Comment of the Day
18th January 2023
Eoin Treacy
Jan 19
Video commentary for January 18th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: BoJ holds on to yield curve control fot a little longer, Yen reverses weakness, Nikkei unlikely to hold gains tomorrow, Wall Street rolls over as Treasuries rally, gold eases, oil reverses early strength in US trading, copper reverses early advance, several global markets are short-term overbought so at least some consolidation is likely.
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Bain Veteran Says 20% Private Equity Returns Have Decades to Run
This article from Bloomberg may be of interest to subscribers. Here is a section:
“The private equity model works,” he said in a Bloomberg TV interview at the World Economic Forum in Davos on Wednesday. “It puts capital to work with experts that really help drive these companies.”
Pagliuca said private equity has “absolutely not” peaked and will still be able to deliver the standard 18% to 20% rate of return in the coming decades.
“We’ve maintained those returns now every decade for 40 years,” he said. “It’s a great business model.”
Buyout firms are readjusting to an environment of higher interest rates that’s making it harder to finance deals and juice returns by loading companies with cheap debt. Valuations have tumbled in both the public and private markets.
Rising rates are bringing a reckoning for those firms that invested heavily in speculative technology companies at super-high multiples, according to Pagliuca. Bain has largely steered clear of this market and its portfolio is doing “pretty well,” he said.
Eoin Treacy's view
There is no doubt that a version of the private equity business model continues perform. The investment practices of the world’s largest sovereign wealth funds, where the holding periods stretch from years to decades is a case in point. They have the financial resources to buy in times of market stress and hold for the long term. There will never be a time when buying low and securing growing cashflows with an infinite holding period will fail.
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Saudi Arabia Says Days of Unconditional Foreign Aid Are Now Over
This article from Bloomberg confirms what I was hearing at the Future Minerals Forum last week. Here is a section:
As part of its deal with the IMF, Egypt agreed to shrink the footprint of all state-run enterprises, including “military-owned companies,” and committed to allow for a more flexible exchange rate.
“We are also looking at our region, and we want to be a role model for the region,” Al-Jadaan said. “We are encouraging a lot of the countries around us to really do reforms,” he said.
Eoin Treacy's view
The UAE’s reluctance to offer donations but attach support to investments is a model Saudi Arabia is now also following. The big oil exporters want regional stability. This change of policy suggests they now appear to believe that will best be achieved through economic reforms.
The Arab Spring shook up the Middle East more than a decade ago and resulted in significant turmoil. It now appears that the policy suite developed in response to those events has matured. Large young populations need to be offered a route to a productive life or rebellion is inevitable.
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BOJ Jolts Financial Markets But Risk of a Bigger Shock Remains
This article from Bloomberg may be of interest. Here is a section:
The Bank of Japan’s decision to keep its settings unchanged Wednesday gave global investors a modest jolt, leaving markets from the yen to Treasuries at risk from a potentially larger shock if officials opt to shift policy in the future.
Standing pat caught some traders by surprise, but it’s unlikely to douse speculation that the BOJ will normalize policy as inflation in Japan accelerates and Governor Haruhiko Kuroda nears the end of his term. It suggests just a temporary setback to bets on a stronger yen and a bond selloff as analysts say it’s still a question of when — not if — the central bank exits its yield-curve control policy.
Indeed, while Japan’s currency at one stage slumped more than 2% against the dollar in the wake of the decision, it clawed back some ground as the session proceeded, helped by a swath of US economic data that dented the greenback. Japanese government bonds surged as traders covered short positions and stocks pushed higher. US Treasury yields declined.
Eoin Treacy's view
There were fireworks in Japanese markets this morning as the BoJ demurred from the tampering with its yield curve control policy. However the rebound in bonds and weakness in the Yen were short lived. Traders don’t see yield curve control lasting beyond Kuroda’s tenure.
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Eoin's personal portfolio: trading long stopped out and reversed, commodity long closed, bond investment position increased.
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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