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The Month the World Stood Still – A Novice Small Business Guide to Shutdown and Avoiding a Long Recession

The Month the World Stood Still – A Novice Small Business Guide to Avoiding a Long Recession

By | General

As COVID-19 spreads around the globe, several governments find themselves at a crossroads, having to weigh between public health and the economic costs of a total shutdown. In this guest post, Smartkarma Insight Provider Sumeet Singh shares his own suggestion of a shutdown that could reduce infection risk for people without crippling the global economy – in other words, some financial pain now to avoid financial agony later.


 

With COVID-19 and stimulus packages being in the news day in and day out, here are my two cents on what policy makers need to do to get over this relatively quickly and with as little pain to the common man as possible.

Whether it’s possible to do so or not is a different story.

Why It’s Not Like 08/09

Having been in Lehman Brothers in September 2008, in the London office’s Equity team, the only main location not totally taken over by some other bank (Barclays took over New York while Nomura took most of APAC), I got to see 08/09 first-hand, including six months of doing nothing in London, i.e. being unemployed!

I’m not going to rant about 08/09 as most of us who are old enough know that it was essentially a crisis cooked by wannabe finance wizards and it didn’t impact the common man outside of the US to such a large extent, apart from the overall slowdown from the drop in US consumption.

COVID-19 is the reverse, where finance is but a bystander and the common man bears the brunt of the pain. However, the common man’s pain has the scope of quickly becoming finance wizards’ pain, not because of the crashing market but more because of the much higher leverage around the world.

COVID-19 Shutdown and Impact

So far we have seen every country fend for itself, with all countries announcing their own lockdowns. This might work to limit the spread of the disease but it won’t work to get the economy up and running again if your neighbour and other trade partners are still in their own trade lockdowns.

The main businesses, apart from tourism and travel, that feel the brunt of a lockdown are the small businesses since they still need to pay salaries, rent, and interest costs, along with other expenses. While bigger businesses have various means of funding, smaller ones are limited to being self-funded or by friends and family or by the neighbourhood bank.

In other words, for most small businesses, funding options are limited. Quite a few can ride out one or two months. However, the longer the shutdown runs, the slower the demand for most goods and services (apart from essentials), and the sooner the businesses will start to cut costs, starting from the most easily expendable: employees. This goes on to create a vicious cycle which someone needs to step in to break.

If governments around the world keep taking a piecemeal, fend-for-yourself approach with non-overlapping shutdowns, then the virus, which has gone from an animal market in Wuhan to the upper echelons of power around the world in less than two months, will not stop.

What is needed is a coordinated global shutdown for at least 30 days. Why 30 and not 14? Because if the incubation period of the virus is 14 days for one individual, even a shutdown that keeps families locked up for 14 days might not work if the virus jumps from member A of the family to member B, say, on day 5 of the lockdown and neither shows any symptoms. Then, on day 14, member B will still be shedding the virus, without symptoms, and we will be back to square one!

So I’m using 30 days as a benchmark but it should probably be more like 45 to 60 days.

So How Will It Work?

If the revenue for all businesses goes to zero, so must the costs. How can this be done?

For the entire duration of the shutdown there will be no salary, no rents, no interest, no capital repayments. The banks won’t earn any interest and they won’t pay any interest either. The bonds won’t earn any interest and they won’t pay any interest either. The landlords won’t earn rent, but they won’t pay any interest and won’t pay for electricity or any other associated costs.

So no school fees, no Bloomberg payments (this can go on even after the shutdown, they make too much money!), no mortgage payments for the entire duration of the shutdown. Theoretically, the world’s GDP goes to zero for the period of the shutdown!

But what about lost income? Well if you aren’t doing much apart from sitting at home, the only income anyone needs is for groceries. Governments need to provide this for free, along with electricity, water, medicine, and the internet (beaming workout and cooking videos). The trick is to make sure they work out how to distribute essentials. Grocery stores, pharmacies, and any other services deemed to be essential are allowed to remain open.

The army and the police need to still be deployed to make sure people abide by the shutdown. All governments declare an emergency giving the police and army the right to arrest anyone who violates the law, i.e. the shutdown.

At times of war most countries ask their citizens to volunteer – the same can be done now. Quite a few people will gladly help rather than sit on their asses for a month. I know I would. Volunteers will be used to make deliveries of groceries to each household on a weekly basis. These volunteers will not be allowed to stay at their homes, just like most front-line medical staff aren’t doing so right now. These volunteers will go into self-isolation when the rest of the population comes out of it.

It sounds like an episode out of Black Mirror. However, with a vaccine more than a year away at the minimum, and the hopes of summer killing the virus fast eroding (look at the number of cases being reported in tropical countries), just one country going into shutdown won’t work until all the countries have been in one (and freed themselves of the virus). Borders won’t open, supply chains won’t work, and trade and commerce won’t get back to normal. Even if a country saves itself, it won’t save a lot of jobs if it has to keep shutting down due to imported cases.

As I am writing this Insight, I have been told by my wife that Bill Ackman has tweeted a similar idea but just for the US. He is wrong because just one country doing it won’t work. As long as the virus is raging in some corner of the world, there will still be a risk of it coming back, as is starting to happen in China and here in Singapore. Both countries now have more imported cases each day, with most of them imported.

As someone on Twitter put it aptly, our grandparents were called upon to fight the war, the least we can do is to sit at home for a month!

If the piecemeal approach keeps going on, the eventual cost in terms of human lives and employment will be a lot higher than foregone GDP for a month or two!

Read Sumeet Singh’s follow-up Insights on this topic:

Lead image by Anna Shvets on Pexel

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Coronavirus: Crisis and Opportunity in the China Market

Coronavirus: Crisis and Opportunity in China’s Economy

By | General

As shocking as the outbreak of the 2019-nCoV novel Coronavirus (or Wuhan virus) is, it has been less shocking to see it eclipse all other market concerns and dominate the conversation. Nothing gets the markets fidgety like a potentially major, potentially global health scare – it transcends industries, it doesn’t follow predictable patterns, and it doesn’t stop at borders.

