I cannot help but wonder what it is that others are seeing that I – and quite a few other investment professionals – do not. There are a few indicators that support the bulls but it is the risk side of the equation that is being ignored.
On the plus side there is undoubtedly a lot of cash seeking a home. Some of the players in the liquidity stakes are relatively new. The boost to oil and gas prices has created much more buying pressure than just a few Russian oligarchs seeking smart London homes or control of a Premiership club. Chinese money, too, has been finding its way into the West. These new entrants may not be directly responsible for buoyant markets but the money they commit does no harm.
Private equity has also been credited with contributing to the weight of money theory. Certainly these houses continue to be very active, even if the Sainsbury’s venture was derailed by the attitude of the family. That they were able to even contemplate bidding for such a major business demonstrates just how this particular band of market players has grown in stature.
According to a report broadcast recently into the rising influence of this group of investors, 20 years ago the members of the British Venture Capital Association – private equity’s trade body – conducted 500 transactions in a single year worth in aggregate £200 million. Last year there were 1,500 transactions, worth some £12 billion. A three-fold increase in the number of deals done translates into a 60-fold rise in their value.
There is another potential message to be taken by the collapse of the Sainsbury’s deal. While the 20 per cent or so controlled by the Sainsbury family was undoubtedly a stumbling block, the other issue that deterred the bidders was the state of the company’s pension fund. It would appear the trustees were unwilling to accept assurances of funding. Only a cash injection would suffice in the event of the bid succeeding. This could help to explain why it is that mid and small cap stocks, which have received the bulk of the attention from these houses so far, continue to outperform the market leaders.
Returning to the new wealth owners, I was intrigued to read recently that there are more than 150 ships queueing outside the ports of New South Wales and Queensland to load some 14 million tones of coal destined for China, Japan and Korea. These ships may have to wait for up to a month before they can take their cargo on board. No wonder the Australian dollar has been in such demand.
Among the other positive pieces of news that crossed my desk recently was the UBS Global Economic Scorecard. It concluded that the world economy is in good shape, with both Europe and Asia on the upside. The US, though, continues to demand downward revisions to growth expectations, although their recession probability indicator has dropped, suggesting there is now only a 1 in 5 chance of a global recession in the next year.
And it will be from America that any global economic trouble stems. I took rather less comfort from a report published by a firm of investment managers that is new to me.
Hoisington is based in Austin, Texas and, according to my source, has a strong following in the US for its quarterly economic review. Under the title “The slow grind to recession”, the forecast is for annual growth to drop into negative territory either late this year or early in 2008.
Brian Tora (firstname.lastname@example.org) is principal of the Tora Partnership.