Weekend Papers Summary
NEW YORK TIMES
-Investors and economists had expected to see some moderation. Instead, prices accelerated again in May, delivering an unwanted surprise.
The news raised the chance that the Federal Reserve, which has already started raising borrowing costs, would make more interest rate increases.
Inflation Spiked Again in May, Delivering a Blow to Biden.
-The Consumer Price Index rose by 8.6%, as price increases climbed at the fastest pace in more than 40 years, underscoring a challenge for President Biden.
-Jan. 6 Panel focuses on the cabinet discussions about removing Trump.
Other reports verify Representative Liz Cheney’s assertion that cabinet members considered using the 25th Amendment to oust Donald Trump after the Jan. 6 riot.
-The Jan. 6 Hearing Put a True-Crime Drama on Prime-Time TV. The first night of the hearings was serious public service, but it told an engrossing story with the tools of a limited series drama, our critic writes.
-Former President Trump disputed his daughter’s account that she had accepted his election loss, saying she had been “checked out.”
-Ukraine’s economy is damaged but functional. Its military is short of Western weapons, giving Russia an advantage along the eastern front.
-The reopening of the restaurants such as McDonald’s, under Russian ownership, illustrates the country’s surprising economic resilience in the face of intense sanctions.
-A top official said that the CDC will re-evaluate the decision in 90 days, and that the requirement could be reinstated. Here’s the latest on the pandemic.
-By endorsing her colleague’s primary challenger, Representative Alexandria Ocasio-Cortez has escalated a Democratic skirmish rippling beyond the state.
-Republicans caught every break in New York. Then Paladino Arrived.
The incendiary congressional candidacy of Carl Paladino has divided Republicans in the state and now threatens to shake up party leadership.
-The trial of Jeanine Añez, who took power after Evo Morales was ousted, has led to concerns about politicians’ use of the justice system to target opponents.
-After a fortune in cash was stolen from South African President Cyril Ramaphosa’s farmhouse, he kept it secret. Now that word is out, critics ask what he was hiding.
THE FINANCIAL TIMES
-Wall Street’s S&P 500 and Nasdaq stock indices recorded their worst week since January as fresh evidence of red-hot inflation and expectations of an aggressive central bank response led to big losses on Thursday and Friday.
-The Democrat and the Republican leading the congressional investigation into last year’s attack on the US Capitol aimed to provide a compelling narrative of the events of January 6 2021, and to lay the groundwork for a possible prosecution of the former president for his alleged role in them.
-Constant bombardment has taken a toll on battlefield morale, reflecting a darkening mood in Kiev as Russia’s army uses its advantages in massed artillery to make incremental progress in the Donbas and its weeks-long effort to take the provincial city of Sievierodonetsk.
-The US Securities and Exchange Commission is investigating Goldman Sachs’s asset management division over certain environmental, social and governance claims made by its funds, according to a source familiar with the matter. The civil investigation is scrutinizing certain Goldman Sachs funds with clean energy or ESG in their names, according to The Wall Street Journal, which first reported the investigation. Goldman rebranded its Blue Chip Fund as the US Equity ESG Fund in June 2020, the report said.
-US defense secretary Lloyd Austin accused China of stepping up coercive behavior towards Taiwan as he stressed that Washington would maintain its military capacity to resist any force that threatened the country.
Speaking at the IISS Shangri-La Dialogue defense forum in Singapore, Austin said China was engaging in provocative behavior across the Indo-Pacific region that ranged from dangerous naval and aerial maneuvers to increasingly assertive military activity around Taiwan.
-The end of the tech boom has sparked a flurry of job cuts as companies move swiftly to tighten their belts. Recruitment at Meta and Uber has slowed, job offers from Twitter and Coinbase have been rescinded and deep lay-offs have swept parts of the sector.
-The US has agreed to lift its Covid-19 testing requirement for international air travellers entering the country following intense lobbying by US politicians and the business community.
-US president Joe Biden unveiled a “new approach to managing migration” in Latin America on Friday, but observers said the measures were only the start of what was needed to address one of the hemisphere’s most pressing problems.
-Pakistan’s new government on Friday unveiled a budget for the coming financial year that aims to restore broken ties with the IMF and stave off a political challenge from ousted prime minister Imran Khan.