While the situation is still developing, with more deaths and infected cases within China and a number of cases throughout the rest of the world, it’s hard to have a firm grasp of the actual impact. Nevertheless, Smartkarma Insight Providers have attempted to piece together some conclusions based on their specialist areas.

Dropping Prices

Vincent Fernando offers a view into China’s tech sector, with a look at 10 tech stocks that have seen large sell-offs since the virus news broke.

It’s no big surprise to see the impact on travel stocks like Trip.com and Travelsky Technology: with travel bans and strict restrictions in place, as well as a large segment of their clients being Chinese travelers, their shares dropped by 12 percent and 13 percent, respectively.

Less obvious might be the hit on stocks like cloud computing company Xunlei (19 percent) and image editing software maker Meitu (14 percent), but Fernando notes this is most probably due to broader market fears, with such stocks being collateral damage. 

Read Vincent Fernando’s full Insight: Coronavirus Casualties: China Tech’s Ten Biggest Losers

The sheer size of China’s market makes it impossible to not have ripples out to the global economy. For example, China is the largest consumer of commodities in the world, notes Gaius King. In a flash note on Smartkarma, he outlines how commodity prices have experienced a significant drop over the past few trading days. This includes iron ore (25 percent drop), zinc (9 percent), copper (11.6 percent), and nickel (11.3 percent). 

“In anticipation of lower economic growth, commodity prices have fallen and we expect prices could fall further as it becomes increasingly evident that the Coronavirus will eventually spread globally,” King writes.

Read Gaius King’s full Insight: Coronavirus & Commodities – What to Do?

Coronavirus: Crisis and Opportunity in the China Market

Most impressive of all – but perhaps expected – has been the Chinese government’s response to help shield the economy from the slowdown caused by virus concerns. On 2 February, the People’s Bank of China undertook a whopper of a liquidity injection, pouring RMB 1.2 trillion in the market (US$172 billion).

To put this into perspective, Michael J. Howell says the liquidity boost “represents in size roughly half the huge net liquidity injection undertaken by the US Fed since early September 2019, but taking place in just one day” – which, in turn, was one of the Fed’s biggest injections ever.

Read Michael J. Howell’s full Insight: China Hits Warp Speed …Risk On Again?

Howell notes that the lifeline should boost short-term business activity in China and around the world. Although it won’t do the yuan’s currency stability any favours, keeping up the momentum behind its economic growth might be more important to China, he adds.

Crisis = Opportunity

It’s not all bad news for everyone, however. Ming Lu points at internet companies, specifically ecommerce websites, which stand to gain from people staying indoors and doing their shopping online. 

“Since 23 January, when the Chinese government sealed Wuhan, the epicenter of the coronavirus, people all over China began to snap up and hoard fast-moving consumer goods,” Lu writes.

Lu used ecommerce giant JD.com as an example case, and found that the website raised prices on several of its goods – in some cases, as high as 127 percent. “JD can surely defend themselves with the excuse that they just provide less discounts than before. However, they had kept those large discounts for a long time,” he says.

As a result, fast-moving consumer goods sold online due to virus fears could compensate for slowdown in other product categories in 1H2020. The crisis might even help pave the way for more mainstream drone delivery adoption, writes Fernando in a separate note.

Read Ming Lu’s full Insight: JD.com (JD): Raised Goods Prices Significantly After Wuhan Was Sealed as Epicenter of Coronavirus

And how about a startup that basically predicted the Wuhan virus spread within China and to major cities around the world? Blue Dot, a Canadian startup backed by Hong Kong magnate Li Ka-Shing, claims to model the spread of infectious diseases with the help of artificial intelligence. 

As Douglas Kim outlines in his Insight, the company first sounded the alarm about the Coronavirus on 31 December 2019, several days before official authorities. While Blue Dot is still private, it’s perhaps worth keeping an eye out for, especially since the new visibility the outbreak has given it.

Read Douglas Kim’s full Insight: Blue Dot: Li Ka-Shing Backed AI-Powered Startup Warned About Wuhan Virus Before WHO Warning

Another name that stands to benefit investors is, interestingly, in the very sector getting pummelled by travel bans and virus fears: online travel. Tongcheng-Elong is a Chinese online travel agency whose stock suffered, dropping 11 percent from 16 to 20 January. But the company’s long-term fundamentals are strong, Fernando says

It should “generate strong returns in the long run due to its combination of a high potential userbase paired with increasing OTA penetration in lower-tier cities throughout China, rapidly improving travel infrastructure & connectivity, and rising disposable incomes,” he writes. The same could be true for beleaguered Trip.com, he adds in a separate Insight. The company has announced refunds and assistance schemes for affected travelers, which should go a long way towards building customer loyalty and good will.

Read Vincent Fernando’s full Insights: TCEL: China’s New Virus Is Scary, But One Chart Shows How You Can ProfitHow Trip.com (TCOM US) Is Actually Getting Stronger During the Coronavirus Crisis

Lead image by Macau Photo Agency on Unsplash

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Elon Musk Is a Fan of the GPIF’s Decision to Curb Short Selling. Others, Not so Much

Elon Musk Is a Fan of the GPIF’s Decision to Curb Short Selling. Others, Not so Much

By | General

When Japan’s Government Pension Investment Fund (GPIF) announced the suspension of lending foreign shares this past week, people who dislike short selling rejoiced. 

None more so than Elon Musk, which is not hard to imagine; Tesla has been the target of short sellers for almost as long as it’s been public, and Musk has waged bitter Twitter wars against them.

But the GPIF’s move isn’t likely to make that much of an impact – certainly not the kind that Tesla’s chief exec might be hoping for.

Playing It Safe

The premise of the GPIF’s decision seems based more towards enabling a move towards ESG (Environmental, Social, and Governance) principles and less on valid concerns about short selling and its impact on stock prices.

