Let’s start this week by talking about Credit Suisse: UBS has been legally compelled by the Swiss government to purchase the embattled bank for all of $3.25B dollars. It’s a little like a shotgun wedding: UBS did not necessarily want to purchase CS, but the Swiss government said otherwise. The bank is saved – equity holders get very little; but they do get something (not much for a bank that had a market capitalisation of ~$70B at one point). On the other hand, AT1 (additional tier 1) bondholders get nothing, nada, effectively writing off $17B worth of bonds. This is unusual for a few reasons – the first is that normally AD1 bondholders come ahead of other forms of unsecured creditors and equity holders; the second is that normally AD1 bondholders, under certain conditions, are entitled to convert their AD1 bonds into equity. Obviously there’s only $3.25B in cash to go around – the bondholders get nothing. From a risk perspective this looks bad for markets – if bond holders, who legally should be above equity holders if bankruptcy occurs – cannot get their money back, what does this do to the bond market? And by extension, what does it do to equities?
The other big question we’ve been thinking about is where does this put other banks? We think the reality is that Credit Suisse and SVB etc were outliers in an otherwise strong banking system: consumers have to put money somewhere – in the past few days big US banks have seen sustained inflows due to customers looking for safety – we reiterate that strong banks which are well capitalised (JP Morgan, Westpac, ANZ) still look like good value to us – especially with how they have sold off. We’re staying away from investment banks like Goldman Sachs that derive so much of their income from trading activity – sometimes boring is better. We still think investors should be holding cash to find opportunity – we were happy to put some of our cash to work last week buying Charles Schwab (+8.00% gain since purchase and Occidental Petroleum (+4.00%). The bulk of our global equities portfolio remains ~69% cash.
NZ
Napier Port withdrew their guidance for the year ahead, citing the unprecedented impact of Cyclone Gabrielle. We think it’s likely Port of Tauranga picks up some business while Napier Port regroups, but note the biggest impact is less fruit to export. We prefer Intratil and Channel Infrastructure for infrastructure exposure; the ports feel expensive given i) lower milk exports and ii) lower fruit exports.
Australia
We note that Sperhia Asset Management is challenging TPG’s $12.65 per share bid for funeral provider InvoCare, and is asking for $13.50 per share. Doubtful other shareholders will agree – we don’t see a Pushpay redux happening here. We downgraded Invocare on the takeover news – we think $12.65 looks like a full value bid and don’t expect much shareholder pushback.
Inflation
It’s easy to forget about inflation amongst all the noise about banks. Inflation is still here; it isn’t going anywhere, and the chart below shows why. Median wage growth is running at 6-7%; employment remains firmly entrenched, which causes more inflation in turn. Not a new story and not news to anyone, but your weekly reminder that the Fed needs to keep raising until the data reverses. More pain to come.
What Markets will be Watching this Week
Monday
Tuesday
Wednesday
CPI (Inflation) data from the UK
Westpac NZ Consumer Confidence
Kathmandu Earnings
Thursday
Us Fed Interest Rate decision
Friday
Bank of England (BoE) Interest rate Decision