Trading desks are in store for a big week for news events says James Grant, head of execution trading and portfolio management, at Banor Capital. Investors will be preparing for a fresh batch of earnings, including major tech firms Apple, Google, and Microsoft, and the Labour government will announce the UK budget on October 30.
In this episode, Grant also dissects the structural challenges across Europe as an investable market; how his team is navigating the region’s liquidity issues, and what he believes needs to be done to unwind these multi-decade problems.
He also shares views on liquidity in equities this quarter to date—including large Vs small-cap valuations—and discusses where his buy-side desk is finding opportunities.
Interview Transcript
Jo Gallagher Welcome to Trader TV This Week, your insight into how trading desks can prepare for the week ahead, I’m Jo Gallagher. Today I’m joined by James Grant at Banor Capital to discuss the main topics and events leading this week. James, welcome to the show.
James Grant Hi, it’s great to be here.
Jo Gallagher So what will be informing your trading and investment decisions this week?
James Grant This week is going to be a busy one in terms of news flow for us. We’re midway through the earnings season right now. We’ve had about 2/5 of that in the US. This week we have the larger names in the market coming out with earnings Apple, Google, Microsoft, etc. So that’s going to be a big bellwether for earnings this season and the direction of travel. And also we want to hear about that CapEx spend. Obviously this year, the R&D side with regards to the AI and data center spend has been hugely important for market direction. So getting some more colour from them will be extremely important, especially considering some of the weaker earnings we’ve seen in Europe.
And then in the UK we’ve got a budget coming up this week. We tend to be a bit more overweight in the UK. We’re probably more pragmatic on the UK government. We’ve seen Labour over the last few weeks and months sort of fleshing out policy via news. Some of that will probably likely see policy tempered down and we’re encouraged from a market perspective by a lot of the commentary regarding their probably more harmonious relationship with the OBR. A lot of the pressure we’ve seen in the UK since the election is simply an unknown when it comes to policy. So once that becomes a known knowns in the market, we think that should enable UK equities to find some support.
Jo Gallagher Tell us a little bit about the markets that you trade in and what has the liquidity looked like so far this quarter.
James Grant At Banor Capital here, we tend to trade in the UK and Italy, they are our home markets where we sit as a company. And interestingly, they tend to be the two markets which are the cheapest on a relative valuation basis compared to the rest of the developed world. In the UK we’ve seen liquidity worsen for a number of years. This goes back to Brexit, GFC (Global Financial Crisis), etc.. And in Italy there’s a relatively low retail participation currently. We’re really looking at where the valuation disconnect is compared to the S&P and compared to some of those Mag 7 names.
There has been a legacy of correlation between the Italian mid-caps star indexes and the Nasdaq. And over the last 12 months, this is completely decorrelated in terms of performance, and considering these are two relatively growth indexes, you would have expected there to be maybe underperformance, but still a strong correlation. Some of that is liquidity-focused. The US is the deepest capital pool in the world at the moment and we have seen a deterioration of liquidity over time in Europe and the UK. And I think when you look at global portfolios, 70% of the MSCI World today is the US. These have just become a smaller focus in investors portfolios and that gives us plenty of opportunity as an asset manager and as portfolio managers in general.
Jo Gallagher So how do you navigate the liquidity challenges in Europe?
James Grant The liquidity challenges are giving us many opportunities as value investors to find assets which are trading below intrinsic value. But obviously entry and exit to those positions are extremely difficult. If we find interesting ideas in this mid-space in particular, sometimes it can take us a significant amount of time to get those positions on and we don’t want to destroy our alpha when entering these positions. And then exiting we’re missing the marginal buyer in the market at the moment.
It’s fine if we find interesting things, but unless that liquidity improves and allows other people to enter the market we’re not going to be able to find those marginal buyers that would enable us to see those assets re-rate. And I guess in terms of the portfolio, you sometimes need a momentum overlay. Value investing in general tends to be relatively stoic in the way that we buy and hold, and we just think just upping your turnover slightly and being a bit more opportunistic with your positioning can improve some of those returns going forward.
Jo Gallagher Now, this might be a very difficult question to answer, but what do you see the solution being to the problems in the UK and European markets and how do you see that playing out?
James Grant There’s many things we can do, whether it’s structural reform, regulatory reform, improvements in investor perception. But something needs to be done. If you look at UK insurance and pension funds, they’re at some multi-decade lows in terms of exposure to UK equities. And as we move to a defined contribution system, we might need to increase that so that people have funded pensions.
Structurally, some of the directives we’ve seen in the markets like MiFID, if we could roll back some of those rules to allow small and mid-sized companies to get better access to the market via research, this would help them to get out there to reduce that cost of capital. Any improvement in investor perception around these countries, around the political situations is going to be beneficial to UK equities and to Italian equities. But this has been a 20-year sort of deterioration in liquidity from the GFC to Brexit and we’re just going to need a number of things to play out just to move the direction of travel.
Jo Gallagher Thank you, James, for your insight and of course, you for watching this has been Trader TV This Week.
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