Stocks Could Return About 10% in 2023—But First, They’re Going to Fall
After a selloff in the year's first half, equities could rebound as investors anticipate a return to economic growth, market strategists
Europe Is Bracing for a Harsh 2023. 3 Sectors for Savvy Investors.
There are plenty of economists and executives warning about the risk of a U.S. recession next year. But the picture in Europe is decidedly worse.
In fact, the outlook for 2023 across the pond can be summed up in one word: grim. Germany and the United Kingdom, two of the region’s biggest economies, are probably already in recession. The 19-member euro area will likely experience a prolonged downturn as well, according to the latest forecasts from the European Central Bank and the International Monetary Fund.
The reasons boil down to Russia’s invasion of Ukraine. That sent energy prices soaring, especially natural gas, and curtailed Europe’s access to fuel supplies. Household bills are still surging, fanning inflation, prompting the European Central Bank to start its first interest-rate-hike campaign in a decade.
“Energy bills are going to stay high for some time,” says George Moran, an economist at Nomura in London. “Not only is that going to be depressing consumption because consumers have less disposable income, but on the business side of things, input costs have shot up massively.”
It’s a different situation than what has happened in the U.S. Although energy prices went up everywhere at the start of the year, they have since mostly come down in the States, and natural-gas shortages were never a problem. Inflation is still elevated in the U.S., but it’s driven by other things besides energy.
“The U.S. has been hit a lot less hard by high inflation,” Moran adds. Output in the U.K. and euro area is still at or below prepandemic levels, whereas the U.S. economy is a good 4% above where it was in the fourth quarter of 2019.
That means that investing in European companies will be tricky. Morgan Stanley predicts the biggest drop in corporate profitability in the region since the financial crisis a decade ago.
For analysts at J.P. Morgan, the best investment bet is to try to avoid companies that are more exposed to consumer spending. Along with higher prices, households will also be coping with rising European Central Bank interest rates. That means favoring healthcare, utilities, and possibly banks.
In Germany, that could be Deutsche Telekom (ticker: DTE.Germany) or Bayer (BAYN.Germany), two of the best-performing stocks in the DAX this year. Aerospace giant Thales (HO.France) is the best performer in the French CAC 40 in 2022. In Spain, it’s the banks that have done well— Banco Sabadell (SAB.Spain) and CaixaBank (CABK.Spain) are among those with the biggest share gains of the past year.
There may, of course, still be bargains to be found among Europe’s consumer-facing firms, especially if the region gets lucky with a relatively warm winter and no further escalation in Ukraine.
Consumers are also being helped by enormous subsidies to help them with energy bills. Since September 2021, European governments have earmarked more than $700 billion to shield households from rising costs, according to the Bruegel think tank.
“If it turns out that the winter is more mild and storage is good, that could be a more positive situation for growth,” says Nomura’s Moran. And if households draw down excess savings from the pandemic to cover energy bills, “we might see consumption being more insulated than we thought.”
Other possible bright spots: Interest rates in Europe probably won’t go as high as those in the U.S. And there’s some hope for an economic pickup in the second half of 2023 after the worst of the energy crisis is behind it.
For now, though, Europe is hunkering down for a difficult winter.
Vivion’s numbers don’t add up. Literally.
Muddy Waters’ latest target has an error in its balance sheet
Vivion is a Luxembourg-based real estate company with a €3.7bn portfolio of investment properties across Germany and the UK.
It is also the latest target of feared short seller Muddy Waters.
The US hedge fund and its pugnacious founder Carson Block are best known for publishing short reports dissecting the finances of public companies, so FT Alphaville was intrigued to see the firm shorting the bonds of a closely held private business instead.
The report on Vivion is long and probes many aspects of its business, from related party transactions involving controlling shareholder Amir Dayan to the occupancy rates of its core properties. Vivion on Thursday issued a brief riposte stating that Muddy Waters’ report “contains numerous factual inaccuracies” and that it “intends to respond to the report shortly”.
In the meantime, however, FT Alphaville has discovered one thing that does appear to contain a clear inaccuracy: Vivion’s own balance sheet.
The first section of Muddy Waters’ report questions the validity of a series of shareholder loans, flagging a series of apparent discrepancies with the balances reported at the holding companies above Vivion.
FT Alphaville decided to take a look at how Vivion reported the shareholder loans in its balance sheet. Here’s a table of Vivion’s non-current liabilities taken from its interim financial statements for the first half of 2022 (the numbers are in thousands of euros, with the left-hand column representing 30 June 2022 and the right-hand column 31 December 2021):
Have you spotted the mistake?
