Closing Stock Market SummaryThe S&P 500 fell 1.8% on Wednesday, tumbling further into correction territory, in a disappointing session. Investors sold into rebound attempts as the Russia-Ukraine situation only seemed to worsen.
The Nasdaq Composite dropped 2.6%, representing the weakness in the mega-caps/growth stocks. The Dow Jones Industrial Average fell 1.4%, and the Russell 2000 fell 1.8%.
The first rebound attempt was at the open, which saw the S&P 500 up as much as 0.9% amid gains in all 11 of its sectors. That was driven primarily by mechanical factors on the belief that the market was primed for a rebound. The market, however, quickly turned negative.
There were only lower highs as the session progressed, feeding into the general pessimism in the market and the negative price momentum. The latest Russia-Ukraine headlines kept the buyers in hiding.
Briefly, Ukraine declared a state of emergency and mobilized its reserves; the U.S. canceled diplomatic meetings with Russia and expanded sanctions to Nord Stream 2 AG and its corporate officers; and the Biden administration warned Ukraine of a full-scale Russian invasion within 48 hours, according to Newsweek.
The growth stocks were at the forefront of selling interest, taking the S&P 500 consumer discretionary (-3.4%) and information technology (-2.6%) sectors to the bottom of the standings. Right before the close, the S&P 500 briefly dipped below its Jan. 24 intraday low (4222.62).
The energy sector (+1.0%) was the only sector that closed higher, rising 1% even as oil prices settled lower ($92.12, -0.15, -0.2%).
Away from equities, there was no flight to safety in the Treasury market, once again suggesting that the stock market's misery was owed to more than just geopolitics, namely the Fed potentially hiking into slower growth.
The 2-yr yield rose five basis points to 1.60%, and the 10-yr yield rose three basis points to 1.98%. The U.S. Dollar Index increased 0.2% to 96.21. On a related note, San Francisco Fed President Daly (not a voting FOMC member) said she supported removing accommodation, starting in March.
Wednesday's economic data was limited to the weekly MBA Mortgage Applications Index, which dropped 13.1% following a 5.4% decline in the prior week. Looking ahead, investors will receive weekly Initial and Continuing Claims, New Home Sales for January, and the second estimate for Q4 GDP on Thursday.
- Dow Jones Industrial Average -8.8% YTD
- S&P 500 -11.3% YTD
- Russell 2000 -13.4% YTD
- Nasdaq Composite -16.7% YTD
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ETF investors pile into Russian equities and defence stocks
Fund flows could be sign that some view crisis as shortlived while others are more pessimistic
Western exchange traded fund investors have ignored rising tensions in Ukraine and bought into Russian equity funds in recent days, but have also loaded up on guns, bombs and bullets.
They have increased their exposure to gold — long considered a safe haven in times of crisis — and energy funds as oil prices hit $96.50 a barrel, but have cut their bets on the US and European stock markets and eastern Europe.
ETFs focused on Russian equities took in a net $89.5mn in the week to Monday’s US market close, according to data from TrackInsight. This equates to a third of the net flows so far this year and is equivalent to 3.1 per cent of the $2.9bn of assets held by the 15 ETFs, listed in the US, Europe and East Asia.
The VanEck Vectors Russia ETF (RSX) had net inflows of $61.3mn in the week to Monday, while BlackRock’s iShares MSCI Russia ETF (ERUS) attracted $20.6mn, according to TrackInsight.
Similar data from FactSet, covering 38 ETFs and mutual funds that have at least 50 per cent exposure to Russia, with combined assets of $8.7bn, showed net inflows of $69.7mn in the week to last Thursday.
The buying spree comes despite a sharp sell-off for Russian equities, with the Moex index down almost 20 per cent year to date. The median Russian ETF is smarting from a loss of 12 per cent so far this year in dollar terms, and 9.4 per cent in the week to Monday.
However, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, said that while the inflows could be a sign of investors looking to buy Russian equities at beaten up valuations, they could also be suggestive of increased short selling of Russia-focused ETFs, a process that also increases the number of shares in issuance.
“The flow to Russian ETFs is either people trying to benefit from the discounted valuation from panic selling or using the ETF to create shares for shorting purposes,” Rosenbluth said. “Getting liquid access to Russian stocks is harder than it is using ETFs.”
Peter Sleep, senior portfolio manager at 7 Investment Management, pointed to “bottom fishing” by some investors, particularly with the Russian stock market already being cheap, as well as “people expressing hope that [the crisis] will all be over quickly”.
The Moscow bourse traded at 5.4 times forward earnings at the end of 2021, according to Siblis Research, compared to 12 times for emerging markets as a whole.
Elisabeth Kashner, director of global fund analytics at FactSet, believed the flows into some of the Russian ETFs, at least, were “opportunistic, probably based on energy price expectations”.
Kashner pointed out that the VanEck Vectors Russia ETF, at $1.2bn the largest such fund, has a 41 per cent exposure to the energy sector, via holdings such as Gazprom, Lukoil, Novatek, Tatneft and Rosneft, and is therefore potentially well-positioned to benefit from any crisis-driven rise in oil and gas prices.
Energy ETFs more broadly have also seen renewed interest, with net inflows of $619mn in the week to Monday, according to TrackInsight, with about half the money vacuumed up by State Street’s Energy Select Sector SPDR Fund (XLE).
Gold has been another in-demand sector, with inflows of $1.1bn over the week, taking buying so far this year to $4.8bn, a sharp reversal of fortunes from last year, when the sector was hit by net outflows of $9bn, the highest since 2013.
“During times of uncertainty, ETFs tied to gold are in vogue as an alternative to the stock market,” said Rosenbluth.
Sleep viewed oil and gold as the “natural hedge” during a time of geopolitical crisis, alongside high-grade debt such as US Treasuries and UK gilts.
However, the gold buying may not necessarily be driven by concern over the fallout from Russia’s aggression towards Ukraine.
“There are a couple of things playing into the gold story. I think it’s people hedging their risk and also the added bonus that it has historically provided some level of inflation protection,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar. Inflation is rising sharply in much of the world, a trend that may be further exacerbated by even higher energy prices.
Defence sector ETFs have taken in $126mn, almost doubling their inflows so far this year.
“It’s the other side of the coin,” said Sleep. “You have got the optimists going into Russia and the pessimists buying into defence stocks.”
In contrast, broad S&P 500 ETFs saw $1.6bn walk out of the door in the week to Monday, reversing the buying witnessed earlier this year, while those tracking the Euro Stoxx 50 index saw outflows of $147mn. ETFs investing in eastern Europe shipped $4.7mn, a meaningful sum for a small sector.
The complex route to VW’s planned Porsche IPO
Investors fear German carmaker’s proposed €20bn listing of historic brand may repeat past mistakes
Like many of Volkswagen’s pivotal announcements, the German group’s management board had no control over the timing of a confirmation that it finally planned to list part of the company’s crown jewel, Porsche.
Instead, the drip-feed of rumours from VW’s many stakeholders — which include a secretive family shareholder, powerful unions, the German state of Lower Saxony and 12 independently managed auto brands — forced the carmaker to rush out a statement in compliance with stock market disclosure rules, just as Russia moved forces into Ukraine.
Neither a botched bulletin, however, nor the prospect of war could dampen the case for liberating Porsche, which delivers just 300,000 vehicles out of the 9mn sold by VW Group each year, yet accounts for a quarter of its profits. VW shares initially rose almost 10 per cent on the news as markets relished a €20bn initial public offering of the historic brand, which would easily eclipse 2021’s $12bn float of electric carmaker Rivian.
As VW chief executive Herbert Diess made a point of emphasising to reporters last year: “Porsche performs in a league of its own.”
