TheChek News Flow

Tehran pitches products including its new ‘Gaza’ drone to the international market in Doha

DOHA, Qatar—Iran says its latest drone can carry as many as 13 bombs with a turboprop engine that can power it over 1,000 miles at 35,000 feet. But its most distinctive feature is the name stenciled on the matte gray fuselage: “Gaza.”

A model of the Iranian defense industry’s new flagship product was exhibited at an international arms fair in Doha this month—the drone’s first display outside Iran, sharing a stage with products from American, Chinese and Turkish rivals.

Since the expiration of United Nations restrictions on Iran’s missile and drone exports in October, Tehran has increasingly sold its military wares on the international market, fueling concerns among the U.S. and its allies. The U.N. curbs had been part of the multilateral nuclear pact with Iran known as the Joint Comprehensive Plan of Action, which the U.S. withdrew from under former President Donald Trump in 2018.

Iran has for years provided free weapons to its Mideast allies to support their activities. Drones and rockets either supplied or designed by Iran have featured prominently in recent attacks by Iran-backed forces, including the assault on Israel by Hamas that started the Gaza war on Oct. 7.

Iranian weapons have also played a role in the indirect confrontation waged between Iran and the U.S., including in the killing of three U.S. service members in a January drone attack in Jordan by an Iran-backed Iraqi militia.

But in Doha, there was no doubt that Iran’s defense industry is going mainstream.

The new “Gaza” drone, named by Iran in solidarity with the residents of the enclave after an escalation of the Israeli-Palestinian conflict in 2021, represents a stepped-up threat to U.S. interests and allies. With a stated range of 1,243 miles, a 68-foot wingspan and a satellite link, the unmanned aircraft could fly from Iran to Israel while loaded with 13 precision-guided bombs. Iran says the aircraft is operational.

By contrast, the Shahed-129, a common Iranian drone, carries only four explosives.

The Shahed drone, however, contributed to the rapid growth of Iran’s arms industry. Iran sold about $1 billion in weapons from March 2022 to March 2023, three times as much as the previous year, Deputy Defense Minister Mahdi Farahi said in November.

Recent Iranian defense deals include an agreement to sell short-range ballistic missiles to Moscow, according to U.S. officials, and the delivery of explosive drones to the Sudanese government for its 11-month war against rebels, according to African security officials.

Before October, such sales would have been prohibited or extremely difficult, requiring permission from the U.N. Security Council.

The U.S. has targeted Iran’s Defense Ministry, which booked the booth in Doha, with sanctions because of its connections with the Russian military, alongside sanctions targeting Iranian drone makers. Washington has also designated the Islamic Revolutionary Guard Corps, which controls Iran’s defense industry, as a terrorist organization. An official from Iran’s Defense Ministry declined to comment.

At the Iranian display in Doha, visitors pored over glossy Russian-language brochures touting a dozen products, including a new air-defense missile. A brochure advertising a space-rocket launcher was printed in Spanish—a reminder of Venezuela’s recent deployment of Iranian-made antiship guided-missile patrol boats. Flyers in Farsi and English promoted new antiship cruise missiles and radar systems—the sort of technologies used by Yemen’s Houthi rebels to target American ships.

Iran has turned its ability to supply asymmetrical warfare—championing the underdogs against more powerful foes—into a sales pitch. One leaflet described Iran’s assault rifles as the best suited “for guerrilla warfare in all climate conditions.”

Sudanese official Mohammed Fath Alrahman came to Doha with a detailed shopping list of weapons for his government’s battle against Russia-backed rebels. After meeting with Iranian defense officials at the exhibition, Alrahman, who represented a government-backed militia, said he had discussed the purchase of 1,000 sniper rifles and night-vision equipment—and found Iran’s equipment a bargain.

“The quality is medium but it’s half-price” compared with the competition, he said.

Iranian defense officials also sat down with representatives from Qatar’s state defense contractor Barzan Holdings, who took a look at Iranian-made assault rifles. Barzan Holdings didn’t respond to a request for comment.

“I am very impressed by their medium-range missile technologies,” said a senior Qatar air force officer, visiting the booth in a peaked cap and epaulets. He said it wasn’t up to him to decide if Qatar should purchase them.

The Qatari defense officials were paying a courtesy visit to Iran’s booth, as they did for all exhibitors, according to a person familiar with the exhibition.

