TheChek News Flow

After years of OECD talks, ‘critical mass’ of nations to apply at least 15% rate from January

Big multinational companies will from Monday be subject to a global minimum tax for the first time, as landmark cross-border tax reforms go live, seeking to raise up to $220bn in extra annual revenue.

Almost three years after 140 countries struck a deal to close glaring loopholes in the international system, some major economies will from January start to apply an effective tax rate of at least 15 per cent on corporate profits.

Under a series of interlocking rules, if profit by a multinational is taxed below this rate in one country, other countries will be able to charge a top-up levy. The OECD, which drove the reforms, estimates it will increase annual tax revenue by as much as 9 per cent, or $220bn worldwide.

Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research pressure group, praised the “super smart design” of the reform. “It will reduce incentives from companies to use tax havens and incentives for countries to be tax havens,” he said, adding that it puts “a serious brake on what was a race to the bottom”.

The first wave of jurisdictions implementing the global minimum tax from January include the EU, UK, Norway, Australia, South Korea, Japan and Canada. The rules will apply to multinational companies with an annual turnover of more than €750mn.

Several countries long seen as havens by multinationals will take part, including Ireland, Luxembourg, the Netherlands, Switzerland and Barbados, which previously had a corporate tax rate of 5.5 per cent.

Neither the US nor China have introduced legislation to do so yet despite backing the deal in 2021. But the global reforms are designed to still have a significant impact.

The deal overseen by the OECD in 2021 consists of two “pillars”. The first aims to get multinational companies to pay more tax where they do business, while the second establishes a global minimum corporate tax rate.

The rules mean that once some nations introduce the global rate, other countries have an incentive to do so because otherwise, participating nations can collect tax at their expense.

“Pillar two only needs a critical mass of countries to implement it,” said Pascal Saint-Amans, the OECD’s former tax chief. “Nobody has found a silver bullet where you can avoid it.”

While much depends on implementation and the response of multinational companies, preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners.

“People weren’t thinking let’s reward Ireland for being a tax haven,” said Ward. “But that may be an unintended consequence.”

Manal Corwin, head of tax at the OECD, told the Financial Times that tracking where additional revenue ended up in the early stages would represent only a “snapshot” of the reforms.

“This will shift over time,” she said. “The future footprint is the value of what’s being delivered.” Corwin said that through the elimination of distortions in the system, she ultimately expected more taxes to be paid “where economic activities take place”.

The introduction of the reforms is also expected to increase tax competition between jurisdictions through credits, grants or subsidies.

Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.

https://www.ft.com/content/191d8388-c5c0-419c-95d6-918df6f09fc5

The OECD confirmed last year that the global minimum tax calculations will provide more favourable treatment for certain tax credits, notably some transferable credits contained in the US’s Inflation Reduction Act.

Will Morris, global tax policy leader at PwC US, said investment hubs would be likely to collect additional tax revenue under the new regime and “give that back to business” via another arm of government.

“Tax competition will not die — it will shift to subsidies and credits,” Morris said.

This dynamic would lead to a lower amount of tax being collected by many countries than the OECD has predicted, Morris reckoned, and he was concerned business would be blamed. “There is going to be more angst from countries that business have been tax planning again rather than the revenue estimates are wrong,” he said.

Other exemptions were included during negotiations on the deal, such as a carve-out for “substance”, so the rules do not discourage investment in tangible assets such as manufacturing factories and machinery.

This carve-out has attracted criticism because it may allow companies to pay tax below the 15 per cent rate if they have sufficient real activity in low-tax countries.

Valentin Bendlinger, an academic who specialises in the global minimum tax, said that while the complex rules made its revenue effects uncertain, he expected “a compliance monster for both tax administrations and multinationals”.

Leader’s remarks came as data showed factory and service sectors continuing to contract to close out 2023

Chinese leader Xi Jinping urged his countrymen to brace for more economic challenges in the year ahead, sounding a cautious note as a string of weak readings highlights the many headwinds facing the world’s second-largest economy.

“On the path ahead, winds and rains are the norm,” Xi said in a New Year’s Eve speech to the nation on Sunday, promising more efforts to shore up growth and address concerns over jobs and the cost of living. “Some companies are facing business pressures; some people are running into difficulties finding jobs and in their daily living.”

Xi underscored the importance of the economy to the country’s political priorities, noting that in 2024—which marks the 75th anniversary of the Communist victory—China must “further boost confidence in development, and enhance economic vitality.”