The GPIF has justified its decision via two main points: 

  • The ownership transfer of lent shares create a “gap” in the period the GPIF holds the stock, which implies the GPIF is not being a good steward of the stock
  • There is no transparency in terms of who ultimately borrows the stock and for what purpose

Both are valid points, although they raise questions. On the first point, Travis Lundy notes that, according to Japan’s Corporate Governance Code and Japanese law, the practice of lending stocks does not result in loss of ownership.

Brian Freitas adds that “prudent lenders will not lend more than half their position so they do not have to recall borrowers in case they need to sell some of their stock,” or there’s an important issue they need to vote on.

Read Travis Lundy’s full Insight: GPIF World’s Largest Fund To Suspend Global Stock Lending

The second point is “a valid argument and more difficult to solve for,” Freitas writes. According to him, it’s not so much about who borrows stock as much as the ultimate purpose of borrowing.

“Stock lending should be permitted as long as the external managers conduct their stock lending activity in compliance with tax laws, do not explicitly lend stock to borrowers to arbitrage dividend tax laws (especially not with a view to share the profits of the enterprise), or to borrowers who are looking to borrow shares solely for voting rights,” he concludes.

Lundy notes that most markets do not require reporting of trades under a certain threshold anyway. “Furthermore, the GPIF clearly does not want to advertise what it will do before it does it or as it does it,” he writes. “It would seem odd that the GPIF requires the transparency of intent of other people in the market while not showing transparency of its own intent.”

Read Brian Freitas’s full Insight: Elon Musk Has a New Friend in the GPIF

Impact

GPIF CIO Hiro Mizuno has strived to establish himself as a proponent and implementer of ESG principles. This creates a risk that observers will interpret the GPIF’s current stance as indicating that short selling is not compliant with ESG tenets. 

As risky as that is, Freitas doesn’t think that’s likely. “Most large asset managers recognise the importance of short selling to promote efficient capital markets and of generating returns for the portfolio,” he writes.

And anyway, Lundy doesn’t think this is what the GPIF is going for. “It would likely be impossible to show empirically that a lack of short selling increases the ability of company management to manage their company appropriately, and increases overall returns,” he points out.

One point of caution is what happens to shares the GPIF has already lent out. Freitas estimates that the fund has lent out around US$20 billion of stock from its portfolio, of which US$5-7 billion is in emerging markets. “If this stock is recalled, there could be some big moves in smaller stocks. If this stock is not recalled, there will be minimal impact of the suspension,” he says.

Freitas believes the GPIF will likely reverse this decision eventually. Lundy, meanwhile, doesn’t think other global pension funds will take a similar route, “though some influence cannot be ruled out.”

Lead image by Aleksandar Pasaric from Pexels

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South Korea-Japan Tensions, Shinzo_Abe,_Moon_Jae-in,_Pence_in_Pyeongchang (1)

How the South Korea-Japan Summit Could Ease Market Tensions in the Region

By | General

The trade spat between China and the US and its fallout has dominated news headlines and the markets for more than a year now. But there are other, smaller conflicts happening in Asia that can have significant impact on stocks and investors. The Hong Kong protests is one; the South Korea-Japan conflict is another.

We won’t go into the details of the conflict’s roots and history as it goes back decades, all the way to World War II – Reuters has a good explainer. But for now, suffice to say South Korea-Japan relations have always been rocky, and every now and then, things come to a head. This is one of those times.

The spat has led to a trade war that has seen multiple industries affected in both countries, including food & beverage, automotive, and electronics. On top of that, South Korea threatened to pull out of GSOMIA, the General Security of Military Information Agreement, although President Moon Jae-in ultimately stepped back from the brink.

Now the stage is set for a South Korea-Japan summit in Chengdu, China in December, where President Moon will sit down with Prime Minister Shinzo Abe and the two sides will try and heal the rift between them. What comes out of the summit is anyone’s guess at this point, which is why Douglas Kim ventured a few possible scenarios in a recent Insight on Smartkarma.

Read Douglas Kim’s full Insight: Five Scenarios Post Moon & Abe’s Meeting at a Summit in China Next Month

In Talks

Kim went through the past history of the two countries and explored factors that can potentially affect the outcome, such as South Korea’s upcoming National Assembly elections and the role of China.

Based on that, he outlined five potential outcomes:

  • Abe and Moon make up and drop hostilities
  • Abe and Moon make no progress in South Korea-Japan relations and the current rift continues
  • The opposition Liberty Party of Korea (LPK) wins the upcoming election and compels President Moon to scale back the hostile stance against Japan
  • The governing Democratic Party of Korea wins the election and restores good South Korea-Japan relations
  • LPK wins the election and maintains the current dynamic of hostility

Regardless of what ends up happening, Kim is optimistic that the ice is thawing between the two governments. “The political rhetoric between them has softened now as compared to the July/August period, when political hostility between the two countries [was at its most extreme],” he says.

This should be good news for several Korean and Japanese companies whose stocks have been affected by the crisis. Kim lists some of the most important ones in his Insight: The Korean side includes names like Samsung Electronics, SK Hynix, Naver, Lotte Holdings, and Hotel Shilla. On the Japanese side, he lists, among others, Panasonic Corp, Asahi Group Holdings, Canon Electronics, Honda, and Japan Airlines.

Kim notes that his analysis leans towards the South Korea-Japan rift slowly healing by early summer of 2020, right before the Tokyo Olympics, which should be a boon to all those stocks.

Hotel Shilla: a Stock that Could Benefit from Easing Tensions

As an example, Kim uses Hotel Shilla to illustrate the impact of the situation on the firm, but also the opportunity therein. Despite what the name suggests, the firm generates the vast bulk of its sales via its duty-free shop business, being the second largest operator of such outlets in Korea and the third-largest globally. The rest of its sales come from its hotel chains, Hotel Shilla and Shilla Stay.