The luxury carmaker, whose origins intertwine with VW’s own, shows “how an automotive icon can remain an outstanding sports and performance brand while repositioning towards electrification”, he added.
In contrast to VW, which has flooded the market with underperforming electric cars, Porsche has focused on excellence.
Following the mantra of its former boss Ferry Porsche, who told his engineers the company “can and may build anything, as long as the product is better than competitors”, the brand most famous for the purr of its engines managed to sell more silent electric Taycan models last year than its storied 911s, delivering 41,000 of the cars to customers, much to the surprise of Porsche’s own executives.
An electric Macan sport utility vehicle is due to follow but not until the second half of 2023, with Porsche chief executive Oliver Blume keen to preserve cash-generating petrol and diesel models, vowing last year that, unlike VW, “Porsche will always offer combustion engines”.
As a result, Porsche is virtually alone among legacy car manufacturers in maintaining profit margins above 15 per cent, and increasing revenues by double-digit figures while speeding into the electric age.
Yet investors have not rewarded VW for its ownership of Porsche. While the brand has been estimated by analysts to be worth between €100bn and €200bn, Diess, who has made it his mission to take on Tesla in the electric race by committing €52bn to develop battery-powered models, has seen his company’s market value lag well below the €200bn he has long hoped to achieve, never mind the $830bn valuation of its US rival.
The Porsche-Piëch family, meanwhile, which indirectly owns more than 50 per cent of VW’s voting shares through the confusingly named Porsche SE holding company, is motivated by “wanting to own an asset like Ferrari, LVMH and Hermes”, according to a person close to the Austrian clan.
The family is still nursing its bruises after being forced to relinquish ownership of Porsche following the failure of its audacious bid to swallow VW in 2009. The aborted attempt, a casualty of the global financial crisis, led to a complex reverse takeover in which Porsche became part of VW, although it continued to be managed by allies of the eponymous family.
Yet the leaked details of the planned IPO, which still needs to be approved by VW’s boards, is already leading to concerns that the Wolfsburg-based company will bungle the listing, in a manner not too dissimilar to the partial float of its Traton trucks arm in 2019, in which it maintained a close to 90 per cent stake, and which languishes below its listing price.
“VW does not have a flawless record when it comes to mergers and acquisitions, to say the least,” said Stifel’s auto analyst Daniel Schwarz, who added that investors might worry that the company, which already mints €15bn in free cash flow a year, could whittle away the proceeds on expensive projects to placate unions and secure employment.
A prolonged clash with workers late last year led to VW pledging to build another factory close to its Wolfsburg headquarters, where it had already promised to base a research arm designed to take on Tesla.
A person close to VW’s unions, which in effect control the company’s supervisory board due to a loose alliance with the state of Lower Saxony, confirmed that the carmaker’s workers’ council would look to safeguard jobs and the future of German plants before approving any Porsche listing.
Additionally, leaked details from the draft agreement for the planned IPO point to the creation of a much-criticised ownership and governance structure that is not unlike the one that has kept many investors from buying into VW itself.
Porsche’s stock would be split equally into ordinary shares and non-voting preference shares, after which 25 per cent, half ordinary and half preference, would be floated at an expected valuation of between €80bn and €90bn for the business as a whole.
This would result in one of the largest IPOs in recent German history. But the Porsche-Piëch family’s investment vehicle could buy all of the ordinary shares on offer, according to people familiar with the matter, leaving just 12.5 per cent of Porsche in free float and threatening to create a stock in which no large investor could build a substantial stake.
People close to VW’s management also warned that there was still a chance that the IPO would be scrapped, either due to internal wrangling or an unfavourable market environment. Significantly, no lender has been officially appointed to lead the transaction, according to a bank involved.
But as one VW watcher quipped, the current plans look eerily similar to the Porsche of old, which was essentially a closed shop to external investors. The marque, they added, was “in danger of going back to the future”.