Xi’s remarks came hours after Beijing published data that offered fresh signs of weakness in the Chinese economy, piling pressure on the government to take bold new steps to fire up growth in the coming year.

Official surveys released on Sunday suggest factory activity slid deeper into contraction in December, owing to thin order books at home and abroad, while the services sector struggled as consumers kept a tight leash on spending.

Construction fared better, aided by a government push on infrastructure, but overall the latest readings point to a soggy end to the year for the world’s second-largest economy after a run of disappointing data on prices, retail sales and private-sector investment.

After a turbulent year for growth, China’s top leaders have signaled that more help is coming for the economy, with pledges of new fiscal stimulus and supportive central-bank policy in the months ahead.

China’s big banks in recent days announced planned cuts to deposit rates for savers, paving the way for potential reductions to loan rates for households and businesses.

Still, officials have telegraphed that stimulus will be measured rather than aggressive, reflecting caution over already-high levels of debt as the economy contends with a drawn-out real-estate crunch and a global economy beset by war and slowing growth in the U.S. and Europe.

“What comes next? Another year of muddling through,” Rory Green, head of Asia economics at GlobalData.TSLombard, predicted in a report on the year ahead for China’s economy. “Growth is not going to collapse, but neither will it reaccelerate.”

China’s official purchasing managers index for the manufacturing sector declined to 49 in December, from 49.4 in November, the National Bureau of Statistics said Sunday, marking the third straight month in which the reading has languished below 50—the mark that separates an expansion in activity from contraction.

The result missed the forecast of 49.8 estimated from a Wall Street Journal poll of economists. New orders at home and abroad slumped deeper into contraction, while a measure of companies’ appetite for hiring new workers fell to 47.9 from November’s 48.1, indicating China’s powerhouse factory sector is feeling the pinch from a slowing global economy as well as sluggish spending at home.

A similar gauge of activity in China’s services sector was unchanged at 49.3, suggesting that consumers remained wary of spending in the midst of anxiety over jobs and the property market.

At the beginning of the year, optimism was high that 2023 would see a Chinese economy roaring back to life after stringent lockdowns to quell Covid-19 outbreaks hammered growth in 2022.

The expectation was that a rebound in China would power the global economy as the U.S. slowed under pressure from the Federal Reserve’s efforts to contain inflation with sharp increases in interest rates.

In the end, U.S. consumers flush with savings helped to hold up U.S. growth despite the rise in borrowing costs, while China’s performance underwhelmed.

A hoped-for consumer boom in China never really took off. Turmoil in the real-estate sector—visible in acres of unfinished apartment blocks and stricken developers—sapped consumers’ appetite for spending, with households opting to sock away savings instead. Chinese export growth slowed along with Western consumers’ desire for more goods after a splurge during the pandemic. Real-estate investment contracted sharply.

The property market remains in a deep slump. New home sales at China’s largest developers fell 35% in December from a year ago, according to private data released on Sunday by China Real Estate Information Corp.

The country’s top 100 developers sold the equivalent of $63.4 billion worth of homes during the final month of 2023, according to CRIC. That was 16% higher than November’s total, but December sales are traditionally higher as developers try to book as much revenue as they can before closing out the year.

The largest developers sold $760 billion worth of homes in 2023, down 16% from the previous year. The total was less than half what the top property companies sold in 2021, according to CRIC.

One stark sign of China’s difficult year is a high rate of youth unemployment, which exceeded 21% in June before the statistics agency said it would stop publishing the data.

Another sign is deflation. Both consumer and producer prices were lower in November than a year earlier. The weakness in price growth in China contrasts sharply with the painful inflation experienced in most of the rest of the world until recently.

Still, China’s economy is expected to expand by around 5% in 2023, a better performance than in 2022 but slower than the growth rates it typically notched in the years before Covid-19.

Many economists have penciled in slightly weaker forecasts for 2024 because the economy benefited in 2023 from a favorable comparison with 2022, when lockdowns in major cities including Shanghai and Shenzhen hurt growth.

The International Monetary Fund, for instance, expects growth in China to slow to 4.6% in 2024, from a projected 5.4%.

Authorities have so far opted for a broad but piecemeal approach to stimulus, characterized by modest cuts to interest rates, looser restrictions on property purchases in some larger cities and other small steps to put a floor under growth.

The approach reflects the wariness of China’s Communist leadership regarding large-scale stimulus policies since a blowout package in 2008 fueled a property bubble. Xi has spoken of his aversion to Western-style handouts to juice demand, preferring instead to focus on building roads and factories.