Nearby, a naval officer in Iran’s Revolutionary Guard, recognizable by the insignia of two crossed machine guns on a blue background, strolled past the large U.S. pavilion. Exhibitors from the U.S., the world’s biggest arms exporter, included defense companies Lockheed Martin, Boeing, General Atomics and Northrop Grumman—maker of the reconnaissance drone that Iran shot down in 2019.

Iran’s new drone represents an effort to catch up with the U.S.-made General Atomics MQ-9A Reaper, the drone used by the U.S. in 2020 to kill Iranian commander Maj. Gen. Qassem Soleimani.

General Atomics spokesman Mark Brinkley said he was aware of the Iranian drone exhibit in Doha—and said the Iranian copy could carry less than a third of the MQ-9’s payload. “Knockoff versions…are plentiful these days,” he said. “Often imitated, but never replicated. Don’t be fooled by look-alikes.”

The Iranian presence at the defense industry trade fair put Qatar, an American ally that hosts the region’s biggest U.S. largest military installation, in an awkward position.

The U.S. contacted the Qataris about Iran’s presence at the show, a State Department spokesperson said. “We continue to have serious concerns about Iran’s efforts to expand its proliferation of dangerous weapons that prolong and exacerbate conflicts around the world,” the spokesperson said.

Qatar, a tiny, energy-rich country, is used to such a balancing act. The Gulf nation has helped negotiate a now-blocked deal to exchange prisoners held in Iran for billions of dollars and is currently trying to broker a Gaza cease-fire.

While the exhibition was open, Qatar’s prime minister and foreign minister, Sheikh Mohammed bin Abdulrahman al-Thani, was in Washington receiving thanks from Secretary of State Antony Blinken for his efforts to facilitate humanitarian assistance to civilians in Gaza.

A former Qatari official said hosting Iran at the trade show was part of Doha’s policy to assuage Tehran, allowing a symbolic presence. No arms deals were signed by the Iranian Defense Ministry during its delegation’s visit, at the trade fair or on the sidelines, according to the person familiar with the arms exhibition.

The display also gave Western agencies the opportunity to gather intelligence on Iran’s latest technologies. At the Iran booth, a man who later identified himself as a German official was cataloging each weapon on his phone.

Iran’s direct rivals in the defense market—China and Turkey—were also fixated on Tehran’s rising profile. A Turkish defense executive appeared confident that Ankara’s technologies could triumph over the newcomers. “Their drones are facing ours in Ukraine,” the executive said outside the Iranian booth. “Ours are more accurate while they have to sacrifice a dozen to hit their target.”

But Chinese manufacturers said they had unfair competition from cheaper Iranian missiles of lesser quality. A Chinese official at his country’s display in Doha said the Iranian weapons were essentially knockoffs.

“They often reverse-engineer our products,” said the official.

As the Kering flagship struggles, one man has become the public face of making it work

A storm rolled over Milan as Sabato de Sarno’s big debut for Gucci took place, thwarting plans to use the city’s streets to present his new vision to the world. Last September’s event was the most hotly anticipated of the year after the designer was plucked from near obscurity by French luxury group Kering to reimagine its struggling flagship following the departure of former star designer Alessandro Michele. The stakes were high, the prospect of being judged harshly even higher. 

“The climax does not come right away, it is sometimes the second or third shows that are the most important,” Kering’s billionaire chief executive François-Henri Pinault told reporters as Julia Roberts took her seat in the front row behind him.

“I mean I would be, like, shitting myself,” Mark Ronson, the award-winning music producer and De Sarno collaborator, said in a recent Gucci-sponsored documentary on the designer.

Barely six months later, the pressure on the public face of Gucci’s turnaround has only increased. This week Kering, which also owns Saint Laurent, Bottega Veneta and Balenciaga, issued a rare profit warning for the luxury sector. Shares plummeted, bringing declines over the past year to more than 35 per cent. As ever at Kering, Gucci — which, with €10bn in revenue last year, accounted for half of group sales and two-thirds of profits — is at the centre of the problem. The parent company said it expected Gucci sales to have fallen about 20 per cent in the first three months of the year driven by declines in China, its most important market.

De Sarno, 40, bears little responsibility for this: product from his first collection only started arriving in stores in the second half of February. But Kering’s recent deteriorating performance in recent years while competitors such as LVMH, Hermes and Richemont had record growth shows how crucial it is that Gucci starts working again. “Kering is Gucci, and Gucci is Kering . . . The problem is there is a very big dependence and perhaps over-dependence on Gucci,” said a person close to the group.

