market folly

We're posting up notes from the Sohn London conference 2017.  Next up is Davide Serra of Algebris Investments who pitched a short of UK 10-year and 20-year Gilts and a long of Santander mezzanine debt.


Davide Serra's Sohn London Presentation

Short 10-Year and 20-Year Gilts

Serra pitched Short 10-Year Gilts at New York Sohn earlier in the year. He reiterated this idea and suggested shorting 20-Year Gilts too

-BREXIT will do nothing to address the social imbalances in the UK. It will actually make them worse. Inequality in the UK is as high as in the US.

- Productivity in the UK is extremely low and imports are high.

- Sterling’s devaluation has generated inflation. The inflation suffered by the lower classes is much higher. Jeremy Corbyn, The Labour Party leader is likely to become the next Prime Minister. Looking at Corbyn’s policies and the likely high level of public spending you want to short 10-Year and 20-Year Gilts.


Long Santander Mezzanine Debt

Santander has not lost money in 200 years of banking. They only had 40 branches 50 years ago now they are running 12000 with 120m clients. Santander were given the Spanish Bank Populaire almost for free by the regulator. As a result, they will be able to achieve higher synergies and more profits.

Algebris are positive on areas of the market where central banks are not buying. Invest where the central banks cannot so that you buy assets that are not being manipulated. Avoid corporate bonds that the ECB has been buying. If you buy European higher yield you get 2%. If you invest in an index of hybrid European financials you get paid 6%. Santander cannot lend to European high yield companies because it is considered too risky and there are regulations preventing it. How can something so risky yield 2% and the bank that is not allowed to lend to it yield 6%? The answer is that the ECB can buy high-yield bonds but not the credit of banks because of possible conflicts of interest with its regulatory role.

Santander is a strong bank. It would have to lose 21bn euro to be unable to pay a coupon. They have never posted a loss.

Remain long the hybrid capital of banks – you want to own the mezzanine debt not the equity.


Be sure to check out the rest of the presentations from Sohn London 2017.