2009 this very steep recovery in value needs to at some point been moderated to a more acceptable level as nothing can go on forever. Investors know this and basically get to a point where they look for an excuse to sell down to achieve this. This is the normal part of a market cycle where it tries to revert back to an “acceptable” level of value. The difficulty in trying to predict these big swings in reverting back to “acceptable” levels makes it a guessing game that is impossible to get right that is why we use low points, created by such sell offs, to buy cheap assets (notwithstanding it may get cheaper next week) because we know in 2-5 years we will have done well out of it. We are currently looking at a strategy to utilise for all our clients to be able to benefit from this opportunity whilst mitigating further downside risk without the need to contribute your own capital which we will get more info to you in the coming weeks.
Another feature of modern markets is the technology aspect which played a large role in the volatility in Wall Street’s falls that at its peak was about 10% for the day. There have been cases of incorrect trades entered for S&P index as well as Proctor and Gamble which lost at its worst some 37% during the session. If someone with fat fingers enters an incorrect trade this can have a huge flow on effect as traders lodge their trades in the computer system to execute automatically. There is also a range of computer trading systems that will trigger other transactions automatically in the event of certain market movements. One erroneous trade can result in a huge flow on effect of transactions which can cause wild movements which can then create panic from the individuals making it quite a scary proposition.
In regards to the bigger picture markets have had a strong rally off their lows in March 2009 this very steep recovery in value needs to at some point been moderated to a more acceptable level as nothing can go on forever. Investors know this and basically get to a point where they look for an excuse to sell down to achieve this. This is the normal part of a market cycle where it tries to revert back to an “acceptable” level of value. The difficulty in trying to predict these big swings in reverting back to “acceptable” levels makes it a guessing game that is impossible to get right that is why we use low points, created by such sell offs, to buy cheap assets (notwithstanding it may get cheaper next week) because we know in 2-5 years we will have done well out of it. We are currently looking at a strategy to utilise for all our clients to be able to benefit from this opportunity whilst mitigating further downside risk without the need to contribute your own capital which we will get more info to you in the coming weeks.
Another feature of modern markets is the technology aspect which played a large role in the volatility in Wall Street’s falls that at its peak was about 10% for the day. There have been cases of incorrect trades entered for S&P index as well as Proctor and Gamble which lost at its worst some 37% during the session. If someone with fat fingers enters an incorrect trade this can have a huge flow on effect as traders lodge their trades in the computer system to execute automatically. There is also a range of computer trading systems that will trigger other transactions automatically in the event of certain market movements. One erroneous trade can result in a huge flow on effect of transactions which can cause wild movements which can then create panic from the individuals making it quite a scary proposition.
Commercial Property Set to Boom (if you still own it)
Real estate research firm CB Richard Ellis has released an upbeat assessment of Australian Commerical Office property assets. They have said that these markets are now stabilising after having fallen as much as 20% in the September quarter last year. This is demonstrated by the fact the average rental income per square metre has risen from $6,688 to $6,744 in the March quarter.
Kevin Stanley from CBRE has said that rental growth as well as a reversal of the blowout on capitalisation rates (where investors demand a greater income yield on assets) will see an increase in the value of these properties. The cities that are expected to have the best growth in rental income are the main centres of Sydney and Melbourne. CBRE's rental growth in these cities is forecast to be 7.5% and 6% per annum until 2013.
BIS Shrapnel recently said that the commercial property investment community overreacted to the financial crisis which will result in solid gains in rent and values as they play catch up. This fact along with the underlying fundamentals of demand and supply, they believe vacancy rate in Sydney will fall to 5%, will also be supportive of rents and capital values. They are extremely bullish on rents saying that they expect rent to increase between 85%-100% between now and 2017. They go on to say that the past and current caution of the banks and investors is going to lay the foundation for supply shortage over the next few years providing great opportunities for patient investors.