Blavatnik-backed DAZN suffers $1.3bn loss in pandemic
Streaming group’s results for 2020 hit as disruption to sport spurs subscribers to cancel
DAZN, the sports streaming group backed by billionaire investor Leonard Blavatnik, racked up pre-tax losses $1.3bn in the first year of the pandemic as coronavirus disrupted the sporting calendar.
The so-called Netflix of sports has agreed billion-dollar deals to broadcast live sport, such as a €2.5bn three-year deal to screen Italy’s Serie A, as it seeks to compete against traditional broadcasters including Sky and ESPN. It also sought to strike a deal for UK sports streaming platform BT Sport.
But the London-based company remains reliant on Blavatnik’s Access Industries, its majority shareholder, for funding. Last week Access agreed a $4.3bn recapitalisation of DAZN that has left the group debt free.
DAZN is planning its next steps after its talks to acquire BT Sport, which broadcasts the English Premier League and Uefa Champions League football competitions in the UK, collapsed.
It is considering expanding into new business areas, including betting and gaming, in search of profitability and last month appointed Shay Segev, former head of gambling group Entain, as chief executive.
In delayed accounts for the year to December 2020, revenue rose to $871.8mn from a restated $819.0mn the previous year, according to a Companies House filing. Its accounts for 2021 are due by the end of September.
DAZN’s net loss of $1.3bn in 2020 was lower than the $1.4bn recorded the previous year.
The group said it had suffered as customers ditched subscriptions when sports suspended play from March to July 2020 as the pandemic took hold and governments rolled out measures to limit the spread of the virus.
“When sports content resumed in the latter half of the year, the group saw improved subscriber and revenue growth,” the accounts said. This boosted subscriber revenues.
Operating costs fell almost 27 per cent to $2bn, primarily because DAZN spent less on the rights to broadcast sports as a result of rebates and contract terminations during the pandemic.
All eyes are on Lebanon’s top banker as the country slides deeper into financial peril
Riad Salameh has so far eluded the justice system at home, but European investigators are tightening the noose
If social media and table gossip are anything to go by, the lucky minority of Lebanese not preoccupied with where their next meal is coming from are transfixed by the waning fortunes of Riad Salameh.
The governor of the Banque du Liban since 1993, Salameh’s personal finances are being investigated by several European countries including Germany, France and Switzerland. These probes have fed judicial inquiries inside Lebanon that — although continually obstructed — are shaking free pieces of evidence suggesting the hitherto middle-income country was reduced to penury by recycled warlords, sectarian dynasts, and a mafia of bankers.
Appointed after Lebanon emerged from its 1975-90 civil war, Salameh has been at the centre of this web for three decades. While it was the profligacy and corruption of oligarchs that ultimately bankrupted Lebanon, the central bank governor was responsible for the machines that financed them, and kept them running over the past decade.
As early as 2015, the IMF detected a $4.7bn hole in the BdL’s net reserves. Salameh then started offering Lebanese banks interest rates that would reach double figures to attract dollars BdL would never be able to repay, as Lebanon’s fiscal and external deficits kept widening. The central bank called this “financial engineering”. Others called it a Ponzi scheme, which has created one of the worst economic depressions in history.
Nobody is being held to account for this, as the UN and World Bank estimate three-quarters of Lebanese have been plunged into poverty, and the country haemorrhages its world-recognised professional elites, doctors and engineers, academics and designers. Nor has a judicial inquiry progressed into responsibility for the gigantic August 2020 chemical explosion, which destroyed the port of Beirut and much of five districts in the capital. Pressure from Hizbollah, the Iran-backed Shia militia that dominates Lebanon, has in effect shut down the investigation, extinguishing the last flickers of the rule of law.
That is one reason Lebanese are fascinated with the Salameh case. They saw how he last week eluded a Lebanese judge’s summons — highlighting tribal loyalties in the judiciary and the rival security services who sought him out and those that prevented his arrest. But he cannot dodge the European investigations that are tightening like a noose.
