Company buys 8.7% of market cap (post announcement pop) and makes dividend yield close to 2.7%. Why not? It can always borrow at 75 over ten yr like last time (2.45% at today’s close) and write off interest costs. Capital restructuring.
BREXIT and the consequences for global investors
The markets (and pollsters) got the BREXIT all wrong last week and Britain did indeed decide to unshackle itself from increased Federalization – and an external Federalization at that. The magnitude of the exit vote surprised even the exit-vote camp, and global markets sharply turned south as investors were seen paring risk and ploughing into safe havens (Treasuries and the like). This was an expected reaction because markets had to pause and catch their breath from the unexpected turnout and assess the outcomes from a future independent UK. (In the days since, a good part of the risk-taking has resumed from the initial knee-jerk reaction)
While some reports may characterize the exit vote as being “anti-trade”, I feel it is more to do with dislike for Federalization and increased bureaucracy, especially that imposed from outside UK’s borders. Immigration was a contention, say others but that too dovetails into the Federalization argument since the Immigration decision was taken by the EU for all member countries. With that as a backdrop, the timing is two years for the UK to formally exit from the EU. A possible new UK Government is expected now that Cameron is stepping down. Along with that is the question of what exit agreements the EU and UK hammer out. It is possible that punitive actions may be taken by the EU to discourage other member nations with exit ambitions. Or it could be that the trade imbalance with Germany (positive for Germany) may dictate a softer, comradely stand.
In any case, we are talking political and trade uncertainty here and uncertainty stretched out in time – a combination that is unpalatable to markets. That should spell increased volatility in risk assets and a general favor towards risk-free assets, however rich they may be. Expect the dust to slowly settle as investors get comfortable with the tone from EU and the new UK Government and they assess the longer term winners and losers (sectors). But aside from this, what can further deepen the damage could be anti-establishment forces increasing in other EU countries as they take UK’s exit vote as a comfort tonic to rev up their anti-EU engines. The keyword therefore is volatility.
BREXIT – short for Britain Exiting the EU – has captured attention, for political and economic reasons. While the long-term effects of Britain staying or leaving the EU are debatable, the immediate attention has been Britons’ divided opinion casting a negative pall over the concept of EU itself. Britons, for the “exit from EU” camp, are asserting centuries-old style of British independence from the continent. They cite reasons of bureaucracy and central command that could stifle British flexibility. The anti-exit or “stay” camp on the other hand, point to loss of trade with the continent and possible economic isolation (and one that President Obama also warned against during his trip to the UK).
Again, while it is difficult to read the tea leaves to figure out long-term repercussions given the dynamic nature of global trade, the immediate bombshell has been the very questioning of EU as a safe mothership for member nations. Britain is still the fifth largest economy in the world and the EU would value its loss from its economic fold. But more importantly, this would open the door for similar-minded nations valuing their independence to think about a possible withdrawal. The snowballing of such an effect could spell disaster to the concept of a EU that still is not a nation with a united fiscal policy and government. Many weaker European nations are chafing at possible Greece-like reforms forced down to them from Brussels and Germany to solve bank problems and tax receipts. They may now take a cue from Britain and exit and devalue their currencies to solve their economic woes.
Thursday is the vote. And there will be immediate winners and losers. Exporters from Britain might benefit handsomely if Brexit happens and the pound is devalued. London, the financial center, could reel in benefits from increased volumes if Brexit does not happen. Right now, the odds seem slightly higher that Britain will continue to stay in the EU. But there is more riding on the Brexit rather than just the quaint notion of Britons asserting their literal and figurative independence from the mainland. This is more about a large economy that is still familiar worldwide firing across the bow of EU and heralding a larger dissent in the wings.
The story is of low global growth and even lower inflation. With that backdrop, there should be an ever-present long-duration buyer to anchor in returns and therefore forcing its effects on shorter duration paper (thus explaining the current flattening in 2-10s).
Today’s wsj also talks of real inflation being closer to zero because of inconsistencies in CPI that don’t take into account changing consumer baskets and quality of improvement.
Thus the fed can’t raise until inflation “normalizes” to the 2% level. Even if it does buck the trend, the legions of bidders are quickly going to bring the effective rate of interest back to low levels. If global growth stories are intertwined as also the market for financial instruments, how can the fed operate from a domestic vacuum?
Ackman rightly says that index funds will “keiretsu” corporate America by showering attention (passive as well) on a mostly-stagnant pool of assets, thus propelling their value over time (and unfairly over the rest of the herd). But if mean-reversion holds true, those index funds will create a minefield for themselves and self-destruct; because as value creation dies (falling victim to stupid money continuing to chase a limited set of assets), distorted valuations between the “chased” and “not chased” will herald the natural death of index plays and the rise of “active” plays that focus on value. Perhaps Ackman is saying he can’t wait for that event to happen?