Hochschild Mining Investors - HOC

Hochschild Mining Investors - HOC

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Stock Name Stock Symbol Market Stock Type Stock ISIN Stock Description
Hochschild Mining Plc HOC London Ordinary Share GB00B1FW5029 ORD 25P
  Price Change Price Change % Stock Price Last Trade
0.40 0.2% 199.80 08:35:10
Open Price Low Price High Price Close Price Previous Close
199.50 198.40 200.60 199.40
more quote information »
Industry Sector
MINING

Top Investor Posts

DateSubject
10/3/2021
16:24
rathkum: https://citywire.co.uk/funds-insider/news/aaa-rated-jourdan-backs-new-commodity-supercycle-with-hochschild-buy/a1466566 AAA-rated Jourdan backs new commodity supercycle with Hochschild buy By Michelle McGagh 10 Mar, 2021 at 13:08 AAA-rated Jourdan backs new commodity supercycle with Hochschild buy With talk of a commodities super-cycle driving the price of metals higher, Amati’s Paul Jourdan has switched gold miner Centamin (CEY) for Hochschild Mining (HOC) which he says offers more ‘optionality’. Commodities across the board have been enjoying soaring prices, with grain costs jumping and oil shooting above $60 a barrel but it is silver that has stolen the headlines thanks to a retail investor pile-in two weeks ago that pushed the price to an eight-year high of $30 an ounce. Although silver has climbed back down since investors organised via Reddit to put a squeeze on short sellers of the precious metal, it has remained at the forefront of the commodity hike. Citywire AAA-rated Jourdan, manager of the £590m TB Amati UK Smaller Companies fund, has been ahead of the curve, ditching gold miner Centamin in favour of Hochschild Mining, which mines both gold and silver. He said the ‘excitement’ around precious metals, particularly gold, has been driven by government’s undertaking vast money printing programmes, leading investors to use ‘precious metals as a store of value…and defend against currency depreciation’. However, the story is different with ‘platinum group metals’ like silver, which although are used for jewellery also have ‘more of an industrial use’. ‘It is a great conductor of electricity, and anti-oxidising agent and anti-bacterial agent,’ he said. Jourdan said the potential demand for silver will expand if it becomes core to electric vehicle charging. ‘If we go down the route of induction charging – where you do not plug cars in but park in a certain place - that will benefit silver,’ he said. However, he noted that silver is ‘very expensive as an industrial metal’ and if it can be substituted for a cheaper metal it will be. ‘The reason we switched from Centamin to Hochschild is due to what it has in the way or options,’ he said. ‘There will be exploration this year and it has come up with some reasonably good results.’ Jourdan said the economic climate is positive for precious metals as the world moves out of the pandemic and through the ‘global industrial cycle’. China, which was first in and out of the pandemic, saw its economy rebound last year, pushing up demand for industrial metals but Jourdan said the ‘supply is constrained so there is some very good price rises’. Hochschild provides ‘optionality’ for Jourdan in that it has a ‘good number of different assets’ that will allows it to benefit from changes in the industrial cycle. This includes a rare metals mine in Chile, which Jourdan said had been at the centre of some investor disagreement. ‘Some investors disagree about how to take it forward. They say the company is a gold and silver miner and it should just do that but I’m keen for it to develop [the rare metals mine] as strategically it is good to have an independent provider of rare metals,’ he said. It is not just silver and gold that are hogging investor attention. The copper price has been climbing in recent months and in December, Goldman Sachs analyst predicted it will hit a 12-month price target of $9,500 per tonne this year, up from a previous projection of $7,500. The investment bank believes it will go on to hit all-time highs in 2022 as demand grows as electric vehicle production ramps up. Although he was reluctant to make predictions on whether copper prices would continue skywards, he said the historic high levels could be ‘sustained’ and there could be a ‘prolonged period of copper at the higher price’. He has added to his stake in AIM-listed copper miner Atalaya (ATYM), taking it to 2% of the portfolio. ‘It is really well run, it has mature assets, and has plenty of possibilities for expansion,’ he said. ‘[The shares are] not super low cost and I like to invest in assets at low cost.’ Jourdan said Atalya’s secret weapon is the copper processing technology it has that will help to cut costs that will be a ‘significant boost’ to the stock. Miners could continue to track upwards from here thanks to the shift to electric vehicles, which will help Jourdan (pictured above) continue his long track record of outperformance. The fund has outpaced peers in the Investment Association UK Smaller Companies sector and the Numis Smaller Companies plus AIM benchmark over one, three, five, and 10 years. Over the last decade the fund has risen 283.1%, more than double the 112.2% from the benchmark, and beating the 179.8% return from the average manager in the sector. ‘If prices stay high, then the good miners…can still do well from here, it is not all in the price,’ said Jourdan. ‘The market is sceptical at the momentum but we have not experienced the electrification of transport that is being brought about so it is hard to use history as a guide [for what prices will do].’