Read Douglas Kim’s full Insight: Hotel Shilla – A Beneficiary of the Thawing Relationship Between Japan & South Korea

Kim is bullish on the stock, as the firm’s operating margin on its hotel and leisure business unit “improved materially to 5.0 percent in the first nine months of 2019, up from 2.7 percent in the first nine months of 2018,” he writes. The growth came from a strong influx of overseas tourists into South Korea, as well as domestic tourists opting for the Shilla brand.

Much of the tourist traffic comes from China, as the Chinese government started allowing its citizens to travel to South Korea again after a rocky period between the neighbouring countries in 2016-2018. An easing of the South Korea-Japan tensions could have a similar effect to tourism from Japan.

If trends like current industry consolidation in Korea’s duty free shop market and tourism recovery continue, Kim sees a potential upside of more than 30 percent over the next six to 12 months. While the stock is almost 35 percent down from its mid-2018 heights, he believes it’s because it’s oversold due to political risks like the South Korea-Japan tensions and the Hong Kong protests, as well as excessive marketing costs to attract Chinese tourists.

Lead image by S. Herman (Voice of America)

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ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

By | General

ESG is turning into a real bad penny in the investment industry. It shows up everywhere and no one seems quite sure what to do with it.

There’s no denying it’s increasingly important, as climate change becomes a more pressing issue and business leaders emphasise the value of social impact and lasting value beyond just shareholders.

On the other hand, someone forgot to send the memo to the markets. The unfortunate truth, as Insight Provider Kyle Rudden demonstrated in a recent Insight on Smartkarma, is that ESG concerns don’t really move stock prices. 

“By definition as non-financial data, ESG is always one or more degrees of separation from what really matters. ESG must impact financial metrics before manifesting, indirectly in prices,” he wrote.

Read Kyle Rudden’s full Insight: ESG and Stock Prices: Fat-Tail Events

For example, Rudden looked at the stock performance of six major pharmaceuticals that were involved in the US opioid crisis – which costs the US economy around US$100 billion annually. The impact to stocks like Johnson & Johnson was negligible, even though the company and others like it faced lawsuits and condemnation over their role in the situation.

Despite this, investors might have good reason to pay more attention. A recent report by sustainable investing advocate Ceres found that around 73 major US companies’ earnings took hits due to extreme weather events and supply-chain disruptions related to climate change increased by 29 percent. 

A different study by the same company estimated that climate change-related factors could put almost US$1 trillion at risk.

ESG-changes

Whether or not ESG-minded investing can have an impact in modern business and investment, there are key players in global markets that take it seriously. And while one might not expect exchanges to lead the charge on this, a survey by the World Federation of Exchanges begs to differ. 

Among other findings, the survey noted that a majority of exchanges report some ESG activity (and most of those through some formal initiative), take steps to improve ESG reporting by issuers for investors, focus on their own ESG disclosures, and cite global sustainability concerns as their motivation.

Kyle Rudden wanted to go deeper, so he analysed 22 financial exchange stocks across 33 countries, totalling US$69.1 trillion in aggregate issuer market capitalisation. 

To carry out his analysis, he measured each exchange on its proactiveness in facilitating ESG disclosure for its listed companies, and its own ESG performance. This gave him a total “ESG’ness” score.

ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

Chart by Kyle Rudden

He wrote up his findings in this comprehensive Insight. The whole thing is a great read to get the full picture, but it’s worth noting a couple of findings: 

For one, Asia-Pacific exchanges seem to be leading the charge in ESG, with five out of the top 10 exchanges being based in Asia. HKEX topped the list, which also included Singapore Exchange, Bursa Malaysia, Japan Exchange Group, and BSE.

Read Kyle Rudden’s full Insight: Asia Exchanges Lead in ESG: HKEX, JPX, SGX

This contrasts nicely with the consensus back when Rudden first started looking into ESG investing (when it wasn’t even called ESG yet): that it was led by Europe, was set to grow in the US, and would never catch on in Asia. “I am ecstatic to see how wrong that view was, and how far the region has come. Not just ESG acceptance, but ESG leadership,” he writes.

Another interesting finding was that size of the exchanges didn’t really matter in this analysis. “The average market capitalisation of the top 10 stocks (the exchange market cap this time) is in line with the average (US$14.6 billion vs. US$15 billion), and the largest of the large didn’t make the top ten,” Rudden notes.

European Banks Drive Change

Despite any scepticism one might have about the virtues of ESG principles, the above analysis shows that several major financial institutions are taking them very seriously. And they’re not the only ones.

Last week, the European Investment Bank (EIB) made waves with its announcement that it would no longer fund fossil fuel projects from the end of 2021 onwards. Regardless of where one stands on this issue, there’s no denying the weight of this decision. EIB is one of the biggest public lenders in the world, having loaned US$61.9 billion in 2018, according to DW.

In the vein of his previous analysis, Rudden took the opportunity to score major global banks on how they approach fossil financing. He acknowledges that this type of investment still matters, and will continue to matter, from a purely economic standpoint – especially since fossil financing is not limited to just one sector or industry. 

Nevertheless, he found that European banks are particularly well-behaved in this regard – unsurprising, since Europe has always been more climate-progressive than other regions. 

Read Kyle Rudden’s full Insight: European Banks: Exemplars of Climate Finance

US banks were, equally predictably, some of the worst performers in the analysis. “In the three years since the Paris Climate Agreement, the world has financed US$2.0 trillion worth of fossil projects. Of that, 54.8 percent was by North American banks and 37.1 percent by US banks,” Rudden notes.

APAC banks take a fairly middle-of-the-road approach here, unlike their exchange compatriots.

Considering this data and global trends and developments, Rudden says it would be wise for investors to “avoid the worst financiers of global warming, and for other stocks to emphasise reductions in fossil activity and adoption of environmentally-proactive policies.”