Vivion’s calculation of non-current liabilities for June 30 is incorrect. Instead of the €3,961,851,000 listed, the line items actually sum to €3,691,851,000. This suggests that Vivion got its 6 and 9 muddled up.
The mistake does not appear to flow through the rest of the balance sheet, as the sum of Vivion’s total liabilities and equity incorporates the correct €3,691,851,000 figure. But it appears to be a major mistake to the tune of €270mn in a crucial part of the company’s financial statements. It also suggests the numbers were inputted manually given the seeming fat-finger mistake on swapping the 6 and the 9.
The usual question in these sort of situations is: why did the auditor not catch this?
The simple answer is that the financial statements are unaudited.
The more nuanced answer, however, is that they were “reviewed” by the Luxembourg branch of KPMG. The audit firm concluded that nothing came to its attention that indicated that the accounts were “ not prepared, in all material respects, in accordance with IAS 34, “Interim Financial Reporting”, as adopted by the European Union.”
While not an audit, KPMG said it still entails some degree of checking the books:
A review of condensed consolidated interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
FT Alphaville asked KPMG Luxembourg about the error and it responded:
We will inform the company about the apparent transposition error in their interim financial statements. We have no further comment in view of our client confidentiality obligations.
We asked Vivion for some context around the error and the company provided us with the following statement:
The table in question had two digits transposed in the subtotal for non-current liabilities. This was simply a clerical error which was correct in the subsequent publication of our EMTN reporting, dated 11 November 2022. Both documents were signed off by our auditors.
Is this a mundane typo or an error that is indicative of wider issues with Vivion’s financial reporting? We imagine that the company’s supporters and sceptics might reach opposite conclusions.
Oliver Blume criticised by investors for dual VW and Porsche CEO role
Volkswagen’s new chief says at public meeting with investors that he intends to keep both jobs ‘long-term’
Volkswagen’s new chief executive Oliver Blume has been criticised by investors in his first public meeting since he took the top job at the world’s biggest carmaker while also remaining boss of Porsche.
Blume, who has been chief executive of VW subsidiary Porsche since 2015, took on the dual role in September after Herbert Diess was ousted from the parent company by shareholders and unions.
His dual role was the first point that Blume addressed in a speech to investors on Friday, arguing that the arrangement was “working out well” and that rules were in place “should there be potential conflicts of interest”.
“The two roles complement each other perfectly: like in soccer, where players give everything for their league club and at the same time play in the national team,” he said.
Investors did not appear reassured. Hendrik Schmidt, governance expert at DWS, which owns about 2 per cent of VW, said Blume’s dual role had caused “considerable unrest” among shareholders for months.
“Such an [arrangement] is so far unique in Germany and, from our point of view, cannot be considered responsible corporate management”.
Volkswagen has a complex ownership structure but is ultimately controlled by the Porsche-Piëch family, the heirs of the Porsche founder.
In September, Porsche was listed in one of Europe’s largest-ever initial public offerings, allowing the Porsche-Piëch family to acquire a larger stake in the sports car brand. Days after going public, Porsche overtook its parent company as the region’s most valuable carmaker.
VW shareholders on Friday voted to approve an extraordinary dividend of €19.06 per share — totalling €9.6bn, or 49 per cent of the proceeds of the Porsche IPO.
Marc Liebscher, a board member at small shareholder lobby group SdK, said Blume “cannot be a servant of two masters”.
Blume defended his position and said he intended to keep both roles “long-term”.
In his first months in the VW job, Blume has had to review the software strategy of the group, which also owns brands including Audi and Škoda.
Under Diess, the group created a unit called Cariad to develop software in house for VW’s various brands, but it has been plagued by delays.
Blume said creating Cariad had been the “right decision” but added that the company was now also considering external partnerships on software.
Binance outflows hit $6bn as Mazars halts ‘proof of reserves’ work
Accounting firm was hired by Binance and other crypto exchanges to conduct key reports
Outflows from Binance accelerated to $6bn in the first half of this week, while accounting firm Mazars has halted its work on crucial “proof of reserves” reporting, as the crypto exchange battles to avert a crisis of confidence.
The net withdrawals increase pressure on Binance, which suffered $1bn outflows in a single day on Tuesday and is battling to reassure investors of its financial strength following the collapse of rival crypto exchange FTX.
Mazars had produced “proof of reserves” reports for Binance and other exchanges, including Crypto.com and KuCoin, as they rushed to persuade nervous clients that they hold sufficient assets to match all customer deposits.
However, the accounting firm said on Friday that it had “paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public”.
