Wednesday 22/09/21

  1. In CLAMPDOWN NEWS, we look at Evergrande and the wider China clampdown as the US Treasury imposes sanctions on a crypto exchange
  2. In GAS NEWS, the IEA urges Russia to boost supply to Europe, the UK returns to square one on gas and the government does a deal to restart CO2 production
  3. In IPO AND M&A NEWS, Universal Music has a strong debut, DraftKings pursues Entain, National Express pursues Stagecoach and Zoom has a spot of bother with a big acquisition
  4. In MISCELLANEOUS NEWS, we see the rise of the robots, the opposing arguments to “tax the rich”, South Africa’s crisis and Uber clawing its way to profit
  5. AND FINALLY, I bring you veggies disguised as sweet treats…

1

CLAMPDOWN NEWS

So the focus continues on Evergrande as part of a wider China clampdown as the US imposes sanctions on a crypto exchange…

Evergrande: will it collapse and what would happen if it did? (The Guardian, Vincent Ni) is a really good article that summarises the story so far for the Chinese real estate company that’s causing so much havoc in world markets at the moment. The main problem here is that the company grew into what some say is the most indebted real estate developer in the world as years of unbridled expansion saw debts grow in addition to assets. Evergrande (known as Heng Da Group in Chinese) has now come a cropper because President Xi Jinping is increasing efforts to deliver better quality GDP growth but forcing industries to change the way they are run and how they are funded. The thing is that Evergrande’s footprint is so broad in China that a default could be a serious blow to the 171 domestic banks and 121 other financial firms who are among those who funded it. Some have made comparisons between the Evergrande situation and the demise of Lehman, which precipitated the financial crisis over a decade ago, but Evergrande is not China’s Lehman moment – but it’s still scary (Daily Telegraph, Ben Wright) argues that it is not the same because it’s not a bank, and therefore didn’t reach into as many areas as Lehman did when things went pear-shaped. The argument here is that the government is unlikely to let it wither and die completely because it has long argued that the financial crisis was the perfect example of the failure of western capitalism and it wouldn’t want the same thing to happen in its own backyard. As I said yesterday, it looks like the most likely scenario is that shares will effectively be worthless and lenders will suffer a big, yet not terminal, hit. Anything that’s actually profitable will be broken up and fed to rivals and the whole industry will have to tighten its belt – something that the authorities will no doubt find pleasing. The knock-on effects of the Evergrande affair (Financial Times) is a really interesting piece which

again looks at the difference between Evergrande and Lehman and contends that it will slow China growth – but warns that if it does this too quickly the global mining sector in particular could be highly vulnerable as China is a huge importer of commodities.

Staying on the subject of clampdowns, I really would recommend that you read the full version of China’s regulatory storm risks triggering wider economic damage (Wall Street Journal, Stella Yifan Xie) if you can because it does a great job of summarising the story-so-far of how the Chinese government has systematically been bringing a number of companies and industries to heel. It contends that there is a lot of pain being inflicted as higher aims of trying to cut both household and corporate debt levels, cutting carbon emissions and cracking down on monopolistic behaviour are resulting in what we are seeing now with Evergrande, edu-tech and fintech. The article argues that the government has the resources to bail out companies it wants to help and China’s central bank has the capacity to ease monetary policy if needs be. * SO WHAT? * So, the upshot of all this is that Evergrande is not expected to be another Lehman and although there will be a lot of pain in the industries affected by the clampdowns, the overall situation is eminently containable by an all-powerful government!

