The storm cone is now flying

At Linchpin, we’ve been quite sanguine about equity markets over the past year.  We have always noted the potential downside, simply because valuations are high historically, but have been unable to see what might trigger a sharp downturn in the short term.  That is changing.  The end March data from our friends at CrossBorder Capital shows global liquidity at 25 (0-100 range), which makes the likelihood of a bear market within the next year around 90%.  Up until January the number had been around 50 for many months.  The shortage of liquidity is concentrated in Developed Markets but Emerging Markets are not immune. Central bank policy is now at 28 (0-100 range), which is nearly the lowest it has been since the 2008 financial crisis.  Federal Reserve tightening is largely behind this and the European Central Bank, in contrast, continues to be relatively relaxed.  The surprise has come from the PBOC, which has tightened markedly since the (Chinese) New Year. Is a market crash imminent?  Global liquidity usually leads market moves by nine months or so, and experience tells us that investor disquiet tends to show up in currency and bond markets first.  So, with the important proviso that politics could trigger anything, we judge that a bear market is not necessarily imminent.  However, in our view, the storm cone is now flying and the (financial) signals to batten down the hatches would be any of the following:     - A sudden fall in the US$, as happened in 1987.     - An increase in flows out of US$ assets.     - Further tightening by the PBOC. Paradoxically, the UK - perhaps because the threat of BREXIT is leading to looser policy - looks among the best placed of the Developed Markets, but the overall conclusion is that Emerging Markets look safer. To purchase this full report on CrossBorder’s Global Liquidity Indicators click here.

Learn in three minutes why the dollar will continue to fall

Linchpin Associate, Michael Howell,  speaks on CNBC on why the US$ is going to continue to decline and what that means for inflation​. Watch the video here.

Are we at peak global, and do markets care?​

Trade wars are in the headlines again, as Trump and Xi exchange threats.  For investors the big question has to be whether these will lead to a reverse of globalisation.  One commentator points out that there are parallels but also big differences with the US-Japan friction of the 1980s.  China, unlike Japan then, is an important part of the US supply chain and hiking tariffs will simply hurt US producers.  Secondly, the US has no big stick to use against China, because it doesn’t provide any form of defence shield as it did for Japan.  Thirdly, China has broader military ambitions which may create additional causes of friction. The base case has to be that Trump’s comma-head advisors head him off actually implementing his threats.  They’ve done a good job over the past 15 months but that’s no guarantee it will happen again.  I say that is the base case because it’s so clearly in everyone’s interest.  Even if this goes in a different direction, it is likely to take time to play out and increased military spending will certainly have a positive impact on some parts of the stockmarket, in Japan, the US or China.  We may indeed have reached ‘Peak Global’, but at least in the short-term trade friction is more likely to be used as the post hoc excuse for a market setback than actually be the primary cause.​


On 27th March 2018, William and Mukesh attended the Cross Pool Open Forum in London.

Upcoming events

Please find below a selection of upcoming events our team members will be attending:  18th April 2018 - Janus Henderson 2018 Institutional Investor Conference, London - William attending 26th April 2018 - EPFIF Private Markets Investors Forum - Is there Value in Private Markets Today? - London - William speaking and Mukesh attending  21st-23rd May 2018 - PLSA Local Authority Conference 2018 - Gloucestershire - William attending 16th-18th July 2018 - LAPF Strategic Investment Forum - Hertfordshire  - William attending 20th September 2018 - LAPF awards dinner, London - William attending          

A bee in my bonnet about stock lending

Stock lending is a practice which many, but not all, asset managers have participated in for decades.  The income received sweats equity assets a little harder and provides some extra liquidity to markets.  The stock lent is usually used to arbitrage tax differentials between different investors or to enable institutions wishing to go ‘short’ to deliver stock when they sell. However, I am increasingly wondering whether it really is consistent with the spirit of acting as a responsible investor, as pension funds are mandated to do.  One of the key tenets of the Stewardship Code is to use your vote at General Meetings but if you have ‘lent’ your stock you have to recall it in time to do that.  In theory, this is always possible but it undoubtedly adds brittleness to the system: the owner may be up against a tight deadline and the chain of stocklending may involve several parties.    My other concern is that the lender of stock cannot prevent his stock being used for aggressive shorting, which I believe is directly contrary to the notion of being a responsible investor.  The Stewardship Code simply states that investors should state their policy on stock lending, so the practice is not in direct contravention, but I cannot bring myself to say that it is consistent with the spirit behind the Code. Ultimately, the judgement investors have to make is whether the return from lending stock makes it worthwhile and I am aware that passive investors in particular often rely on the practice to cover the frictional costs of running an index portfolio.  Buzz, buzz, buzz… If you have a view on this subject please do contact me. ​

William Bourne attends SPS Local Authority Pension Fund investment issues conference

On 15th March 2018, William attended the SPS Local Authority Pension Fund Investment Issues conference in London.​

ARE Investor sentiment surveys WORTH ANYTHING?

I found myself being given some grief last week in the comments thread after an FT article by Chris Flood because I questioned whether investor sentiment surveys gave much useful information.  The debate, perhaps because of the ‘Global investors shun UK stock market' headline, was rather hijacked by the Brexit pro and anti brigades – hence the suggestion that I was the devil incarnate from I’m still not sure which side.  My perspective was simply that of an investor. It led me to ask myself the question again. I have spent over 30 years viewing investor survey sentiments as simply publicity for the sponsor, on the basis that the information tends to be stale, sample rather than aggregate, and inconsistent because investors will not all be using the same benchmark.  My comments aroused ire because I also suggested that institutions might be a little cynical in what they tell the world.   I prefer to use the risk appetite data provided by our friends at CrossBorder Capital.  It is true that it answers a slightly different question: viz are investors in aggregate overweight relative to their long term average, rather than their benchmark.  But it has the advantage of being timely, aggregate and it also gives a clear signal of investors’ overall risk appetite - ie. are they risk ‘on’ or risk ‘off’?  Particularly at extreme times like 2007-8 (greed was on top) and early 2009 (fear dominated), the fact that this was an entirely objective signal was invaluable. Right now?  I’m awaiting end February data imminently, but at end January investor holdings in UK equities were between 1 and 2 SDs above their average. From my experience last week, there is clearly a different body of opinion about investor sentiment out there, but if you wish to find out more how CrossBorder do it, please click here. ​