In his Sunday speech, Xi signaled that he will stay the course—pledging to press ahead with “Chinese-style modernization,” a slogan that encapsulates his vision of state-led economic development.

He also signaled more government attention to youth employment, as well as concerns over the costs of child-rearing and elderly care.

“Everyone is very busy and the stresses of working and living are very great,” Xi said. “We need to create a warm and harmonious social atmosphere…and create convenient and comfortable living conditions.”

Esma’s Verena Ross says efforts to monitor and curb bets that use borrowed money need to go further

The threat to financial markets from leveraged trades has not abated in the last year, despite regulators’ efforts to rein them in, the head of Europe’s securities regulator has warned.

“My view is that leverage and liquidity risks in funds remain as high as they were [in the past year],” Verena Ross, chair of the European Securities and Markets Authority (Esma), told the FT, of her outlook for 2024. “This continues to be an area where we need to monitor very closely and react where we see risks.” 

Deals that use borrowed money to boost investors’ returns have drawn growing scrutiny from global regulators over the past few years, after the early pandemic “dash for cash” exposed the potential for shocks in areas of finance subject to less stringent supervision than traditional banks.

Since then there have been a series of other shocks, including last year’s wild swings in the nickel price on the London Metal Exchange and the UK gilt market crisis, when a wave of selling by obscure pension fund strategies forced a Bank of England intervention.

Authorities have focused on bets that use derivatives such as futures and swaps to magnify their returns, as well as liquidity mismatches that could lead to fire sales and US hedge funds’ enormous bets in government bond markets.

Ross said that Esma, which supervises and regulates Europe’s financial markets, was preparing to publish a first-of-its kind report on leverage so that outsiders could see data on the level of borrowing by different types of investment funds, including an in-depth analysis of real estate funds in the largest EU jurisdictions.

While the data will be from the end of 2022, Ross said Esma was also carrying out “ongoing monitoring” with national authorities on leverage in their markets.

“With improved data and an improved ability to analyse what the funds actually look like . . . we can also have a better picture of what the risks are and then make sure the right tools are in place to deal with that, if the market moves in a particular direction,” Ross said.

“Leverage is not the only risk that we will actually be monitoring,” she added. “We’re also looking at liquidity mismatches, at valuations . . . And so in these other areas, you will also see action being taken.”

Her comments echo the recent concerns of other regulators over funds that hold hard-to-sell assets like property but allow investors instant access to their cash.

“Funds that allow for daily redemption when they have very illiquid assets are a problem,” said Ross. 

While funding continued to trend down in 2023, big raises were there to be had. Fifteen startups in the U.S. — many of them AI startups — raised $500 million or more in funding rounds and some got a lot more than that.

Let’s take a look at the biggest rounds of the year.

1. OpenAI, $10B, artificial intelligence: The top deal comes as no surprise. After having been rumored for weeks, Microsoft confirmed in late January it had agreed to a “multiyear, multibillion-dollar investment” into OpenAI, the startup behind the artificial intelligence tools ChatGPT and DALL-E. The exact dollar amount was not confirmed, but Semafor reported in January that Microsoft was in talks to invest as much as $10 billion. The deal followed a $1 billion investment in 2019 from Microsoft into the AI startup. It also helped position Microsoft in what will be an all-out battle for AI dominance with other tech giants such as Alphabet and Amazon — although regulators are now looking into the relationship.

2. Stripe, $6.5B, fintech: The second-biggest round of the year went to payments giant Stripe, but it is not the typical huge, late-stage growth round. The South San Francisco-based company raised a $6.5 billion Series I at a $50 billion valuation. The valuation is a significant drop, as the company was valued at $95 billion in March 2021, and earlier this year it was reported this round would be at a $60 billion valuation. The company said it would use the new cash to provide liquidity to current and former employees, and help offset a tax bill that will come due when it modifies employees’ stock grants that are set to expire (which we’ve talked about before). No lead investor was announced, but firms including Andreessen Horowitz, Founders Fund and General Catalyst participated.

3. Anthropic, $4B: San Francisco-based Anthropic raised nearly $7 billion in funding this year alone — so it was busy. However, this September round was the largest. The ChatGPT rival inked a deal with Amazon for the e-commerce and cloud titan to invest up to $4 billion in the AI startup. The new investment gives Seattle-based Amazon a minority stake in Anthropic. The immediate investment is $1.25 billion, with either party having the right to trigger another $2.75 billion in funding, Reuters reported. As part of the deal, Anthropic will now use Amazon Web Services data centers, as well as AWS Trainium and Inferentia chips to build, train and deploy its models. No valuation was given with the round.

