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Stock market investors start to look beyond coronavirus

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Investors are finally able to see light at the end of the tunnel.

Monday’s news that Pfizer and BioNTech had secured a breakthrough in their quest for a vaccine against the Covid-19 virus boosted stocks that have struggled throughout the health and economic crisis. Some markets broke new records.

Now, some of the euphoria is wearing off. Doubts still linger around the potential vaccine — including how and when it will be distributed, and whether Pfizer’s jabs end up as the international solution. Some caution is warranted. But for fund managers paid to look ahead, such details are irrelevant. The key is that an end is in sight.

“Health-wise, all that is pretty important. But from a markets perspective, it’s not,” said Salman Baig, a multi-asset investment manager at Unigestion in Geneva. The US presidential election is over, leaving no serious doubt among fund managers that Joe Biden will take office in January, Mr Baig said, and the vaccine news for the first time opens up the real possibility of life returning to normal as soon as next year. “That’s two major sources of uncertainty that are much lower. We should see a broad rally from here.”

Global stocks were already floating around all-time highs before news of a potential vaccine broke, lifted by the huge dose of monetary stimulus administered by central banks from March to soften the financial impact of the pandemic. But Pfizer’s breakthrough was still enough to set new records in the MSCI All World index and the S&P 500 benchmark in the US. 

Line chart of % change since October 13 showing Tech stocks faltered on the vaccine breakthrough

“Despite investor focus on the prospective policy implications of the Biden presidency, the vaccine for Covid-19 is a more important determinant of the path of both the economy and stock market in 2021,” wrote analysts at Goldman Sachs on Wednesday as they lifted their forecasts for the S&P 500 for the coming months. The bank now expects the index — which closed at 3,585 on Friday — to reach 3,700 by the end of this year, from 3,600 expected earlier.

Crucially, this week’s rally came with a twist: stocks that have benefited from the shift to work and play at home, such as Zoom, dropped heavily, leaving the tech-heavy Nasdaq 100 index down more than 1 per cent for the week. Meanwhile, stocks in airlines and cinema chains, among others, rocketed, raising the possibility that cheap and unloved so-called “value” stocks — mainly in unfashionable industries closely linked to economic performance — could finally enjoy a resurgence.

Value stocks have suffered a decade-long losing streak, while growth stocks, typically in sectors such as technology, have been on a tear. Monday’s news hammered those trendy stocks, and sparked a powerful rally for dowdy value.

Amundi, the European investment group, said in its outlook for 2021 that the Pfizer vaccine is a “game changer”. But it cautioned that the path ahead will still be bumpy. “Markets are now pricing in a rosy scenario: broad availability of a vaccine, abundant liquidity, and policies that will remain accommodative for ever. The sequence will not be so linear,” chief investment officer Pascal Blanqué said.

So far, that has been borne out. Major stock markets have not lost all of their lustre from the vaccine development. But most lost ground towards the end of the week.

In part, that reflects the nature of Monday’s rally. Stocks and sectors beaten up by the virus did shoot higher, but the most buoyant markets were those that had attracted the heaviest weight of negative bets, or shorts. These were boosted as investors reduced their short positions, analysts said.

The S&P 500, for instance, up almost 10 per cent this year, gained a modest 1 per cent, held back by the underperformance of big tech stocks. Europe’s markets, however, swept higher more forcefully, with the Stoxx 600 index gaining almost 4 per cent, the most since May. Within Europe, the gaps were also large. France’s CAC 40 index, for example, still bearing the scars of early 2020, jumped 7.6 per cent — its biggest rally since the March tumult and one of its biggest rallies of all the past two decades. 

The more muted tone in markets by the end of the week also underlined how investors are grappling with competing factors. One is the tantalising promise of a return to normal life in the coming months. Markets serve to price in the future today, so it is standard form to bake that prospect into asset prices now. But the other is the grim current reality of drawn-out lockdowns in Europe and rapidly accelerating coronavirus infection rates in the US.

Time horizons are therefore crucial, fund managers say.

“Short term, there’s the prospect of lockdowns in the US and more measures in Europe,” said Mr Baig. “You could try and play that. But from our perspective we don’t want to hold short-term views. That means we have to eat some volatility along the way, but for us that’s better than trying to time coronavirus-related news.”



