TheChek News Flow

China’s equity markets could hold on to recent gains following the announcement of economic stimulus—and perhaps even extend them near term—but the long-term outlook remains fairly bleak, says Thomas Mathews, head of markets at Capital Economics. The expected boost to growth from the stimulus suggests the stock market rally is unlikely to unwind much just yet, but Mathews points out that this isn’t the first time in recent years that a seemingly pro-growth shift by policymakers has fueled a rally, all of which have faded. What could keep things going this time is sustained growth in companies’ EPS, but that’s something they have struggled with in the past, he adds. “We don’t see much in this stimulus package to change that, so despite our cautious near-term optimism we’re sticking with our downbeat long-run view.”

The company sees the decorative paints market in South Asia as ripe for consolidation

AkzoNobel AKZA -2.07%decrease; red down pointing triangle said it will explore options for its South Asia decorative paints operations, ranging from establishing partnerships to seeking mergers or asset sales, as part of a strategic review.

The Dutch paints maker last week laid out plans to cut 2,000 jobs globally, or around 5.6% of its workforce, in a bid to counter cost pressures and simplify operations after earnings disappointed recently.

The company said late Thursday that the review of its portfolio will start in South Asia, where it sees the decorative paints market as ripe for consolidation. AkzoNobel said its decorative paints operations in South Asia are well placed to participate in the market’s development, singling out its India business as highly profitable.

“The review will explore various strategic options ranging from partnerships or joint ventures through to mergers or divestments,” AkzoNobel said.

The review aims to redeploy capital toward accelerating growth in the group’s core coatings business, AkzoNobel Chief Executive Greg Poux-Guillaume said.

EU countries set to greenlight tariffs on Chinese electric vehicles

It’s EV Day in Brussels as member states are expected to confirm tariffs on imports of Chinese electric cars, heightening a spat with its largest trading partner.

But researchers estimate the move will only boost sales of EU-made electric vehicles if the bloc sticks to strict emissions targets, writes Andy Bounds.

Context: Diplomats from the EU’s 27 member states vote this morning on a European Commission proposal for anti-subsidy tariffs of up to 35.3 per cent, on top of the existing 10 per cent tariffs. Discussions on the tariffs have been controversial, but to block them, 15 countries representing at least 65 per cent of the EU population would have to vote against.

Commission officials are confident of success. Germany has led the charge against the tariffs, saying they would rebound on its own manufacturers who sell many models in China.

German finance minister Christian Lindner has said Berlin must vote against the tariffs, but it’s unlikely the opposition, joined by Hungary, can muster enough support. Italy and France are in favour, and Spain is expected to abstain, which in effect counts as a yes vote.

Governments hope the tariffs, which will last up to five years, will give the EU industry breathing space to sell its own, more expensive cars — currently struggling to compete with China’s cheaper offerings.

Transport & Environment, an NGO, has forecast that this will only be effective if the EU sticks to limits for reducing carbon emissions next year. Many rightwing politicians and carmakers have lobbied to delay lower thresholds for average car emissions, which should force them to sell more EVs.

According to the NGO’s study published today, EVs manufactured in China should capture a quarter of the market this year, but that could decrease to 20 per cent in 2025 and 18 per cent in 2026 under the tariffs.

But if the EU delays the 2025 emissions targets, Chinese-made EVs could grow to 27 per cent of the market next year as EU producers focus on higher-profit sales of cars with combustion engines.

“Higher EV tariffs are right but only in tandem with the car CO₂ targets. They are part of a coherent industrial policy to boost electric car production in Europe,” said Julia Poliscanova, senior director of Transport & Environment.

“The EU risks having the worst of both worlds if it delays the 2025 CO₂ targets while limiting the affordable models imported from China.”

There goes the neighbourhood

There goes the neighbourhood

There is $35tn trapped in US residential home equity. And it deserves a far more sophisticated capital market, says Thomas Sponholtz.

A few weeks ago, I got a press release from the venerable Carlyle Group announcing the latest cutting-edge contraption in the private credit frenzy. But this particular deal being announced stood out to me. Carlyle said it was partnering with specialised finance upstart Unison, whose founder and chief executive, Sponholtz, is a former Barclays Global Investors executive. 

