ALEX BRUMMER: Covid reality check for investors

ALEX BRUMMER: Current panic is a result of Covid unknowns – but it also shows how far markets have strayed from fundamentals during a pandemic that still shows no real end

A temporary suspension of air traffic to Southern Africa is sensible enough until more is known about the latest Covid variant.

The reaction in the financial markets is far too exaggerated.

This is not March 2020 when there were no tests, no PPE, too few ventilators and none of the innovative immunological treatments that have emerged.

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The nasty blow to aerospace and hospitality stocks, which have swallowed large dollops of new stocks and debt in Covid-19, makes sense. Anything that disrupts airline operations will impair their ability to lend and reward investors for patience.

The real story is the extraordinary bull market that has seen the S&P 500, Wall Street’s broadest measure, double in value. Compared to that benchmark, the sharp drop in the Dow Jones is barely noticeable.

In the UK, the lagging FTSE 100 managed to creep back to pre-Covid levels before the latest variant made its way in. The stock rally was accompanied by what the late Harvard economist Kenneth Galbraith called the “bezzle.” Current manifestations include the boom in special acquisition vehicles (SPACs), which have attracted £72 billion in investment, and crypto currencies. Before bitcoin values ​​collapsed on ‘Red Friday’, the price had vaulted to $60,000.

A leading US investment banker on a Thanksgiving visit to London noted that the true value of bitcoin is closer to $60.

That has not stopped people from trading and making fortunes. It is the ones left behind who will reap the bitterest harvest in the same way as holders of cut and cubed subprime mortgages in the financial crisis.

What is certain is that bull markets, driven by low interest rates and bond buying, will not last forever. During the search for safe havens, money poured out of stocks into government bonds in the latest frantic trades, pushing yields on US Treasuries, Japanese Treasuries, Treasuries and European bonds down.

Since bond market interest rates often set the pattern for official interest rates, the ruckus could discourage central banks from rushing into the fight against inflation.

An important factor behind the rise in the cost of living is energy prices. It has long been argued that oil markets are imperfect and speculators are responsible for the foam. The rate of the 5 percent drop in Brent oil in the latest trade is an indication that high prices aren’t just due to tankers being stuck at sea and congestion at refineries.

The current panic is a result of unknowns with the coronavirus. But it also shows how far markets have strayed from fundamentals during a pandemic that still shows no real end.

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KKR’s bid for Telecom Italia is hard to ignore. It’s one of Europe’s largest public-private deals, costing £9 billion nominally, but actually worth £28 billion if the debt mountain is taken into account. Italian Prime Minister Mario Draghi, formerly a Goldman Sachs banker, is eager to close the deal because private equity could do no worse at running a chaotic company allegedly involved in dodgy Serie A football deals.

Under KKR, the plan is that the infrastructure arm, the equivalent of BT’s Openreach, would be broken up with the government of Rome taking a stake. The hurdles are formidable. Right-wing parties hate the idea of ​​Telecom Italia falling into the hands of foreign private equity sharks. And the company’s largest investor, French billionaire Vincent Bollore of Vivendi, thinks it’s being sold cheaply.

Another French billionaire, Patrick Drahi, has yet to play his hand after taking 12 percent of BT in June this year.

He too would face political roadblocks if he made a full offer.


The grand dame of British real estate, Land Securities (LS), is making some big bets on destination retail. Real estate bible EG reports that LS plans to spend £600m on Nuveen, which owns designer brand parks in Bridgend and the Cheshire Oaks shopping center in Ellesmere Port.

It also wants to buy the Lendlease minority in Kent’s Bluewater.

The online revolution, the Covid-19 shock and corporate tariffs have not shattered LS CEO Mark Allan’s confidence in the future of in-person shopping.