Pinault has said that he thinks Gucci can grow to be a brand with €15bn in annual sales in the medium term, even as he acknowledged it was underperforming peers. But it raises questions about why it took Kering so long to act after it became clear that Michele’s maximalist, bohemian vision was no longer working. 

De Sarno’s rise has been so precipitous that the Gucci documentary is entitled Who is Sabato de Sarno?. Growing up in Cicciano, outside Naples, his interest in fashion led him to study design at Milan’s Istituto Secoli — a school he selected for its emphasis on technical skills as well as creative process, according to people who know him. He then worked his way up the ranks at Prada and Dolce & Gabbana before spending 14 years at Valentino, where he rose to become outgoing creative director Pierpaolo Piccioli’s right hand. 

In November 2022, before Michele’s exit had been made public, De Sarno was brought into Kering to interview for an unspecified position. His appointment was announced in January 2023. At his leaving party, the Valentino team wore shirts emblazoned with “I [heart] SDS”. “I was not born a creative director. I was an assistant director. Assistant. Assistant’s assistant’s assistant. I know the process,” De Sarno has said. 

The decision to pick an unknown surprised many, but it has precedent. Michele was not a big name before he took the reins in 2015. A lower-profile designer may also fit with Kering’s desire to present a sleeker, more pared back Gucci. “It’s pretty clear he was put in that role to execute Kering’s plan . . . and he has executed it. His pieces speak to a broader range of luxury consumers, older women too,” said an industry insider in Milan. “But it’s not an exciting product.”

Described by those who know him as a workaholic who likes to get involved in the details, De Sarno has also demonstrated a canniness for building on a theme. He dubbed his first collection Ancora, which in Italian can mean “still”, “more” and “again”, alluding to the desire to renew Gucci. “I loved the passion behind this word,” he said, so much so that he got it tattooed on his arm. 

His collections have been threaded through with a shade of carmine red which De Sarno found in the lining of one of the house’s classic “Jackie” bags. Shoes, bags and clothing have been produced to match, as have magazine pages and billboards. He also had the hall outside his office painted “Ancora” red.

And while De Sarno can speak in the diaphanous language of design (“My show is about shape, volume, fabric, right choice, right colour”), he also shows a shrewd understanding of the business. “Sabato started from a very simple thing: rather than build a collection and then put accessories on it, I want to build the collection around accessories,” creative director Riccardo Zanola, who worked on his first collection, says in the documentary. 

Accessories are the backbone of most luxury businesses, and Gucci is no exception: more than two-thirds of its revenues last year came from leather goods and shoes. And while critical reception has been mixed, the small amount of De Sarno’s work that has hit stores has been well received. “Our top customers liked the product and asked for it,” said Micheal Kliger, chief executive of luxury ecommerce retailer MyTheresa.

But whether it is enough to pull Gucci, and Kering, out of the doldrums remains to be seen. “He can do a great job, he just needs to be given time . . . you won’t see the effect on sales for a while,” said Domenico de Sole, Gucci’s former chief executive. 

Backstage at his debut, producers shouted final instructions as the lights faded to black. “OK, finally,” De Sarno intoned, as his show began.

Europe’s high-end houses are being challenged by the rapid growth of local brands

There are cracks showing in the most important market for global luxury. Gucci’s slump in sales, with parent Kering’s warning this week of a slowdown in Asia, prompted investor concerns about demand for the wares of Europe’s luxury groups.

Tastes in Asia — and its largest market China — are certainly changing. But a closer look at those trends suggests they won’t hit luxury groups equally. There will be winners, both among Europe’s high-end houses and a growing crop of local rivals.

China’s second-hand luxury market is booming. Rapid growth in this market, estimated to be worth over $8bn in China, is starting to be replicated in other parts of the region, notably in south-east Asia.

That means resale values are becoming increasingly important to shoppers, with consumers showing a preference for brands whose products retain their value. Hermès, Louis Vuitton and Chanel tend to top that list, not just thanks to high demand but also because of regular price increases.

Shopper preferences are shifting away from affordable, mass market luxury to less frequent but higher-end purchases. With that comes a tendency to favour classic products, meaning a smaller number of brands are getting more demand. As share prices of European luxury companies fell this week after Kering’s warning, LVMH and Hermès fared best.