Sponholtz had long believed there was room for innovation in home lending, specifically in how Americans could monetise home equity. Home equity loans, home equity lines of credit and reverse mortgages were all debt products that, one way or another, had to be paid back with interest by homeowners.

But what if homeowners get liquidity by avoiding a fixed obligation and instead monetise the upside of their property? And so Sponholtz’s company, Unison, created what it called an “equity sharing agreement” where the homeowner effectively sells stock in their house in exchange for upfront cash.

But the equity-sharing agreement was just the beginning. Carlyle and Unison have now conjured their next frontier idea: homeowners also deserve a convertible bond.

House rules

So far the original equity product has about 17,000 customers and its total portfolio of homes is worth $7bn in aggregate.

Not surprisingly, Unison’s immediate cash does not come cheap. The company will buy as much as a 15 per cent interest in homes, spending between $30,000 and $500,000 per home. The homeowner will pay for an appraisal and Unison will invest at a 5 per cent discount to that appraised value. There is also a 3.9 per cent transaction fee.

And finally at the time of sale, which must happen by year 30, Unison is owed four times the proportion it put in. To put some numbers on it, imagine a deal where the firm buys 10 per cent of a house worth $1mn.

In a decade, let’s say the house is worth $1.5mn. Unison gets its $100,000 back as well as 40 per cent of the gain, or $200,000. The house jumping 50 per cent in value over 10 years reflects an annualised rate of return of 4.1 per cent. Unison’s $100,000 investment turning into $300,000 reflects a return of 11.6 per cent

(Importantly, the equity gains for the homeowner from paying down their initial mortgage are kept by the homeowner and their own equity returns are, of course, determined by the size of their initial down payment at time of purchase).

Unison says its returns have been 21 per cent annualised.

Sponholtz told the Financial Times he had grappled for years with trying to figure out how to take on equity exposure to residential owner-occupied housing but that there was no straightforward security or proxy. Housing was important not just because its gross market size, but also because it was a “dirty hedge” against inflation, the main risk in fixed-income investing, he said. 

“Home prices go up with inflation . . . you have a really interesting investment that neutralises the negative convexity,” Sponholtz said, referring to mortgage prepayments that surge when interest rates fall and fall when rates rise.

Enter private credit and Carlyle. Unison had some success bundling its equity-sharing agreements into structured products — it recently got a credit rating on the tranches created. But the pure equity product by definition comes with erratic cash flows that made it tricky to securitise. 

And so Unison wondered if it could merge housing debt and housing equity into a single product. It has, as a result, created the “equity-sharing loan” that resembles a corporate convertible bond with its fixed obligation attached to a call option.

This is how it works: a homeowner takes out a second mortgage in order to get immediate cash — but the interest rate charged on the second mortgage is lower than the market price. In exchange, Unison gets 1.5 times its proportion in the future appreciation of the house (note that this is less than the four times it is owed in the straight equity product described above).

In an example on its website, Unison said it would shave off almost 2 percentage points from a straight loan interest rate (charging 5.2 per cent annually instead of 7 per cent) in the cash “coupon” it is owed. At the end of the 10-year loan, Unison would, however, get its 1.5x appreciation share as well as the capitalised sum total of the 1.8 per cent initial cash interest rate savings (that’s the 7 per cent minus 5.2 per cent).

Carlyle estimates the all-in cost of capital of the equity sharing loan of 10 per cent to 11 per cent: 6 per cent cash interest, 2 per cent of the cash deferred “payment-in-kind” interest and 2 to 3 percentage points of kicker from the equity sharing slice.

Unison said its typical customer has a Fico score over 700 and that typical use of proceeds are home improvements or paying down credit card debt. The company says its equity-sharing product is far cheaper than getting an unsecured loan from the likes of SoFi.

Carlyle has agreed to purchase up to $300mn in such loans from Unison, which it can then place with its insurance clients. 