Then in US imposes sanctions on crypto exchange in ransomware clampdown (Financial Times, Hannah Murphy) we see that the US Treasury, who has been working with the FBI, has imposed sanctions on a cryptocurrency exchange called SUEX, which it said deliberately “facilitated illicit activities for [its] own illicit gains”. The sanctions mean that US citizens and companies will be blocked from making transactions with it. * SO WHAT? * Cybersecurity experts have been calling for more measures to stop money laundering and ransomware attacks for ages and it just seems that this is the latest blow to crypto, which is having a poor run of things at the moment. I think that holders of crypto will all be praying for Elon Musk to Tweet some kind of positive message that could give Bitcoin a useful little pick-me-up 😁…

2

GAS NEWS

Russia is sitting pretty as the UK rues its bid to make the gas sector more competitive and CO2 production gets a government funded kick-start…

IEA urges Russia to ramp up gas supply to Europe (Financial Times, David Sheppard, Max Seddon and Natassia Astrasheuskaya) shows just how desperate things are getting at the moment as the International Energy Agency is appealing to Russia to supply Europe with more gas to ease the current energy crisis that risks stunting the economic recovery of the continent. The IEA believes that Russia is deliberately curtailing energy supply to Europe and some European MPs have been going as far as calling for an investigation into Gazprom, which is the country’s state-backed monopoly exporter of pipeline gas. Funnily enough, Gazprom is saying that it is meeting its current obligations and could increase supply if needed, but at a higher price. * SO WHAT? * Putin must be loving this! At the moment, Russia is seeking to gain approval to start the Nord Stream 2 pipeline to Germany, which was completed earlier this month. There have been delays because it will redirect some gas via Ukraine, where Russia has been waging a proxy war since 2014. It seems that Europe’s energy shortage has been timed to perfection to put maximum pressure on those involved to approve the go-ahead of Nord Stream 2. The current shortage is also due to higher demand for LNG in Asia and lower windspeeds across Europe – but it is the first time that an official body has acknowledged what many have been saying behind the scenes. From where I sit, Russia’s got Europe over a barrel on this one and will milk this opportunity for all it’s worth…

Back in the UK, I thought it was worth mentioning UK gas crisis/Centrica: incumbents pick up the pieces of failed challenger policy (Financial Times, Lex) because efforts to encourage competition in the gas sector over the years, which resulted in the number of UK energy suppliers mushrooming to a peak of 70 in 2017 to the current 50, have ultimately come to nothing as many of them are expected to go out of business as a result of current price rises. * SO WHAT? * One of the biggest of the challengers, Bulb, has 1.7m customers but it is already seeking funding so it looks like old fogies British Gas and Centrica could come riding to the rescue and feel some customer love after a long time of being out in the cold!

There will be palpable sighs of relief up and down the country due to ‘Farmageddon’ averted by carbon dioxide deal (Daily Telegraph, Hannah Boland, Oliver Gill and Robert Mendick) as it turns out that the government has done a deal with US company CF Industries which means that the company will start operations again to produce fertiliser and CO2 (remember, this one company is responsible for 40% of the UK’s fertiliser and 60% of its CO2 – and the CO2 is the by-product of making fertiliser. * SO WHAT? * I think this was inevitable – and I wonder whether the government will now do something about temporary visas for EU workers to really get the party going as we head into the end of the year. This whole thing does make me wonder, though, how one foreign company has been allowed to become so powerful in two such key areas. Once this dies down, I really think that the situation needs looking at and investments made to ensure it doesn’t happen again.

3

IPO AND M&A NEWS

Universal has a blast, DraftKings wants Entain, National Express aims to buy Stagecoach and Zoom has problems…

In a quick scoot around today’s IPO and M&A news, Universal Music shares sing on debut delivering $140m payday to CEO (Financial Times, Leila Abboud and Anna Nicolaou) shows that shares in the world’s biggest music level shot up by over 30% on its market debut at Euronext in Amsterdam. * SO WHAT? * French media group Vivendi, its controlling shareholder, will still own an 18% stake in the business and although Vivendi is being left a decidedly less racy company as a result of the sale it now has €8bn to console itself with and make other acquisitions. It has already announced that it will be increasing its stake in French publishing and retail group Lagardère and the extra cash may tempt it to put in a full takeover bid…