The new investment is just the latest in what has become a fundraising spree for Anthropic this year.

4. Anthropic, $2B: Like we said earlier, Anthropic was busy this year. This was the company’s second-biggest deal of the year. In October, the WSJ reported previous investor Google agreed to invest up to $2 billion in the OpenAI competitor. The deal includes $500 million upfront and an additional $1.5 billion more over time, per the report. In February, it was reported that Google also had invested between $300 million and $400 million in the startup.

5. (tied) Inflection AI, $1.3B, artificial intelligence: Palo Alto, California-based Inflection AI raised the second-biggest AI round of the year. The startup is building what it says will be the “largest AI cluster in the world” and has created large language models to allow people to interact with its AI-powered assistant called Pi, or Personal AI. Pi lets people quickly receive relevant information and advice on their interests. To build the platform, the startup locked up a huge $1.3 billion round led by Microsoft, Reid Hoffman, Bill Gates, Eric Schmidt and new investor Nvidia, which values Inflection AI at $4 billion, according to Forbes, which first reported the news. The new funding brings the total raised by Inflection to more than $1.5 billion, per the company. Founded last year, the generative AI platform is a competitor to other AI firms such as OpenAI and Google. It was co-founded by Mustafa Suleyman, who previously co-founded the Google-owned AI lab DeepMind and serves as CEO at Inflection.

5. (tied) Juul, $1.3B, consumer goods: This one may come as a surprise to many. Embattled San Francisco-based e-cigarette maker Juul raised about $1.3 billion in November, according to a regulatory filing reported on by Reuters. Earlier this year, Juul laid off about 250 people to reduce operating costs and agreed to pay $462 million to settle claims by six U.S. states that it unlawfully marketed to minors. Investors were not disclosed for the new round. The company also raised cash in November 2022, after cutting jobs and costs.

7. (tied) Metropolis, $1.1B, computer vision: One may not expect to find a parking startup on this list, but here we are. Los Angeles-based checkout-free parking startup Metropolis raised $1.7 billion in debt and equity led by Eldridge and 3L Capital. The company has raised $1.05 billion through a Series C offering and $650 million of debt financing. The funding was used to take logistics firm SP Plus private in a deal worth approximately $1.5 billion. The deal is the biggest M&A transaction of the year by a VC-backed company, per Crunchbase data. It even beat out Databricks’ purchase of San Francisco-based language models training startup MosaicML for $1.3 billion in June. Metropolis has developed a computer-vision system that enables drivers to park without using a credit card or even cash. Instead, drivers can use the app and enter information such as name and payment method. Metropolis then tracks the car and charges the owner. It can even email a receipt as they’re leaving the parking lot. Founded in 2017, the company has now raised $1.9 billion, per Crunchbase.

7. (tied) Generate Capital, $1.1B, renewable energy: While OpenAI’s raise happened in January, the first big round of the year went to this San Francisco-based green infrastructure investor and operator. Generate raised $1.1 billion, per SEC filings and reports. The raise came just about 18 months after it raised $1 billion in 2021. Generate invests in an array of infrastructure projects, from community solar systems to municipal wastewater treatment to electrifying fleets. Founded in 2014, the company has raised $4.2 billion, per Crunchbase.

9. (tied) Redwood Materials, $1B, renewable energy: Figuring out how to get the raw materials for the batteries needed for electric vehicles is attracting big money these days. Swedish lithium-ion battery producer Northvolt raised $1.2 billion through a convertible note in August. Berkeley, California-based mining startup KoBold Metals raised a $195 million round in June at $1.15 billion. And battery materials firm Redwood Materials followed suit with a massive $1 billion-plus in new funding in August. The round was co-led by Goldman Sachs Asset Management, Capricorn Investment Group‘s Technology Impact Fund and funds advised by T. Rowe Price Associates. The Carson City, Nevada-based battery recycling startup creates sustainable materials for circular EV supply chains. That is not the only big money Redwood has seen this year. In February it received a conditional commitment for a $2 billion loan from the U.S. Department of Energy to build a recycling and remanufacturing facility in Nevada. Founded in 2017, the company has raised $3.8 billion, per Crunchbase.

