Bubbles ‘Wherever We Look’ Unnerve Top Nordic Buyout FundAdam Ewing
The biggest buyout fund in the Nordic region says an unprecedented era of monetary stimulus is inflating asset prices across markets to extreme levels, with history offering little help in predicting how it will all end.
“There are financial bubbles being built up and how they’ll be solved, I don’t know,” Thomas von Koch, managing partner at EQT Partners in Stockholm, said in an interview. “The problem is global, not just for Europe. It’s the asset bubbles in general that concern me. It’s wherever we look.”
Charting a path through markets today poses challenges most portfolio managers haven’t faced before. Economic theory taught us to expect hyper-inflation when money costs nothing; instead we now face the threat of deflation. “I can virtually toss those textbooks in the fire,” said von Koch. From an investor perspective, the development means stocks that track economic cycles are less appealing, he said.
“We try to buy what’s not affected by the underlying business cycle,” von Koch said.
Given the record-low interest-rate environment -- with Sweden, Switzerland and Denmark imposing negative benchmark rates -- investors need to accept that they’re probably buying at too high a price, von Koch said. That can result in losses when unprofitable companies get buoyed by the market tide.
“It’s better to pay up with an expensive multiple for a good company than to pay up a mid-range multiple for a bad company,” he said. “The good ones will be able to weather the storm. The bad ones, that’s where the over-valuation is for real.”
The Stoxx Europe 600 index has already jumped about 11 percent this year, while Stockholm’s benchmark OMX Stockholm 30 index has climbed about 13 percent, reaching a record high.
EQT bought German manufacturer E.I.S. Aircraft Group on Feb. 13 and completed the 2.15 billion-euro ($2.47 billion) purchase of Siemens AG’s hearing-aids business last month.
Since the European Central Bank started signaling its intention to unleash an historic quantitative easing program, due to start next month, bond yields have broken through previous record lows. Five-year bonds sold by the governments of Denmark, Switzerland, Germany and Austria all trade at negative yields, according to data compiled by Bloomberg.
On the flipside, the extreme monetary stimulus across Europe is helping economies in the region by bringing about a currency devaluation that will support growth, von Koch said. Germany in particular is benefiting from the development, he said.
“Germany is only just now seeing the translation effect, so what you’re seeing -- a boom is maybe too strong a word -- but clearly northern Europe is a huge beneficiary of the strong dollar,” von Koch said. “Huge, because the region is a heavy net exporter, especially Germany and Sweden.”
Though the crisis in Russia and Ukraine poses a risk to the outlook for Europe, von Koch said he doesn’t think President Vladimir Putin is “stupid enough to start World War III.”
Instead, von Koch says excessive leverage fueling a hunt for yield is something “one should be wary about.”
Debt levels are approaching those recorded in 2006 and 2007, just before the global economy lurched into its worst crisis since the Great Depression, according to von Koch.
“You also have a private market chasing yield with a bond spread between those and debt provided by the banks that has never been as narrow as it is today,” von Koch said. “And the underlying economies for the companies, you don’t have much growth. From that perspective, we’re more leveraged today than in 2006-2007.”