Then in DraftKings makes $20bn offer for Ladbrokes and Coral owner Entain (The Guardian, Mark Sweney) we see that British company Entain, which owns Ladbrokes and Coral, has attracted a fat takeover approach from US rival DraftKings. Entain’s share price shot up by almost 20% on the news, which comes not long after the company rejected a takeover approach from US partner MGM Resorts in January. Entain and MGM Resorts (which owns casinos including the Bellagio in Las Vegas) currently operate an online sports betting partnership in the US

called BetMGM. It seems that consolidation in the US following the ongoing legalisation of sports betting is continuing apace – and I don’t see it slowing down anytime soon…

Back home, National Express in talks to buy rival Stagecoach (The Guardian, Julia Kollewe) highlights the potential combination of the UK’s biggest coach and bus operators. It would no doubt be compelling because of the cost savings that could be wrung out of it but you do wonder whether the Competition and Markets Authority will let it go ahead unscathed given the relative prominence in their business (although there is little actual overlap in their operations).

Mind you, it sounds like trouble could be brewing in Zoom’s nearly $15billion deal for Five9 under US government review over China ties (Wall Street Journal, Kate O’Keeffe, Aaron Tilley and Dawn Lim) as Zoom’s proposed acquisition could turn out to be problematic as a Justice Department-led panel has identified potential national security risks due to Zoom’s ties with China (its chief exec is China-born US citizen Eric Yuan, for instance). * SO WHAT? * This could be a real blow for Zoom which is trying to continue the momentum it built last year on teleconferencing by making acquisitions and providing more services in the ongoing “war” with Microsoft Teams and others. The drama continues – but if everything’s OK, the deal is expected to get regulatory approval in the first half of next year.

4

MISCELLANEOUS NEWS

Automation increases, we look at the flip side of “tax the rich”, South Africa considers basic income and Uber aims for its first ever profitable quarter…

I really wanted to mention another few stories that I found really interesting today. Robots replace humans as labour shortages bite (Financial Times, Harry Dempsey and Dave Lee) shows how automation continues to spread in the workplace (something I think has accelerated following labour shortfalls during the pandemic), Labour’s obsession with taxing the rich hurts the very workers it claims to represent (Daily Telegraph, Kate Andrews) makes some very interesting points which counter the “tax the rich” argument (which reared its head again in recent tax increases) – namely that the top 1% of income earners pay almost 30% of income tax and that they are far more able to move country if they are targeted, leaving the rest to pay more tax – and South Africa moves closer to basic income in wake of civil unrest (Financial Times, Joseph Cotterill) shows that things are getting so bad in South Africa that its government is looking into introducing a

basic income grant following extreme poverty and massive unemployment. * SO WHAT? * OK, so the automation thing is one of those slow-burner type stories that continues to creep along, but I really think that the coronavirus outbreak has shown just how important more automation could be to economies in the event of another pandemic. The “tax the rich” stuff is, yes, coming from the “Tory-graph”, but it is a counterargument worth remembering given how easy it is to say “tax the rich” on just about everything. The South Africa story is truly tragic though and just shows how problematic the economy has become.

Then there’s a bit of good news for the long-suffering ride-hailer that everyone loves to hate in Uber set for its first profitable quarter (The Times) as the company announced a positive-sounding trading update yesterday which implied that the company will be profitable on the quarter for the first time ever! * SO WHAT? * This sounds pretty positive. I wonder whether this will be ground zero for a stellar journey as this reminds me of Amazon years ago that was long-criticised for pouring money into growth at the expense of profitability – and look where that is now! 

5

...AND FINALLY...

…in other news…

Today, I thought I’d bring you some cunning skills in Teen disguises brussels sprouts as tasty snacks to stop sister eating her food (The Mirror, Emma Rosemurgey). OK, so I don’t think she really did this to stop her sister but the skills are amazing!

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Some of today’s market, commodity & currency moves (as at 0757hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
6,981 (+1.12%)33,919.84 (-0.15%)4,354.19 (-0.08%)14,746.4 (+0.22%)15,349 (+1.43%)6,553 (+1.5%)26,639 (-0.67%)3,628 (+0.40%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$71.52$75.31$1,779.001.365011.17263109.571.1641442,310.18

(markets with an * are at yesterday’s close, ** are at today’s close)