Welcome back to the Weekend Reading
It’s been a turbulent week, as I write this our market is redder than an English backpacker after a day in the sun and news of rising 10Y bond yields have created some particularly interesting material to write about – how considerate of them.
Let’s try to make sense of the week that was.
Coming to Europe (Didi moves to Europe)
Ride-sharing giant and one of our private equity mainstays, Didi, is rumoured to be planning an expansion across to Europe.
People close to the deal say that Beijing’s ride-sharing titan is looking to roll out services across the U.K, France and Germany, chasing new growth markets to bolster the company position ahead of the long-anticipated IPO in Hong Kong.
On the back of this news, potential rivals Uber and Delivery Hero both saw losses in their share price, of 3.7 and 3.9% respectively.
Source: Bloomberg
Didi currently operates in 13 countries outside of mainland China, expanding into Russia and Australia last year and making strategic investments into other ride-sharing companies across parts of Europe already.
Like trying to break into any big European family, Didi is going to face challenges in the Eurozone’s particularly volatile regulatory landscape for big tech and gig economy companies. Only last week, the U.K courts ruled into common law that Uber must treat its drivers as ‘workers’ rather than contractors, giving them eligibility for vacation pay and minimum wage.
Bubbles in Paris
It’s nice to live in a world where the first time you hear about rapper Jay-Z having his own champagne label, is when LVMH announces a deal to acquire 50% of it.
LVMH’s Moet Hennessy has bought a 50% stake in Armand de Brignac, a Champagne producer owned by Jay-Z, the latest in what seems to be an extensive list of celebrity-owned alcohol companies making the news. No news has been reported on the financials of the deal, but based on an estimated ~$150 million USD of sales in 2019, we can assume it will be a 9-figure sum.
Jay-Z has been an investor in the brand since 2006, when he touted the brand, known for its Ace of Spades logo on a metallic silver bottle, in a video for “Show Me What You Got.” Jay-Z bought out Sovereign Brands’s stake in the company in 2014.
According to Bloomberg, the champagne market has been hit hardest of almost all liquor sales over the last year due to the cancellations of weddings and functions – being less socially acceptable to drink bubbles whilst stuck working from home, as opposed to nursing a scotch on the rocks just off-camera during Zoom meetings.
LVMH, whose brands include Moet & Chandon Champagne and Hennessy Cognac, saw sales dropping 14% over the period.
Unending Liquidity
In case you thought the US stock market wasn’t looking volatile enough over the last few days, Deutsche Bank has you covered. Deutsche strategists estimate that the latest round of stimulus checks from the Biden administration could unleash over USD $170 billion of retail funds into the equity market.
A survey of retail investors showed respondents planned to put 37% of their stimulus cash directly into equities.
Source: Bloomberg
We don’t touch on GME or the other ‘YOLO’ stocks here, if only because I’m saving it till slightly later in this note – but it goes without saying that a combination of free trading apps and direct government stimulus has helped fuel a boom in retail involvement in the stock market, most notably from first-time investors.
If anybody thought the momentum trade was over, then it’s worth noting one other finding from that Deutsche survey: “When faced with a hypothetical modest selloff, a majority of respondents said they would increase their investments”.
Death and Taxes
It’s weeks like this that make me think history may have misquoted Benjamin Franklin, because what we saw in Hong Kong could be described as “death by taxes”.
Source: Bloomberg
The Hang Seng Index closed over 3% lower during a session this week, off the back of Hong Kong’s first increase in stock-related stamp-duty since 1993. The one-day drop was the largest in over five years and ended a 38-day streak of inflows from Mainland investors.
The Hong Kong government expects the tax hike, to go into effect August 1st this year, to generate more than $12 billion HKD per year in revenue, in order to aid a $120 billion HKD stimulus package to assist the ailing economy.
Citigroup estimates that the increase in stamp duty will increase trading costs from 6% to 15% and shave off trading volumes in the short-term.
The GME that keeps on giving
Did you hear that since the initial ‘short squeeze’, the executive team at GameStop had implemented a new business model to drastically increase revenues and underlying fundamentals of the company?
No? Neither did I, but GME has once again been on a surge of over 150% this week, buoyed by some renewed vigour by retail investors.
