Monday, 9 September 2013

Musing from a bike saddle . . .

It's a good thing to start a Monday knowing the newly elected Prime Minister of your country is a cyclist. And the first morning after the election he was on his bike on a normal bunch ride through Sydney's northern suburbs. The message is positive for everyone planning on getting on a bike and even though some riders might have preferred a different election result they need to recognise that for cycling this is a good thing. As I've often said on this blog being on a bike gives you time to think and reflect on things. Australia for the past 6 years has been governed by a fractious group of political insiders who spent very little time thinking out the consequences of policy and too much time chasing "big ideas" and unrealistic outcomes to understand the benefits of stability on an economy. Maybe if either of the centre-left PM's we had during this period had got on a bike they may still have been in power today.

The world is of course not going to slow down just because you get on a bike for a couple of hours and even though for many ears the Chinese were great advocates of cycling they now prefer the car to support their love of their newly found wealth. China looks like it will start to officially mark down GDP expectations from 7.5% to 7% as it comes to accept that internal demand is not keeping up with expectations. On Friday the latest figures for the balance of trade were published and exports rose 7.2% YoY v. expectations of 5.5% and July’s 5.1%. Imports rose a less than expected 7% YoY, leaving the trade surplus at more than $28 billion.

The Chinese consumer is still cautious and probably waiting for the new leadership to settle in. It doesn't help that the current trial of Bo Xilai continues to dominate the media as this seems to caution all against a more swashbuckling approach to capitalism in general. Whatever the case I go back to a Credit Suisse report from mid June suggesting the GDP growth rate gets down to 6% even though GS, DB and others are still positive on the back of export demand. I suggest investors remain cautious and continue being long USD assets while divesting some profits into the UK and possibly something from France.

I was talking to some people about some risk management work last week which caused me to do some research into the current exposures of the mega banks in terms of their value-at-risk reporting. While not wanting to get into a longer discussion about methodologies I was surprised that VaR numbers seem low by historical standards. Take Citigroup as an example. Now I know that they've gone through a horrible period post the GFC, but given the size of their balance sheet it should be notable to investors that they are running a mere $120m of daily VaR on average during the 2Q13 period and that has been fairly consistent with their very recent history.

Citigroup VaR: Form 10Q extract
Citi uses the 99% one day confidence measure here as required by the regulators, though some banks (e.g. UBS) give  the 95% variation and some weekly information. If you ever feel inclined to look into the risk at these major institutions you just go to the US SEC's website and look at filings of their Form 10Q's. Why is all this important? Well as an investor, risk costs capital. That means that the more risk I have the more capital I need and in raising capital you're probably diluting your return on equity. Now if some regulators get their way banks will be required to raise even more capital for each dollar at risk. Take the UK for example where the government had to nationalise a number of institutions in 2008-09, there Sir John Vickers, who chaired the Independent Commission on Banking suggests that a doubling of core tier 1 capital may be required to sufficiently protect the tax payer from future shocks. In my mind and reading the VaR reports from several banks the various institutions are already well on the way to being in an operational position to cope with regulators increasing said requirements. Given this investors need to understand that banks are less likely to be able to deliver the mid-teen RoE that was previously the norm and as such most of the high beta rally in the financials is over. Investors looking for above trend returns will need to either diversify into institutions more exposed to early cycle returns (Europe) and less on the US. The fact that the UK government will soon start to sell of it's banking assets should be all you need to switch first to France and then finally to the southern economies.

Thinking a little laterally for the moment one wonders what the effect of all the shrinkage in the banking sectors risk taking has had on local economies reliant on their largesse? My old home of Geneva finally starting to see things cool in its' housing market. 

Not exactly giving it away, but things are changing . . .
I can testify to the frightening cost of living there. During my time there real estate prices went crazy due to a slow growth in the housing stock, a flight of bankers and support staff from areas such as the UK, a Europe wide tax scare and regulatory restrictions on foreigners. Now it would seem things are cooling. Transactions throughout the summer period were few and far between as bid-ask spreads widened dramatically, especially in the SF3m plus market range. Most significantly the collateral required for bank loans is changing. Previously 50 or 100 year loans were not uncommon and these were based on individuals being able to pledge their pensions against a mortgage. But, just as bank's have had their cost of capital changed, so to have house buyers by virtue of a halving of the amount of pension that can be used to offset the mortgage. It's just like doubling the amount of tier 1 capital that banks need to hold and the result will be the same, i.e. returns will go down.Therefore if you're long Swiss property now as a speculative hedge you need to think again. If you're living in Geneva and own a place and you're happy, then either work harder or just grin and bare it while you're cycling in the Alps or skiing in Megeve.



  1. Thanks your tutorial is indeed useful. I have just saved it. Thanks investment

  2. Agree about thinking twice re Geneva as a spec hedge. Your old home of Geneva will always attract buyers bc of reputation, great outdoors, great schools, etc. But not that exciting...

    Personally, i say if one has even USD100K to play with then best to buy a property in Ulaanbaatar. Buy and hold / rent and in 10 years you're laughing (for the right reasons, hopefully). The place is where Qatar was 20 (?) years ago.

    That's if you got the risk appetite for it. Oh and who knows in 10 years maybe it will become the cycling capital of the region :)

    1. Thanks for your thoughts. Am meeting with a gentlemen who has owned property in Mongolia for several years tomorrow morning for breakfast. Perhaps we can talk regarding further acquisitions?