Given all of this why are the Australian banks putting so much pressure on the unlisted property sector to continue to sell assets at this point of the cycle? Surely, it would be both the banks interest and the investors in these assets to sit tight and wait for the cycle to improve. Banks have behaved disgracefully during the global financial crisis in regards to these borrowers who even though they are still collecting rent and paying their bills have seen the interest they pay increased dramatically. This increase has not been as a result of the general level of interest rates going up rather the banks have increased the margin which they charge the borrower on top of what the funds cost them. Given the lack of competition in Australia as a result of the GFC these investors who are mainly mum and dad investors will see a tremendous amount of their wealth passed onto the banks at best and destroyed at worst due to rash asset sales. An organisation called the Light of Day has been attempting to lobby the Australian Government on behalf of retirees and other investors in these investments at this point with no success.
Kevin Stanley from CBRE has said that rental growth as well as a reversal of the blowout on capitalisation rates (where investors demand a greater income yield on assets) will see an increase in the value of these properties. The cities that are expected to have the best growth in rental income are the main centres of Sydney and Melbourne. CBRE's rental growth in these cities is forecast to be 7.5% and 6% per annum until 2013.
BIS Shrapnel recently said that the commercial property investment community overreacted to the financial crisis which will result in solid gains in rent and values as they play catch up. This fact along with the underlying fundamentals of demand and supply, they believe vacancy rate in Sydney will fall to 5%, will also be supportive of rents and capital values. They are extremely bullish on rents saying that they expect rent to increase between 85%-100% between now and 2017. They go on to say that the past and current caution of the banks and investors is going to lay the foundation for supply shortage over the next few years providing great opportunities for patient investors.
Given all of this why are the Australian banks putting so much pressure on the unlisted property sector to continue to sell assets at this point of the cycle? Surely, it would be both the banks interest and the investors in these assets to sit tight and wait for the cycle to improve. Banks have behaved disgracefully during the global financial crisis in regards to these borrowers who even though they are still collecting rent and paying their bills have seen the interest they pay increased dramatically. This increase has not been as a result of the general level of interest rates going up rather the banks have increased the margin which they charge the borrower on top of what the funds cost them. Given the lack of competition in Australia as a result of the GFC these investors who are mainly mum and dad investors will see a tremendous amount of their wealth passed onto the banks at best and destroyed at worst due to rash asset sales. An organisation called the Light of Day has been attempting to lobby the Australian Government on behalf of retirees and other investors in these investments at this point with no success.
Why is Centre Capital Supporting a Bid in Orchard Process?
We have receieved a few queries from clients and other parties regarding our support for one of the bids lodged in the Orchard process. We have produced this document to paint a clear picture.
Is Centre Capital Bound to the Bid?
While we participated in a bid we are not exclusively tied to it. We expressly reserved the right to support a better option if one emerged.
Why Did Centre Capital Get Involved with the Bid in First Place?
Our process was to support an option we could recommend in the absence of a better option to ensure there was a solution at the table. To have a solution you need a couple of things: the know how and the financial backing. This syndicate had both and we were not willing to see them walk away from the process as this would not have been in the investor's, our client's, interests.
The syndicate behind the bid accepted our support and participation on a non-exclusive basis because they recognised we had this duty to our clients; even though a one way option from their perspective was suboptimal.
Does Centre Capital have an Economic Interest in the Bid?
No.
Where Does it Stand Now?
Now that we have seen board changes at Orchard and hopefully a change in the current KPMG process is not far away we are now looking to see if a better option emerges for our clients.
Bigger is Better
When talking to prospective clients it inevitably comes up that some people feel safer by investing through larger institutions. We believe that whilst there can be good points about all business models we feel that our model is specifically designed for our clients and here is why.
- Our clients get a personalised service where you are more than a number.
- Larger institutions can tend to want to push “product” that they are associated with. Centre Capital just wants to access the best possible solutions for clients regardless of where they may be found.
- We believe that larger institutions methods for managing money can be to protect their own business models not to give their clients the optimum solution.
- We tap into a whole range of research and ideas to ensure that we are getting a broad range of ideas to formulate strategies for clients.
- The strategies we recommend for clients are the strategies we implement for ourselves personally. If it’s not good enough for us it’s not good enough for our clients.
Furthermore, as with all things in life sometimes things don’t turn out according to the script that is where you will need someone that will get in and look after you. We have fought hard for our clients over the last couple of years including taking on one of the big 4 banks and a large managed fund to ensure our clients interests were looked after.
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