10/3/2021
16:23
rathkum: AAA-rated Jourdan backs new commodity supercycle with Hochschild buy By Michelle McGagh 10 Mar, 2021 at 13:08 AAA-rated Jourdan backs new commodity supercycle with Hochschild buy With talk of a commodities super-cycle driving the price of metals higher, Amati’s Paul Jourdan has switched gold miner Centamin (CEY) for Hochschild Mining (HOC) which he says offers more ‘optionality’. Commodities across the board have been enjoying soaring prices, with grain costs jumping and oil shooting above $60 a barrel but it is silver that has stolen the headlines thanks to a retail investor pile-in two weeks ago that pushed the price to an eight-year high of $30 an ounce. Although silver has climbed back down since investors organised via Reddit to put a squeeze on short sellers of the precious metal, it has remained at the forefront of the commodity hike. Citywire AAA-rated Jourdan, manager of the £590m TB Amati UK Smaller Companies fund, has been ahead of the curve, ditching gold miner Centamin in favour of Hochschild Mining, which mines both gold and silver. He said the ‘excitement’ around precious metals, particularly gold, has been driven by government’s undertaking vast money printing programmes, leading investors to use ‘precious metals as a store of value…and defend against currency depreciation’. However, the story is different with ‘platinum group metals’ like silver, which although are used for jewellery also have ‘more of an industrial use’. ‘It is a great conductor of electricity, and anti-oxidising agent and anti-bacterial agent,’ he said. Jourdan said the potential demand for silver will expand if it becomes core to electric vehicle charging. ‘If we go down the route of induction charging – where you do not plug cars in but park in a certain place - that will benefit silver,’ he said. However, he noted that silver is ‘very expensive as an industrial metal’ and if it can be substituted for a cheaper metal it will be. ‘The reason we switched from Centamin to Hochschild is due to what it has in the way or options,’ he said. ‘There will be exploration this year and it has come up with some reasonably good results.’ Jourdan said the economic climate is positive for precious metals as the world moves out of the pandemic and through the ‘global industrial cycle’. China, which was first in and out of the pandemic, saw its economy rebound last year, pushing up demand for industrial metals but Jourdan said the ‘supply is constrained so there is some very good price rises’. Hochschild provides ‘optionality’ for Jourdan in that it has a ‘good number of different assets’ that will allows it to benefit from changes in the industrial cycle. This includes a rare metals mine in Chile, which Jourdan said had been at the centre of some investor disagreement. ‘Some investors disagree about how to take it forward. They say the company is a gold and silver miner and it should just do that but I’m keen for it to develop [the rare metals mine] as strategically it is good to have an independent provider of rare metals,’ he said. It is not just silver and gold that are hogging investor attention. The copper price has been climbing in recent months and in December, Goldman Sachs analyst predicted it will hit a 12-month price target of $9,500 per tonne this year, up from a previous projection of $7,500. The investment bank believes it will go on to hit all-time highs in 2022 as demand grows as electric vehicle production ramps up. Although he was reluctant to make predictions on whether copper prices would continue skywards, he said the historic high levels could be ‘sustained’ and there could be a ‘prolonged period of copper at the higher price’. He has added to his stake in AIM-listed copper miner Atalaya (ATYM), taking it to 2% of the portfolio. ‘It is really well run, it has mature assets, and has plenty of possibilities for expansion,’ he said. ‘[The shares are] not super low cost and I like to invest in assets at low cost.’ Jourdan said Atalya’s secret weapon is the copper processing technology it has that will help to cut costs that will be a ‘significant boost’ to the stock. Miners could continue to track upwards from here thanks to the shift to electric vehicles, which will help Jourdan (pictured above) continue his long track record of outperformance. The fund has outpaced peers in the Investment Association UK Smaller Companies sector and the Numis Smaller Companies plus AIM benchmark over one, three, five, and 10 years. Over the last decade the fund has risen 283.1%, more than double the 112.2% from the benchmark, and beating the 179.8% return from the average manager in the sector. ‘If prices stay high, then the good miners…can still do well from here, it is not all in the price,’ said Jourdan. ‘The market is sceptical at the momentum but we have not experienced the electrification of transport that is being brought about so it is hard to use history as a guide [for what prices will do].’ https://citywire.co.uk/funds-insider/news/aaa-rated-jourdan-backs-new-commodity-supercycle-with-hochschild-buy/a1466566
