Its the holiday season yet the shorter's keep on shorting.
Why are they so confident? Love to know what they are focusing on.@donnyk01Maybe the shorters think that the recent simultaneous fall in prices across several asset classes (equities, property, corporate bonds) will have a meaningful negative impact on CGF’s Regulatory Capital Base (because of CGF holding a mix of all those assets in their Life Investment Portfolio). In fact, I have been asking myself that question too.
By way of reminder, CGF target a PCA Ratio (defined as Regulatory Capital Base divided by Prescribed Capital Amount) between 1.30 and 1.60, the level at June 30th 2018 being 1.53. A hypothetical fall of the PCA Ratio below 1.30 could theoretically force CGF to raise fresh capital; therefore, this could conceivably be a legitimate rationale for shorting.
Having looked through the last few years of CGF’s financial results, I noticed that the moves in asset prices that occurred
during the first half of FY2016 were closely resemblant of those occurred during the current half.
Namely, both Australian and International (US) shares declined by 10%-15% between June and December 2015, and Investment Grade credit spreads widened by 60-70bp; the only difference is that Australian property prices did not (on average) decline during that period.
If we look at the actual Investment Experience of CGF for 2016H1 (see slide below), we can see that the mark-to-market impact on Fixed Income and Equities was indeed negative (for an aggregate hit by -118m$), but that was more than offset by the reval of the Annuity liability book (+124m$), whose Illiquidity Premium widened very much in line with the prevailing level of BBB credit spreads.
Therefore, given that the composition of CGF’s Life Investment Portfolio hasn’t changed significantly, I would not expect a substantial aggregate mark-to-market impact from Fixed Income and Equities in 2019H1.
View attachment 1401765What may contribute a negative impact is the reval of CGF’s Investment Property Portfolio, which represents ~17% of the total Life Investment Portfolio, or ~3.1bn$.
If (for instance) we conservatively assume a 10% devaluation in the Property assets, which would basically bring their carrying value down to the original cost base, that would correspond to a -310m$ hit.
If we adjust CGF’s Regulatory Capital Base down by the same amount, the PCA Ratio would go from
1.53 down to
1.41, everything else being the same. Therefore, the ratio would still be comfortably above 1.00 and within the 1.30-1.60 range.
In practice, I see a 10% Property deval as being unlikely, because a) the carrying values are rather conservatively marked in the first place (only ~11% above average cost) and b) there is going to be a small realised gain from the sale of 0.7bn$ of property assets during 2019H1.
To conclude, if balance sheet concerns (as a consequence of asset price moves) are currently the rationale for shorting CGF, I see that rationale as being flawed.
IMHO & DYOR
(20min delay)