Macquarie’s new normal

What exactly was normal about a global debauch with inflated asset prices, the proliferation of eye watering levels of debt, the invention of multiple layers of new forms of securitisation and derivatives that imperilled the entire monetary system, circular risk management practices and a Wall Street and City of London-driven kleptocracy whose greed ultimately led to the global financial crisis? That was the question implied by Macquarie Group’s chief Nicholas Moore, when he asserted that markets are returning to “normal”.

Presumably he meant the return of financial conditions that raised and trained investment banks willing to clip both sides of the ticket, securitise the ticket, sell the ticket off in AAA chunks, float the ticket selling business in an IPO, then take fee income from the listed ticket based business, which is then securitised and sold off in AAAchunks. And so on, forever.

Meanwhile, back in the real world (normal or not) Macquarie is trading at about half its peak. Still, although it was effectivelyu nationalised when it was the beneficiary of government guarantees during the GFC, it remains an innovative outfit, with about 40 per cent of its business coming from products that did not exist five years ago. It gets half its income from overseas, so it has shown an ability to play globally that is rare in Australian business.

Macquarie did some intelligent buying when Wall Street was reeling from the GFC. A quarter of its income is coming from America. It is not going up against the government backed “too big to fail” investment bank elite inAmerica, such as Goldman Sachs and Morgan Stanley. Rather, it is targeting the second tier players who have thinner capital bases and less international capacity.

The trouble is that buying assets in the US is more of a trading play. The big growth must surely be in Asia, where the capital markets, especially in China, are undergoing arguably the biggest financial transformation ever seen as they develop deeper stock markets, bond markets and other forms of finance. Macquarie is looking to Singapore for fixed interest, currency and credit trading in yet another version of the “regional hub”. It has also has a regional equity market plays and the commodity trading skills that should play well in the region. But there is little sense of a more ambitious growth plan in what will probably be the world’s faster growing region for decades.

Macquarie was the best performing stock in January, with a 10% jump. Brokers were perhaps remembering that when they did not rush to sells. Deutsche and Southern Cross Equities have buy recommendations despite modest price targets of $46-47. Morningstar and Citigroup have holds. Citi has a target price of $40, lower than the share price – despite a falling stock price – which leaves one wondering why they are not advising a sell.

Macquarie’s forward earnings multiple of about 15-16 is not especially cheap compared with the wider market. Although its anticipated dividend yield of about 4.5% gives some protection investors probably need something a bit better than “normal” to get enthusiastic.