Markets seem to be getting excitable again.
The Twitter IPO is on the cards (I don’t know yet if I’d buy into Twitter, but it’s certainly a great source of news – you can follow the MoneyWeek team here
And of course, there’s the Royal Mail privatisation – more on that in a moment.
But perhaps the most excitement is happening outside the equity market – over in the bond market.
This week, US telecoms group Verizon managed to sell a whopping $49bn of bonds, the largest corporate bond sale in history. This was to fund its deal to buy the 45% of its Verizon Wireless joint venture with Vodafone that it doesn’t already own.
The coming end of the cheap money era
But these enthusiastic bond buyers should watch out, says MoneyWeek editor John Stepek. If it “looks like an incredibly good time to borrow money, that usually means it’s a very bad time to be lending money.”
You see, “lurking behind this deal was the spectre of Ben Bernanke.” Everyone is worried that when the Federal Reserve starts to ‘taper’ off quantitative easing (maybe as soon as next week), that this will mark the beginning of the end for cheap money. Money will no longer be ‘on sale’.
And that’s why “Verizon wants to raise money to pay for the deal now”.
You can see evidence of the “let’s beat the rush” mentality in other interest-rate sensitive markets. For example, “property website Zoopla is apparently looking at a stock market listing that could value the company at £1.3bn, or a whopping 50 times earnings”.
This comes at a time when the London property market – which is of course “very vulnerable to rising interest rates” – looks particularly frothy.
Of course, the question remains: when will rates rise? “This is all about politics,” says John. For now, “it’s still politically problematic for central bankers in the developed world to raise interest rates’”.
However, “if the UK economy continues to rally, then Bank of England governor Mark Carney is going to look increasingly wrong-headed. And unlike in the US, inflation is already on the cusp of being a problem in the UK”.
As my colleague Merryn Somerset Webb has pointed out, “equities don’t tend to start panicking about inflation and rising interest rates until we hit the 4-5% mark”.
However, “be very careful about the extent of the bond exposure in your portfolio (subscribers can read more on this from my colleague Phil Oakley). And if you’ve been considering fixing your mortgage rate, I think you can probably do so safely here without worrying too much about regretting it in the future”, says John.
Royal Mail: lots of problems, but worth a punt
Getting back to that Royal Mail flotation – those of you who remember when the original wave of privatisation hit in the ‘80s will no doubt be wondering – is it worth piling in this time?
The Royal Mail has lots of things wrong with it, as my new colleague Ed Bowsher noted in yesterday’s Money Morning, from disgruntled staff to a disappearing market.
Yet Ed reckons it could be worth a punt. Why?
Well there are a few reasons to be more optimistic than it might seem. Royal Mail’s parcel division is doing OK, and the dividend on offer looks pretty tasty.
But the main one is that the government wants this flotation to succeed. It’s all down to promoting the ‘feelgood’ factor ahead of the election. This is one stock market listing that the government is not keen to see fail, so it’ll be priced accordingly.
We’ll be looking more at the deal in the next issue of MoneyWeek, out on Friday. (If you’re not already a subscriber, get your first three issues free here).
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Get ready for a raid on pensions
This ‘feel good’ drive is, of course, the same thing that’s behind the current surge in the UK property market – a government keen to make the voters cheerful regardless of the post-election cost.
Trouble is, at some point someone’s going to have to pay for all this. That someone is more than likely to be you, notes Merryn on her blog this week.
Among the most obvious targets of all are pension pots. After all, “it’s easy for governments to make the case that pension benefits accrue disproportionately to the rich”. Already, “the lifetime limits and annual limits on pension savings have been cut several times”.
One likely future target is the tax-free lump sum. “Right now, from the age of 55 onwards, anyone with a pension is allowed to withdraw 25% of its value in cash, tax free. Anything else you draw from your pension later as income is taxed”.
This is arguably “the best bit of having a pension – without it, a good many people would be better off to keep paying all their taxes upfront, skipping the regulatory uncertainty of pensions, and keeping control of their own assets”.
However, as Ian Cowie notes in The Sunday Times, experts think “the Treasury is “actively considering” capping the amount you can take tax-free”. Such a policy could bring in “proper money”, since limiting the tax-free sum to £36,000 a year “would bring in an extra £2bn a year”.
Politically, such a limit “wouldn’t look bad to most people… it would please those making a big deal about intergenerational conflict at the moment, and it would be very simple to do”.
So what should you do? Merryn suggests that, “if you are 55 already and have enough in your pension for the government to get away with defining you as rich (perhaps £250,000 upwards), you might as well take your 25% (as Cowie says he plans to) before the Treasury does much more of its active considering”.
Commenting on the piece, dave21kj is angry. “This is theft, there is no other way to describe it. If someone signs up to something with a set of rules then that should be honoured”.
GFL agrees, and makes another good point: “As soon as a limit is introduced, I can see it rising a lot slower than inflation! It’s a perfect tax from a government viewpoint, the type that doesn’t impact too many people right away.”
Why the Co-op should look to its ethics
This week, Bengt Saelensminde turned his attention to the Co-op in his Right Side email.
“With so much muck flying”, and having previously tipped Co-op bonds, he feels that “I can’t hold my tongue any longer”, says Bengt.
Co-op’s latest plan to deal with the technical bankruptcy of its bank is to “stick in a few quid from the central business and then stiff the bank’s bondholders for a load of capital to ‘un-bust’ it”. Even though many bondholders are “reliant on the income from said bonds”, it has said that “there’s no plan B”.
You may think that this is “fair enough”. After all, “that’s what the bondholders are there for – to provide the bank’s capital, and if the bank is bust, then the capital is gone.”
However, “there’s something missing in this résumé”. The word ‘ethical’ is plastered all over the company’s documentation. It has promised, “not only to bondholders, but to everyone it deals with, that it will play with a straight bat”.
In Bengt’s mind “that means that the group goes further than the law demands. What else can it mean? I mean, everyone has to follow the law – but if you claim to be an ethical operator, you go that bit further.”
Of course, “commentators in both the media and the business world seem to think that the ethical pledge is just some hollow notion – some platitude that can be ignored when it comes to the harsh reality of recapitalising the group’s bank”.
However, Bengt argues that “there’s a legal commitment here”. Although this commitment is “a little vague”, it “is still very much in play… Unlike all those pesky ‘for profit’ organisations, this is an organisation that operates not just under the law, but ‘in accordance with co-operative values and principles’.”
So, says Bengt: “it’s surely not too much to assume that such concerns encompass making good on contractual commitments – including commitments to pay interest and repay any loans to bond holders”.
After all, “the Co-op Group constantly reassured bondholders that their money was safe”. However, “it suddenly seems the bank has been massively undercapitalised for years”.
He points out that others agree with him. Indeed, “MP Jesse Norman (on the Treasury Select Committee looking into this debacle)” has said that “‘You would expect them [the Co-op Group] to bear full responsibility for their ownership’.”
And ironically, although the bank is meant to be owned and run by its members, they “haven’t even been asked about how they want to recapitalise their bank.”
Overall, “If the new guys in charge of the Co-op think they can renege on past commitments and the founding principles of the group, then they’re wrong. If they go along with the plans to stiff bondholders, they’re going to have a massive fight on their hands”.
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Have a great weekend!
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