9. (tied) Stack AV, $1B, autonomous driving: Brand-new self-driving, commercial trucking startup Stack AV hauled in a big round in 2023. The company was founded by the same folks behind autonomous vehicle startup Argo AI — which was shuttered last year — and just like the previous company, Stack has brought out big-name investors with cash. Bloomberg reported SoftBank Group is backing the new venture with more than $1 billion. The round is the third-largest ever for a Pittsburgh-based startup — per Crunchbase data — behind only two of Argo AI’s rounds.

No startup could outdo the raises by OpenAI and Stripe, but there were large raises abroad.

The brand’s latest campaign features three new supplements and celebrity ambassadors Rosie Huntington-Whiteley, Jimmy Butler and Radhi Devlukia.

Fashion and lifestyle brand Alo Yoga is helping its loyal consumers get in the spirit of wellness, kicking off the new year with its “Move Into Wellness” campaign and the launch of three new ingestible supplements.

With “Move Into Wellness” the brand will position its entire health and wellness ecosystem in one campaign for the first time. Summer Nacewicz, executive vice president of marketing and creative at Alo Yoga, told WWD that the campaign further sets the stage for how Alo supports a 360-degree journey of wellness. Alo’s core pillars include movement, recovery and mindfulness — all of which the brand has dedicated educational content around in addition to product offerings.

“It’s something that truly embodies what we stand for, which is inspiring mind-body wellness,” Nacewicz said. “January is such a unique time of introspection and reset, of personal growth and intention setting, so it’s the perfect time to connect to someone with a message that speaks to where they are in that moment.”

Giving dimension to the campaign are three celebrity ambassadors who have been longtime friends of the Alo world and embody the brand’s elements with Rosie Huntington-Whiteley representing fashion, Jimmy Butler representing performance and Radhi Devlukia representing wellness.

“The special thing about this campaign was that all three of the ambassadors were already part of our Alo world,” Nacewicz said. “Through them, we paint a multifaceted view of what wellness is — a mix of movement, mindfulness and recovery. Rosie loves doing pilates at our wellness club, Radhi’s been a beloved guest on our podcast and Jimmy has been such an advocate for us over the past few years.”

It was serendipitous, she said, that they also perfectly represented the different facets of wellness that Alo wanted to speak to, adding that Alo seeks to inspire an attainable version of wellness. This means wellness for the sake of feeling better, having more energy and less anxiety. All of these messages will be seen throughout the campaign across social media platforms, in stores, studios and through global community partnerships.

Speaking to how Alo has become part of her overall wellness journey, Huntington-Whiteley said her “approach to wellness is continually evolving and, at the moment, it’s centered around establishing a mindful and healthy routine in my daily life. The pilates sessions at the Alo Wellness Club have been instrumental in integrating movement seamlessly into my life, guiding me toward healthier choices in my daily habits. This disciplined routine acts as the anchor that grounds and harmonizes everything for me.”

Sharing his perspective, Butler said “there is a lot of focus on what I do on the basketball court and everyone sees the results. People don’t see how much time goes into my training, practicing my craft and then recovery. I started taking recovery seriously once I became a professional, and it has done so many great things for me as an athlete and as an individual. I value being able to stretch, work out, get a massage and hop in the cold plunge whenever I’m at the Alo Wellness Club.”

As its “Move Into Wellness” campaign continues to roll out over several weeks, the company will also launch three more supplements, in the form of capsules, to its existing offering of the Alo Stackable Wellness System, which already includes three gel shot supplements. Similarly, the capsule formulas have been created to feature potent vitamins, exotic superfoods, antioxidants and adaptogens to balance inner wellness with no fillers, GMOs, dyes or artificial substances. The supplements can be taken alone or as part of a personal supplement routine.

“We’re so excited to debut our second drop of wellness ingestibles, this time in capsule form,” says Danny Harris, co-chief executive officer and cofounder of Alo Yoga. “Through these innovative daily formulas, we’re continuing to spread mindful movement, inspire wellness and create a community to complete a holistic wellness routine that puts glow-boosting health at the forefront.”

The first three capsule supplements, which launched Friday, include the Superfood Multivitamin, the Chill and the Energy Pop. Two more drops of the wellness ingestible capsules are expected to follow.

