TheChek News Flow

Investors should beware the unwinding of Biden’s economic legacy

A return of Trump to the White House could reverse many of the measures that underpinned a strong investing environment

There is much riding on the upcoming US presidential elections for investors. As Joe Biden prepares to leave the White House, he leaves an admirable economic legacy that has underpinned a strong investing environment.

Under Biden, 15mn jobs were added to the US economy, the current 4 per cent unemployment rate is the lowest rate in decades, and GDP in absolute terms is at the highest level ever. So, too, are corporate profits and share prices, which have risen around 45 per cent since Biden’s inauguration. The dollar has been strong against all other major currencies. Inflation, now around 3 per cent, is well below its post-pandemic peak. The average household is enjoying gains in inflation-adjusted disposable income, which bodes well for future growth.

That environment may now be at risk in the coming presidential election if Donald Trump returns to power. Potential changes fall into three main categories: Biden’s legislative achievements, policies related to trade and other foreign engagement, and those linked to regulation and the staffing of government functions.

The conduct of monetary policy may also be altered. Under Biden, the Federal Reserve tightened policy to lower inflation without political pressure. Would Trump try to interfere in policy if re-elected, as he has sought to in the past? And the next president can choose a successor to chair Jay Powell when his term expires in May 2026.

On the legislative front, Biden and House Speaker Nancy Pelosi successfully pushed bipartisan legislation aimed at supporting long-term investment and competitiveness in the US. Let’s consider three measures now at risk. First is the act that finally tackled public infrastructure shortfalls in the US. Such long-tailed investment in roads, bridges and water systems had been repeatedly deferred and there was little advance planning to meet the increasing challenges from climate change.

Second, the Biden team passed the Chips Act, which provides funding for the technology sector and is lessening US dependence on foreign supply in critical categories.

The third major legislative success was the Inflation Reduction Act, which has been a major boost to the development of greener energy. This is critical not only for the environment but also because the US electrical grid will not meet future demand unless renewable energy sources are used, and the underlying infrastructure is upgraded.

The interconnection between trade and foreign policies should also be high on the radar of investors. The Biden administration has strengthened US ties with other nations. New tariffs have been introduced but in a less confrontational way than under Trump, targeting concerns such as dumping and national security.

Trump intends to make aggressive use of tariffs that goes even beyond that of his first presidential term. He has called for them on almost all imports coming into the US, including from countries that are allies and friendly trade partners. And Trump favours a weaker dollar. Most economists agree that the net effect would be slower growth and higher inflation in the US and other countries. There would be diminished demand for the Treasury securities needed to finance the national debt, causing upward pressure on interest rates.

Another risk to the economy from a second Trump term would be immigration. The US economy has long prospered from its attraction to immigrants at both ends of the education and economic spectrum. Sectors such as agriculture and hospitality are currently sounding the alarm on worker shortages. Two-thirds of working PhDs in engineering and medicine in the US are immigrants. Failure to reform the system, and to encourage legal immigration, will slow economic growth and be inflationary. Trump actively torpedoed comprehensive bipartisan immigration legislation earlier this year.

The former president also favours dramatic shifts in government regulation and agency staffing in a second term that could eliminate thousands of non-partisan civil service positions. These would include the scientists and other technical experts in federal agencies who work on policy details. The recent Supreme Court decision to reverse the so-called Chevron deference — which allowed technical experts in agencies to set specific rules — would push further in the same direction, handing more power to political appointees. History has shown that thoughtful regulation, not deregulation, is most closely associated with sustainable economic growth. This is yet another reminder that elections have consequences.

Funding surge for blank cheque companies points to Spac bounceback

An investing class left for dead after early excesses and poor performance shows signs of life

Investors and bankers are lining up to raise billions of dollars for new special purpose acquisition companies, defying predictions the asset class would be wiped out after a series of scandals and a regulatory crackdown.

Spacs, colloquially known as blank cheque companies, raise money in an initial public offering before searching for a company to acquire. New fundraising has been improving slowly this year, rising about 20 per cent over the same period of 2023 to $3.1bn, according to Dealogic, and advisers are expecting activity to pick up pace.

More than 20 Spacs have filed IPO documents since the start of June, targeting a combined $4.3bn in fundraising. That compares with just $1.8bn raised in the entire second half of 2023. 

“There is a lot of receptivity from IPO investors for the product. I think it is a good time [for Spac founders], particularly if you’ve been successful in the past,” said Tina Pappas, a managing director at Jefferies who leads the bank’s Spac business. “I don’t think we’ll see the likes of 2021 again . . . but I do think that the pace of Spac IPOs will accelerate through the rest of this year and into next year.”

