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PM vows to relax state aid rules after EU split
Pledge to diverge from Brussels regime threatens to hamper trade deal talks
SEBASTIAN PAYNE AND CHRIS GILES LONDON JIM BRUNSDEN — BRUSSELS
Boris Johnson has pledged that the UK will break free of EU state aid rules after Brexit to make it easier to prop up ailing industries, in a move that is aimed at winning over Labour voters but could make it harder to secure a trade deal with Brussels.
The prime minister set out proposals yesterday to make it “faster and easier” for a government to intervene in failing industries after the UK leaves the EU, with officials saying it would allow “extremely rapid responses to economic turbulence”.
Mr Johnson’s assertion that Brexit would allow Britain to adopt looser state aid rules marks an abrupt change for a politician who has spent most of career — in politics and journalism — fulminating against supposed statist tendencies in Brussels.
It also dismayed rightwingers who argue that leaving the EU would allow Britain to move in a more free-market direction. The Institute of Economic Affairs think-tank accused the Tories of paying “lip service” to “free markets and free enterprise”.
The prime minister insisted his proposal would not complicate his hopes of obtaining a trade deal with the EU, but he added he would “fundamentally change” public procurement rules to “back British business”, which would tilt the level playing field against European rivals.
Ivan Rogers, former UK ambassador to the EU, said the idea appeared to mimic Donald Trump’s “Buy America” policy, noting that the Tories had once played a key role in writing into European treaties provisions to curb unfair competition.
The political declaration on a future UK-EU partnership, agreed by Mr Johnson, commits both sides to “common high standards” in state aid, competition, social and employment legislation, environment, climate change and tax.
Mr Johnson insisted his new regime would enable the government to move more quickly when industries required assistance.
“I believe in competition, I believe in a level playing field, but we need to speed things up,” he said at a press conference. “There are ways we would be able to do things differently and better.”
Tory officials referred to attempts by the government to help the troubled UK steel industry in 2015, which they claim were hindered by a “50-day” wait for approval from Brussels. “That caused a lot of unnecessary anxiety,” said one.
The proposals are modelled on principles set out by the World Trade Organization, instead of those underlying the EU’s single market.
However, moving away from the state aid provisions could lead to problems in Northern Ireland. The province has a unique status in Mr Johnson’s Brexit deal and will have to remain aligned to the EU’s level playing field provisions.
Conservative party officials insisted that the proposals would not lead to any further checks between Britain and the island of Ireland and said any system would be developed with the input of the devolved administrations.
The new policy, which builds on what was set out in the Conservative election manifesto, could help the party in its target seats in industrial areas of the Midlands and north of England.
But Victoria Hewson, head of regulatory affairs at the IEA, said: “Extending these rules, by allowing government to use taxpayers’ money to prop up industries that have no future, would be to move swiftly in the wrong direction, crippling the emergence of new and innovative businesses that our economy relies o
n.”
A magnate shakes up the 2020 race
Money and his success as New York’s mayor make a formidable candidate despite a late start, writes Joshua Chaffin
Days before the 2001 election, polls showed Michael Bloomberg trailing a seasoned opponent by double-digits. Dismissed as a billionaire trying to buy his way into office, the first-time candidate’s style was charitably described as “low-key” — and less charitably as detached or “dry as toast”. Yet he prevailed to become New York City’s mayor. “Nobody believed we would do this tonight, but we had faith,” he said as supporters basked in victory.
That formative political experience — and a battery of data and opinion research — have kindled a similar faith among Bloomberg loyalists this week as he joined the race for the 2020 Democratic presidential nomination. But at a time when progressive ideas are on the ascendant, some derided the announcement as a misguided vanity project for a 77-year-old media baron who ran in New York as a moderate Republican.
Senator Elizabeth Warren, who has put taxing billionaires at the centre of her candidacy, welcomed Mr Bloomberg to the race this way: “He doesn’t need people. He only needs bags and bags of money.”