Lead image from Pixabay on Pexels.com

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Singles’ Day Isn’t the Only Reason Why Alibaba’s Hong Kong Listing Is Timely

Singles’ Day Isn’t the Only Reason Why Alibaba’s Hong Kong Listing Is Timely

By | General

Alibaba’s Singles’ Day was a brilliant idea.

Pick a relatively minor “holiday” that’s memorable and people are familiar with. Offer massive discounts. Associate your business with said day. Eventually take over said day and make it part of your overall brand. Profit.

Singles’ Day has been many things for Chinese internet giant Alibaba. It’s been a massive publicity stunt, a driver of massive sales numbers, and a powerful flex to the rest of the world. In the last few years, Singles’ Day has traveled far beyond China’s borders as a signal of Alibaba’s huge scale compared to US rival Amazon.

This latest Single’s Day was no exception, drawing in a record US$38 billion worth of sales – although the day’s annual sales growth continued slowing as it has done for the past years and disappointed co-founder Jack Ma.

On the back of (a still pretty successful) Singles’ Day, NYSE-listed Alibaba has moved closer to its long-awaited secondary listing in Hong Kong. The company is now set to start trading in Hong Kong on 26 November, to raise US$13.4 billion. 

Strong Sales, Healthy Fundamentals

Other than the publicity momentum that Singles’ Day always gives the company, why would it go ahead with this listing now? 

Insight Providers on Smartkarma, including Sumeet Singh and Arun George, point out that Alibaba is in a good enough position financially not to need the extra cash. “With strong cash generation metrics and net cash of US$13 billion in 2QFY20, Alibaba does not need to raise money,” writes George.

Read Arun George’s full Insight: Alibaba HK Listing Bear View: HK Raise Will Worsen the past Poor Capital Allocation

Most of the company’s fundamentals are pretty sound, as Rickin Thakrar points out in an Insight. 

The company showed significant top-line growth of around 40 percent in 2Q19/20. “While it is a step down from FY18/19 [growth] of 51 percent, this remains robust in our view, especially given the macro environment as well as continued robust competition in both commerce and cloud,” Thakrar writes. Unlike competitor Tencent, Alibaba reports its interest and revaluation income below the EBIT line, he adds, which means Alibaba has a clearer line in terms of operating results.

Read Rickin Thakrar’s full Insight: Alibaba HK Listing: Do the Fundamentals Stack Up?

Sumeet Singh singles out the lack of a price range as particularly strange. “The lack of a price range might mean that the ADRs continue to languish,” he notes. “In my view, the company is trying to do all it can to protect the ADR from being impacted. However, […] the ADR was always going to go down as people would look to pocket whatever discount was being offered for the Hong Kong listing.” 

The ADR still dropped 2.4 percent on the day this Insight was published (14 November), while Alibaba finally set a price of no more than HK$188 per share. “It doesn’t really tell you anything about the company’s willingness to give on pricing apart from the fact that they don’t want to give a sizeable discount. To sum it up in one word, I would call it cheeky,” Singh adds in a subsequent discussion.

Read Sumeet Singh’s full Insight: Alibaba IPO/​​​Secondary Listing –  Not Good for the ADR, Should Have Put a Price Range to It

The most prominent reason for the secondary listing is that investors in Hong Kong and China have been hotly anticipating the move. The Hong Kong listing finally gives the local retail investment community (and loyal consumer base) an inroad into the firm. 

Plus, thanks to Stock Connect rules that allow HKSE-listed stocks to trade in the exchanges of Shanghai and Shenzhen, investors from China can take part in one of their country’s most successful companies.

The US Factor

The other reason is a common denominator for a lot of international market developments over the past couple of years: The trade war between the US and China has generated a lot of mistrust and bad blood for Chinese companies operating and/or listed in the US. Brands like ByteDance’s TikTok and Huawei are synonymous with national security threats to many American legislators.

In a recent Insight, Travis Lundy draws attention to a proposed bill in the US Senate that seeks to prevent the US federal pension fund from investing in Chinese-listed shares. This ties into a broader conflict between US regulators and China over transparency in auditing Chinese companies listed in the US. 

Taken far enough, such moves by US politicians “could mean that the same politicians would wish for companies listed on US exchanges, which are not able to have their audit work or subsidiary audit work fully inspected, to have their right of US listing removed,” Lundy writes.

Read Travis Lundy’s full Insight: Anticipating the Alibaba HK Listing

In such an event, “companies like Alibaba would want to have another listing where US-listed ADRs would be fungible to trading on a different venue,” he adds. This is especially important for Alibaba given its top position: “If successful, Alibaba will be the largest company to have a secondary listing in Hong Kong with a primary listing in the US,” writes Arun George.

Whatever the case, with the Hong Kong listing going ahead, Alibaba is set for another public market record (its 2014 NYSE listing, raising US$25 billion, is still the world’s largest at the moment). The secondary listing is still expected to be the biggest of the year, almost double that of Uber’s US$8.1 billion flotation… at least until Saudi Aramco’s IPO gets going.

Lead image by Foundations World Economic Forum / Ben Hider

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TikTok Creator ByteDance Defies China Tech Slowdown as It Goes After Facebook’s Crown

TikTok Creator ByteDance Defies China Tech Slowdown as It Goes After Facebook’s Crown

By | General

A big part of Facebook’s current troubles has to do with the company’s dominant position in the social networking space. In fact, until ByteDance and its strange little app, TikTok, came along, it was hard to find a crack in Facebook’s armour. 

With over 2 billion monthly active users (MAUs) and a near-global presence, Facebook has become the social platform against which all other ones measure themselves. Any potential competition, Facebook has either acquired (Instagram, WhatsApp) or copied and thrown into irrelevance (SnapChat).

It’s all the more interesting to see the one competitor that Facebook hasn’t yet been able to stave off come from a completely different market (China) and grow internationally like few of its compatriots have managed.

