The Weekly Update

Monday saw the biggest daily gain for the renminbi for more than a decade although you’d be hard-pressed to notice given the amount of negative press comment about China these days. The renminbi gained 1.2% against the dollar after the resumption in mainland trading following the Chinese new year. This is the biggest gain against the dollar since the renminbi was unpegged back in July 2005. Last week also saw China’s trade balance balloon to USD 63.29bn for the month of January, a new all-time record. At the time of writing, so far this year the renminbi has gained 1.58% against the dollar and 5.97% against sterling in total return terms. Most clients we have met with recently are shocked when they discover that the renminbi has been steadily appreciating over the past several weeks. They seem even more surprised when they realise that the renminbi has gained more than 10% against sterling over the past year, in total return terms, making the renminbi one of the best performing currencies over the past 12 months.

Less surprising is the fact that Greece is officially back in recession after announcing its second consecutive quarter of negative growth. The IMF, which is still to confirm whether it will join a third bailout, is pro-debt relief on the basis that Greece’s debt to GDP at ~175% is unsustainable. This is far too difficult for Greece to finance with yields from two years to 10 years all above 10% currently; some form of debt relief seems inevitable.

Our cut-off for investments in our funds is a net foreign liability of 50% of GDP, above which we believe that countries become increasingly vulnerable. This why we have steered clear of Greece but also avoided countries like Brazil in recent years as our projections suggested a combination of an overvalued exchange rate and a current account deficit would cause Brazil to breach the 50% threshold. This week Standard and Poor’s downgraded the country for the second time in six months, rating the country BB.

In fact, Standard and Poor's went on a bit of a downgrading rampage last week, taking the market by surprise by slicing some oil-exporting sovereign credit ratings by as much as two notches. The majority of the rating decisions were based on the agency’s revisions to oil price assumptions; of Brent crude averaging $40pb this year and $50pb by 2018. Aside from Brazil, affected countries included Kazakhstan, Oman and Saudi Arabia, amongst others.

Of the countries within which we invest, Saudi Arabia’s rating was revised to A- (rated Aa3 by Moody’s and AA by Fitch), and Oman was cut to BBB- (rated A1 by Moody’s). Aware that oil has had an impact on these countries’ balance sheets, we were not surprised by the agency's decision to downgrade. The CDS on these countries more than prices in these downgrades; for example Saudi Arabia’s 5-yr is trading at a CDS of +175, ~90bps wider since September 2014; when oil prices began their descent.

Our exposure to these two nations is via two positions in Saudi’s dominant utility company (SECO) and a holding in Lamar Funding; the state-owned funding vehicle for the country’s electricity transmission network. Rated A1/A+/AA-, the SECO 5.06% 2043 and 5.5% 2044 issues are backed by the sovereign’s ratings; as the Gulf’s largest utility firm is 81% owned by the Saudi government. These bonds continue to offer some of the most attractive risk-adjusted expected returns of ~30% (fair value), with a yield ~6% and offer plenty of cushion; roughly 5 notches, against unexpected events. The Lamar Funding 3.958% 2025 issue, rated A3/BBB/BBB+, yields an attractive 5.7% with an expected return over 15.5% and trades at 3.5 notches cheap; more than compensating for any downgrades. We are not looking to change our positioning in any of these holdings for the time being.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.