Indeed, Mr Bloomberg is wielding his $54bn fortune like a bludgeon. A $30m television advertising bombardment that one political strategist called “shelling the beach” lauds his accomplishments: building his eponymous media and data business; resuscitating New York after the September 11 terror attacks; and then donating billions to tackle climate change, gun violence and other causes. “I offer myself as a doer and a problem-solver — not a talker,” Mr Bloomberg said in a no-frills, online campaign launch on Sunday.
Yet those successes bring with them awkward questions. Allegations have resurfaced about a testosterone-fuelled and sexist office culture at Bloomberg LP. In one 1997 lawsuit, Mr Bloomberg is alleged to have uttered “kill it” when an employee informed him she was pregnant — something he has denied. His aides say the claims are not new, but they play differently after the #MeToo drive against sexual harassment.
Mr Bloomberg’s mayoral record poses problems for his efforts to attract black voters, a crucial Democratic constituency. He recently apologised for his longstanding support of a “stop-and-frisk” policing strategy that disproportionately affected minority New Yorkers. Pundits warn that if Mr Bloomberg’s campaign goes down in flames, he could split moderate Democrats and smooth the path for a candidate on the far-left.
A son of working-class Medford, Massachusetts, Mr Bloomberg is entirely self-made. At Johns Hopkins University, he was the only Jew in his fraternity. After Harvard Business School, Mr Bloomberg rose quickly at the Wall Street firm of Salomon Brothers, where he earned a reputation for smarts, sharp edges and occasional crassness. To his surprise — but not that of his colleagues — he was sacked after a 1981 merger.
Mr Bloomberg rebounded by inventing a securities data terminal that upset the incumbents — Dow Jones and Reuters. There are now more than 300,000 Bloomberg machines on traders’ desks around the world. But the campaign is tying the company’s news division up in knots. John Micklethwait, editor in chief, has said that the 2,700 journalists will refrain from investigating Mr Bloomberg and, for the sake of fairness, his Democratic rivals. But they will continue to scrutinise Mr Trump. “This is uncharted terrain,” the editorial board explained in a note to readers.
Mr Bloomberg’s fellow tycoons are fans already. Rupert Murdoch once described him as “the most creative media entrepreneur of our time”. And Stephen Schwarzman, the Blackstone founder, predicted Mr Bloomberg’s intellect would single-handedly shift the Democratic debate.
The adulation is due to his success as an entrepreneur and as mayor. Mr Bloomberg, who took office just months after the 2001 attacks, helped guide New York’s long recovery. He overcame the administrative challenges of a recession and daunting budget deficit and made clear the stricken city would survive and thrive as a financial centre.
After controversially rewriting New York’s rules to allow himself to serve a third term, Mr Bloomberg moved into philanthropy — and regularly batted down speculation about a possible presidential run. He initially passed on the 2020 campaign after fearing he would play spoiler to moderates like Joe Biden. Friends say he changed his mind over the summer after polls showed the leading Democratic candidates struggling in battleground states. His best chance may lie in tapping the many Democratic voters who prize the ability to beat Mr Trump above all else. His late entry has forced Mr Bloomberg into an unorthodox strategy. Skipping the early voting states of Iowa and New Hampshire, where successful candidates typically build momentum, he is putting plans to bet hard on the 14 “Super Tuesday” states that vote on March 3. So, while the rest of the field was fighting in Iowa this week, Mr Bloomberg jetted to Virginia and Arkansas.
Mr Bloomberg will also wage what aides are calling a “parallel campaign” with a $100m digital media assault that includes attacks on Mr Trump in battleground states. “Part of showing that Mike is the one who can beat Trump is taking the fight to Trump,” says Jason Schechter, the campaign spokesperson. It might seem far-fetched. But then, so is most of Mr Bloomberg’s career so far.
