When Britain’s answer to Warren Buffett gives his opinion on the market, people listen.
But only, it seems, if they like what he has to say.
The bearish departing words of Anthony Bolton, one of Britain’s most successful fund managers, who is now stepping down from fund group Fidelity, have seen much comment over the past few days. But few people really believe the bull market is anywhere near coming to an end yet.
So what’s Bolton worried about? And is he right to be?
Anthony Bolton’s concerns about the market seem to stem from pretty much the same source – private equity. On the one hand he’s worried because he’s finding it hard to find any value in the stock market. “Investors are not differentiating between higher and lower risk investments – low quality companies are being given the same valuations as high quality companies. The conditions are there for problems.”
One reason behind this is that people are chasing low quality because everyone now expects stragglers to be picked off by private equity. In effect, they are chasing losers on hopes of bid action. That’s never a good reason to buy into a share.
And Bolton’s other fear is the ease of borrowing to fund such bids. “Even private equity companies have expressed surprise to me about how easy it is to borrow money at the moment,” he said. “I think the phrase is ‘covenant-lite’, but in many cases it appears to mean no covenant at all.”
What does he mean? Covenants, as Paul J Davies and Gillian Tett explain in the FT “are the restrictions that lenders place on borrowers to help ensure that they get their money back.” Basically, they are a series of checks and balances that allow the lender to monitor how well the company is doing. They enable the lender to ensure it has enough control, and enough early warning signs, to take action where necessary to protect its investment.
With covenant-lite, the lender’s control and ability to monitor the investment are heavily watered down. Given the increasingly huge sums that are being financed, this seems like a bad idea.
But as Tett and Davies point out, these days, even where covenants exist, “these protections have recently been becoming so slack that they might as well be crossed out.”
The basic reason is that, just as mortgage banks in the US (and over here, we just don’t know it yet) chased standards lower in the sub-prime market as they competed for more loans business, so the same is happening with the investment banks. They want the fees, and they want the ego boost of backing a big deal. And when the boys in the City and on Wall Street start getting involved in preening contests, there’s no end to the stupidity that can ensue (see What peacocks and private equity have in common.
The net effect, as Bolton says, is that “there is a lot of buoyancy in the markets and this is typical of what you get in the late stages of a bull market.”
Of course, no one wants to hear this. He might be one of the best investors of his generation, but now he’s retiring, maybe he’s a bit old-fashioned, maybe the world’s moved on, we all get more cautious as we get older, don’t we, now run along old chap, eh?
But Bolton’s not the only influential investor feeling bearish.
On the other side of the world, 78-year-old Li Ka-shing, Asia’s richest man, and arguably that region’s answer to Warren Buffett, is also bubble-watching.
“I’m worried about the stock market in China.” He’s got good reason to be. The benchmark CSI 300 index has risen 85% since the start of the year, and closed at a new record yesterday. Earlier this month, in a single day, 385,121 new stock broking accounts were opened, another new record.
“Domestic investors are getting too sanguine about investing in the market,” said Teo Joo Wah of Singapore’s Fullerton Fund Management to Bloomberg.
But as with Bolton, it seems that everyone will pay his comments due respect – and then just keep on buying. Kenny Tang, associate director of Tung Tai Securities in Hong Kong, told the newswire: “Mr Li has a reputation of making the right calls. But I don’t think his comment will immediately trigger a panic sell-off. It’ll probably remind people to be more cautious and stay alert.”
Stay alert? Be more cautious? The CSI is trading on 43 times estimated earnings. How much more warning do you need?
The last time China sold off – by just 9% in a day – it sent markets all over the globe into a tizzy. If a real slump happens – as it did in the similarly-overvalued Gulf markets last year – Mr Bolton and Mr Li are likely to find their caution vindicated.
Turning to the stock markets…
A late surge saw London stocks end the day in positive territory following lacklustre trading earlier on. The blue-chip FTSE 100 index added 19 points to close at 6,579 and the broader indices were also higher. Royal Dutch Shell and BP were among the day’s biggest risers on renewed merger talk. Peer BG Group also made strong gains. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 closed 9 points higher, at 6,027, following a quiet day’s trading. In Frankfurt, Deutsche Post led the DAX-30 18 points higher to a close of 7,499.
Across the Atlantic, US stocks ended the day lower as investors consolidated gains. The Dow Jones fell 10 points to close at 13,476. The S&P 500 was one point lower at 1,512. And the tech-heavy Nasdaq was 8 points lower at 2,539.
In Asia, the Nikkei closed 99 points weaker at 17,399 today as lower metals prices weighed.
Having soared by over $2 yesterday, crude oil futures remained above the $64 mark, at $64.76, this morning. In London, Brent spot was last trading at $69.61.
Spot gold fell to a two-month low of $653.40 yesterday and was trading at $657.65 this morning. Silver, meanwhile, was little-changed at $12.80 this morning.
In the foreign exchange market, the pound had fallen to 1.977 against the dollar and was at 1.4635 against the euro. And the dollar was at 1.3507 against the euro and 121.26 against the Japanese yen.
And in London this morning, national carrier British Airways announced its first loss for eight quarters as trans-Atlantic traffic fell and threatened industrial action disrupted flights. The company made a net loss of £128m – greater than analysts’ estimates – as sales dipped by 5.9%. BA shares had fallen by as much as 3.4% today.
And our two recommended articles for today…
Is the Euro the next global currency?
– It’s been endorsed by both gangsters on the streets of Moscow and the authoritative journal Foreign Affairs. But whilst the Euro may be a good currency to do business in, legal or otherwise, is it really the best place to store your wealth? For more on whether the Euro really is the natural alternative to the beleaguered dollar, click here: Is the euro the next global currency?
How to minimise stock market losses
– The world is an uncertain place. So how can you avoid losing too much should the market suddenly take a turn for the worse? Ignore trendy tech stocks and look to commodity stocks. To find out which ones look attractive – and how to ensure you don’t pay too much for them – read: How to minimise stock market losses