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British equities and recession in the sceptered isle

|By Matein Khalid| David Cameron, Wall Street’s elite, Mutti Merkel, Obama, the Eurocrats of Brussels, the great and the good of the City and the IMF’s Lady Christine all got it so horribly wrong. I slept Thursday night with sterling at 1.50 on New York and awoke to see it trade at 1.34 on Friday, a 30 year low before the Plaza Accords. Britain has voted to leave the EU and Scotland’s Chief Minister has asked for a new referendum. The next domino to fall could well be Mrs. Merkel, Mother of Europe now that Cameron has committed political hara-kiri. There is now other way to gloss over the fact that, alas, all bets are off in global markets. I never thought I would live to see the day Nigel Farage sounded Churchillian, though with a hint of Lord Haw Haw’s sinister sneer. But I did.

Brexit will have a chilling impact on capex, growth, jobs in England (UK for how long?). Recession is certain if the Bank of England does not stimulate the money markets with a £80 – 100 billion gilt purchases. Morgan Stanley plans to move 2000 employees to Dublin (great) and Frankfurt (awful). This is the tip of the iceberg. Property prices from office towers in the City to cozy pied-à-terre in Belgravia, Mayfair, South Ken and Chelsea will plunge. Battersea’s offplan leveraged Ponzi scheme on the Thames? A 80% price fall in 2017-18.

I see no reason to buy sterling now as the Old Lady of Threadneedle Street has no choice but to resort (lender of the last resort!) to money printing if the recession deepens. It is also dangerous to bottom fish in British equities as profit forecasts will darken this autumn. Bookie stocks in London deserve to be shorted or even delisted for providing such lousy pole forecasts. They should stick to Kim and Kanye or Premier League WFG chav stories. It makes sense to position for second round geopolitical and financial shocks as Article 50 is invoked and the Tories begin another civil war now that Cameron has deprived them from the pleasure of a Thatcher/Heath style regicide.

UK economic growth will take a hit as the Foreign Office and Downing Street rearrange international economic relations. My friends on London currency desks tell me that the Swiss central bank intervened to stem the franc’s safe haven spike. I have loved gold and gold miners, (up 90%) since 2015. Cash is king, queen and grand vizier to me as I see asset prices slammed by contagion.

UK equities will benefit from the pound’s fall only when it bottoms – too bad they do not give us an electric shock in the derrière when this happens. Yet can the Bank of England really kick start the UK economy with rate cuts alone amid such protracted geopolitical and financial market volatility? No. Recession is certain.

UK bank shares, UK property firms and German machinery exporters are obvious shorts in this milieu. The pound is in free fall and can well fall to 1.25, lovely for UK exporters (Diageo, Unilever, Burberry, Victrex) while a disaster for banks and property, the reason Lloyds, RBS, Barratt, British Land and Persimmon are down 20%. The shock to the UK economy is far too traumatic.

All my friend, mostly fund managers and merchant bankers in the City, voted Remain. However, the cabbies I took in Chester and York (went to see Roman and Plantagenet ruins!) were informly Leave, as was my favorite pukka sahib Brit. CIO friend at a major Omani bank in Muscat.

Gold outperformed every other Brexit strategy hedges I know, with its 7% stellar move. I would not commit capital now as there is major blood on a Street far too complacent about Remain. We saw a 25% hit in Japanese equities but the Bank of Japan cannot risk 95 yen and the death rattle of Abenomics. This means massive intervention in the yen money market in Marounuchi, an argument to buy the Nikkei index fund (symbol EWJ). Expect to hear the Federal Open Mouth Committee (FOMC) jawbone markets in high decibel count as the terrified hoofbeats of the Wall Street herds trigger panic in the court of Mama Yellen. The capitulation trade? Deutsche Bank, UBS, Credit Suisse and, yes, Barclays Bank PLC!