“We are taking high-quality assets and making them attractive, bringing private markets to bear to finance the real economy,” said Akhil Bansal, head of credit strategic solutions at Carlyle.

Sponholtz says Unison has several more products in the works, including providing financing to help with initial down payments (reminiscent of this recent Wall Street Journal story about friends buying houses together during the pandemic).

Consumer finance is a tricky balance between innovation and exploitation. Lending people money, extracting user fees and using leverage to turbocharge it all is extremely lucrative (just Google “subprime billionaires” to see for yourself).

Residential housing is equally fraught given its centrality in the lives of individuals and families. Just last month, Invitation Homes, the single- family home roll-up created by Blackstone, entered into a $48mn proposed settlement with the US Federal Trade Commission over charging renters hidden junk fees. 

A more advanced financing is supposed to grease the gears of capital formation and ultimately housing construction. Unison and Carlyle believe their mousetrap will do so, and America needs them to be right.

Watches and jewellery head Frédéric Grangié on securing Swiss manufacturing expertise through a portfolio of partners

When design house Chanel announced that it had taken a 25 per cent stake in Swiss brand MB&F over the summer, it did a bit more than help preserve another independent watchmaker’s future. Having struck similar deals with independents such as Romain Gauthier and FP Journe, Chanel’s long-term strategy for three decades has been to establish itself as a serious actor in the watch industry.

The company, which is owned by the billionaire Wertheimer family and headquartered in London, already benefits from a significant distribution network and strong growth. Sales across the business reached $19.7bn last year, up 16 per cent against 2022 on a like-for-like basis, while operating profits rose 10.9 per cent to $6.4bn.

Its first foray into watchmaking came in 1987 with the Première, 16 years after the passing of founder Coco Chanel, whose fashion designs catapulted the brand to fame. According to Frédéric Grangié, president of Chanel watches and fine jewellery, there were two ways into watchmaking for a fashion brand in the 1980s.

“One was to treat a watch as essentially a fashion accessory and, at that time, most of the fashion brands went that way and signed licences,” he says. “But, from the very start, the idea of Chanel’s owners was to identify a manufacturer in Switzerland.” In 1993, Chanel bought Châtelain in La Chaux-de Fonds, which today employs around 500 staff.

“There was a very strong will to make sure that the design and the integrity of every single product in the watchmaking world at Chanel would be on par with the other products of the house,” says Grangié. “This was a very high ambition because, back then, Chanel was already the leader in fashion and in fragrance, and it controlled absolutely all aspects of the operations.”

Just how far Chanel was prepared to go became apparent when it launched the black ceramic J12 in 1999 and the white ceramic four years later.

In order to master the material, Chanel purchased a German company, Inmatec Technologies, a specialist in manufacturing customised ceramic feedstocks and ready-to-process granulates to make injection-moulded components for the automotive, aerospace, and domestic appliance industries.

“It’s a real industrial company,” says Grangié. “I guess most people wouldn’t go as far as buying a ceramics factory, but this was the best way to control the quality. It means we have a manufacturer that is really state-of-the-art, which we use for ourselves and for a number of other brands, providing cases and bracelets. I believe that we absolutely need to have that portfolio of partners to which we are suppliers, because we learn a lot from that.”

A similar motivation was behind Grangié’s decision in 2018 to acquire a 20 per cent stake in movement maker Kenissi.

“It was critical for us to be to be part owners of that manufacturer, and to make sure that we would be able to have those movements customised for Chanel, with the highest level of quality and durability,” he says.

Now that Chanel produces its own ceramic cases and bracelets, as well as owning part of the movement maker, Grangié feels justified in describing the current J12 as a true “manufacture watch”. In 2018, Chanel also bought 20 per cent of FP Journe, signalling its ambitions were not restricted to industrial production. This was not a total surprise, as the company had already invested in Roman Gauthier in 2011, as much for the component-making side of the business as the brand. The same pattern of acquiring a minority interest has now been repeated with MB&F.

This strategy gives the watchmakers financial security while still retaining independence. In MB&F’s case, while the financial terms of the deal have not been disclosed, founder Maximilian Büsser will own 60 per cent of the company, while Serge Kriknoff, who runs R&D and production, will own 15 per cent.