THE NEW YORK POST
-A Maryland factory worker accused of killing three coworkers and injuring two other people in a Thursday shooting was charged with dozens of felonies, including murder, authorities said Friday. Joe Louis Esquivel, 23, of Hedgesville, WV, was hit with a slew of murder, attempted murder, assault and weapons charges in connection with the Smithsburg massacre, according to the Washington County Sheriff’s Office.
-Starbucks is considering an end to the “open bathroom” policy at its stores due to mounting concerns about public safety, CEO Howard Schultz said. Schultz said Starbucks was exploring whether to alter the policy, which allows non-customers to use store bathrooms, due to a nationwide “mental health” problem that was posing difficulties for the coffeehouse chains’ employees.
-Elon Musk’s deployment of thousands of Starlink satellite internet terminals to Ukraine has been a major boon for soldiers resisting the brutal Russian invasion – with one top US general stating that the service has helped Ukrainians stay connected to the West.
Since the day Telegram was launched almost 9 years ago, we've been giving our users more features and resources than any other messaging app. A free app as powerful as Telegram was revolutionary in 2013 and is still unprecedented in 2022. To this day, our limits on chats, media and file uploads are unrivaled.
And yet, many have been asking us to raise the current limits even further, so we looked into ways to let you go beyond what is already crazy. The problem here is that if we were to remove all limits for everyone, our server and traffic costs would have become unmanageable, so the party would be unfortunately over for everyone.
After giving it some thought, we realized that the only way to let our most demanding fans get more while keeping our existing features free is to make those raised limits a paid option. That's why this month we will introduce Telegram Premium, a subscription plan that allows anyone to acquire additional features, speed and resources. It will also allow users to support Telegram and join the club that receives new features first.
Not to worry though: all existing features remain free, and there are plenty of new free features coming. Moreover, even users who don't subscribe to Telegram Premium will be able to enjoy some of its benefits: for example, they will be able to view extra-large documents, media and stickers sent by Premium users, or tap to add Premium reactions already pinned to a message to react in the same way.
While our experiments with privacy-focused ads in public one-to-many channels have been more successful than we expected, I believe that Telegram should be funded primarily by its users, not advertisers. This way our users will always remain our main priority.
Since the day Telegram was launched almost 9 years ago, we've been giving our users more features and resources than any other messaging app. A free app as powerful as Telegram was revolutionary in 2013 and is still unprecedented in 2022. To this day, our limits on chats, media and file uploads are unrivaled.
And yet, many have been asking us to raise the current limits even further, so we looked into ways to let you go beyond what is already crazy. The problem here is that if we were to remove all limits for everyone, our server and traffic costs would have become unmanageable, so the party would be unfortunately over for everyone.
After giving it some thought, we realized that the only way to let our most demanding fans get more while keeping our existing features free is to make those raised limits a paid option. That's why this month we will introduce Telegram Premium, a subscription plan that allows anyone to acquire additional features, speed and resources. It will also allow users to support Telegram and join the club that receives new features first.
Not to worry though: all existing features remain free, and there are plenty of new free features coming. Moreover, even users who don't subscribe to Telegram Premium will be able to enjoy some of its benefits: for example, they will be able to view extra-large documents, media and stickers sent by Premium users, or tap to add Premium reactions already pinned to a message to react in the same way.
While our experiments with privacy-focused ads in public one-to-many channels have been more successful than we expected, I believe that Telegram should be funded primarily by its users, not advertisers. This way our users will always remain our main priority.
Tidjane Thiam’s Spac replaces Pimco with ‘better fit’ Edward Zeng
Investment vehicle led by the ex-Credit Suisse chief has yet to do a deal since launching in February 2021
Tidjane Thiam’s investment vehicle has parted ways with Pimco, claiming to have found “a better fit” in Chinese entrepreneur Edward Zeng.
Freedom Acquisition Corp, a special purpose acquisition company led by ex-Credit Suisse chief Thiam as executive chair, floated in February 2021 and has yet to identify a private company to merge with.
The loss of the world’s largest bond manager was revealed in a regulatory filing this week, which showed that Pimco had agreed to offload its entire stake in the sponsor vehicle to Next G, an affiliate of Zeng’s advisory firm China Bridge Capital. Zeng has also been appointed as a director to replace Jamie Weinstein, Pimco’s head of corporate special situations.
Freedom’s chief executive Adam Gishen said it took the decision. “We actively managed the replacement of Pimco by Edward Zeng as our co-sponsor,” said Gishen, a former investment banker at Credit Suisse.