Salameh is being investigated for embezzlement and money-laundering, not least the alleged siphoning off of BdL commissions charged to Lebanese banks purchasing government securities to an undeclared firm run by his brother. The bank governor told the Financial Times in an interview last week that he had done nothing wrong, and that the allegations against him were politically motivated.
However, this is big money, against a backdrop of greed by the elites and poverty for the masses, as Lebanon hurtles towards state failure. After the civic uprising that toppled the government in October 2019, foreign exchange inflows dried up and the banks (most of them part-owned by politicians), shut depositors out of their mostly dollar accounts, limiting withdrawals as the Lebanese pound lost more than 90 per cent of its value. Influential Lebanese had little problem transferring their dollars out of the country — which needs the BdL — while ordinary people had their savings confiscated.
The succeeding interim government’s rescue plan in April 2020 estimated the BdL deficit at nearly $50bn and total bank losses at $83bn, more than the size of Lebanon’s shrinking economy. The central bank and the bankers rejected this. Indeed, Lebanon fielded four different teams to negotiate with the IMF, as though they were engaging in a tag-wrestling contest. The banks are also jibbing at more recent estimates by the current government of the financial losses, even though the distribution still favours them. They meanwhile inflate their way out of debt and reduce dollar liabilities by forcing depositors to withdraw the worthless Lebanese pounds that the BdL prints at way below market exchange rates.
Obviously this is down to more than one person. If Salameh is as guilty as many suspect, he also likely knows where the bodies are buried. Perhaps that is why he is still protected at home.
He remains, however, the point-man in the attempt to restart IMF negotiations he helped torpedo two years ago. Now, the objective demands for a bailout are higher because the economic collapse is so much deeper. But how can the fund deal with a man who is the subject of multiple investigations, having championed him for decades?
France is trying to push Salameh out, but he somehow still has US support, albeit ambiguous. “We don’t know whether he’s the grenade on the table or its pin” one American official admits.
Stellantis/Carlos Tavares: profiting from higher prices and a richer mix
The auto group now needs to show investors it can succeed in China and catch its rivals on electrification
Stellantis kept the pedal to the metal in its first year. Net profits nearly tripled at the group forged last January from Peugeot-maker PSA and Fiat Chrysler. Faster-than-expected delivery of cost savings testified to the execution skills of highly rated boss Carlos Tavares.
The world’s fourth-biggest carmaker now needs to show it can catch up with rivals on electrification and successfully navigate the post-pandemic terrain.
The share price jumped by 6 per cent on Wednesday, pushing gains since January 2021 up to a quarter, much in line with the Stoxx Euro autos index. Yet its forward price/earnings multiple of about 5 times is more than 30 per cent lower than rivals like VW and GM, using Jefferies estimates.
To narrow that gap, the 14-brand Franco-Italian-American group needs to show its boast of being “powered by diversity’‘ is an advantage not a drag. It must also convince investors that it can succeed in two areas where FCA and PSA were weak: China and electrification. Stellantis’s first all-electric pick-up truck, the Ram 1500, will arrive in 2024. That puts it a year behind GM and two years behind Ford. The hope is that it can learn from its rivals and avoid costly mistakes.
Stellantis should also show it can sustain double-digit operating margins, even when the pandemic supply shortages ease. Its 2021-adjusted operating margin was 11.8 per cent, nearly a fifth above target, as it prioritised high margin models in response to the chip crisis. Supply constraints will continue in 2022.
As the chip shortage unwinds, so will the mix-induced boost to profitability. The outcome also depends on capacity in Europe. Bosses, including Tavares, have warned of potentially heavy job losses, given the costs of developing new technology. Moreover, they want to tackle the European industry’s chronic oversupply.
Carmakers like Stellantis must try to retain some of the pandemic era’s pricing gains, so investors can benefit from higher returns.