Breaking Out of the Home Market

ByteDance has many successful media products in China, including news service Toutiao and social video platform Douyin. But it’s TikTok, Douyin’s international version, that’s catapulted it to overseas success.

The app, which allows users to create and publish videos limited only by runtime and users’ creativity, climbed to the top of the short video app space in its home market, with 486 million MAUs in June 2019 – a 61.4 percent increase compared to a year ago, writes Ke Yan in an Insight on Smartkarma. At its heels is competitor Kuaishou, a Tencent-backed firm, with 341 million MAUs. 

Read Ke Yan’s full Insight: ByteDance (字节跳动) Pre-IPO: How Has It Done in 1H?

Douyin’s dominance is more thanks to “internal competition” between ByteDance’s other video apps, like Huoshan (Volcano) and Xigua (Watermelon), says Chinese market observer Ming Lu in a recent Insight

“We believe ByteDance learned the ‘internal horse race’ from Tencent,” he notes. “To set up different studios for the same business, let them compete with one another, and take the winner to compete with outside operators.”

Douyin, internationally known as TikTok, came up on top. It seems ByteDance learned the trick all too well – internet giants in China like Tencent and Weibo even started blocking links to ByteDance’s apps on their own platforms.

More impressively, ByteDance has managed to maintain that growth in the face of a slowing mobile market in China. Ke Yan points to data from QuestMobile showing that mobile usage peaked at 1,138 million in early 1H2019 and flattened out afterwards. Mobile ad revenue growth also slowed down from 24 percent in 2018 to 14 percent in 2Q2019, he writes.

Read Ming Lu’s full Insight: ByteDance: The Unlisted Company’s Video Apps Leading the Market and Threatening Internet Giants

The Road to Profit and IPO

ByteDance has grown its presence overseas by copying key elements from competing apps and strategic acquisitions – in this case, the Musical.ly short video app. Ironically, it’s a pretty similar playbook to Facebook’s ascent to social domination.

This is why Facebook has good reason to be watching its back. Ke Yan quotes data from SensorTower that estimate 664 million mobile installs for TikTok globally (excluding China) versus 711 million for Facebook in 2018. In September 2019, the data firm estimated that TikTok surpassed Facebook in downloads by about 10 million.

Meanwhile, a copycat app that Facebook launched, called Lasso, largely failed to make much of a splash. According to a report by TechCrunch, Lasso had just 425,000 installs since November 2018, compared to 640 million TikTok installs for the same period (again, outside of China). 

“In our opinion, ByteDance is the most successful Chinese TMT company in the overseas market,” Ke Yan writes.

Read Ke Yan’s full Insight: ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok

As the company starts looking like the next tech IPO hopeful, it needs to address monetisation. Most of the company’s ad revenue at the moment comes from its Toutiao segment, but user spending on Douyin and TikTok has shot up by 588 percent, reaching almost 11 million in June. 

This is through in-app purchases, where users buy virtual gifts for other users within the app. The trend has been catching on outside China, with overseas uses accounting for 31 percent of in-app purchases on TikTok.

Ke Yan sums up some of the challenges ByteDance faces on its monetisation drive, with two main issues being the limited space for ads on the app and the lack of ad revenue sharing with content creators – arguably the app’s lifeblood. 

Given that this is a common problem on such platforms, and that Key Opinion Leaders (KOLs) are a major driver of brand awareness and marketing initiatives in its native market, this is an avenue that ByteDance will need to streamline sooner rather than later.

It will also need to deal with increasing scrutiny from the US government, with a national security inquiry into TikTok currently underway.

With ByteDance posting a profit for the first time in 1H2019 and valued at US$75 billion in its pre-IPO round last October, everyone, including Facebook, will be watching closely at the company’s next steps towards an IPO. 

Lead image by TikTok

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WeWork’s Compromised Vision Offers a Glimpse Into SoftBank’s Vision Fund Troubles

WeWork’s Compromised Vision Offers a Glimpse Into SoftBank’s Vision Fund Troubles

By | General, WeWork

We don’t know whether WeWork has managed to do any serious consciousness elevating lately, but it has definitely elevated the blood pressure of many investors – including those tied to SoftBank’s Vision Fund, which is quickly becoming part of the cautionary tale. 

Despite what’s shaping up to be a costly bailout of WeWork and an attempt to right the ship by SoftBank, the latest developments are throwing a pall over SoftBank Group.

In an early October Insight on Smartkarma, Kirk Boodry noted the 47 percent holding company discount at the Group as investor concerns mounted. The WeWork snafu played a large part in this, but Boodry also points out that several other publicly-listed Vision Fund investments are now losing money. 

Notably, in his latest Insight on SoftBank, Boodry reported the Vision Fund to be down US$6 billion on its largest investments. As of 23 October, the Vision Fund was down 75 percent on WeWork and 6 percent on Uber (which is down 30 percent from its IPO value), even with the latter’s relative rally. And Slack, the other big tech hopeful that went public through a direct listing this year, closed at US$21/share, making it one more money-losing investment for Vision Fund.

Read Kirk Boodry’s full Insights: Softbank G: A Summer of Pain as Cornerstone Vision Fund Investments Falter and Softbank G: We Company Deal Is Wrong on so Many Levels

Why are these numbers important? For one, they’re putting the blockbuster Vision Fund into question. But also, SoftBank was, until recently, talking up an even more ambitious successor fund. Recent developments that made markets more nervous than ever about tech “unicorns” going public have put a dampener on those plans.

“A second Vision Fund is a harder ask when you have lost 75 percent on your largest investment and 6 percent on the second largest,” as Boodry puts it.

But it’s this second Vision Fund that SoftBank is trying to salvage with this bailout of WeWork, argues Mio Kato. SoftBank doesn’t seem to be consolidating WeWork despite taking what seems to be an 80 percent stake, so that it can avoid WeWork’s considerable liabilities – SoftBank would certainly not want those on its financial results.