At the time of the deal, Büsser said that “in addition to allowing us to pursue our independent path, free of any pressure on growth, the investment by Chanel will strengthen our operations by providing access, when needed, to their wider ecosystem and network of specialised suppliers”.

As Chanel is a family-owned company, Grangié appreciates the value of independence. Businesses in which the fashion house invests retain their independence but give Chanel privileged access to their knowhow. “We would certainly not have been able to develop our portfolio of high complications without the initial work by Romain Gauthier — we now have seven movements in that portfolio,” Grangié explains. Similarly, the expertise of Les Cadraniers, FP Journe’s dialmaking company, has been tapped by Chanel to create, among others, the Mademoiselle Privé Pique-Aiguilles collection.

In the current market conditions, Grangié feels having the expertise of Romain Gauthier, FP Journe and MB&F at Chanel’s disposal gives its high watchmaking an edge. “They [all] have different qualities and different savoir-faire,” he says. “Each contributes very differently to the business: Romain with components; François-Paul [Journe] with dials; Max with a number of collaborative projects.” Grangié is quick to add that the contributions of each company are not limited to the areas he mentioned. “It is a way of working that fits into our architecture — how we see watchmaking today and, importantly, tomorrow.”

Grangié is now looking beyond challenging market conditions far into the future. “I consider that 20, 30, 40 years from now, Chanel has what it takes to be one of the very serious, successful watchmakers in Switzerland. It’s been a long journey, but by watchmaking standards, by Swiss brand standards, it’s very, very quick.

“In our business, particularly if you are the youngest on the block, which is our case in terms of watchmaking, it’s very important to be humble. But that doesn’t prevent you having high ambitions.”

Urban loft designs, vintage car accents, fine Italian linens and Venetian glass were among the special touches that stood out at the annual Monaco Yacht Show, where upscale builders said markets like the Middle East and Asia Pacific are fueling growth.

MONTE CARLO, Monaco — Frivolity was alive and well on the shores of Monte Carlo, where the ultra rich signed on the dotted line for the most innovative, design-rich vessels the seas have ever seen.

The mood was high at the Monaco Yacht Show, where 120 super-yachts were unveiled between Sept. 24 and 27, many of them with tailor-made decor. And it wasn’t just the high-end design amping up the mood. The financial outlook for the rest of the year was boosted by an uptick in bespoke yachts, while sales of the Italian yacht sector, the biggest in the world, rose 13.6 percent to 8.33 billion euros in 2023 with no signs of abating for the rest of this year, according to the Yachting in Figures report produced by the Italian Marine Industry Association’s Market Intelligence and Research Department released at the end of September.

Italy is home to go-to shipbuilders like Fincantieri, Azimut|Benetti, Sanlorenzo and Ferretti Yachts.

“The market again defied our expectations in 2023, with over 200 new yacht sales where we had predicted around 150. Particularly sales by Italian builders between 30 and 60 meters continued apace, with U.S. buyers remaining keen on new builds,” said the Monaco Yacht Show Market Report 2024. For yachts spanning over 60 meters, new build sales slowed, but as of mid-July, a turn for the better or stable sales are expected by the end of the year. Worldwide and over the last five years, on average, around 171 super-yachts were completed, representing a total value of around 4.5 billion euros per year, rising consistently since 2021, the report added.

At a press conference at the fabled Hôtel Hermitage Monte-Carlo, Azimut|Benetti Group, which is headquartered in Avigliana, Italy, near Turin, said its revenues rose to 1.3 billion euros in the fiscal period between 2023 and 2024, compared to 1.2 billion euros last year, driven by key markets. Its chief executive officer Marco Valle was upbeat at the conference and forecasted a 15 percent growth by the same period next year.

Azimut|Benetti Group, which was ranked the number-one firm in the world according to length built by Boat International, said it has a solid backlog for boats that have yet to be built, up to 2029 for some Benetti models, with 40 percent of its clientele hailing from Europe, followed by the Americas at 37 percent and finally the Middle East and North Africa up at 23 percent.