Macro Ideas – Strategy ideas amid the trauma of Brexit

It is impossible to predict the macro zeitgeist in real time as a global political event of such seismic importance unfolds before my Bloomberg screen. So I go all cash and fly to Munich not to seek peace in our time but to revisit loony King Ludwig’s Bavarian Gothic fairy tales castles, the cafes of Schwabing/Marienplatz and visit Garmisch with my liebe Hausfrau. There will be a bloodbath in global finance in the next six months. Why? Bank credit default swaps suggest a rise in funding risk. This is Lehman all over again, only worse.

Note Brexit crude oil fell 5% on Brexit. The cost of bank risk will skyrocket in a world where Barclays and RBS shares can fall 20% in a single session. Is this negative for GCC banks, the largest component of regional stock markets? Is the Queen of England English (well, she is genetically German, thanks to Empress Vicky and Prince Al, the bearded dude on the big chair in Hyde Park!).

Defensive sectors? Note UK education publisher Pearson PLC rose 2%. So did Swiss pharma Novartis. Gold? If you are lucky enough to get a profit taking move down to $1310 for new money. It makes total sense to short Tesco with its huge sterling revenues but buy Carrefour, now 7% cheaper even though it has no real sterling revenues. Vive la France, vive MAF Holdings, vive Carrefour!

The real winner of Brexit? Boris Johnson, possibly the next Old Etonian Prime Minister. Donald Trump scored the marketing coup of the millennium by making sure he opened a Scottish golf resort on the day Brexit shook the sceptered isle, this green and pleasant land.

The Chicago Volatility Index has soared 32%, a compelling argument to sell put options on devastated UK banks. Why not Barclays New York ADR, down 30% overnight, a screaming option strategy. Jes Staley was one of the smartest investment bankers of my generation at J.P. Morgan and he will turnaround the 300 year old Quaker bank Bob Diamond’s LIBOR rigging banksters destroyed. Dividend cut? Yes. Gulliver’s travels? Futile since HSBC shares have been such a disaster despite $100 billion in write offs, legal fines, 80 business exits, a $109 billion Mexican money laundering fine, 50,000 payroll cuts, the $5 billion sale of HSBC Brazil to Banco Bradesco. Profit warning? Yes.

I have done my best to hedge global macro risk in 2016 by recommending (table pounding!) the most shunned, least foreign owned emerging market in Asia – Pakistan. This is a local play since the biggest holders of Pakistan sovereign Eurobonds are Khoja financiers of Zurich and the Gulf, not the big EM leemings in the City, New York and Singapore (Aberdeen Wallah!). Friends who trusted me on Pakistan lucked out in the best performing stock market in Asia or Europe in 2016. Bull market zindabad! Christmas came early on McLeod Road in Karachi.

I was horrified that so many Gulf family office and institutions have this touching faith in London property even though it is among the most overvalued bubbles on the earth. I have made no secret of my investment thesis on Makkah Umra hostels, an asset class immune to Brexit risk or even the Saudi credit cycle. To exploit a no brainer asset class it is unfortunately necessary to possess a brain, as some of the biggest and smartest families and institutions in the GCC know all too well.

Fund managers shares should be shorted Hundreds of billions of retail money will flee asset managers in US, Europe and, yes, the GCC. Bear markets are savage and merciless. I know. I barely survived several in my own life. How will UK fund managers sell funds on the Continent? Paybacks in Finanzplatz Frankfurt and the Ville Lumiere are being plotted against the City even as I write. Who to short? Notice Invesco fell 10% on Friday. Get real. Get out. A UK asset management platform is no leprosy due to Brexit. Outflows will escalate. Fees will shrink. Markets abroad will vanish. Balance sheets will tremble. Index funds will fail. Firms will die. Private equity firms? A screaming short, with both black stones and black rocks.

The markets assume the European project will unravel. Why else is London down 3% but Italy and Spain down 12 – 14% as I write. There are existential threats to the Euro with the elections/referendum this autumn against the regimes of Rey Manuel and Matteo Caesar, the coolest Florentine to rule Bella Italian since Lorenzo de Medici. If Italy/Spain exits, Monnet’s dream ends. Global equities then fall 50%, as they did in 2008 and 2001.

