When UK member of parliament Jo Cox was killed in her constituency on 16 June, the market reaction was immediate. The British pound and the euro rallied after weeks of poor trading amid Brexit uncertainty, while the previously attractive safe haven investments such as gold and government bonds were sold off. Indeed, gold fell by as much as $23 once police confirmed Cox's death, The Wall Street Journal reported at the time.
Why did this happen? Because most market participants – previously wary of a potential Brexit – suddenly thought the "Remain" camp was much more likely to win. Just over a week later, the opposite proved true, and investors who had priced in a Remain victory were suddenly scrambling to cover their losses in a post-Brexit market.
Finance likes to brand itself as rational, sure-sighted and logical, with decisions driven by hard data and careful analysis. But, as the financial reactions on 16 June demonstrate, that is often far from the truth.
Indeed, financial decisions are just as likely to be driven by irrational and emotional factors such as fear, trust and hope, as well as a sheepish tendency to follow winning formulae blindly.
Today, the financial world, and by implication aviation finance, is fearful.
REASONS TO BE FEARFUL
That fear is caused by a more-potent-than-usual cocktail of likely downside events: Brexit, a possible Trump presidency, fluctuating oil prices, a rise of nationalist politics across the world, a slowing Chinese economy, Basel IV and the spectre of terrorism from either the reportedly retreating ISIS or allegedly resurgent Al-Qaeda.
In aviation, that fear and nervousness is impacting financial activities and results already.
Irish low-cost carrier Ryanair recently issued a profit warning as Brexit concerns weaken the British pound. Additionally, FlightGlobal understands that one aviation fund is behind schedule in raising money as investors assess exactly how they see the market post-Brexit.
In the Middle East, local bank financing has slowed amid concerns about the impact of oil prices on how much US dollars those banks expect to be able to receive going forward, FlightGlobal understands from sources.
From a banker's point of view, Basel IV is also on the horizon. The regulation has the potential to sideline the banks to roles of mere arrangers. Indeed, one major European bank is only writing short-tenor asset finance debt in order to be able to reduce its exposure to any capital requirements, FlightGlobal understands.
Also, the global economic outlook is gloomy. The IMF is expecting overall growth of about 3% this year. China is no longer expanding at the rate it was, while Europe and South America are both beset by problems. The US is a mature economy, and growth has lost pace in India and certain ASEAN countries.
Fundamentally, a slowing economy could put off people travelling in the near future.
GHOSTS AT THE FEAST
There are far other potential downside events, such as a lack of capacity discipline, that could impact aviation finance in the near future. It is true that the industry itself is cyclical, but this time it looks like it might hit turbulence along with everything else
Indeed, the markets – and the aviation industry – are currently braced and expecting a downturn of some kind, driven in large part by the uncertainty in the world.
Can this drive decision-making in air finance? It certainly affects perception. For example, FlightGlobal argued that Avolon's $10 billion acquisition of CIT Group's aircraft leasing business, a 6.7% premium over its adjusted net assets of $9.4 billion at the end of June, made sense partly because it turns the lessor into a heavyweight that can sustain a barrage of economic gut shots.
Whether or not the worst outcomes possible right now come to pass is a moot point. The point is that it is both feared and, crucially, seemingly expected by key decision makers. In a way, once that fear is accepted, the market then acts logically in accordance.
Macbeth tipped over into paranoia and fear when Banquo's ghost turned up to the feast. The financial markets have Banquo and his extended family round for supper it seems. If anyone knows where that will lead, they will likely be the subject of The Big Short Part Deux.
Source: Cirium Dashboard