25/2/2021
09:09
spinnereins: Are the investors of SLV just a cheap source of capital to provide liquidity ? And what is technically their silver, 3rd parties get priority to the physical and SLV investors paper ?
17/2/2021
19:46
stevea171: The iShares Silver “Trust” SLV Is Likely A Fraud. February 17, 2021. by Dave Kranzler It’s been suspected by many truth-seekers since the respective inception of GLD and SLV that each Trust was set-up as a mechanism to divert institutional cash flows into the respective Trusts that might otherwise flow in actual physical gold and silver. As has been verified by recent actions taken by the SLV sponsor, BlackRock, these trusts are nothing more than gold and silver derivatives and thus are embedded with the same risks as investing in futures and options. In the end-game, most investors in GLD and SLV will end up losing most, if not all, of their “investment” in these fraud-riddled securities. After all, “sophisticatedinvestors in SLV have been led to believe that SLV is a de facto investment in silver. And now we know that SLV is an “investment” in paper securities fractionally backed by silver bars. In technical parlance, SLV is a derivative, and a fraudulent one at that. https://www.silverdoctors.com/silver/silver-news/the-ishares-silver-trust-slv-is-likely-a-fraud/
30/1/2021
08:41
misterbluesky: Gold price is riding silver's new attention wave, but is that good news? Friday January 29, 2021 14:37 (Kitco News) Friday's rally in precious metals saw gold rise more than 1% and silver rally more than 5% on the day. But this time around, it is gold chasing silver, as the latter sees a wave of new interest. "We had a nice move in silver and gold. It seems like there are a lot more silver enthusiasts out there now," said TD Securities global strategy head Bart Melek. Usually, silver follows in gold's footsteps, but not this week, analysts told Kitco News. "The price action on Friday has nothing to do with gold. It is more due to what is going on with equity markets and the Reddit posts. There are now posts encouraging investors that there is a short squeeze on silver while suggesting much higher prices," said Kitco Metals global trading director Peter Hug. "Generally, silver reacts to gold. This time around, gold is reacting to silver." Silver rose from around $25 on Thursday to nearly $27.80 on Friday, with March Comex futures last trading at $27.36, up 5.55%. Gold, in the meantime, advanced from $1,840 level to nearly $1,880 in the last two days, with April Comex futures last trading at $1,860.60, up 1.05% on the day. "There is significant retail interest in silver both in the physical market and in the ETFs. Also, some of the mining stocks that might have short interest in them exploded to the upside, the same as the GameStop phenomenon. It is a frenzy. Everyone is chasing the market. If that continues, gold is going to be higher," explained Hug. There is evidence of Robinhood traders invading the silver market, said Walsh Trading co-director Sean Lusk. "If you look at the action on call volumes on the options, they exploded — massive explosion in call volatility and option volatility. There are signs that new investors are entering the space. In some way in the gold market as well," Lusk said. The precious metals market, especially silver, is starting to garner a lot of attention. This could keep pushing prices higher, especially considering that the fundamentals are favorable as well, Lusk noted. This interest in silver is spilling into gold and could help prices reach $1,900 and higher next week, said analysts. "There is some correlation trade with it. Fundamentally, we also saw the U.S. dollar relax a bit Friday. But when there is interest in silver, there is interest in gold," said Melek, who is bullish on gold in the short-term. "Talking about silver is reenergizing gold investors. The metals have many of the same drivers, but silver is much more volatile." And whether or not this increased interest will lead to a massive surge in prices, it does bring the attention of a new audience that was not looking at precious metals before, added Melek. "This could produce more indirect interest as opposed to direct. The Reddit phenomenon has just alerted the broader market to silver and got people paying attention," he said. https://www.kitco.com/news/2021-01-29/Gold-price-is-riding-silver-s-new-attention-wave-but-is-that-good-news.html
