In this briefing:
- L Brands: Sale of Victoria’s Secret Helps Draw Attention to Bath & Body’s Success
- The US and Developed Countries: Bump in the Road or Cliff Edge?
- Covid-19/Economic Impact/Huawei/Hong Kong/Mastercard
- Sanders-Buttigieg Are Co-Front-Runners, but Bloomberg Is Racing to the Nomination
- Factories Outside of China Now Halting Production as Virus Impact Expands
It was reported by several news media outlets that the private equity firm Sycamore Partners Management LP has been in talks with L Brands Inc (LB US) regarding the purchase of the latter’s iconic lingerie brand Victoria’s Secret (VS). Media reports suggest that it is almost a done deal and an announcement can be expected as early as tomorrow, 18th February 2020. In addition to acquiring VS, Sycamore Partners Management LP is also weighing a private investment in public equity deal (PIPE) to help L Brands reduce its debt burden.
We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.
China News That Matters
- New name, leaders and a spike in cases
- Getting back to business
- Huawei: new indictments, old fears
- Beijing appoints better enforcers for Hong Kong
- For everything else there’s…
Mike Bloomberg, a self-made billionaire in the technology & financial sector and 3-term mayor of New York, is quietly surging in the polls, helped by the chaos of Iowa and the muddle of New Hampshire. His Super Bowl ads, focused on gun control and climate change, have shown the voting public that he is passionate about serious issues (and core Democratic ones). He is neither a great debater nor a public speaker, but he has well-thought-through positions on the issues, a record of accomplishment that makes Trump look like a fake business/political dwarf, and a massive gusher of money that he is willing to use liberally. A conservative on national security, centrist on most social issues, but a radical on climate change and gun control, Bloomberg has what it takes to win the presidency, and the Democrats are likely to come around to that view by mid-March.
Buttigieg leads the delegate race, with 22 (just ahead of the 21 that Sanders has) after the first two contests of the long US presidential marathon. The counting fiasco in Iowa robbed Buttigieg of the momentum that normally accompanies a surprise winner in Iowa — which propelled both Jimmy Carter and Barack Obama all the way to the presidency. Sanders won New Hampshire, but his 1.3pp margin of victory was infinitesimal compared to his 22pp victory over Hillary Clinton in 2016, in what is practically his home state (since he has been in elective office from neighbouring Vermont for 39 years). Sanders now leads the Democratic polls nationwide, but he will lose South Carolina (29 February) to Biden, and narrowly leads in Nevada (22 February). In his 3 runs for president (1988, 2008, 2020), Biden has yet to win a primary or caucus; until he does that, he is being written off. Winning Nevada would help him, South Carolina will be too late.
After Super Tuesday, the Democratic contest will likely become a two-horse race between a couple of Jewish septuagenarians (Bloomberg turned 78 on Valentine’s Day, Sanders will be 79 in September); their GOP rival will turn 74 on 14th June. The succeeding primaries will become a contest for the vice-presidential nomination between Buttigieg and Klobuchar (both from Midwestern swing states, Indiana and Minnesota; the former won by Trump in a landslide in 2016, the latter a Democratic stronghold where Hillary Clinton held on narrowly). Currently, Bloomberg has taken a lead in Arkansas (a Super Tuesday state) and Florida (March 17th primary). He also looks very strong in Virginia, where Bloomberg played a big role in ensuring a Democratic victory in the 2018 Congressional election, and is drawing a lot of endorsements in return. Biden remains strong in several Super Tuesday states (Texas, North Carolina) and later voting states (Georgia, primary on 24 March). Crucial to Bloomberg is to inherit the majority of Biden’s primary voters if and when the former VP’s campaign fades. Currently, it looks credibly like a two-horse contest after Super Tuesday. If Sanders remains ahead of Bloomberg at the end of March, he will likely win the nomination; if Bloomberg gains enough ground to win 4-6 Super Tuesday states, he will become the moderate standard-bearer. Nationwide polls show Bloomberg beating Trump by a larger margin than any other Democratic candidate. If it is Bloomberg vs Trump after the party conventions, markets will be relieved, and should rally. (If Sanders wins the nomination, Trump’s chances of re-election would rise, but we think Sanders is unlikely to win the nomination; if he does, markets will remain very nervous until Election Day in November).
As a follow up to our note Evidence of Global Slowdown Accumulates as Stores Remain Closed and Supply Chains Are Crippled, reports that business impacts have increased are starting to take a more regional or even global flavor.
Despite some factories in China resuming operation on 10th February, several regions have extended shutdowns and labor supply remains restricted due to quarantines. This has caused many factories to delay resuming operations with the few facilities that have resumed operations remaining severely under capacity. We are now seeing a follow-on impact with reports of non-China based factories reporting production halts.