“We believe Zeng’s involvement — with his proven track record of creating value through Spacs — is a better fit for Freedom and its investors in the current environment. We remain focused on doing a deal — at the right price — as promised to our investors.”
Pimco declined to comment.
Spacs are shell companies that list on stock exchanges and use the proceeds to hunt for private companies they can acquire and take public through a reverse merger. Most are required to complete a deal within two years of their initial public offering or return the money raised to investors.
Freedom shares are trading at $9.81, below the $10 float price.
Freedom raised $345mn in its initial public offering on the New York Stock Exchange in early 2021. The vehicle, which focuses on fintech, counts François Pinault, the French billionaire who founded luxury group Kering, among its investors.
The Spac is Thiam’s first move in financial services since his departure from Credit Suisse in 2020. He is among a number of bank chiefs who have launched blank-cheque vehicles, including former UniCredit boss Jean Pierre Mustier.
The boom in Spacs has receded in recent months. Rising interest rates and the prospect of tougher regulation from the Securities and Exchange Commission have spooked investors and made some investment banks reluctant to work with the vehicles.
Eni/Plenitude: more gas than greenery in Italy’s eco-float
Valuations based on forecasts for a few years from now are fast losing their appeal
Eni of Italy plans to float a stake in its renewable business Plenitude. But a mooted valuation of up to €7.5bn is lower than initial estimates. Growing investor scepticism on environmental claims could make forthcoming green demergers less lucrative for industrial owners.
Bankers have been talking up the eco-friendly credentials of forthcoming initial public offerings to counteract tough markets. Deals in the same mould as Plenitude include Italy’s De Nora and Nucera from Thyssenkrupp of Germany, which both have a hydrogen angle.
Eni, a state-backed energy giant, set ambitious net zero goals after being slapped on the wrist by Italian regulators for “greenwashing” in 2019. Plenitude is central to its energy transition plans. The company corrals together Eni’s existing 1.1GW of wind and solar assets, which are expected to grow to 6GW by 2025. Another component is a network of 6,500 electric vehicle charging points, expected to increase to 30,000 by the same year.
As with most partial demergers, the idea is that the two companies will be worth more as separately-listed entities. Spinning Plenitude off from Eni’s fossil fuel rump should be rewarded with a higher multiple and a lower cost of capital, bosses hope.
The problem is that Plenitude’s main green businesses are not expected to produce meaningful earnings until 2025. Even then, they will be less than half of the total. Ebitda of €600mn last year came almost exclusively from the group’s retail gas supply business, the largest in Italy.
There is nothing wrong with using cash flows from fossil fuels to fund green investments. But investors should be clear what they are paying for. Plenitude’s rumoured valuation equates to 12 times trailing ebitda. That is suspiciously close to green energy darlings such as wind generator Orsted on 16 times or EDP on 14 times.
Comparable retailing operations in traditional generating groups trade on multiples closer to seven times. Only on 2025 earnings — valued at five times expected ebitda — does Plenitude’s multiple make sense. Valuations based on forecasts for a few years from now are fast losing their appeal with investors.
The new ESG risks for sovereign bonds
Plus, hedge funds say short selling is ESG-friendly
Hello from New York. For all the environmental, social and governance (ESG) obituary writers out there, pens down: There is good news for ESG in the bond market.
From the beginning of the year to the end of April, ESG funds saw $7.4bn in inflows while non-ESG funds reported $168bn in outflows, according to a report from Bank of America on June 8. (The BofA analysts literally wrote “wow!” after reporting their findings).
In the US specifically, ESG bond funds saw $2.9bn for the period compared with $80bn in cash out of the door for the rest of the bond fund universe.
The strong demand for fixed-income ESG bond funds contrasts with shakier performance in their equities-focused counterparts, which have been hit by factors including rising energy prices.
But there are some more worrying signals amid those strong flows. As Simon highlights in today’s edition, bond investors may be underestimating serious ESG risks around their sovereign debt portfolios. And I have a report on the controversial issue of ESG short selling. Thank you for reading. (Patrick Temple-West)
Russia’s war: the tough ESG lessons for bond investors
Investors in Russian sovereign debt are sitting on hefty losses after Vladimir Putin’s invasion of Ukraine sent the value of his country’s bonds into freefall. Could they have avoided that outcome by paying more attention to environmental, social and governance factors? And could they protect themselves against similar losses by waking up to ESG risks in other troubled nations?
