Optimism returned to markets overnight. There is a growing sense that Greece’s creditors might have the upper hand, putting the feared ‘Grexit’ in doubt.
As you probably know by now, Greece votes on whether to accept the terms of the bailout on Sunday. Greece submitted a proposal to its creditors yesterday, which accepted most of the terms of the bailout with a few amendments. They flatly rejected it. The creditors are playing hardball.
It’s not as if the Greek government is asking for massive concessions. As the Financial Times reports:
‘Mr Tsipras’s letter to creditors said Athens would accept all the reforms of his country’s value added tax system with one significant change: keeping a special 30 per cent discount for the Greek islands, many of which are in remote and hard-to-supply regions.
‘Eurozone officials said keeping the exemption would significantly increase the size of the government’s budget shortfall and, more significantly, perpetuate a highly complex VAT system. This complexity is one reason Greece has exceptionally low revenue from VAT.
‘On the contentious issue of pensions, Mr Tsipras requested that reforms passed in 2012 be implemented more slowly. He also asked that a special “solidarity grant” awarded to poorer pensioners, which he has agreed to phase out by December 2019, be reduced more slowly than creditors wanted.’
The response? No deal. The creditors said there will be no negotiations until after the results of the referendum. They clearly want to make the Greek people live with draining capital controls (which restrict their access to cash) for as long as possible. They want them to have a taste of what life is like with creditor support.
It also suggests they think the ‘yes’ vote will win. They are betting that the Greek people will see the vote as a referendum on staying in the Eurozone, rather than on the terms of the bailout package.
The majority of the Greek population want to stay in the Eurozone and its creditors know that. The crucial question is under what terms. It’s better to die on your feet than to live on your knees so if the Greeks vote yes I’ll be very surprised.
But the creditors think otherwise. They see a ‘yes’ vote as a way to get rid of the pesky Syriza party that dared to stand up to them. This is certainly a high stakes game for both sides. The creditors just upped the ante.
The market saw the recent developments as providing a bit of breathing space and, in the absence of any bad news, stocks around the world rallied. European stocks surged around 2% while US markets rose around 0.8%.
Aussie stocks opened modestly higher this morning after rallying strongly yesterday. A takeover offer for port and logistics company Asciano by Brookfield Infrastructure Group, a Canadian outfit, improved sentiment yesterday and stocks surged.
You could put some of this gain down to short covering, which means those betting on further falls in the market on an escalating Greek drama bought back stock to get out of their bearish positions.
The $9 billion bid for Asciano also reminded investors that there is plenty of offshore cash looking to buy up quality, long life assets. While the offer is a conditional one at this stage, it could value Asciano at around $9 a share.
Based on current consensus earnings forecasts for the 2016 financial year of 46 cents per share, the offer puts Asciano on a price-earnings (PE) multiple of nearly 20 times. That’s pretty expensive given the market’s long term average is around 14 times.
But there’s another way to look at is as well. The inverse of the PE ratio is the earnings yield. That means Brookfield, if it pays $9 per share and Asciano hits its forecasts, will generate an earnings yield from its new business of just 5% (1/20).
Investing to get a return from a business of 5% is not entirely appealing. It wasn’t long ago that you could get 5% from a cash account…which came without business risk and didn’t need reinvestment to maintain the value of the assets.
But in countries that operate with zero or near zero official interest rates, like the US and Japan, 5% returns aren’t that bad. Cash gives you nothing after inflation. And 5% is better than government bonds too. The view is that transport and infrastructure type assets like those owned by Asciano are a better investment than government bonds in this low interest rate environment.
From The Australian:
‘While underlining the attraction of infrastructure assets in general, Brookfield’s approach also reflects the desperation of large investors to find sustainable, strong cashflows in a low-yield environment.
‘The gap between low-cost debt funding, to which Brookfield would have easy access, and the cashflows from a business like Asciano mean such a deal would add to earnings from the start.’
Just a few months ago, the Japanese bought out Aussie transport and logistics company Toll Holdings. Now it looks like the Canadians (accessing cheap finance in New York most likely) will take out Asciano.
The point is, cheap capital looking for quality assets will continue to flood into Australia. While we ever continue to consume more than we produce (i.e. run a current account deficit) we will run a capital account surplus. That means Australia will continue to sell off prime assets to finance its standard of living.
It doesn’t matter whether its land (residential property) or major infrastructure assets like ports. What it does mean though, is that once the asset is sold, we lose all claim to the revenues and profits generated by it. And we slowly become all the poorer for it.
For The Daily Reckoning, Australia