US merger rush triggers fears over end of Wall St bull run
Rising number of stock-based M&A deals is seen as an alarm bell of late-cycle behaviour
JENNIFER ABLAN AND ERIC PLATT NEW YORK
It is boom time once again in corporate America as chief executives agree to a rush of multibillion-dollar tie-ups.
But the consolidation — which topped $70bn this week alone and included deals for the high-end jeweller Tiffany and discount broker TD Ameritrade — has left investors with a burning question — is this a signal of the bull market’s impending end?
The rising proportion of stock-based M&A deals — the highest level since 2000 — is just one alarm bell of possible late-cycle behaviour.
Takeovers where an acquirer pays only with its own stock, as brokerage Charles Schwab did this week when it agreed to buy smaller rival TD Ameritrade for about $26bn, account for nearly 20 per cent of deals this year, according to data provider Refinitiv.
High valuations for the $3.4tn worth of takeovers agreed so far this year have also made US stock investors nervous. Companies and buyout groups are paying about 22.5 times the net income a target generates in a year.
While that is down from a 2018 peak, it remains at its second-highest level since 1998. This has affected how companies are deciding to structure their takeovers as well as whether they go ahead with a deal at all.
Winston Chua, an analyst at TrimTabs Investment Research, pointed out that flurries of M&A tend to peak around market tops as “companies attempt to buy growth rather than grow companies organically”. In the past, record dealmaking has coincided with market peaks as it did on the eve of the dotcom boom-and-bust in 1999-2000 and then again ahead of the financial crisis in 2006-07.
Mark Grant, chief global strategist at investment bank B. Riley FBR, said equities were “toppy”, given stretched valuations and slowing earnings momentum, adding: “The rash of M&A deals shows companies are looking for growth.”
Optimists believe this time is different. To them, supportive monetary policies from major central banks, including the US Federal Reserve and the European Central Bank, can lengthen the ageing and vulnerable M&A and stock market cycle.
“A pick-up on M&A could fuel and lengthen any ongoing rally in the stock market,” said Jim Paulsen of the Leuthold Group. “It may eventually signal a market peak but it could be from much higher levels. M&A is just a single indicator among many impacting stock market conditions.”
Meanwhile, investors’ ferocious appetite for returns and yield, particularly against the backdrop of trillions of dollars of negative-yield bonds, has sent them looking for income and opportunities in equities.
“What we are seeing in the recent bump in M&A activity is that corporates and other investors have concluded that despite the advanced age of the current cycle we are not about to descend into a recession, rather that the current cycle still has legs,” said Eric Shube, head of US M&A at law firm Allen & Overy.
Hedge fund investor Thomas Hayes of investment firm Great Hill Capital said dealmaking could yet accelerate without signalling a market top, particularly if a trade deal between the US and China is agreed and a global downturn is averted.
One test case that investors can look to is 2015 when M&A set a record high. While that year was followed by a brief slowdown at the start of 2016 alongside a slide in commodity prices, deal-making and stock prices ultimately recovered.
“The cycle has room to run and will be reflected in accelerating M&A,” he said. “It’s a sign that animal spirits are coming back into the market and fear is thawing.” But the rush of big-ticket M&A deals set against the old age of the current upswing in major equities markets still has many market watchers on edge.
The risk of a near-term pullback for the benchmark S&P 500 index is “quite high” following its 25 per cent surge so far this year, said Lori Calvasina, head of US equity strategy at RBC Capital Markets.
“Levels of confidence have been trending lower and are well below the highs of the current cycle,” she said. “The most noteworthy deterioration has occurred in the Conference Board CEO gauge, which is actually nearing levels typically seen in recessions.”
Bankers who work on mergers said that the higher prices for companies, as well as fear that the stock market is due for a correction, has prompted boards to use their own stock for deals with the view that if stocks do decline, they will at least be saved from overpaying for a takeover with cash.
Investors have warned of other signs of a market top already this year, pointing to overhyped valuations of venture capital-backed groups such as property leasing company WeWork — the SoftBank-backed group that ultimately had to restructure itself.