Spacs surged in popularity during the coronavirus pandemic, as low interest rates and skyrocketing share prices fuelled investor demand and encouraged hundreds of early-stage companies to combine with Spacs as a way to go public faster and more cheaply than through a traditional IPO. 

However, fundraising cratered after 2021 due to a combination of rising rates and poor performance by many of the combined companies.

The boom and bust also led the Securities and Exchange Commission to announce a series of new regulations, though the final version of the rules watered down some of the most contentious proposals.

Supporters acknowledge the industry will have to work hard to win over sceptical companies and investors, but believe they will be helped by the bottleneck in mainstream IPOs as the market regains momentum after a long slowdown. 

“There are over 1,300 unicorns out there, and the exit route on both the IPO side and the strategic M&A side has been closed,” said Jimmy Fang, chief operating officer at Spac sponsor Explorer Acquisitions. “Even in the hottest tech IPO market ever, you’re unlikely to get more than 150 IPOs in one year. What happens to the remaining companies? . . . I’m not saying Spacs will fill the entire void there, but I certainly believe they can fill a sizeable amount.”

Explorer is planning to raise funds for a new Spac in the fourth quarter of 2024 or the first quarter of 2025.

Instead of celebrity founders targeting highly speculative sectors such as flying taxis and space tourism, most new deals are being led by specialist repeat issuers who are on the lookout for more staid companies that want to go public but may struggle to stand out in a crowded market.

Raj Shah, a portfolio manager at Stoic Point Capital Management, said a revival in less flashy companies listing through Spacs could create “a unique opportunity for public investors”.

“There are trillions of dollars in PE and VC-backed [businesses] in line to go public and not all are going to secure a spot up front with Goldman or Morgan Stanley . . . we would anticipate several high-quality businesses and dealmakers to explore other [ways to go public].”

Despite the increased optimism, however, some Spac founders — known as sponsors — have been taking steps to reduce their risks after losing out during the earlier bust.

Sponsors make an initial investment to fund a Spac’s operations and due diligence while it searches for a target, and are paid in deeply discounted “founder shares” in the new company. That can earn them huge profits after a successful merger, but if the Spac fails to find a target, the sponsors lose their whole investment while the IPO investors get their money back with interest.

More than 350 Spacs liquidated without finding a deal since the start of 2022, according data from Spac Research. In response, many recent deals were structured so that outside investors fund the majority of the sponsor’s initial investment, in exchange for a small portion of the founder shares.

The practice is controversial. Some fear it will fuel the perception that Spac founders are looking to make a “quick buck” without having enough skin in the game. A banker who has worked on several such deals, however, said it was reasonable to share some risk and “create alignment” between sponsors and their IPO investors.

Fang said he hoped Spacs would eventually be able to follow a similar trajectory to another four-letter word in the capital markets — “junk” bonds.

“Spacs might need to be rebranded to something a little more pleasing. Junk bonds eventually got rebranded to high-yield. Leveraged buyouts became private equity. Something along those lines that shifts away the perception of seediness into something a bit more legitimate.”

Low footfall before Games raises doubts among locals over scale of immediate economic boost for France

Brasseries, shops and other small businesses in Paris are suffering a sharp drop in sales as footfall dwindles before the Olympic Games, with arrivals of tourists and ticket holders yet to make up for an exodus of locals. 

The gloomy retail period, coupled with warnings over weak revenues from some airlines and hotels during the event, has cast doubt on the scale of France’s economic boost from the Paris 2024 Games. 

Inside a security perimeter along the banks of the Seine, impenetrable to anyone who has not preregistered ahead of the opening ceremony on Friday, the collapse in clients has been even more drastic.

“It’s strange to have so few people here for lunch,” said waiter Marc Houlier at the Deux Palais, a café on Île de la Cité often packed with lawyers from a nearby court.

Some restaurant owners were experiencing a 50 per cent drop in July sales and were concerned about paying rents and salaries, said Bernard Cohen-Hadad, head of the CPME small business lobby for the Paris region. “We knew it would be difficult for deliveries and with metro closures . . . but we had not expected this lack of French or foreign tourists.”

For other businesses the decline in revenue was as much as 70 per cent, according to hotel associations and other lobby groups that called for financial help similar to that disbursed during the Covid-19 pandemic. 

“The economic situation for many was already difficult due to inflation and high energy costs,” Francis Palombi, who heads a federation of commercial companies, said, adding that “anxiety-inducing coverage of the lockdown” had persuaded many Parisians to flee the city.

A regional committee to examine compensation claims is being set up, while President Emmanuel Macron on Monday said his caretaker government would look into the fallout. The state helped pay for temporary unemployment schemes during the pandemic.

Though some businesses may not recoup losses, spending is expected to pick up when the Games begin — football and rugby tournament events are already under way — with restaurants, the metro system and other services raising prices to cash in on demand.