Read Mio Kato’s full Insight: Softbank: WeWork Rescue Looks Like Desperation to Save Vision Fund 2

Kato runs through several calculations on the number of shares and voting rights. Vicki Bryan also notes that the deal terms have been shaped in such a way as to ensure that SoftBank is not actually acquiring WeWork and will not have defined control thanks to reduced voting rights – which will help with the aforementioned avoidance of consolidation.

As cash lifelines are necessary to keep WeWork afloat, it doesn’t bode well for WeWork bondholders, as Bryan predicted back in September. “New credit facilities… then will bury all WeWork bonds below secured debt that has a superior claim to virtually all tangible assets the company owns,” she wrote at the time.  

Read Vicki Bryan’s full Insight: Gravity Works As WeWork Doesn’t; Now Plan B

Boodry highlights a big part of the problem with Vision Fund when he says that “Softbank is often the only provider of reference prices on the investments it makes and that forces investors to compensate for valuation risk by applying a higher holding company discount.” It remains to be seen what SoftBank’s Q2/FY2019 results look like when they hit on 6 November.

Lead image by Miki Yoshihito on Flickr

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Why Alternative Data Is the Latest Power Tool on the Investor’s Belt

Why Alternative Data Is the Latest Power Tool on the Investor’s Belt

By | General

It might ring strange invoking alternative data in 2019, after terms like “alternative facts” have entered the vernacular. Thankfully, alternative data is not half as nebulous as that other alternative term, even though it may seem that way sometimes.

Alternative data is nothing new in the world of finance. Analysts and industry watchers have always relied on non-financial inputs that have an impact on financial developments. 

The weather, spending habits, fashion trends, popular hangouts, social unrest: Any one and all of those datasets can affect economic activity and gives analysts context on top of traditional financial information, like a company’s earnings or market data.

As independent analyst Campbell Gunn puts it in a recent Smartkarma Original Insight: “The ancient Greeks knew that the climate influenced the economy. In 1748 in Spirit of the Laws, Montesquieu stated that excess heat made men slothful and dispirited, which in turn would limit agricultural output and economic growth.”

Read Campbell Gunn’s full Original Insight: Alternative Data & Japan’s Personal Care Companies – An Evolving Weapon For Active Managers?

What’s changed since Montesquieu put quill to paper is the nature of data itself. Data these days is coming through a multitude of sources and covering a myriad of use cases.

From satellites churning out geolocation data to our smartphones producing detailed reports of our app usage, and from point-of-sale systems and credit/debit card transactions to social and consumer sentiment, data is as abundant as it is complex.

According to AlternativeData.org, total Buy-side spend on alternative datasets and infrastructure is expected to top US$1.7 billion in 2020, up from US$232 million in 2016. As different types of data become more easily available to more people, this trend can only keep climbing.

The Personal Care Touch

While alternative data is clearly interesting from a research and academic point of view, how can it benefit active investors?

That very question drove a set of Smartkarma Original Insights, a subset of research where Smartkarma engages Insight Providers for bespoke reports on specific topics, markets, or sectors. 

The Insight Providers, including Gunn and LightStream Research’s Mio Kato and Oshadhi Kumarasiri, combined a number of sources and analysis methodologies to tackle Japan’s personal care sector. Companies they looked at include Shiseido, Fancl, and Kose.

In particular, LightStream used point-of-sale (POS) data to complement company disclosures. POS data, writes Kato, has a much higher frequency and gets a lot more detailed. This allows analysts to dive deeper, produce more accurate forecasts, and better track trends and potential surprises down the road.

Read Mio Kato’s full Original Insight: Alternative Data – An Evolving Weapon for Active Managers (Fancl and Kao)

For example, Kumarasiri looked at a variety of data sources on Shiseido, Japan’s second-largest personal care company. According to his analysis, cosmetics sales in Japanese department stores have increased at a CAGR of around 9 percent from 2012 to 2017, which sounds like good news for companies like Shiseido. 

But using POS data, LightStream found that, while a lot of this growth is thanks to increased tourist spend, domestic spend on such products is declining in Japan, potentially because of trends like an ageing population and the shrinking of younger demographics – traditionally the target segment for such products. 

“As such, we believe domestic cosmetic consumption has matured, and all the companies are finding it difficult to grow their sales to Japanese customers outside of the high prestige segment, which is becoming increasingly competitive,” writes Kumarasiri.

Using the same data source, Kumarasiri and Kato can project how different segments will perform in the near future. “Nothing in this world is certain; things change every second. And the same theory applies to our investment thesis,” writes Kumarasiri. “POS analysis helps us identify… trends early and help investors to respond before the actual financial results are out.”

Read Oshadhi Kumarasiri’s full Original Insight: Alternative Data – An Evolving Weapon for Active Managers (Shiseido, Kose, Pola Orbis)

Consumer Sentiment Shaping Markets

Kumarasiri similarly used POS data to get a sense of how Japan’s beer industry is doing. He chose a good time too, right in the middle of the Rugby World Cup 2019 happening in the country. Kumarasiri expected a bump in beer sales during the major sports event, and he wasn’t wrong. 

Sales started picking up almost two weeks before the tournament started – average daily beer sales through drug stores grew 6 percent YoY, he writes. That growth sped up once the first games got going, growing 21 percent between 20 and 28 September. 

Kumarasiri notes this is a boon for an industry on the decline. Japan’s beer market experienced a significant slowdown after the government introduced amendments to alcohol taxes, leading to steep price increases and precipitous drops in consumption, according to a report on Research and Markets. Another such amendment is expected to further impact retail sales and total volume of beer until at least next year, the report notes.

At least the World Cup seems to have saved 2019. “We believe the overall Japanese beer market would grow 3 percent in 2019 solely through the contribution from the [tournament],” Kumarasiri writes.