“Our stackable wellness system is packed with adaptogens and exotic superfoods that boost your mood and health,” Nacewicz said. “They are made to support you as you look to rev up before a workout with our all-natural, caffeine-free, mood-booting energy pop or wind down at the end of the day with our calming chill capsules. We think about everything that goes into your health — not just the one hour a day that you may work out, but the other 23 hours you are recovering. We really seek to inspire, not prescribe. Wellness is very personal and everyone can have a different version of it that feels right to them. We want to create the tools (products) and education (content) to help them feel better, live longer and be the best version of themselves.”

As someone who uses Alo’s Stackable Wellness System, Butler told WWD that he has found the brand’s clean supplements “fit seamlessly into [his] wellness journey. After a tough game or intense training session, Chill is my go-to. It helps me recover and decompress, easing my body and mind. This is important as it gives me space to reflect, which is often essential for a professional athlete with a hectic and demanding schedule.”

Moreover, Huntington-Whiteley said having recently decided to cut out caffeine, she has turned to Alo’s Energy Pop supplement. “It provides that additional burst of energy, lifting my spirits throughout the day,” she said. “Juggling the responsibilities of motherhood and a busy schedule makes it challenging to maintain a consistent workout routine, but the Energy Pop supplement from Alo has become a valuable ally, helping me stay on track.”

The Alo Stackable Wellness System Capsules will be available in Alo stores and online as well as sephora.com.

Demand for French brand’s products is booming thanks in part to an unusual strategy, as rivals struggle

Hermès RMS 0.42%increase; green up pointing triangle is a brand that shows its real mettle in a downturn. The secret to its steady growth might be the restraint it shows in good times.

The French handbag maker’s shares gained 33% in 2023, making it the luxury sector’s best-performing stock. Parisian rival LVMH Moët Hennessy Louis Vuitton LVMUY 0.30%increase; green up pointing triangle, which owns Christian Dior CDI 0.35%increase; green up pointing triangle and is also considered one of the safest bets in luxury, rose 8%. But across the industry, most large European luxury stocks ended 2023 in the red as demand for expensive baubles sputtered following a record three-year shopping binge.

What is it about Hermès that keeps shoppers buying through slumps, even as other brands’ stores empty out? The Birkin handbag maker’s sales climbed 16% from a year earlier in the third quarter of 2023, while others such as Gucci’s owner, Kering, reported a fall. That kind of growth is hard to achieve now that Hermès is bigger than it was. The brand was on track to generate 13.3 billion euros, equivalent to $13.9 billion, in sales for the whole of 2023 and has roughly doubled in size in three years.

Catering to the superrich, who are the last to feel the pinch, helps Hermès in lean times. Luxury brands that target status-loving but not necessarily wealthy consumers are struggling as these buyers rein in extravagant purchases. Hermès isn’t immune to the trend: Its perfume and makeup business grew at less than half the rate of the group overall in its latest quarter. But these entry-level products contribute less than 4% of total sales, and demand for its other products is strong.

Hermès’s discipline in good times, when competitors can get greedy, might make it more resilient in downturns. The brand avoids becoming overexposed. In 2023, Hermès was on track to reinvest 4% of its revenue in promotions, which is low for the luxury industry. LVMH reinvested 12% of sales in marketing over the first half of 2023. And Hermès spends most of its marketing budget on events such as the recent Hermès in the Making show in Chicago rather than on splashy billboard campaigns.

The brand keeps demand hot by producing too few of its best-known goods. Hermès could probably find three buyers for every Birkin or Kelly handbag it makes—the company’s most popular products. But it only increases output from the factories that produce its handbags by 7% each year.

Starving the market this way means there are always buyers, even in downturns. But it also creates a lucrative opportunity for resellers. Because it is rare for shoppers to stroll in off the street and score a Birkin in an Hermès store, the bags fetch a fat premium in the secondhand market.

This markup is a useful measure of the brand’s heat for investors. Resellers can currently sell a pristine Birkin 25 handbag for 2.3 times its original $10,400 price tag, according to data from luxury website The Real Real. This is down from 2.5 times at the peak of the luxury boom in 2022 but still a healthy sign.

Hermès also leaves some money on the table by not raising prices as much as it could. The brand charges more for its goods when it needs to offset higher manufacturing costs or exchange-rate shifts, but rarely to boost profits. When demand for luxury goods was high during the pandemic, some rivals saw an opportunity to boost their margins. The cost of Chanel’s medium-size classic flap handbag rose 64% between 2019 and 2022 in the brand’s U.S. stores, compared with a 2.5% increase for an equivalent-size Hermès Birkin bag over the same period, according to data from PurseBop.