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Analysis

BoE sees tight labour market as trigger for higher rates

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UK interest rates updates

The Bank of England was not expecting to change its coronavirus monetary policy guidance so soon.

For the past year it has said it would not even consider tightening monetary policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.

With inflation having already burst through this target, reaching 2.5 per cent in June and the BoE now thinking it will rise to 4 per cent later this year, and signs of labour shortages across the economy, the committee decided to drop that guidance.

None of the Monetary Policy Committee was ready to raise interest rates yet from the historic low of 0.1 per cent, but the committee agreed new guidance that said if economic data followed its latest forecasts, “some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”.

The change and the new guidance raised lots of legitimate questions on what the MPC meant in practice, but Andrew Bailey, BoE governor, was not in a mood to be transparent when discussing the committee’s new stance at a press conference on Thursday.

He declined to answer simple questions about the balance of opinion on the committee and the definition of “modest”, but he was a little more forthcoming in his press conference on what the trigger would be for higher interest rates.

Line chart of CPI inflation (annual % change). Actual and BoE forecasts showing The BoE now expects UK inflation to reach four per cent this year

The first two “key judgments” that the MPC would consider before changing policy were its view that much of the coming rise in inflation would reverse automatically next year and that there would be a continued recovery as the pandemic waned. On these Bailey was confident the committee’s view was right. It was a third judgment, on the labour market, that he stressed was most likely to prove the trigger for higher interest rates earlier than expected in the months to come.

The outlook for employment has already changed much faster than expected, with many employers now struggling to hire even though both unemployment and inactivity remain well above pre-pandemic levels.

“The challenge of avoiding a steep rise in unemployment has been replaced by that of ensuring a flow of labour into jobs,” Bailey told the news conference, adding that the committee would closely monitor labour market developments, particularly on unemployment, wider measures of slack in the economy, and underlying wage pressures.

The BoE now thinks that unemployment, which was 4.8 per cent at the end of May, has peaked, and will fall steadily to 4.4 per cent in a year’s time and 4.2 per cent from 2023.

Underlying wage growth has already returned to near pre-pandemic levels, the bank estimates. This is much stronger than expected given the large number of workers still standing on the sidelines: there are 250,000 more unemployed than pre-pandemic, 750,000 more counted as inactive, and 2m still at least partly furloughed in late June.

But what is worse from an inflation perspective is that the BoE has found evidence of “frictions” in the labour market, especially the difficulties employers are reporting in recruitment.

For now, the MPC is taking the view that these problems are temporary and are “likely to dissipate” with the hiring crunch owing in large part to the speed at which entire sectors reopened. Another factor behind the shortages — existing employees’ apparent reluctance to look for a new job — would in any case be more likely to depress wage growth than to fuel it.

Companies report recruitment difficulties

But the MPC warned that if labour shortages proved bigger and more persistent than expected — if workers were in the wrong place, or had the wrong skills, for the jobs available, or if young people who had left the labour market to study stayed in education for some years — that was likely to make wages rise, inflation more persistent and the BoE raise interest rates.

When it does become time to tighten monetary policy, the BoE also changed its guidance on Thursday on how it will make borrowing more expensive for households, businesses and government.

Until Thursday, the BoE’s declared policy had been that it would not change the level of money created and assets purchased under its quantitative easing scheme until interest rates had reached 1.5 per cent.

In future, it said that once interest rates reached 0.5 per cent, it would no longer reinvest the proceeds of government bonds that reached maturity and were redeemed.

Bailey said this new policy of quantitative tightening was not supposed to supplant higher interest rates, but would provide a “predicable and gradual” path for reversing quantitative easing. Some £70bn of the BoE’s £875bn gilt holding are due to mature across 2022 and 2023, with another £130bn across 2023 and 2024, he added.

Once interest rates rose to 1 per cent, the MPC said it would consider active sales of the assets it owned, but only if that was warranted by economic conditions and sales “would not disrupt the functioning of financial markets”.

In both areas of policy, the BoE was adamant it was making no promises and would change policy only when that was needed to keep inflation under control. This meant the wait-and-see strategy that has been its watchword since the early days of the coronavirus crisis would continue.

But as Ruth Gregory, senior UK economist at Capital Economics, said: “Talking about the mechanics of tightening policy, that is another signal that tightening is drawing nearer”.