30/1/2021
00:00
misterbluesky: How WallStreetBets Is Fueling A Rally In Silver Stocks Fri, January 29, 2021, 4:23 AM· Silver stocks such as First Majestic Silver Corp (NYSE: AG) are shining amid speculation that the Reddit-fueled frenzy will extend to the precious metal and companies associated with it. What Happened: First Majestic shares closed 21.56% higher at $16.86 and gained 12.69% in the after-hours session on Thursday. The iShares Silver Trust (NYSE: SLV), an ETF that tracks silver closed 5.55% higher at $24.72. Spot silver traded 0.71% lower at $26.227, while March silver futures were up 1.38% at $26.28 at press time. On Thursday, a WallStreetBets post claimed that banks are “manipulating gold and silver to cover real inflation.” The post went on to say that the inflation-adjusted price of silver should be ,000 and not . “$AG is essentially $GME for Silver, highest short float in the sector, nice leverage to silver, and just broke out above 10 year resistance too,” said another post on the Reddit investor forum. Other silver stocks that have seen a surge include Hecla Mining Company (NYSE: HL), which closed 16.84% higher and gained 3.2% in the after-hours session, and Fortuna Silver Mines Inc (NYSE: FSM), which closed 13.73% higher at $7.62 and rose 7.09% to $8.16 in the after-hours trading. Why It Matters: Investor Chris Camillo said on Benzinga’s Short Squeeze videocast that he owns a $500,000 position in First Majestic and also owns iShare Silver Trust. The Reddit investors are clamoring for vengeance against the likes of JPMorgan Chase & Co (NYSE: JPM), which they allege have manipulated the silver market. If the investors on the forum are successful in moving silver prices, ETFs associated with silver-like ProShares Ultra Silver (NYSE: AGQ), and Aberdeen Standard Silver Shares ETF (NYSE: SIVR) could see gains. AGQ closed 11.42% higher on Thursday, while SIVR saw gains of 5.46%. https://finance.yahoo.com/news/wallstreetbets-fueling-rally-silver-stocks-042313106.html
19/11/2020
14:55
stevea171: Market Priming For Another MASSIVE Buying Wave As Silver Eagle Sales Again Surge Higher. November 18, 2020 If we experience the same type of demand next year, we will enter a silver market like never before. While that may sound like hype, the CLUES… by Steve St Angelo of SRSrocco Report The Silver Market is just one step away from another MASSIVE BUYING WAVE and is just waiting for the next leg to drop in the global economy and financial system to do so. With silver investment demand to account for nearly 75% of the global mine supply this year, if we experience the same type of demand next year, we will enter a silver market like never before. While that may sound like hype, the CLUES are all around. I check many of the large online dealers’ inventory, and many are sold out of the fractional silver rounds, or have a minimal inventory. The fractional silver round inventories are normally the first to sell out when there is a large buying wave. I have mentioned several times; the Silver Market is one of the only sectors in the economy that sees INCREASED BUYING when the price goes LOW or HIGH. Normally, investors tend to sell when the price of a stock or asset is declining. Not the silver market. Due to the ongoing disintegration of the U.S. financial system and economy, precious metals investors realize THERE IS NO PAPER SOLUTION to what’s coming. Thus, LOW and HIGH silver prices motivate more buying. I wrote about this in my article below: For example, Silver Eagles sales continue to be very strong in November as another 750,000+ coins were sold in the last week. The total Silver Eagle sales so far in November are now 3,456,000 versus a total of 463,000 for the entire month last year. Furthermore, the U.S. Mint sold another 25,000 oz of Gold Eagles over the past week to reach a total of 769,000 oz for the year, compared to 152,000 oz for full-year 2019. Because the price of silver is approximately 75 times less than gold, investors can buy a great deal more silver bullion. Thus, when the next BUYING WAVE comes next year, it may be one for the RECORD BOOKS. hTTps://www.silverdoctors.com/silver/silver-news/market-priming-for-another-massive-buying-wave-as-silver-eagle-sales-again-surge-higher/