This conservative approach means Hermès doesn’t grow as fast as it could, but keeps its performance consistent. Steady growth is one reason why the stock is so expensive. Hermès’s shares change hands for 45 times projected earnings, compared with 22 times and 17 times for LVMH and Kering, respectively.

Unfortunately for rivals that would like to mimic Hermès’s success, the strategy isn’t easy to copy. Hermès can afford to grow below its potential because it can count on a backlog of future demand. Only certain watchmakers including Rolex and Patek Philippe, with waiting lists for their products, have a similar dynamic.

In 2009, the global luxury market shrank by 7.5% as the world reeled from the financial crisis, according to data from Bain & Co. Hermès managed to increase its sales that year by 8.4%. The brand looks set to buck trends again in the latest slowdown.

A big year-end rally faces challenges including inflation and the deficit

A resilient U.S. economy and cooling inflation fueled an intense year-end bond rally. Now, some suspect investors are too sanguine about the months ahead.

The rally marked the latest in a series of swings that sent the yield on the 10-year U.S. Treasury, which falls when bond prices rise, leaping and diving throughout the past 12 months. Fears of a prolonged stretch of higher interest rates repeatedly drove the yield to decade-plus highs, only for stress on the banking system and a Federal Reserve pivot to drag it down again.

The yield has fallen a full percentage point since topping 5% in October for the first time in 16 years, easing worries it would hurt the economy by raising borrowing costs on mortgages, corporate loans and other forms of debt. Many investors and economists are now predicting a so-called soft landing, expecting inflation to subside without a spike in unemployment or a recession.

Plenty of challenges could still roil the bond market. The growing fiscal deficit is set to spur another deluge of U.S. Treasurys, more companies will need to refinance their low-rated debt, and the final legs of the Fed’s fight against inflation are likely to prove the trickiest.

We asked five investors whether we are past the inflationary surge and avoiding a recession.

George Bory, chief investment strategist for fixed income at Allspring Global Investments, says the risks to the macroeconomy hinge on the market’s biggest assumption: that inflation will fall smoothly and orderly toward the Fed’s 2% target.

Bory is among those who think the hardest part of the inflation fight will be getting the central bank’s preferred measure of price increases—the core PCE index—down to 2% from the latest 3.2%. Treasury Secretary Janet Yellen said in December that she doesn’t think the last mile will be “especially difficult” and expects the economy to glide into a soft landing.

“Our base case is inflation does come down, but not as orderly as the market thinks,” Bory said. “Ultimately getting to 2% will be challenging for the Fed without a notable slowdown in growth.”

Bory doesn’t rule out a range of outcomes that could drag Treasury yields lower or propel them higher. If elevated borrowing costs ultimately choke off the economy’s steam, a recession could drag long-term bond yields closer to 3%. Meanwhile, a reacceleration of inflation could be “meaningfully disruptive,” bringing 6% yields into view.

He favors bonds from companies that are prepared to cope with higher rates. His message to bond investors: Hunt for quality companies that have the cash flows to meet any refinancing needs over the next few years.

“The most important thing to focus on in this cycle is the path to refinancing,” he said. “If there is a clear path and management is able to articulate their strategy, we like that credit.”

James St. Aubin, chief investment officer at Sierra Mutual Funds, is worried that higher rates and tougher lending standards by bankers are beginning to bite.

“Those two things in concert usually put a lot of pressure onto the economy, and ultimately move it into a recession,” he said. “The long and variable lags of monetary policy shouldn’t be ignored, and I think they are right now.”

Markets might succumb to “the curse of high expectations” in 2024, he added.

Rising rates have slowed the economy in previous decades in part by forcing lenders to go on a diet. Banks usually pull back on making risky loans when they are worried about being paid back, or seek to borrow less because the Fed has made it more expensive.

The model soft landing was engineered by the Alan Greenspan-chaired Fed in 1995: The central bank doubled the fed-funds rate to 6% before cutting it back, without spurring a slowdown. Notably, banks didn’t restrict their lending. Today, they are tightening terms on everything from individual borrowers to big corporations.

St. Aubin says corporate debt markets face the most acute threat this coming year, as companies eventually have to refinance at higher rates. Stress in the credit markets could cascade into stocks.

Investors aren’t acting worried. The extra yield they demand to hold corporate bonds instead of ultrasafe Treasurys is near multiyear lows. (Investors typically demand higher yields for corporate bonds when they are concerned about a slowdown spurring defaults.) So-called credit spreads are similarly tight even on low-rated bonds.