Another challenge to European brands is the rise of homegrown luxury alternatives. Rising geopolitical tensions in recent years have created a more patriotic group of Chinese shoppers. The tendency to turn to local producers has been evident in everything from electronics to electric cars, with millennials leading the shift. The luxury segment is no exception.

Chinese fashion and luxury brands have been growing rapidly in recent years, with premium brands such as Shang Xia — a Chinese luxury fashion brand backed by Hermès — gaining popularity among locals. Peer Icicle has grown to over 270 stores in China. Others, like Chinese outerwear brand Bosideng, have made progress in shifting upmarket to a more premium customer. Shares of Bosideng are up a fifth this year, reflecting improving operating margins of 17 per cent on sales of $2.3bn in the year to March

Even as luxury spending from the ultra-wealthy segment remains resilient, middle-class Chinese shoppers have been the real force behind the growth of the past decade. As long as the economic slowdown in China persists, consumers will get more choosy and more focused on resale values. Investors need to get more picky too.

Bondholders are keeping faith with Javier Milei’s radical reforms as Argentina’s chainsaw-wielding president wraps up his first 100 days. Benchmark 2030 bonds have climbed to 50 cents on the dollar from less than 40 cents when Milei took office on Dec. 10.

Argentine legislators are less enthused. The Senate voted down Milei’s wide-ranging Decree of Necessity and Urgency 42-25 last week. The Chamber of Deputies will probably follow suit, killing the president’s Plan A for overhauling his country’s floundering economy. Milei withdrew a still more ambitious “omnibus bill” from the lower chamber for lack of support last month.

Investors applaud Milei’s unilateral actions, like slashing fuel subsidies and transfers from the central government to Argentina’s 23 provinces. He cut the peso’s official exchange rate in half, boosting key agriculture exports and easing currency flows.

Argentina reached a primary budget surplus (excluding debt service) in January and February for the first time since 2011, says Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management. Inflation has halved to a still vicious 13% monthly on Milei’s brief watch. “From a pure financial perspective, he has been quite successful,” Larose notes.

Lawmakers are watching a different metric: poverty, which by some measures has soared from 40% to 60% in Argentina since last autumn. Milei needs Congress, where his Freedom Advances coalition holds a tiny minority, to push through structural reforms to pensions, labor, and state-owned enterprises, among other sclerotic sectors.

“If all Milei achieves is budget cuts, he will bring economic pain without fixing the source of recurring crises,” says Benjamin Gedan, director of the Wilson Center’s Latin America Program.

Milei has unveiled a political Plan B, end-running Congress to conclude a “May Pact” with the nation’s governors. While details are vague, cash-strapped regional leaders will probably sign on to something, which could make Congress more malleable, says Alejo Czerwonko, chief investment officer, emerging markets Americas, at UBS Global Wealth Management.

The key structural reform to watch is pensions, agree Czerwonko and Larose. The current system is inequitably tilted toward state employees and indexed in a way that embeds inflation. “You need to update the pension formula so that it doesn’t become a very strong headwind as inflation moderates,” Czerwonko says.

Milei may also find a relatively soft target in the “social movements” and unions that Peronist predecessors set up as middlemen for welfare payments to the population, Gedan says. “He could try to circumvent these patronage networks,” he adds.

Argentines seem willing to bear Milei’s painful reforms so far, judging by relatively muted popular protests. “After 100 days, the honeymoon is still more or less there,” Vontobel’s Larose says.

Nonetheless, Milei’s landslide defeat in the Senate marks the end of any expectations that he could wave a magic wand over Argentina’s manifold difficulties. “It is unlikely in one presidential term to undo 70 years of decline,” Czerwonko concludes.

Milei’s personal transition from firebrand maverick to horse-trading executive playing an exceedingly weak legislative hand looks imperfect at best. After withdrawing his omnibus bill, Milei declared he “wouldn’t negotiate with traitors” who had “swindled” their congressional seats.

The good news for bond traders is they don’t need Milei to succeed—with a capital “S”—for Argentine bonds to be worth 50% of par. The bull run reflects assumptions that the country’s next restructuring will be delayed by a year, Larose says.

Not exactly an achievement for the history books.

The London-based mining company produces copper ore, diamonds, and platinum, but its shares are treated more like lead. It offers shareholders two ways to win.