Source: Bloomberg
And perhaps one casualty (besides hedge funds of course) of this price action has been investors in ETFs, as investors pour out of funds which provide 37% profits and then whipsaw to equally as vicious losses within a week. State Street’s SPDR Retail ETF (ticker XRT) lost 80% of its assets back in January, and now it’s gearing up to face round two.
GME currently makes up 5.9% of the ETF, of which it should actually make up only 1%, since the ETF cannot re-weight fast enough to reflect GME’s actual position in the market. Citigroup has commented that this sort of stock-specific volatility can hurt something like XRT’s ability to be a portfolio hedging tool for more conservative investors, since your hedge can suddenly be weighted 20% towards GME without warning.
The Roaring 10’s (Rates sell-off: Jesse)
I’ve asked the talented Jesse Imer to help us make sense of the latest movements in the bond market.
If higher inflation (“reflation”) has been the topic de jour it’s no surprise that this view was articulated by bond “vigilantes” who aggressively sold-off bonds this last week, but has been a new trend established since the start of February.
What’s been happening is that a growing market consensus are pricing in economic growth and potential economic overheating, where economies expand above their potential.
Intuitively, this is based on the premise that when we grow below our potential, there’s slack or an “output gap” whereby we can’t overheat because there’s spare capacity, i.e. workers under-utilised.
On the flip side, when we grow above potential, prices inflate due to increased demand outstripping available supply.
This is where we are right now – debating whether we’re going to overheat later this year or not.
Not right now, later this year and in the years to come >> this is why government bond yields are anchored between overnight cash to ~4-5 years, then 5+ year yields spike upwards.
Over in the USA, it seems the Federal reserve isn’t worried:
Australian govies have vastly under-performed during this period as well, with yields rising faster than comparable US yields.
To articulate this point, I’ve charted AU 10y yields (top panel, white line) versus US 10y yields (top panel, orange line).
For much of 2018, 2019 and part of 2020 our yields were lower than US treasuries, but this reversed in 2020 where there is now a positive differential.
Remember when interest rate differentials mattered in markets?
That used to be a sure-fire reason for AUD out-performance >> and when coupled with commodity price rises, almost guarantees continued AUD strength.
Either way, we’re at an interesting point where the bond market sell-off provides a buying opportunity for those in the lower inflation camp, and higher risk-free rates could underpin equity market underperformance.
As for the move, it may seem sudden but we’re literally at similar levels to exactly 12 months ago.
Again, logical if we’re expecting our growth gap to evaporate and start producing economic growth at pre-COVID levels.
If we’re going to have pre-COVID levels of economic growth and inflation, why not pre-COVID bond yields?
Source: Bloomberg
A Bullish Legacy
In a sad anecdote, the sculptor of a Wall Street icon has passed away at 80.
Arturo Di Modica, the Italian-born sculptor behind the famous “Charging Bull”, passed away this week.
The raging bull has been an image associated with New York, Wall Street and financial markets since the 1990s. After first being illegally deposited in 1989, public outpouring of support for the sculpture has kept it securely nestled in the Bowling Green for over 30 years.
Keeping the Crypto Course (Microstrategy buying more Bitcoin)
MicroStrategy Inc. the enterprise software company that moonlights as a Bitcoin investor, paid an average of $52,765 for nearly 20,000 BTC last week after issuing over $1 billion USD in convertible bonds.
Source: Bloomberg
This latest investment pushes their total holdings past 90,000 coins at a rough market value of $2.2 billion USD. Shares in the company jumped as high as 13% off the back of this news – another contender for the approach of buying companies with BTC exposure instead of the coin.
It hasn’t been entirely smooth sailing, with MicroStrategy reporting $70.7 million in cumulative impairment losses at the end of last year from BTC price fluctuations – and if they had bought their latest tranche before the $45k/coin low on Tuesday, they could have posted over $150 million losses in that deal alone.
Speakers
Our morning calls are back up and running, thank you to everybody dialling in presently – for those who aren’t, we do encourage you to listen in for some unique content from some very capable speakers.
Have a safe and enjoyable weekend.
– Max and the Mason Stevens team.
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The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.