16/10/2020
23:44
risa5: 2 FTSE 250 stocks I’d buy for a second wave of the coronavirus Friday, 16th October, 2020 | More on: HOC IGG Striking FTSE 250 gold In times of crisis, investors flock to gold. Although the price of the yellow metal dipped as investors sold everything in March this year, it was not hit as hard as oil or stocks. In fact, the first wave of the coronavirus was positive for gold: its price is up 24% since the start of the year, and an all-time high price of $2,063 per troy ounce was hit in August. Higher gold prices are good for the companies that mine and sell it, like Hochschild Mining. Investors might flock to safe-havens, like gold again if economies stutter in the second wave of the coronavirus. Investors bidding up the gold price would be positive for Hochschild Mining’s share price. Beyond the coronavirus, there is the possibility of inflation returning, which is positive for the price of gold. Hochschild also mines silver which is used in things like solar cells. Net-zero targets and ‘green recovery’ packages bode well for the long-term price of silver. Higher silver prices are good for shareholders of FTSE 250-listed Hochschild Mining. https://www.fool.co.uk/investing/2020/10/16/2-ftse-250-stocks-id-buy-for-a-second-wave-of-the-coronavirus/
29/2/2020
15:24
risa5: Hochschild Mining - A Precious Opportunity For Long-Term Value Feb. 28, 2020 12:05 PM ET Summary Hochschild Mining is a gold and silver miner with a track record of production growth and cost control. The company offers upside and optionality with greenfield and exploration projects including an exciting rare earths deposit project. Capital allocation is a sensible split between returns to investors via increasing dividends and investment in innovation and growth projects. Gold and silver bull markets provide support for near-term stock price momentum to continue. In these uncertain times, exposure to precious metals is a sensible portfolio hedge. Precious metals prices are rising as investor sentiment shifts firmly to risk-off mode. The easy option would be to simply hold ETFs linked to the prices of these metals. The Global Investor thinks it’s worthwhile to take a bit more risk and own precious metal mining stocks instead as they both benefit from rising commodity prices, and if picked carefully have growth profiles in their own right. In a recent article, I talked about why I was bullish on Centamin (OTCPK:CELTF) thanks to the emergence of gold sector M&A - see Centamin Is A Golden Opportunity. In this article, I introduce a new precious metals miner I’m bullish on, Hochschild Mining (OTCPK:HCHDF), as it boosts output levels and reduces its all-important all-in sustaining costs. 2019 results takeaways In its 2019 full-year results released on 19th February, Hochschild Mining produced a strong set of financial results: EBITDA increased by 28%, EPS increased 80% and its dividend was increased by 19%. This was driven by the company having record production at its largest mine, Inmaculada, just as commodity prices were trending upwards. Output at the San Jose mine was also at a record level. In all, Hochschild’s mines produced 16.8m ounces (oz) of silver and 269,892 oz of gold last year, or 38.7m oz silver equivalent. Production and resource growth Commodity producers are driven by two factors: prices and production. To get exposure to prices we can just buy ETFs, but it’s the growth in production that adds value to owning the right mining stocks. Production comes from reserves and resources ultimately, and Hochschild added 12m oz net to Inmaculada’s resources, once 2019 production is considered. Hochschild also finally got the nod from the government to explore two brownfield areas key to extending life at the Pallancata mine in Peru. CEO Ignacio Bustamante noted the Inmaculada team had been "very successful" hunting for high-grade areas: We have found an additional 46m ounces of silver equivalent material with an average rate of 475 grams per tonne. That's a clear indication that the higher grades are there and we are going to go at full speed during the year. Brownfield exploration capex will grow by almost 30 percent in 2020, to $36m. 2019’s results would have been even better had it not been for some exceptional costs impacting 2019 profits. But these costs, including the $12m in layoff costs at the closed Arcata mine, other mine closure costs and $15m impairment from delayed production