That’s the argument of analysts at Verisk Maplecroft, who have published new research showing that 15 hard-currency sovereign debt issuers have even worse ESG risks than Russia.
The situation facing Russian bond investors is an example — albeit an extreme one — of the perils facing investors who take a complacent approach to sovereign ESG risks, David Wille, financial sector risk analyst at Verisk, told Moral Money. Well before the invasion, Verisk’s ESG metrics for Russia gave “a sense that something is wrong here”, Wille said, with Russia receiving a score similar to “Venezuela or Iran, which are already pariahs — whereas its debt was being priced similar to countries like Lithuania”.
So which other countries’ ESG performance should investors be worried about, according to Verisk?
President Recep Tayyip Erdoğan of Turkey. The country scored worse than Russia in Verisk’s rating system © AP
One important case is Turkey, a big bond issuer that ranks two notches below Russia on Verisk’s 15-point scale, reflecting President Recep Tayyip Erdoğan’s continuing crackdown on civil freedoms and the separation of powers. Egypt, Peru and Nigeria are among the other nations coming in behind Russia. China and Saudi Arabia, while ahead of Russia, also score poorly.
These results might raise eyebrows among those who note that Peru, for all its recent political unrest, has not invaded a South American neighbour. But rather than giving a verdict on a country’s ethical credentials, Verisk’s recently launched rating system is intended to give greater clarity on material risks that have received too little investor attention, said Wille.
Turkey scored even worse than Russia because of its dire performance on issues such as labour rights and food security, he said. And Russia’s environmental score — despite the climate impact of its giant oil and gas industry — benefited from slight “improvements in its regulatory framework”.
Verisk’s in-house analysis shows a clear relationship between its ESG ratings and sovereign debt performance, with the former often serving as a lead indicator for the latter, according to Wille. That chimes with other research showing the potential utility of such data to investors, even leaving aside moral considerations. JPMorgan found that the ESG versions of its emerging market debt indices offered similar returns but with lower volatility. Pimco analysts showed that high ESG performance came with lower credit spreads for sovereign issuers, “over and above the effect of any macroeconomic and financial variables”.
Verisk, and other providers of national-level ESG data, will now hope to capitalise on a surge in attention to country risk, as investors look to get ahead of the next crisis. “When something happens, like a coup or war, the markets react straight away,” said Eileen Gavin, global markets analyst at Verisk. “But there are lots of softer things happening — interference with electoral processes, subtle changes in laws — that are not being picked up.” (Simon Mundy)
Short selling ‘essential’ to ESG goals, hedge funds argue
Man Group argued that shorting could not serve as a carbon offset © REUTERS
It is one of the more controversial topics in ESG: does short selling deserve to play a role in socially conscious investing? Former Japanese pension chief Hiro Mizuno kicked off the debate when he stopped lending to short sellers in 2019, arguing they do a disservice to long-term investing.
Then earlier this year, Man Group, one of the world’s largest hedge funds, stirred the pot by arguing that shorting cannot serve as a carbon offset. Shorting, in lieu of actually cutting emissions, “will come across as inauthentic and likely not endear hedge funds to the climate cause”, Man’s co-head of responsible investment Jason Mitchell wrote in the FT.
(In essence, short sellers borrow shares to sell and then buy them back at a lower price, making money on the difference.)
Man’s position uncorked a round of pushback (see here and here). And now the hedge fund’s main lobbying group in Washington has weighed in to argue that short selling is ESG friendly. In a new report published today, the Managed Funds Association reported that “short selling can potentially reallocate $50bn-$140bn of investments away from the most heavily polluting companies.”
The paper argues that short selling “can be an essential tool to accomplish ESG goals by helping reallocate capital away from high-emissions companies all while maintaining investment performance”.
Shorting can be used as a hedging tool against climate risks and it can tilt investments toward carbon neutral positions, the Managed Funds Association said.
But why all the fuss now about the ESG qualifications for short selling?
Hedge funds are jostling to win business from pension funds and sovereign wealth funds that have been putting growing weight on sustainability issues. So they have an incentive to play down concerns that short selling — a central tool for many hedge funds — could undermine ESG goals. What’s certain is that this report is unlikely to be the last in the debate. (Patrick Temple-West)