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Lars Windhorst tries to plot future beyond H2O crisis

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As the world retreated into lockdown, German financier Lars Windhorst criss-crossed the globe in a private jet on a mission to raise billions.

The 44-year-old needs to make good on a promise to buy back more than €1bn of bonds from H2O Asset Management, a once-feted European fund manager whose backing helped Windhorst assemble an eclectic collection of businesses that includes Italian lingerie maker La Perla and German football club Hertha Berlin.

After the extraordinary scale of H2O’s bets on the financier threatened to capsize the asset manager in 2019, Windhorst last year vowed to buy back the illiquid debt at the heart of a crisis which has drawn regulatory scrutiny. But more than 12 months later, H2O’s clients, whose money is tied up in the troublesome securities, are still waiting.

The challenge is one of the toughest yet for Windhorst. Hailed as a precocious entrepreneur by then-German chancellor Helmut Kohl when he burst on to the business world in the mid-nineties, his chequered career has included personal bankruptcy.

An initial plan to use an investment vehicle called Evergreen to buy back half the bonds last year and the rest by this June fell apart. Then last August French regulators ordered H2O to suspend several funds because of uncertainties over the valuation of the bonds.

The London-based asset manager has significantly written down the value of the securities, which in some cases Windhorst has agreed to buy back several years ahead of their maturity, and shifted them into so-called side pockets that are closed to investor redemptions.

A criminal investigation launched by the Berlin prosecutor’s office into Windhorst is a further complication. Authorities are probing whether Evergreen violated German law by allegedly engaging in banking activities without the necessary licences. Windhorst denies any wrongdoing and said he has offered his assistance to authorities.

Chart showing the scale of H2O’s Windhorst exposure at fund suspension

Armed with infectious optimism, an insatiable thirst for dealmaking and an uncanny ability to escape from near ruinous predicaments, Windhorst insists that a large chunk of the debt will be bought back this year.

“Tennor [Windhorst’s main investment company] expects to pay down a major part of the H2O debt before the end of the year,” Windhorst told the Financial Times.

Following the collapse of the Evergreen plan, Windhorst bought himself some breathing space until early next year when Tennor in May announced a restructuring of its debts with “major creditors”, the biggest of which is H2O.

Under the agreement, Tennor Group’s debt will be consolidated into a new €1.45bn bond, carrying a 4.5 per cent interest rate, which is due to be repaid in early 2022. H2O said that the agreement provided a “more stable platform” to liquidate the securities in the funds’ side pockets.

Bet on Hertha Berlin

Windhorst, who operates from a swanky office in London’s Mayfair and a new base in the pricey “Palme” office building in Zurich once occupied by Russian oligarch Viktor Vekselberg, says he tires of the scrutiny that his relationship with H2O has generated.

“It’s normal in business that things are difficult. It’s not a problem for me, I deal with it,” said Windhorst. “I get beaten up for this and we need to move on here and make money and do business.”

Obtaining a clear view of Tennor’s finances is difficult. La Perla, one of its highest-profile investments, posted a €136m loss last year. However, several subsidiaries’ accounts have not been signed off, with filings citing delays in finalising Tennor’s own audited accounts that were due to be filed by the end of March.

According to a 2019 provisional balance sheet filing, the latest that is publicly available, Tennor Holdings had €2.6bn in liabilities at the end of that year.

Windhorst has long lent on debt and short-term funding deals, including repurchase agreements, to finance his businesses. It is a pattern he says he wants to break.

The shadow cast by H2O has done little to dull Windhorst’s ambitions, however. The financier is on track to complete his €374m investment in Hertha Berlin, a German football club with a long history but largely empty trophy cabinet. The agreement to acquire a majority stake was announced just a week after the H2O scandal erupted in 2019.

In June, he took to Twitter to scotch rumours he had fallen behind on payments to the club. “Hello to all doubters who don’t believe this is my account,” Windhorst declared. “Everything is on schedule,” Björn Bäring, Hertha Berlin’s head of finance, told the FT. A final €30m instalment is due this month.

La Perla
With H20’s backing, Windhorst was able to acquire the Italian lingerie maker La Perla © Alamy

Since Windhorst took control, Hertha Berlin broke its transfer record for a player but lost a manager, the legendary German striker Jürgen Klinsmann, after just 10 weeks in February 2020.