Emerging Markets – Dr. Raghuram Rajan’s lost passage to India

It is dangerous to speak truth to power in a time of cholera. It is dangerous to tell the truth, to call billionaire oligarchs who have looted state owned banks “crooked”, to call the Maharajah’s political courtiers “venal”, to criticize religious intolerance when a lifelong RSS zealot is the Indian Prime Minister. So Raghuram Rajan, the most brilliant central bank governor to serve India’s 1.2 billion people, obviously had to go. Billionaire oligarchs and the RSS’s brown shorts, stick wielding ideologues are the real kingmakers in Modi’s India seven decades after a RSS assassin gun down Mahatma Gandhi.

Raghu, as he once asked me to call him the only time we met at a New York conference in 1999, stabilized the Indian rupee, slashed inflation and the repo rate, saved India a sovereign credit downgrade, restored monetary credibility with the offshore fund managers who bankroll its 7.6% GDP growth rate, was the most respected Asian central banker at the IMF, the World Bank, the Fed, the Bank of England, the political chancelleries of the world. But a bigot BJP lawmaker, a nonentity who lost his teaching job at Harvard for his communal, extremist poison, branded him “not mentally fully Indian”. This would be hilarious if it were not so tragic that a peanut brained intellectual joke dares to judge Raghu, who I am almost certain will win the first Noble Prize in economics for India since Cambridge’s Dr. Amartya Sen.

This world class economist, a gift from the gods to India and my professional dismal science tribe, was not given a term extention while his predecessor, whose money printing cost Indians a 50% free fall in the rupee and who inflicted the draconian regressive tax of double digit inflation on 500 million poor Indians, served a full five years. Raghu, a man hailed as a genius by the cognoscenti of Wall Street, Liverpool Street and, yes, Dalal Street is sacked by the Prime Minister while men who have plundered India’s public banks and inflamed religious intolerance grace the inner sanctums of the BJP. This is wrong. This is shameful. This is unreal. This will haunt India for decades after Modinomics is exposed as nothing remotely similar to the Reagan/Thatcher economic revolutions that embraced the free market and rolled back the state in the 1980’s. But, friends, Romans, I publish this column to bury Dr. Rajan, not to praise him.

Raghu returns to the realm of ideas in Chicago where he is happiest. I do not blame him. A man who refuses to toady up to the political masters as RBI Governor is anathema to both Congress and the BJP’s imperious, imperial court. Arun Jaitley is a loyalist and a lawyer, not even an economist but he and not Arun Shourie is the Finance Minister. Men who value ideas and beauty do not crave petty power or black money slush funds in a Swiss private bank. Raghu should have heeded the advice of Lord Tennyson and the lesson of the Light Brigade. Ours is not to reason why, ours is but to do and die. We need meek, timid, compliant yes men at the RBI who do not call oligarchs and banksters “crooked”, who do not brand the Netaji Crooks R Us Brigade “venal”, who do not evoke the memory of the Nuremberg Laws (strange, I will be in Nuremberg next week!) in New Delhi 2016. We need men who can bat and ball, hail Caesar on command, dutifully scream yes sir, no sir, three bags full sir (sirji, in Pakistan, in the court of King Assi Tussi!).

Modi should really appoint another Tamil to be governor of the RBI. Dr. Subramanian Swami would be an ideal Indian ambassador to Wall Street. Rekha would be even better, a lady of grace and beauty even greater than Swami’s. It does not matter who is the next governor of the RBI because now we know why they get the job.

My Indian friends tell me Dr. Rajan’s sacking in a storm in a teacup, that he was no jewel in India’s crown, that it is rude to expose Emperors who wear no loincloths. I passionately disagree. As an investor in emerging markets, I live and die by the Latin world credere – belief. Without credere, there is no credit. So Modi and Jaitley have gravely damaged India’s sovereign risk and raised the risk premium for inflation, G-Sec issuances and the rupee. Yet this is far less important than the BJP’s power of politics and patronage – the Congress was no different, only far sleazier. The next RBI governor will have to curry favour at the court of the BJP princes, not insist that India’s powerless be defined in the image of the powerful, as they have been for all these centuries. I hope to shake Raghuram Rajan’s hand for the second time in my life. Raghu, you are my hero. India will never forget you.