Cambridge Weekly Update – 27th August 2019

Populism politics reversing austerity?

Following last week’s excitement over the yield curve inversions in the US and UK – which have been powerful recession predictors in the past – this week saw the return of calmer capital markets. World stock markets have stabilised and, while still reacting quickly to political news flow, the outlook appears to have stabilised too. All eyes were firmly pinned on the US mountain resort of Jackson Hole, where the world’s central bankers have gathered for their annual convention. Given that the ebb and flow of central bank-induced liquidity has driven markets over the past 12 months, this focus is not surprising. Indeed, on Friday, when China’s announcement of retaliatory tariffs soured market sentiment, US central bank chair Jay Powell’s confirmation of continued monetary support was enough to swing stock markets from negative back to positive.

UK investments in times of uncertainty

In general, the job of an investment manager is to buy assets where the expected return for the investment is at least in line with its risk taken. Managers never buy an asset today if they know that the asset’s price will fall because of a riskier environment tomorrow. If they knew it would be riskier tomorrow than the majority of other investors expect, they would sell the asset today and buy it back tomorrow. But how can you know that it will be riskier, what risks are discounted in today’s price, and that tomorrow (rather than the day after tomorrow) is the best time to buy?

Fiscal easing at last – to balance political risks

Last week, all eyes were on the inversion of the US yield curve (the difference in yield between 2-year bonds and 10-year bonds turning negative). Given that in the past this has been a reliable precursor of recession, investors and the financial commentariat were naturally alarmed. But our assessment is that years of extraordinary monetary easing have undermined the predictive quality of the yield curve. In the absence of external shocks, the sluggish growth the global economy has slowed to this year is likely to continue without deteriorating further towards economic contraction. At the moment, there is not enough doom and gloom in the data to justify recession predictions, and the return of loosening global monetary policy should be enough to see us through.

Greene King is dead, long live Greene King

International investors are looking through the Brexit gloom to see the hot property available in UK stocks: British beer. At least, that’s one way to spin the news this week that pub chain Greene King has been snapped up by a Hong Kong holding company. CK Asset Holdings – founded by Hong Kong’s richest man Li Ka-shing – offered £8.50 per share for the pub chain and brewer, a hefty 51% premium on Greene King’s closing share price last Friday. The deal values the company at £2.7bn – £1mn for each of its 2,700 pubs across the country – although the actual figure CKA will pay will rise to £4.6bn when the debt that the Hong Kong business will be taking on is included.

Read the full commentary here