Earlier this year a creditor obtained a judgment in a Dutch court to auction off the investment vehicle Windhorst used to buy his Hertha Berlin stake. The suit, which relates to a short-term loan, is “generally settled”, according to a lawyer for the creditor.

The investment in Hertha Berlin is one of several demands on Windhorst even as the H2O bill remains outstanding.

Shortly before H2O described the financier’s efforts in August 2020 to buy back the bonds under the Evergreen plan as “very partial”, Tennor committed €100m to medical robotics start-up AvateraMedical.

It also announced a major stake in a joint venture with New York-based luxury condo developer Extell to build what is intended to become the tallest Manhattan skyscraper. Despite sluggish progress following planning objections, Windhorst is confident that the project will be “perfectly timed” for an eventual recovery in Manhattan’s luxury residential market.

Windhorst has also expanded his shipping business. Tennor first acquired ailing shipbuilder Flensburger Schiffbau-Gesellschaft in 2019 from Norwegian businessman Kristian Siem. FSG late last year laid the keel on the first ship since it relaunched its operations after insolvency proceedings. The customer: a company owned by Windhorst.

Then last month, FSG snapped up luxury yacht shipyard Nobiskrug in Germany for an undisclosed price. Previously owned by French billionaire Iskander Safa’s Privinvest, Nobiskrug was placed into insolvency in April.

“Both shipyards combined have secured orders in excess of €1bn”, said Windhorst.

If a reliance on debt has been a feature of his business career, so have legal battles.

Earlier this year Siem filed suits at London’s High Court. Meanwhile, in June a judge in Amsterdam ordered Windhorst to “disclose his assets and to provide security” in relation to a long-running dispute over his acquisition of a 50 per cent stake worth €169m in international show jumping event Global Champions Tour from US billionaire Frank McCourt.

Windhorst is adamant that the public filings paint a misleading picture. All the suits bar one filed by entities linked to former Tennor advisory board member Manfredi Lefebvre d’Ovidio, which have made claims worth more than €120m, have been amicably settled, he says. Representatives for Siem, Lefebvre d’Ovidio and McCourt declined to comment.

Paying off

There are signs that the businessman’s frantic flight schedule is beginning to pay off. Windhorst in May sold Berlin-based ad-tech company Fyber, which he owned 90 per cent of, to Nasdaq-listed Digital Turbine at a $600m valuation. The transaction was settled for $150m in cash plus shares in Digital Turbine.

Meanwhile, Windhorst says Tennor has agreed to sell a minority stake in Avatera for €600m. A start-up in the fast-growing field of medical robotics, Avatera has long been considered a potential crown in Tennor’s investment portfolio.

H2O disclosed in a corporate filing that it was unable to dispose of a 12.5 per cent Avatera stake held by one its funds in an “orderly fashion” earlier this year, with a spokesperson saying the asset manager’s priority was to sell at the best price.

Although Avatera is likely to require considerable investments to realise its potential, Windhorst remains bullish. “Avatera has the potential to be a €10bn to €20bn business,” he said.

If that proves the case, it would mark a remarkable turnround for the financier. But four years since H2O stepped in as Windhorst’s saviour, backing his empire as he fought off aggressive creditors, including a Belize-based company linked to a former Russian energy minister, it is the asset manager’s clients who remain in need of rescuing.

Gerard Maurin, an investor, who is spearheading efforts by some to claim damages from H2O, says that communication from the asset manager on the repayment schedule has been vague.

“It motivates us even more to continue our action,” he said. “It’s not normal to have to wait [to redeem your investment].”

 



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‘It has never been like this’: US house price spiral worries policymakers

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House prices are rising in many major economies. This FT series explores whether these increases are sustainable.

A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days.

“It has never been like this,” said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. “It’s unprecedented.”

US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs.

“Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,” Marcia Fudge, US housing and urban development secretary, said at a recent congressional hearing.

Nationally, house prices in May were 16.6 per cent higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data and up from 14.8 per cent in April.

“A month ago, I described April’s performance as ‘truly extraordinary’, and [now] I find myself running out of superlatives,” said Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices.

The pace of price growth and sales has been particularly fast in smaller cities, suburban enclaves and towns.

