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U.S. elections and geopolitical uncertainty could also lift the currency

Further signs of a solid U.S. economy and potential delays to anticipated interest-rate cuts could prolong the dollar’s strength, analysts said.

Many analysts and fund managers have been anticipating that the dollar would fall this year as the Federal Reserve starts to cut interest rates, but rate-cut expectations have been trimmed back sharply recently while U.S. elections and geopolitical uncertainty could also lift the currency.

“Doubts are spreading as to the ability of the Fed to cut rates at its June FOMC meeting,” Jane Foley, head of FX strategy at Rabobank, said in a note.

“This, combined with political risks, suggests the prospect of a stronger-for-longer dollar.”

Money markets show expectations of U.S. interest-rate cuts have been slashed to just 62 basis points this year from around 150 basis points at the beginning of the year, according to Refinitiv, as data continue to point to robust economic growth and stubborn inflation. This has kept Treasury yields elevated and supported the dollar.

Pimco favors the dollar over the euro and other European currencies such as the Swiss franc and the Swedish krona in anticipation of further evidence of the U.S. economy performing better than others, economist Tiffany Wilding and Andrew Balls, chief investment officer for global fixed income, said.

Jonathan Petersen, senior markets economist at Capital Economics cited a risk that U.S. economic growth and inflation could stay strong rather than soften as expected, forcing the Fed to keep rates high while other central banks reduce rates.

“This would be enough to push interest rate differentials (and the dollar) back towards levels last seen in late 2022,” he told Dow Jones Newswires.

“Our sense is that the tailwinds that have supported the dollar so far this year, notably the favourable shift in interest rate differentials, will gradually turn to headwinds.”

Capital Economics expects the DXY dollar index—which measures the dollar’s value against a trade-weighted basket of currencies—to decline to 98.34 by the end of 2024 and to 97.84 by the end of 2025.

The DXY index is last at 104.290, having hit a 20-week high of 105.100 on April 2.

Natixis Research forecasts a smaller fall in the DXY index, to 102.300 in six months and gradually declining to just below 100.000 in 15 months’ time.

Natixis forecasts 100 basis points of U.S. interest-rate cuts this year, below their previous estimate of 150bps. This is well above the 62 basis-point reduction currently priced by U.S. money markets, with a first cut almost fully priced in for July, according to Refinitiv, and above the Fed’s current forecast of 75 basis points.

“This will weaken the dollar, but less than initially expected, especially in the second half of the year,” FX strategist Nordine Naam and the economic research team of the French bank said in a note.

Saxo’s head of FX strategy Charu Chanana expects that the better performance of the U.S. economy versus its peers will start to fade and weigh on the dollar.

“U.S. economic data has been strong in the first quarter, but signs of weakness are emerging, potentially marking a turning point for the U.S. economy,” she said.

Saxo expects that a ‘soft landing’ for the U.S. economy, where inflation slows without causing a steep economic slowdown or recession, could bring with it a weaker dollar and it may be prudent to reassess long dollar positions.

This is based on the ‘dollar smile’ theory, where the dollar strengthens in periods of either economic prosperity or economic uncertainty, but weakens during periods of moderate growth.

However, there are concerns about how long dollar weakness will last.

“New risks loom on the horizon,” she said.

A Trump election victory “could potentially lead to a strengthening of the dollar due to tariff risks and safe haven flows,” she said.

Investors should stop using an approach that many have long regarded as fundamentally flawed

It is rare these days to come across a climate change denier in the world of institutional investors — especially those who choose to invest in infrastructure, an essential lever of the energy transition and decarbonisation of the economy. Investors tend to believe the latest science on climate change. But, when it comes to asset pricing, strangely enough they often do not.

At the end of 2022, a group of large pension plans, including funds from Canada, Japan and the UK, discovered that they had lost a large part of the £5bn investment in Thames Water that they had recorded on their books. This Easter, they learnt that they had probably lost all of it.

There is only one way for a water utility serving the capital of a G7 country to lose so much value so fast: it was never worth £5bn to begin with.

Yet its owners denied this reality for years. The signs that Thames Water and its parent Kemble Water Finance constituted a high-risk, low-profit business were there all along. The cost of capital in this investment should have been considered quite high (and increasing over the years) and its value much lower.