at its Pallancata mine, were related to optimizing performance. Higher profitability meant higher tax payments too. The company also managed to improve its debt position and refinance some debt at lower interest rates. It’s easy for a management team to talk up a company’s prospects, and every company does this. But the real sign of walking the walk is in the dividend. Hochschild has shown its confidence by raising its final dividend by 19 percent to 2.3¢ a share, which took the total payout for 2019 to 4.3¢. This was above the analyst consensus of 4.0¢. Biolantanidos: Rare earths, a long term optionality Hochschild’s dividend yield is nothing special, but that’s because the company is investing in more attractive opportunities in exploration and launched an exciting rare earths project for $56m. The rare earths project will largely depend on the results of a feasibility study scheduled for 2021, but this investment gives investors significant optionality in an early-stage rare earths project that Finance Director Ramón Barúa said at the 2019 results presentation would effectively be the largest rare earths deposit outside China. Hochschild plans to spend $7m on this project in 2020 and hired a separate management team to manage this development in order not to distract its group management from running the core gold and silver operations. Rare earths are used in magnets needed in renewables, electric vehicles, and defense technology. They have become a strategic material in recent years and China controls the majority of the world’s supply and processing capability, meaning any production outside of China has extra significance. If the feasibility study brings positive results, then the deposits will incur new investment requirements before production comes online. So at this stage it’s we can assign little value to the asset but instead view it as a call option on rare earths, i.e. a project with limited downside and much larger upside. Hochschild, which has gold and silver production in Argentina, is aware of the political risks in that country and is, therefore, increasing investments in Peru as well as some focusing on exploration properties across Canada, the United States, and Chile. In the short term, the strength of the company’s core gold and silver business, with growing production and growing margins, provides cash to return to investors and invest in growth projects. This is exactly how a mining company should be run: producing cash that should then be allocated between returns to shareholders and growth opportunity investments. Innovation in reducing costs Pretty much every commodity producer is a price-taker and has no influence over commodity prices. However, every producer does have some control over its costs. One aspect The Global Investor really likes about Hochschild is it has managed its all-in sustaining costs to be at the lower end of guidance in 2019, which was a small reduction on 2018 costs, and AISC guidance for 2020 is set to be lower again (excluding some costs on a tailings storage facilities project). The company also is investing in a program of innovation throughout the value chain. There are two parts to this: ore sorting and mine digitization. Ore sorting means mined material can be better split between mineral holding ores and waste, which enhances the yield from the processing stage. This is still in a pilot stage but has the potential to reduce costs in the future as well as making more efficient use of water and chemicals in the processing stage of mining, something very important in the new ESG era. The second innovative project Hochschild is working on is mine digitization. This means by using sensors at the mines, data can be collected more accurately and quickly, and the result is that drilling and scooping could become 30-40% more productive, allowing for a reduction in fleet size and costs. Again, this not only reduces costs but reduces the impact on the environment. These two innovations have the potential to produce significant operational and project upside. Risks As with any mining company, exploration is highly risky. While a good track record helps, it's no guarantee of future success. Production is also risky, as mineral grade decline can hit sections of the mine, reducing metal recovered from the processing stage. Another risk is that the company mostly operates in Peru, Chile, and Argentina, and investors could suddenly increase the country risk premium associated with these emerging markets, which would then push the share price