Read Oshadhi Kumarasiri’s full Insight: TrueData POS: Japan’s Beer Market Trends During Early Days of the 2019 Rugby World Cup

Another example came earlier this year on Smartkarma. Devi Subhakesan and Rohinee Sharma of Investory conducted a deep-dive analysis of the fast fashion sector and its implications for ESG-minded investors – one of the first Smartkarma Originals.

For their research, Investory included consumer sentiment they sourced through their own survey in Shanghai and Mumbai. “Asia’s growing middle income group seems to be following in the footsteps of their Western counterparts with regard to their shopping attitudes,” Subhakesan wrote. The segment generally prefers the frequent buying and discarding of casual clothes, with emotional and social influences driving their purchases, the survey revealed.

Read Investory’s full Original Insight: Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

But they didn’t seem to be as aware of the environmental and sustainability implications of fast fashion, the survey found. “Improved awareness about the scale and seriousness of the environmental damage caused by the fashion industry in Asia can likely change how consumers prioritise their brand choices,” Subhakesan added. 

This is the kind of information that will generally not show up in a company’s financial disclosures, and yet can be material to a prospective investor.

Lead image by Kevin Ku, Pexels

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As Global Business Gets Serious about Sustainability, Research Is Ready for Its ESG Moment

As Global Businesses Get Serious about Sustainability, Research Is Ready for Its ESG Moment

By | General

There are few certainties in the world, especially these days, but some things we can always count on: death and taxes, for one. Also, corporations exist to maximise profit and serve the shareholders.

Or do they? As much of a staying power as Milton Friedman’s credo has had in the modern world economy, it might be time to rethink things.

At least, that was the message coming out of the latest Business Roundtable a couple of months ago, where US business leaders came out with a timely message for sustainability. 

Some choice quotes from key people included JP Morgan boss (and Business Roundtable Chairman), who said “The American dream is alive, but fraying… Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.” 

Tricia Griffith, President and CEO of Progressive Corporation, added that “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.”

ESG Buzz

Now, if we’re feeling cynical, we could say this is just paying lip service to current buzzwords like sustainability and environmental, social, and governance-focused investing. You might know that last part as ESG.

And it’s true that this has been an issue for ethically-minded investors. It’s all well and good to have a clear conscience and invest in good causes but, at the end of the day, investments need to generate returns. If ESG-focused investments aren’t paying off, should investors keep pursuing them just for the sake of ethics? 

Similarly, if businesses generate profits despite sticking with shady practices, anti-environmental policies, and no regard for the social impact of their practices, is there a practical reason for them to lean into ESG? In fact, aren’t they in breach of their fiduciary duties to shareholders if they do and profits plummet as a result?

The Business Roundtable’s announcement is important, even if it’s just grandstanding, because it seems to be willing to break that particular taboo. The message is clear: shareholder interest should not be the only Northern Star a business follows. It’s good, then, that there is data that seems to reward this mindset.

According to Allianz’s ESG Investor Sentiment study, published last year, two-thirds of millennials stated that ESG considerations were important to their investment decision-making. More than half of their Generation X counterparts said the same, whereas only 42 percent of Baby Boomers agreed.

Source: Allianz ESG Investor Sentiment Study

It’s clear that for the new crop of investors and shareholders, sustainability is a concern – and this means that businesses also take notice. 

It certainly seems to be in their best interests to do so: Investments with a sustainability mandate were more than US$30 trillion in 2018, a 34 percent increase from the two years before, as per a report from the Global Sustainable Investment Alliance.

ESG Research Comes of Age

Where does that leave research? ESG-focused research has been the subject of much eye-rolling, as the buy-side seeks to separate the objective, substantive wheat from the marketing and ideologically-driven chaff.

“A major source of frustration for investors is that out of the vast corpus purporting to be ESG alpha research, only a fraction: 1) is actually about alpha even when it thinks it is, and 2) can pass for real research based on objective, analytically-rigorous methods,” writes Kyle Rudden, an independent analyst focusing on “alpha-centric” ESG research.

Rudden, who recently started publishing on Smartkarma, is confident that ESG research can be objective, generate sound investment ideas, and put data ahead of ideology. He should know – Rudden cut his teeth working on the sell-side for JP Morgan, where he managed the Global Energy Research Team. 

There, he encountered a spate of ESG failures in the market, from governance failures like the Enron scandal to environmental and social debacles that evaporated billions of dollars in shareholder value.

Read Kyle Rudden’s full Insight: ESG Alpha: Fluff or Stuff?

“All this time, I was doing ESG research without knowing that’s what I was doing,” he recalls. “When ESG entered the zeitgeist, it provided a framework that cast earlier experiences in a brighter light.”

This taught him the importance of ESG research based on hard facts and data, without the ideological baggage and other biases that can sometimes come with this line of thought. These can skew research, especially when it promises alpha – the industry shorthand for when an investment idea has managed to beat the market return for a certain period. 

That’s what makes Rudden’s approach to ESG research alpha-centric: deriving alpha from ESG, focusing on the causal relationships between the two, rather than alpha with ESG, which just seeks to generate alpha while also adhering to ESG principles.

Of course, there’s a reason why this isn’t more common in the industry. Not only is it a lot of work, there are unique challenges inherent to ESG. Limited data, inconsistent reporting cycles, and expensive integration make things harder.

Some of these factors have been highlighted elsewhere, such as BNP Paribas’s ESG Global Survey earlier this year. 

Barriers to ESG adoption

Source: BNP Paribas ESG Global Survey

Read our blog: Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

Ultimately, demand – itself a powerful market force – will determine the future of sustainable practices in business, investment, and research. 

Speaking on the sidelines of Institutional Investor’s inaugural ESG Investing Summit in New York, T. Rowe Price’s Director of Research for Responsible Investing, Maria Elena Drew, said that companies the asset management firm invests in have started disclosing more information on ESG issues, because more of its clients ask for it – which then sheds more light into those companies’ practices.

“As companies disclose more data, it makes it a lot easier for us to analyse how they operate from an environmental or social or ethical perspective,” she noted.

Lead image by Singkham

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