A key reason why the risks of investing in Thames Water were ignored is the continued use of invalid asset pricing approaches for reporting its “fair value”.

For instance, many investors in private assets — and in this case the water sector regulator, Ofwat, too — rely on the “capital asset pricing model” (CAPM) to estimate a cost of capital and the value of the business (and for Ofwat the allowed level of water tariffs).

This model states that the cost of equity of a company is a function of the expected return of “the market” and how much this company correlates with it or its “market beta”. Today, CAPM remains the most commonly used framework for estimating the value of private investments like infrastructure companies.

Yet the scientific community has known for more than 30 years that CAPM, while one of the foundations of the field of academic finance, is wrong. That’s right: the model used by most large valuation firms, many private asset managers and the regulators of UK network utilities has been proven not to work.

CAPM relies on a very abstract notion of “market portfolio” and does not fit the market data. It has been shown time and again that better models can be used to explain asset prices, and that these approaches have led to the creation of entire new industries from hedge funds to factor investing. What is more, the way CAPM is used to value private assets often makes a mockery of the original model by relying on inputs that seldom have any relationship with the actual investment.

The inevitable conclusion from all this is that the reported values of private investments held by institutional investors and their managers today are very likely to diverge significantly from their true market value, and do not represent the level of risk taken or the liquidation value of these assets. This is how investors in Thames Water saw their investment go from £5bn to zero in a few months — they were blindsided by bad models and bad data. In other words, they ignored the science.

Some will point out that these values are audited. This is correct but also irrelevant. Auditors validate a process, not the content of the valuation exercise. Did you use a well-known asset pricing model? Tick. Did you adjust for the asset illiquidity? Tick. It is not for the auditors to say which asset pricing model is the correct one, what the “illiquidity premium” is or if the level of interest rates used corresponds to current market levels.

Sticking to these practices amounts to denying the science and the importance of risk when it comes to the market value of private assets. As with climate change, the costs of this denial are increasingly becoming larger, as private assets represent a greater share of the portfolio of investors.

There is a better way. Applied financial research and data availability about private investments have made significant progress since CAPM was developed in the 1960s. It is time for investors in private companies like Thames Water to take a more scientific view of asset pricing. They need proper measures of risk for the private asset classes to which they now allocate large amounts, and of the value of the assets they hold.

After all, these underpin the value of everything from defined benefit pension rights to defined contribution lump sums, life insurance policies, wealth management and many other products. And for all of these there is, ultimately, a fiduciary responsibility to report the true market value of what’s sitting in your clients’ portfolios.

Prime Minister Pedro Sánchez calls ‘housing a right and not a speculative business’ as costs soar for locals

Spain has become the latest EU country to eliminate “golden visas” that attracted thousands of foreign property investors, as soaring housing costs render the programmes politically toxic.

Prime Minister Pedro Sánchez said his cabinet would on Tuesday take the first steps towards scrapping the visas, which were introduced in 2013 and enabled investors who spent at least €500,000 on real estate to obtain the right to live in Spain.

“We will take the necessary measures to ensure that housing is a right and not just a speculative business,” said Sánchez, head of a Socialist-led coalition government.

Spain’s decision follows moves by Portugal and Ireland last year to scrap golden visas linked to real estate. In all three countries, the programmes were introduced to attract overseas investment and fuel a recovery from financial crises driven by a crash in their real estate markets.

The European Commission has been critical of golden visas, citing security risks as well as concerns over possible corruption, money laundering and tax evasion. In 2022, it called on member states to address those risks and end even more controversial golden passport programmes, notably in Malta and Cyprus, which offer not just residency but citizenship.

In Spain, many of the roughly 10,000 golden visas granted in the past decade had gone to Russian and Chinese citizens, a government official said. They enable recipients to live in the country for three years.

Economists do not see Spain’s golden visas as the prime reason for rising property prices, but since last year Sánchez has been under pressure to end the scheme from leftwing members of his coalition worried about soaring housing costs.

Although golden visas can be obtained via various forms of investment, Sánchez said 94 out of every 100 granted in Spain had been linked to property purchases. They were concentrated in tourism hubs including Barcelona, Málaga, Alicante, Valencia, Madrid and Palma de Mallorca, he said.