Columbus’s housing market has exploded since the start of the pandemic, as historically low interest rates, remote working, increased demand for larger homes and a relatively limited supply of houses for sale sparked a feeding frenzy among prospective homebuyers and a windfall for sellers.

Line chart of S&P CoreLogic Case-Shiller national home price index (year-on-year % change) showing US housing market booms again

Homes in Columbus sold more quickly than in any other large metropolitan US area, according to Zillow, the property website. Almost three-quarters of Columbus properties were under contract in less than a week in April. Other fast-moving areas included Denver, Colorado, and Salt Lake City, Utah.

The fierce competition means many properties are selling at a significant premium to their listing price, favouring those on higher incomes or younger first-time buyers whose parents are willing to stump up the cash required to win a bidding war.

FT Series: Global house prices — raising the roof

House prices are rising in many major economies — but is it sustainable?

Part 1: How the pandemic has triggered the broadest global house price boom in more than two decades

Part 2: Buyers flock to smaller US cities, renewing policymakers’ concerns about affordability and risk

COMING SOON:

Part 3: Netherlands grapples with the social consequences of rapidly rising house prices

Part 4: Why Berlin’s renters want to expropriate their homes from Germany’s publicly listed landlords

Part 5: Should house prices count in inflation data, and what can central banks do about the economic effects?

Columbus’s average sale price has jumped 15.8 per cent in the past year, according to Columbus Realtors, the local industry body of which Jones is president.

“People say to me, ‘Don’t you love this market?’” he said at a recent open house for an almost 6,000 square foot family home with a listing price of just under $1m in a residential neighbourhood east of downtown Columbus.

“I say, ‘Not especially, because I represent buyers and sellers alike’,” he added. “Somebody is a loser here.”

Other places have experienced even more frenetic sales. Median home prices in Austin, Texas, have risen 40 per cent year on year, according to online real estate brokerage Redfin. Buyers have also flocked to Phoenix, Arizona, where prices are almost 30 per cent higher in the same period. In Detroit, Michigan, they have risen 56 per cent.

Suburban enclaves and smaller towns have also benefited. Redfin reported last month that median home prices in “car-dependent” US areas had surged at twice the pace of those in “transit-accessible” cities since the start of the pandemic — with the former gaining 33 per cent while the latter increased 16 per cent.

Across the 30 largest metropolitan areas in the US, Columbus, along with St Louis, Missouri, and Tampa, Florida, logged some of the biggest net increases in people arriving in the area, according to an analysis of US Postal Service records of mailing address changes by commercial real estate and investment firm CBRE.

Most moves came from the “surrounding area”, defined as a few hours’ drive from the householder’s previous address, the analysis suggested.

The house price spiral is feeding into the rental market too. According to Apartment List, a listings website, national median rent has risen 11.4 per cent so far this year, more than three times the average increase in the same period in the previous three years.

“The high cost of housing keeps millions of families up every night,” Fudge warned. “They wonder if they can afford to keep a roof over their head — and still manage to keep their lights on, to pay for their prescriptions, to put food on their tables.”

Remote working boom fuels demand for suburban and rural areas

Industry experts say the pace of price growth is set to slow as supply begins to catch up with demand.

The number of existing-home sales rose 1.4 per cent month on month in June, according to the National Association of Realtors. Lawrence Yun, chief economist at the industry body, said supply had “modestly improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in an uptick in sales”.

Real estate experts and economists surveyed by Zillow expect price growth to peak this year and then ebb.

“At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year,” Yun said.

Daryl Fairweather, chief economist at Redfin, said “homes that would have gotten 20 offers are now getting only two or three”.

But she added that while “we are already seeing demand start to stagnate”, prices were not coming down significantly — suggesting that policymakers’ concerns about affordability are likely to persist.

Federal Reserve chair Jay Powell recently said that today’s trend looked distinctly different to the one a decade ago that pre-empted what was at the time the worst recession since the Great Depression — but he called the problem of housing affordability “a big one”.

“Housing prices are moving up across the country at a high rate,” he told a congressional committee last month.

Although he acknowledged that it was “not being driven by the kind of reckless, irresponsible lending that led to the housing bubble that led to the last financial crisis”, he warned that it “makes it more difficult for entry-level buyers to get into the housing market, so that is a concern”.



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