News that private equity giant KKR had submitted a bid for the $70bn drugstore chain Walgreens Boots Alliance, which would amount to the largest leveraged buyout in history if agreed, also reverberated across Wall Street, with some investors pointing back to the last big PE boom ahead of the financial crisis.
Days earlier, rating agency Fitch warned that losses on leveraged loans, a market that is critical in funding buyouts, would experience greater losses than it previously thought.
‘The cycle has room to run. It’s a sign animal spirits are coming back into the market’
Stability destabilises a generation of macro hedge fund stars
Robin Wigglesworth
Last week, Louis Bacon decided to call it quits. After three decades at the top of the hedge fund industry, Mr Bacon’s decision to close Moore Capital Management to outside money is understandable — but nonetheless symbolic of how difficult “global macro” hedge funds such as Moore have found the past decade.
Many traders that once profited handsomely from big, bold bets on seismic economic trends have lately struggled to live up to the reputations they forged in the 1990s. As if to hammer the point home, Stone Milliner Asset Management, a $3bn macro hedge fund established by Bacon acolytes, last week also told clients it was winding down, according to Bloomberg.
This followed the closure of other prominent macro funds, such as those managed by John Burbank’s Passport Capital and Hugh Hendry’s Eclectica.
The hedge fund industry as a whole is facing headwinds with performance stuttering, investor money seeping out and closures on track to outpace new launches for a fifth year in a row. But for macro hedge funds, Mr Bacon’s bowing out may prove a landmark in a slow, potentially terminal decline.
Journalists are naturally wary of predicting the death of anything, given the long record of rash prognostications marking a turning point. Businessweek running a cover story on “the death of equities” on the cusp of the strongest stock market bull run in history is an apt example.
Macro funds still manage $245bn, according to eVestment, despite suffering $23bn in outflows this year. Several of the biggest — such as Brevan Howard, Caxton Associates and Tudor Investment Corp — are enjoying something of a renaissance lately. Greg Coffey, another prominent Bacon protégé, has also had a banner year.
But there are several reasons why macro funds, at least as we have come to know them, might be in at least secular decline. In his final letter to investors, Mr Bacon said “disappointing results . . . obviously inform this decision” but in a call with the FT he expanded on the crux of the problem: “One part of the macro toolbox is missing — volatility.”
It is true that market volatility has been sloping downwards for years. Aside from the occasional burst of turbulence, stocks, bonds, commodities and currencies have all become increasingly quiet.
What is less widely appreciated is that this market tranquillity is not caused just by low interest rates and quantitative easing — though central banks have played a big role — but it also reflects an era of macroeconomic calm.
This may seem odd, given that the global financial crisis, Europe’s subsequent turmoil and periodic bouts of emerging market chaos are still seared in the memory. Nonetheless, the data paint a remarkable picture of macroeconomic “secular stability”, as M&G Investments’ Eric Lonergan has dubbed it.
Yes, the 2008 recession was severe but it was less destructive than many feared a global crisis of that magnitude would prove. And both before and since, a range of economic indicators have been far less volatile than historically has been the case.
Inflation is the most notable example, proving astonishingly resistant to both booms and busts over the past two decades, but JPMorgan Asset Management has calculated that the rolling 20-year growth rate across 17 developed economies is now the steadiest it has been since the late 19th century.
That is a difficult environment for hedge funds that specialise in profiting from economic trends and dislocations.
Of course, this era of tranquillity for the global economy could shatter. But many of the tricks of the trade that the industry’s big players pioneered are now commoditised and systematically mined by quant funds.
The talent pool is also drying up. Most of the well-known macro hedge fund managers learnt their craft at the proprietary trading desks of investment banks. But those have been hacked back since the financial crisis and being a good market maker is a fundamentally different skill from placing big punts.
That raises the question of where the next generation of great macro traders is going to come from.
There will still be opportunities in certain areas, such as finely constructed trades around political events that machines will always struggle to fathom. Macro hedge funds are clearly not going to disappear. But they will look very different from the firms that once reigned over the industry.