“These are the cities that are facing a highly stressed housing market, where it is almost impossible to find decent housing for those who live and work there and pay their taxes every day,” Sánchez said.

“This is not the model of country that we need, one of speculative investment in housing, because it is a model that leads us to disaster and above all to lacerating inequality.”

Spanish MPs must first approve a change in the law in order for the golden visa to be scrapped.

In a study published last year, Transparency International’s Spain arm said the country had granted 2,700 visas to Chinese citizens and more than 1,100 to Russians.

While Ireland scrapped its programme entirely last year, Portugal closed down the real estate route but enables people to obtain golden visas through other forms of investment. Existing golden visas remain valid in both countries.

The Barcelona-based group has been buying up brands and its diversification into cosmetics is paying off

Beauty may be in the eye of the beholder but the fast-growing cosmetics sector should have a broader appeal to investors. Fragrances, face creams and foundations have the attractive qualities of high margins, pricing power and a growing share of household budgets.

Those strengths are not necessarily reflected in the performance of German beauty retailer Douglas, which is down more than a tenth since its March IPO. Puig, a frequent industry outperformer behind brands such as Paco Rabanne and Nina Ricci, should have better luck. On Monday, it revealed its intention to float in Spain with a mooted valuation of up to €10bn.

The Barcelona-based group, whose name is pronounced “poodge”, was originally a licensed fragrance manufacturer. It has spent the past decade buying up brands, with 10 deals in 12 years including a majority stake in Charlotte Tilbury Beauty. Diversification into skincare and cosmetics is paying off; these were the fastest-growing segments last year. Plans to raise €1.25bn via listing could fund further deals and consolidate ownership of businesses in which it has acquired majority stakes.

A sizeable secondary sale is also expected from the Puig family, who will maintain control of the company via dual class shares.

Beauty is a category through which luxury groups engage with aspirational new consumers. Puig’s brand acquisition strategy is adding up. Its sales were ahead of the market last year, up by 19 per cent with make-up and skin care up by 23 and 31 per cent respectively. The latter is attributed to the success of Charlotte Tilbury, which is popular for products including its Magic Cream moisturiser.

Nonetheless, spending on beauty is expected to slow this year in line with a broader luxury slowdown. The sector might manage sales growth of 7 per cent this year, thinks Bernstein, down from 15 per cent in 2023. Hence the decline in Douglas’s share price. Shares in US-listed Ulta and e.l.f. have also suffered.

Despite this, Puig’s mooted valuation looks achievable. Assume it continues to outperform and sales grow by a 10th this year, ebitda margins stay at 20 per cent and net debt remains roughly constant. Then the enterprise value to ebitda multiple would be 10.5 times at a €10bn valuation. That would be well below L’Oréal on 20 times and below the 12 times that Coty and L’Occitane trade at.

Spain’s largest IPO in years is so far looking good.

BOLOGNA, Italy, April 8 (Reuters) - Ferrari wants to increase its expertise in battery cells given their importance in its shift to electrified vehicles, but it has no plans to manufacture them itself, its CEO Benedetto Vigna said on Monday.

The Italian luxury sports car maker has been selling hybrid-electric cars since 2019 and has promised its first-fully electric vehicle at the end of next year. Ferrari (RACE.MI), opens new tab, which sold just shy of 14,000 cars last year, might not have the scale to produce its own cells profitably.

"We want to open up cells and understand what is in there," Vigna said at the opening of a research centre on battery cells in partnership with Italy's Bologna University and chipmaker NXP Semiconductors (NXPL.O), opens new tab.

"Production will always be done through external manufacturers, based on the know-how we hope to acquire through this research centre," Vigna said during a presentation.

"We cannot afford to take cells as black boxes," he added.

The E-Cells Lab is focused on electrochemistry and is aimed at boosting Ferrari's long term expertise in battery cells, which it buys from external suppliers.

"We'll use more and more cells and will ... need to know the chemistry," Vigna said.

E-Cells Lab would initially focus on lithium-based, liquid-state cells, but was ready to turn to address new chemistries and technologies, although Vigna said he did not see solid-state batteries as a real option for the time being.