down. While exposure to Argentina is especially a risk now, given the country’s hard-left government, Hochschild has been in Argentina for many years, under several government regimes, without incurring significant damage. Gold and silver prices are sensitive to interest rates, inflation rates, and changes in investor risk appetite, and the company has no control over the prices of these two commodities. Valuation As an asset-heavy company, Hochschild Mining can be valued and compared against peers using the EV/EBITDA multiple. On a trailing basis, Hochschild's EV/EBITDA stands at just 5.2x, which is very cheap compared to the gold and silver sector median of 8.9x, according to Seeking Alpha data. London listed gold and silver peers include Centamin trading at 6.6x, Polymental International trading at 12.6x, and Fresnillo trading at 7.2x EV/EBITDA. Summary In summary, Hochschild Mining offers a track record of free cash flow generative production, operational cost control, exploration, and green-field optionality with a strong balance sheet enabling strategy execution and future shareholder returns. Rising gold and silver prices are just a bonus. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HCHDF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. https://seekingalpha.com/article/4328198-hochschild-mining-precious-opportunity-for-long-term-value
23/1/2020
15:42
risa5: Global Central Banks Fueling a Ponzi Market Ultimately, investors will awaken to the rising tide of defaults and downgrades. January 20, 2020 | By Scott Minerd, Global CIO One of the topics that I am focused on in Davos is the deterioration in the quality of the corporate bond markets. The disturbing trend is that despite the rally in risk assets in the prior year, the number of defaults rose by approximately 50 percent, according to data compiled by J.P. Morgan. Additionally, the number of distressed exchanges increased by 400 percent. This correlates well with our observation that the number of idiosyncratic defaults has been increasing. Ultimately, markets will need to reprice for this rising risk with increased bond spreads relative to Treasury securities. However, that day of reckoning when spreads rise is being held off by the flood of central bank liquidity and international investors fleeing negative yields overseas. And let’s not forget downgrade risk of BBBs: today 50 percent of the investment-grade market is rated BBB, and in 2007 it was 35 percent. More specifically, about 8 percent of the investment-grade market was BBB- in 2007 and today it is 15 percent. It has more than quintupled in size outstanding, from $800 billion to $3.3 trillion. We expect 15–20 percent of BBBs to get downgraded to high yield in the next downgrade wave: This would equate to $500–660 billion and be the largest fallen angel volume on record—and would also swamp the high yield market. Ultimately, we will reach a tipping point when investors will awaken to the rising tide of defaults and downgrades. The timing is hard to predict but this reminds me a lot of the lead-up to the 2001 and 2002 recession. The prolonged period of tight credit spreads experienced in the late 1990s lulled investors into unwittingly increasing risk at a time they should have been upgrading their portfolios. This brings to mind the famous observation by economist Hyman Minsky, who stated that stability is inherently destabilizing. That is to say that long periods of relative stability in risk assets causes investors to keep upping the risk during a long period of calm. Ultimately, this leads to what he called a Ponzi Market where the only reason investors keep adding to risk is the fear that prices will be higher tomorrow (or in the case of bonds, yields will be lower tomorrow). Daniel Kahneman observed this behavior in his own work, when he identified that investors’ fear of missing an opportunity induces them to buy when they should be selling. Even though the recession clearly has been put off until 2021 and perhaps 2022, in the lead-up to the 2001 recession, credit deterioration started to be evidenced three years earlier in 1998 as defaults and credit spreads were rising. This would sound like good news for yield starved investors and I would agree. But patience will lead to bigger opportunities for disciplined investors who don't wander off into exotic asset classes or chase current returns. Https://www.guggenheiminvestments.com/perspectives/global-cio-outlook/global-central-banks-fueling-a-ponzi-market
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