Caution warranted in a time of easy money

JANA’s quarterly asset allocation meeting is one of the most powerful forums we have as it brings together the top down macroeconomic analysis and considerations of the Capital Markets Group (CMG), with the bottom up micro and macro findings of the firm’s asset class research teams. This debate of the whole firm in one room, which draws upon the 100s of investment manager and strategist meetings that we are privileged to participate in, creates an environment that leads to insights, we believe, that are greater than the sum of the parts.

JANA’s quarterly asset allocation meeting is one of the most powerful forums we have as it brings together the top down macroeconomic analysis and considerations of the Capital Markets Group (CMG), with the bottom up micro and macro findings of the firm’s asset class research teams.  This debate of the whole firm in one room, which draws upon the 100s of investment manager and strategist meetings that we are privileged to participate in, creates an environment that leads to insights, we believe, that are greater than the sum of the parts.

We have been thinking about another dimension of the market environment.  It is a dimension that doesn’t neatly fit into the framework for considering shorter term asset allocation decisions, but it is one that we believe is almost certainly likely to be highly relevant to investment outcomes over the next three to five years.  That is, the combination of free money and the distraction of COVID creates a fertile backdrop for a golden era of capital misallocation.

  1. Free money

Liquidity conditions have been easy for some time and the ramifications of this have been well-outlined to clients in Notes for some time.  However, this has been exacerbated by COVID relief measures.  ‘Free money’ and the comfort of knowing ‘the Fed has your back’ is not conducive to capital allocation discipline.  It has never been easier to raise money if you are a loss maker with a silver tongue, a galactic traveller, asteroid miner, the 100th ecommerce/cloud platform, or any junk bond issuer.  The rubes have never been greener or keener.

Key players, keen to ensure that no available liquidity goes to waste, are the visionary entrepreneur, with the ability to sell the disruptive, exponential growth dream; and the visionary investor, with the ability to raise billions from investors hopeful of them repeating past glories.

The SPAC

Special Purpose Acquisition Companies (SPAC), or ‘blank cheque companies’ are flying off the shelves.  How do they work?  You hand over your money to a SPAC company on the understanding that they will buy something, usually a private company that is involved in some exciting venture that taps into the Zeitgeist.

1. Image

Notable SPAC listings in 2020

A SPAC that has been in the news lately is Nikola.  The CEO Trevor Milton was recently forced to resign after news leaked that a publicity clip of the Nikola One prototype in full flight actually showed the truck coasting down a long decline in neutral. Nikola Motor Company – Nikola One Electric Semi Truck in Motion.  The substance of the company continues to be hotly debated in the market with Bosch and GM scrambling to assure investors they did solid due diligence.  There is now even a SPAC ETF – The Defiance Next Generation SPAC ETF (SPAK).

  1. The Fog of COVID

Sadly, rising social unrest following the disruptions of the GFC has seen a rise in populism and a weakening of democratic institutions globally.  In the US we have seen a weakening of whistle blower compensation and ESG disclosure requirements and , while also in the US there has been concerns around postal voting in the upcoming presidential elections following the decision by the Postmaster General to remove hundreds of high-speed mail sorters and receptacles.    In Europe, we have witnessd the recent spectacular unveiling of German Fintech champion Wirecard as a fraud.  The Wirecard scandal reflects very poorly on the regulator BAFin (who persecuted whistle blowers and journalists) and threatens to reach the highest levels of government.   Closer to home, there has been criticism around the Australian Government’s decision to abandon responsible lending obligations for financial institutions, seen by many as a way to reward banks and provide support for the housing market.

While a weaker regulatory framework is not necessarily a bad thing, it does provide investors with less safeguards against bad behaviour – we can all still clearly remember the poor lending practices that led to the GFC.  During a time when regulation is being wound back, investors need to adopt a stricter buyer beware mindset.  In this regard the current environment has made it much easier for corporations to do a lot of things while people are distracted.  A couple of examples below:

3. Image

The table below highlights other examples of how easy money and lax governance are creating potentially large divergences between investor outcomes.

4. Image

  1. The End Game

Could it all end happily ever after?  Maybe, we’ll leave the last word to Softbank with a slide from one of its earnings presentations earlier this year.

5, Image

So there is a way out, but it requires the unicorns to not only survive the fall into the Valley of the Coronavirus, but to also evolve wings in order to resume trend on the grassy knoll.  We live in hope, but in the meantime the only antidote is vigilance, cynicism and not believing anything you can’t verify yourself.

Sydney
9/255 George Street,
Sydney NSW 2000
02 9221 4066
JANAadmin@jana.com.au

Melbourne
9/530 Collins Street,
Melbourne VIC 3000
03 9602 5400
JANAadmin@jana.com.au

JANA respectfully acknowledges the Traditional Custodians of the land where we work and live. We pay our respects to Elders past, present and emerging. We celebrate the stories, culture and traditions of Aboriginal and Torres Strait Islander Elders of all communities who also work and live on this land.

We use cookies

Through the use of cookies on this website we aim to improve our services and enhance users online experience with us (e.g. website statistics), and does not identify individual customers but does identify internet browser. Where we do identify you, JANA treats any use or disclosure in accordance with our Privacy Policy.
  • Functional cookies
  • Advertising
  • Social media
JANA respectfully acknowledges the Traditional Custodians of the land where we work and live. We pay our respects to Elders past, present and emerging. We celebrate the stories, culture and traditions of Aboriginal and Torres Strait Islander Elders of all communities who also work and live on this land.