“Everyone always sees a soft landing just before a recession,” said St. Aubin. “Then something happens. Things slow down abruptly.”

Rick Rieder, BlackRock’s chief investment officer of global fixed income, says he has never been more excited about heading into a new year.

“We haven’t seen three years of returns in 10-year Treasurys as negative as they have been in 150 years,” he said. The recent aggressive recoil in bonds proves that “the only way to generate a big splash of returns is on the backside of prices recalibrating.”

Bondholders are enduring their worst spell on record. Consecutive years of negative returns were unheard of before 2022, when the Fed’s rapid rate-increase campaign sent bonds to their worst annual losses in U.S. history.

“The only thing I’m a little disappointed about is how fast the markets are moving—it’s way faster than historically, including what is being priced in for the Fed.”

Fed officials penciled in three quarter-point rate cuts in 2024 at their December meeting, which would take the benchmark interest rate to around 4.6%. Traders are wagering that the Fed will slash its benchmark rate below 3.9%, kicking off cuts in March, according to FactSet. Expectations for a wave of rate cuts have boosted Treasury prices, dragging yields lower.

Why is Rieder so eager for 2024? Investors can pocket a lot of yield without taking the risks needed to generate similar returns in recent years.

“Do you need a lot of low-quality leveraged loans? CCC-rated bonds? Mezzanine commercial real estate risk? No,” he said. “This is an environment where you can clip 6.5% to 7% without taking that risk.”

Rieder likes investment-grade bonds, agency-backed mortgage-backed securities and European corporate debt.

“This year, the traditional 60/40 portfolio was carried entirely by the stock market before this bond rally,” he said. “My sense is next year, fixed income will be a bigger part of portfolio return.”

Frances Donald, global chief economist at Manulife Investment Management, says the market is underappreciating the odds of a recession, or inflation dropping below the Fed’s 2% target. Both would mean yields have much more room to fall.

“Everyone is focused on the hard versus soft landing debate,” she said. “But under the surface, we already have the longest manufacturing recession ever seen.”

The manufacturing sector has been contracting for more than a year, according to an Institute for Supply Management survey. Donald points out that shares of smaller companies, stocks that are typically sensitive to the economic outlook, lagged behind the broader market for much of the year. Corporate spending on new projects is “swan diving lower,” the buying and selling of existing homes has hit lows unseen since the financial crisis and U.S. exports will likely suffer from global growth slowing.

The trade: Despite a potentially bumpy road ahead for bonds, the heap of pressures means investors should buy them, according to Donald.

Why invest in an economy with so much trouble looming?

“The U.S. is likely to be the ‘cleanest dirty shirt’ ” on the global stage, Donald said. “Investors looking for a place to hide—they’ll go there.”

Torsten Slok, chief economist of Apollo Global Management, says the market is too focused on the Fed and not enough on Washington’s surging bond issuance and expansionary fiscal policies.

The U.S. government is set to issue substantially more debt in the first quarter of 2024 than it did in the same period of 2023, which went on to set an annual record. That is assuming there isn’t a recession. If there is, the government would likely have to issue even more bonds to make up for revenue shortages and to finance unemployment benefits.

“There’s a tug of war between the Fed at one end of the rope and the supply of Treasurys at the other end,” he said. “The market needs to take the bond supply more seriously—and in my view it will be paying more attention to Treasury auctions than ever before.”

Treasury auctions have already attracted scrutiny, worrying investors that demand for U.S. debt is waning. Concerns that supply will outpace demand should lift long-term Treasury yields even as the central bank cuts short-term rates.

Slok also thinks the Fed’s recent pivot toward forecasting rate cuts, which sparked a rally in markets, is complicating its battle against inflation.

“The pivot is easing financial conditions through much lower rates, stocks rallying and tightening credit spreads,” said Slok. “You potentially risk that the pivot provides its own boost to growth and inflation in the coming quarters.”

A number of indicators point to the economy reaccelerating, according to Slok, including booming housing starts and renewed confidence among home builders as mortgage rates have fallen. The Atlanta Fed GDPNow Forecast currently shows fourth-quarter growth as likely to print at a 2.3% annual rate, which would build on 4.9% growth in the third quarter.

“The market seems to think the inflation problem is solved and there’s nothing to worry about,” he said. “We’re starting to move from a soft landing to a no landing scenario, where the Fed is not done and must hold rates higher for much longer.”