Similarly, Ameglia, Italy-based Sanlorenzo, the second-ranked builder by length, under art director Piero Lissoni since 2018, said it closed the first half of 2024 with revenues up 6.9 percent. In its most recent financial report released Sept. 9, the firm said it sees sustainable growth over time. Its main geographic drivers were similar, with the Middle East and North Africa region sales up 142 percent, the Americas up 9.2 percent and Asia Pacific up 20.9 percent.

In Touch With Nature

Sanlorenzo unveiled a roster of new designs that bring enthusiasts even closer to nature and amplify the home-away-from-home feeling.

Museum Effect

Baglietto, the La Spezia, Italy-based manufacturer, which will celebrate its 170th anniversary this year, unveiled its T52 MY Akula outfitted with interiors by Team for Design — Enrico Gobbi in cooperation with architect Carlo Lionetti.

Custom features on this yacht include soft-hued woods like oak and other natural materials that appeal to the sense of touch, with wall and cabinet frames in brass and other metals adding brightness and even-lighter color touches to the ensemble. Murano glass vases, sculptures, works of art, lamps and even the artistic glaze on the stairwell were among the unique pieces designed specifically for this vessel by Italian artists and designers, including by the yacht’s designer, as is the case of the warrior at the entrance.

Tailor Made

Fabled Italian linens-maker Frette made its debut with a yacht at the Monte Carlo yacht show with an eponymous yacht owned by an investor and member of its parent company, Raza Heritage Holdings.

The 43.59-meter motor yacht crafted by Palumbo Superyachts in Italy debuted Frette’s highly anticipated bespoke collection, which is known to have been used on the altar of St. Peter’s Basilica in Vatican City, the dining car of the Orient Express, prestigious hotels and by European royal families.

M/Y Frette was envisaged specifically for a yacht’s interior, providing an added layer of luxurious details to the vessel, and showcasing the essence of Frette’s bespoke artistry and knowledge. The concept was also on display via an installation at Hotel de Paris: a wall made of corals and rocks with an ocean-themed flora and fauna motif matched with the yellow, orange, pink, and deep blue piping designed onto the plush beach towels and bathrobes.

Modern Retro

With the allure of a vintage convertible, J Craft’s vessels navigate the seas with wooden motorboat glamour made with modern materials and traditional Gotland [Swedish] craftsmanship. More of a passion project than a mode of transportation, its boats were envisaged in 1999 by renowned Swedish restaurateur and hospitality entrepreneur Björn Janson. The firm is now owned by former hedge fund manager Radenko Milakovic who fell in love with the company and its evocative designs that have been used as props for a Chanel ad campaign.

In Monte Carlo, he showed off the Torpedo BaBeBi [a combo of the names of the daughters of the owner of the boat], running his hands over the polished steel dashboard. “This is my creation. The Swedes hate it, they just want wood,” he said, agreeing that it possessed the feel of an old Corvette from the ’50s or ’60s, inviting visitors to touch, feel and put their hands and feet on the plush fabric. “Don’t worry, this boat is made for the sea and to meet the waves. There’s nothing you can touch that will break,” he said.

In detail, BaBeBi introduces a fully “marinized” silver metallic hull, developed in collaboration with a top automotive brand. BaBeBi’s cockpit showcases a unique set of colors, developed specifically for BaBeBi, blending diamond-stitched upholstery with mahogany cockpit interior and teak wood floors. The rich color set continues inside the high-gloss, mahogany-clad forward cabin, fully outfitted with luxurious Hermès fabrics and custom-designed Rosenthal porcelain, Iittala glassware, and silverware crafted by Prince Carl-Philip Bernadotte of Sweden, son of J Craft’s first client, King Carl XVI Gustaf of Sweden.

The main driver for the firm right now, Milakovic said looking out into a yacht-studded sea, is the appetite for novel vessels. “This is in many ways a mini super-yacht. She’s built to a super-yacht standard but she’s a very small version. The driver is the wish for differentiation, the wish to be unique and to build exactly what you want,” he said.