According to communications seen by the Financial Times, the level of media focus on the matter was also a factor in Mazars’ decision.
The willingness of auditors such as Mazars to issue proof of reserves reports has been a key factor in soothing nervous investors as crypto exchanges seek to prevent “run on the bank” scenarios of the kind that sank FTX, which is alleged to have fraudulently made off with customer assets leaving a multibillion-dollar shortfall in client funds.
The reports are far more limited in scope than a traditional audit of a company’s accounts, including its liabilities, and are much less robust.
To prepare a proof of reserves report, an auditor uses procedures agreed with the company but does not vouch for whether those procedures are appropriate. The auditor also does not give any assurance or opinion over the numbers in the report, as it would in a full financial audit.
Mazars’ decision to halt work on proof of reserves reports was not driven by specific financial problems at any of the companies, said a person briefed on its decision. The firm’s work was so limited that it had “not looked that much” into the financial position of the companies.
Some people at Mazars feared that despite caveats in its reports the firm was “lending credibility to a very volatile sector” and felt it had been “naive” and “silly” to take on the work, the person added.
Binance said the Mazars report was “additional validation” that the exchange’s assets were equal to or greater than its liabilities to customers.
“Over the past week, Binance passed a stress test that should give the community extraordinary comfort that their funds are secure,” the exchange said on Friday, adding that it was able to fulfil recent withdrawals “without breaking stride”.
Binance has said it holds more than $60bn in assets, enough to honour withdrawals. The company’s disclosures do not include its liabilities, which makes it difficult to ascertain its financial health.
In a recent interview with CNBC, Binance’s chief executive Changpeng Zhao refused to confirm whether the exchange would be able to finance a potential $2.1bn clawback from FTX in the event that funds were requested as part of FTX’s bankruptcy proceedings.
“We are financially OK,” said Zhao, adding that he would leave such issues to Binance’s lawyers.
On Friday, Binance re-emphasised its plans to deliver proof of reserves to its customers but did not commit to a timeline.
“We have reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a proof of reserve for a private crypto company and we are still looking for a firm who will do so,” the exchange said.
“We embrace additional transparency and we are looking into how best to provide those details in the coming months,” Binance added.
However, some auditors are sceptical of the crypto industry’s commitment to transparency.
Following the collapse of FTX, Paul MacIntosh, EY’s US financial services crypto co-leader, said on LinkedIn that proof of reserves reports do not assess companies’ internal controls, “which ultimately was the downfall of FTX”.
“To move to true transparency and trust in the industry requires a much bigger step up,” he said, calling for the industry to invest in better accounting systems, IT controls and independent corporate governance.
Several audit firms have said they had elevated some or all of their crypto-related clients to the status of “high risk”, triggering more thorough work that will take longer and lead to higher bills.
KuCoin said it was aware of Mazars’ decision and was “open to work[ing] with any leading and reputable audit[or]”.
Crypto.com said it would “continue to engage with reputable audit firms in 2023 and beyond”.
Both KuCoin and Crypto.com said they had provided customers with the ability to verify their own holdings individually online.
Gapping down
In reaction to earnings/ guidance:
- ACN -2.5%, DNUT -2.4%, NX -2%
News:
- GH -33% (announces results from pivotal ECLIPSE study)
- DHI -1.7% (acquires Riggins Custom Homes for $107 mln)
- CVX -1.2% (invests in carbon capture co)
Analyst comments:
- DBVT -7.1% (downgraded to Sell from Neutral at Goldman)
- DEA -1.3% (downgraded to Underperform from Market Perform at BMO Capital Markets)
Gapping up
In reaction to earnings/guidance:
- SCHL +5.7% (also increases share repurchase program to $75 mln), ADBE +5.2%, WGO +2.2%, X +1.5%
News:
- MAXR +121.4% (will be acquired by Advent Int'l for $6.4 bln, or $53/share in cash)
- EXAS +16.6% (clinical data from rival GH seen as a positive for EXAS)
- OCGN +10.3% (OCU400 receives orphan drug designations)
- OB +7.1% (authorizes new $30 mln share repurchase program)
- ASTS +2.6% (signs agreement with NASA that formalizes cooperation to protect assets in low Earth orbit)
- AMEH +2.1% (authorizes new $50 mln share repurchase program)
- INST +1.7% (acquires LearnPlatform)
- RITM +1.4% (authorizes new $200 mln share repurchase program)
- SCVL +1.2% (authorizes new $50 mln share repurchase program)
- VMEO +1.1% (reports Nov total sales)
Analyst comments:
- CMPS +2.9% (initiated with a Buy at EF Hutton)
