A resurgence of catalysts
The Ukraine conflict could have interesting implications for relative value (RV) strategies.
Historically, the worst period for RV strategy performance has been the low-yield, low-growth environment of the years between 2008 and 2020 (the shaded region in the figure below). By contrast, prior to 2008, when yields were higher, RV did well in both high-growth (1960s and 1980s) and low-growth (1970s) eras. It suggests that RV performance is more sensitive to yields than economic growth.
Even prior to the outbreak of the Ukraine conflict, inflation and growth data had started to point to an end to the low-yield regime. This had caused RV trades to gradually recover since November 2020. Wars are generally inflationary (Edward Yardeni, Fed Watching for Fun & Profit). This has been evidenced in recent weeks by soaring prices for soft commodities, energy and metals. All else being equal, inflation should eventually lead to higher yields.
The opposing view is that heightened economic uncertainty will slow down the pace of Fed rate hikes and balance sheet normalisation, keeping a cap on yields.
Metrica’s view is that the inflationary factor will prove to be more significant, meaning that a return to the post-2008 macroeconomic environment is unlikely. So whether or not global growth is affected by the war, the medium-term outlook for RV strategies is positive.
Metrica calls for a strategic review at SK Chemicals
- Metrica welcomes the recent value-improving initiatives announced by SK Chemicals.
- However, these measures have had only a very limited impact on the share price discount, which still exceeds 80%.
- Metrica calls for SK Chemicals to launch a formal strategic review within the next two months to consider further measures to address the discount, up to and including a sale or spin-off of SK Bioscience.
Please refer to the dedicated website for more information.
Metrica Partners urges SK Chemicals to sell SK Bioscience shares upon the lockup expiry
- The board of SK Chemicals seems unconcerned with its shares trading at an 83% discount to net asset value. In Metrica’s view, the board has a fiduciary duty to care about its share price.
- The company should address the discount by selling a stake in its subsidiary SK Bioscience upon the IPO lock-up expiry of 18 September and distributing the proceeds to shareholders.
- SK Chemicals can pay a special dividend of 1.3x its share price while still retaining 50% ownership in SK Bioscience as well as 100% ownership of its profitable chemical and pharmaceutical businesses.
For more details, please refer to the dedicated website.