Investors must look beyond bonds for solid ways to diversify
Michael Mackenzie
When we start to measure the most eye-popping market moments of 2019, the accumulation of negative-yielding debt to a peak of $17tn in late August will take some beating.
The stack of debt in the deep freeze, which effectively forces buyers to take a nominal loss when holding to maturity thanks to achingly high prices, has since shrunk. Even so, the tally still stands at about $12.6tn, including $1tn of corporate debt.
The still elevated total is a symptom of a bigger problem — some central banks are continuing their grand adventure in keeping policy rates below zero while others in the UK, Australia, Canada and the US are holding just above that dividing line.
That leaves investors, particularly those of a younger age, facing a tough time building portfolios that benefit from the textbook trade-offs between fixed income and equities, as seen back in August.
This aspect was recently highlighted by Richard Clarida, vice-chair of the US Federal Reserve, when he noted “the value that bonds have provided over the past 20 years as a hedge against equity risk”.
In short, a diversified investment portfolio that experiences a big drop in the value of risky assets such as shares and corporate bonds is bolstered in part by an appreciation in the value of long-dated government paper.
During periods of strong performance for risky assets, the fixed returns of long-dated government bonds also provide a stream of income that can be reinvested over time at higher yields.
Now there is a groundswell of concern among investment managers about how the current financial system is built on shakier foundations — negative-yielding paper and government bonds that provide meagre fixed coupons of interest. This limits those bonds from playing an effective role of acting as ballast for portfolios should they suffer in the event of a market shock.
The yin and yang between government bonds and equities has been on full display during the past 12 months.
The 10-year US Treasury yield peaked just shy of 3.25 per cent in early November of 2018 as the Fed was tightening policy and shrinking its balance sheet.
When equities and credit markets subsequently plumbed the depths in December last year, long-dated government bonds were already appreciating sharply in price terms, sending their yields tumbling.
David Kelly at JPMorgan Asset Management makes the point that, since 2009, “a plain vanilla, 60/40 portfolio of US stocks and bonds, rebalanced annually with dividends and coupons reinvested,” has generated “a total return of 221 per cent, or roughly 11.2 per cent per year”.
So far this year, the S&P 500 index has gained 28 per cent, including the reinvestment of dividends, while an index of long-dated US Treasury debt has delivered a total return of nearly 19 per cent.
But if a shock were to hit, the exceptionally high prices in Japanese and European bond markets mean there is less scope for a further rally.
Indeed, some investors have already taken advantage of Treasury yields climbing from their lows of August.
Earlier this month, the Treasury sold 30-year bonds at a yield of 2.43 per cent and demand was so strong that banks managing the deal were left with their lowest underwriting share on record, around 21 per cent.
But the limits of this bond hedge are clear to some investors, particularly when combined with the interest rate sensitivity, or duration, of key bond indices.
This explains why long-dated bonds have performed so well in the past 12 months as their high duration has spurred a pronounced appreciation in prices compared to paper with short-dated maturities.
Many market participants fear that this helps to make long-dated bond prices unusually wobbly.
BlackRock Investment Institute noted this week how a rising average duration in bond benchmarks “makes them more sensitive than in the past to swings in interest rates, with potential for greater volatility”.
Even without a sharp economic downturn, bonds could prove to be a feeble bedrock for a portfolio.
“Fixed income will provide very little in the way of real returns if the economy merely moves sideways,” said Mr Kelly at JPMorgan Asset Management.
This, he said, forced investors to look elsewhere for solid ways to diversify a portfolio, including considering real estate and stable dividend-paying companies, and areas of emerging markets where dollar-denominated bonds have performed strongly this year with relatively high yields.
For the conservative-minded who have up to now enjoyed the security and solid returns of a portfolio split between bonds and equities, this year’s spike in negative-yielding debt suggests investors need to alter their approach towards what is truly fixed income.
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