Mining stocks have lagged behind the market, and Anglo American has lagged behind mining stocks. Its shares, though, look like a buying opportunity for investors seeking a turnaround story.

London-based Anglo American is one of the world’s leading diversified mining companies, producing copper, iron ore, diamonds, platinum, and other metals on six continents. Its stock, down 24% over the past 12 months, hasn’t performed like one, trailing larger peers like Glencore and BHP Group. Operational problems and tough conditions in several key markets, including diamonds—where the company’s De Beers unit lost money in 2023—and a disappointing multiyear production outlook late last year have rattled investors and depressed the shares.

Anglo American’s future, however, looks bright. Metals prices are improving, and the company is vowing to cut costs, improve operations, and make a strategic review of all its businesses, including a capital-intensive fertilizer project it’s building in the United Kingdom. “Nothing is off the table,” CEO Duncan Wanblad told analysts on the company’s earnings call in February. That could even mean a sale of the $30 billion company, which would be easily digestible by one of its competitors. Most paths point to a rebound for Anglo stock.

“The status quo is not an option,” says Christopher LaFemina, a mining analyst at Jefferies, who notes that if the situation doesn’t improve, Anglo American could attract an activist or a buyer.

Because of its recent troubles, Anglo American’s stock looks inexpensive. The company’s U.S. shares fetch about $12 on the over-the-counter market under the ticker NGLOY. Right now, the stock trades at about 11 times projected 2024 earnings, in line with peers. The company’s earnings power is considerably higher, with depressed prices for platinum-group metals, as well as the weak diamond market. In 2022, it netted $2.49 a share. Like many non-U.S-based miners, it has a variable dividend pegged to 40% of profits, which has resulted in a 3.9% yield over the past 12 months. LaFemina has a Buy rating and a price target equivalent to $16.50 for the U.S. shares.

Anglo American, founded in 1917, was once the dominant company in South Africa, known for its gold mines. These days, copper is Anglo American’s best business, and most of its mining operations are located outside the country. It has a new, low-cost Peruvian mine and another two in Chile. Its production is around 1.2 billion pounds annually, about a third of industry leader Freeport-McMoRan , with low cash production costs of about $1.50 a pound.

Copper also has the best long-term outlook among metals, due to limited new supply and increased demand from green energy, leading Morgan Stanley analyst Alain Gabriel to call the assets the company’s “jewel in the crown.”

The stock isn’t trading that way. Shares of Freeport, a purer copper play, have gained 6% this year and recently hit a 52-week high as the metal topped $4 a pound. Anglo is down 2%. “Anglo is not getting credit for copper because of the other issues,” LaFemina says. “It’s the best way to play copper among the diversified miners.” He puts copper at about 40% of the company’s net asset value.

One of the knocks against the company is its ongoing exposure to South Africa, where its businesses are concentrated in Anglo American Platinum, 80% owned by Anglo American, and Kumba Iron Ore

KIO

-1.37%

, which is 70% owned. Both stakes could be spun off to shareholders. The country has been plagued by economic woes, crime, and power outages.

The diamond business is concentrated in southern Africa. De Beers, which sells a third of the world’s diamond production, was hit hard last year by weakening demand in key markets like China and the growth in lab-made stones.

Part of LaFemina’s bull case is a recovery in both diamonds and platinum-group metals. De Beers sells diamonds into the market 10 times a year, and the most recent sales were the best in about nine months. Palladium prices have gained 15% over the past six weeks.

The bigger challenge might be operational. Anglo American’s net debt rose by nearly $4 billion, to $10.6 billion, last year, and it could burn nearly $1 billion in cash in 2024, due in part to the $1 billion of annual capital expenditure on a giant underground fertilizer project in northern England that isn’t expected to come on-line until 2027. Analysts are lukewarm on that project, given a high projected cost of $7 billion and uncertain returns. It probably would be bullish if the company succeeds in bringing in a partner to pick up some of those costs.

Morgan Stanley’s Gabriel recently upgraded Anglo American to Overweight from Equal Weight, citing the portfolio review and potential operational improvements. His price target is only about 10% above the current price, but he puts the company’s sum-of-the-parts valuation at about $16 per share.

Ultimately, Anglo American offers shareholders two ways to win. It either cleans up its business this year, or it could find itself in the hands of a larger mining company that will develop its attractive resource base.

We’d call that striking gold.