The Olympics are expected to contribute to an expansion in France’s output this year, said economists and officials.

The Insee statistics office forecast a 0.3 percentage point boost to gross domestic product in the third quarter, roughly in line with Allianz estimates of an overall €10bn boost to GDP from tourist spending and government investment in infrastructure.

Locals’ pre-Olympics exodus was expected, including by the Paris 2024 organisers, although the economic effect has been magnified by the move to hold many events in the city centre.

Before London 2012, deserted streets grabbed headlines, as did worries over ticket sales, but a surge in activity during the Games made up much of the earlier shortfall. The UK also enjoyed a tourism boom the following year. 

Airlines Delta and Air France-KLM have warned of hits to revenue as tourists who would normally come to Paris in the summer steer clear.

In the hospitality sector, hotel group Accor, an Olympics sponsor, expects a modest 2-3 per cent boost in revenue from the Games this year, but it is banking on the long-term Olympic effect. “I’m telling my teams: ‘this is our chance to be visible for the long run’,” said Accor’s European chief executive Patrick Mendes. 

Occupancy levels are now close to 76 per cent, up 3 percentage points from the same period last year, according to consultancy Lighthouse. But advertised room prices have fallen some 44 per cent from a peak reached about a year ago, dashing hoteliers’ hopes of juicier returns. 

At the Deux Palais café In the barricaded zone, only about a dozen people were having lunch on a midweek visit and normally harried waiters stood by the bar chatting. Houlier said the management had given some staff the week off but planned to bring them back next week when the strict lockdown was eased.

Even outside the perimeter, business is limp. In the northern district of Montmartre, there are still tourists visiting the Sacré-Coeur basilica. Ahmed Alim, manager of a stand selling postcards and souvenirs, said sales were steady but he has about one-third fewer customers than normal. 

“In the long term this is going to be a success if it all goes well, Paris will be seen by millions of TV viewers and that will compensate for this morose moment,” said CPME’s Cohen-Hadad. “But in the short term, the economic boom is not there.”

Second quarter performance highlights struggle to turn round the Paris-based luxury group

Kering, owner of Gucci and Saint Laurent, on Wednesday warned its operating income could fall by as much as 30 per cent in the second half of the year, compounding the woes at the luxury group amid a wider downturn in the sector.

Paris-based Kering, one of the biggest names in luxury, was a laggard compared to peers LVMH and Hermès even during the pandemic-era boom and its performance has only worsened as the industry as a whole has slowed.

On Wednesday the group said that sales at Gucci, its biggest brand accounting for half of sales and two-thirds of profits, have fallen further as a turn round under a new designer, in addition to management changes, has so far failed to gain traction.

Sales in the second quarter fell 11 per cent to €4.5bn, coming in below expectations, while those at top brand Gucci fell 19 per cent on a like-for-like basis, including “a continuing marked decrease in Asia-Pacific”, Kering said.

Operating income at the group was down 42 per cent in the first half of the year to €1.58bn, in line with analyst expectations compiled by Reuters after the company guided sharply lower at its last results. A recurring operating margin of 17.5 per cent was significantly lower than during the same period last year which the company attributed to “negative operational leverage”.

“In a challenging market environment, which adds pressure on our top line and profitability, we are working assiduously to create the conditions for a return to growth . . . While the current context might impact the pace of our execution, our determination and confidence are stronger than ever,” said chief executive François-Henri Pinault.

Kering has said that it is continuing to prioritise long term investment in its brands despite strained demand. Gucci is still rolling out product lines from its new designer Sabato de Sarno, which the group says are being well received by customers, but it is not the only brand that is struggling.

At Saint Laurent, its second largest label, sales fell 9 per cent on a comparable basis in the second quarter, accelerating the trend from earlier in the year.

Bright spots were Bottega Veneta, where sales rose 4 per cent in the second quarter, and the company’s eyewear division, where they rose 5 per cent. 

Kering’s shares have fallen over 23 per cent so far this year to trade at €300 each, giving it a market capitalisation of around €36.6bn — a far sharper sell-off than industry bellwether LVMH — after the group shocked investors in April with a sharply lower profit outlook for the first half of the year. 

Kering, which is controlled by the billionaire Pinault family, had already issued a rare profit warning for the luxury industry in March amid falling sales, especially in the crucial Chinese market, contrasting with Hermès and LVMH, where strong growth and profits have been the norm in recent years. 

Other smaller luxury companies Hugo Boss and Burberry, which is also in the midst of a turnaround, have followed suit in recent weeks. 

“More bad news and downgrades,” wrote Luca Solca at Bernstein. “The Kering guidance for the first half of the year is de facto materialising.”