>>> Weekly Market Update

Weekly Market Update: Markets stew over how many Fed rate hikes to expect in 2022

A wild trading week kicked off with a bang on Monday as stocks plunged along with most other risk assets including crypto. Investors continued to aggressively prune risk ahead of Wednesday’s FOMC meeting. Major US indices moved into correction territory (down 10%) intraday and the VIX surged near 39, taking out the December high. Volumes jumped and breadth was exceedingly poor, which had traders looking for clues of potential selling exhaustion and perhaps a bottom. Consternation around the Federal Reserve’s designs on pulling back the punch bowl this year were perhaps married with worries about economic growth after US Markit PMI services dropped to 50.9, the lowest levels since January 2020. Volatility was extreme every day this week, though Monday appeared to put in a near term bottom and equities edged higher for the week with the S&P adding 0.8%, the DJIA rising 1.4%, and the Nasdaq about flat.

The choppiness continued right into Wednesday’s FOMC meeting. As expected the Fed left rates unchanged and all but assured liftoff will begin in March. In his press conference Chairman Powell showed no inclination of flinching since his hawkish pivot in back in November. Futures markets quickly began to price in at least five Fed rate hikes in 2022 after he noted they would not rule out another hike in May and adding every meeting going forward would be ‘live’. The US Treasury curve fattened notably post-FOMC, with the 2-/10-year yield spread narrowing some 10+ basis points. The US dollar remained bid and gold was under modest pressure. WTI crude hit a fresh 7-year high which was probably not lost on Chairman Powell and his colleagues. On Thursday, Q4 GDP printed at a whopping 6.9%, but that was pre-Omicron data and was boosted by a large build in inventories. Weekly initial jobless claims continued to illustrate a tight labor market with low layoffs and plentiful job openings.

By Friday, futures were under pressure once again heading into the opening bell. December PCE and Employment Cost Index data resulted in a brief respite of selling as the data met or came in softer than market expectations. Indices continued to vacillate widely, moving in and out of positive territory on several occasions. Traders remained focused on Monday's lows as a key technical gauge heading into the weekly close, while breadth remained decidedly negative, though improving some from the recent highly depressed levels.

In corporate news this week, Apple posted record quarterly profit and revenue, and CEO Cook noted he sees supply issues improving and services continuing to grow strongly. Microsoft’s results and outlook lifted tech stocks mid-week as its earnings continued to rise and its cloud division remained one of the industry’s fastest-growing. Visa shares rose after reporting a beat on profits, with management pointing out it doesn’t believe the current Omicron surge will curtail the economic recovery. Tesla shares fell despite announcing a record annual profit as CEO Musk cautioned that the supply chain issues were a negative factor this quarter and that those holdups are likely to continue through 2022.

Intel stock hit its lowest levels in a year after its revenue and margin outlook disappointed investors. Weak guidance and supply chain disruptions sent Western Digital shares plunging after the manufacturer reported results. Robinhood shares dipped to hit single digits after reporting a big net loss and a reduction in active users in Q4. Nvidia reportedly is preparing to ditch the planned takeover of Softbank’s Arm division as regulatory hurdles appear to be too formidable.


SUN 1/23
(DE) German Navy Chief Schönbach resigns after positive comments on Russian Pres Putin - press
RNO.FR Alliance of Renault, Nissan and Mitsubishi expected to announce plan to invest more than €20B over next five years on EV development - press

MON 1/24
*(FR) FRANCE JAN PRELIMINARY MANUFACTURING PMI: 55.5 V 55.3E (14th month of expansion)
*(DE) GERMANY JAN PRELIMINARY MANUFACTURING PMI: 60.5 V 57.0E (19th month of expansion and highest reading since Aug 2021)
*(EU) EURO ZONE JAN PRELIMINARY MANUFACTURING PMI: 59.0 V 57.5E (19th month of expansion)
6752.JP Said to start producing new Tesla batteries in 2023; New batteries will reportedly boost Tesla Model S range from ~650km to ~750km - Nikkei
*(UK) JAN PRELIMINARY MANUFACTURING PMI: 56.9 V 57.6E (20th straight expansion, but lowest reading since Feb 2021)
(RU) Russia govt spokesperson Peskov: Blames US and NATO for rising tensions in Ukraine; Sees very high risk of Ukraine offensive in Donbas region
*(US) JAN PRELIMINARY MARKIT MANUFACTURING PMI: 55.0 V 56.7E (Lowest since Oct 2020)
SON Increases prices for paperboard tubes and cores by at least 6% on US, Canadian shipments; Effective Mar 1, 2022
*(SG) SINGAPORE CENTRAL BANK (MAS): TO RAISE SLIGHTLY THE RATE OF APPRECIATION OF THE S$NEER POLICY BAND, Leaves width of band and level at which centered unchanged (intra-meeting move)
*(AU) AUSTRALIA Q4 CPI Q/Q: 1.3% V 1.0%E; Y/Y: 3.5% V 3.2%E
1112.HK Will not proceed with planned 5-year USD bond offering, cites market conditions

TUES 1/25
005380.KR Reports Q4 (KRW) Net 0.55T v 1.38T y/y; Op 1.53T v 1.64T y/y; Rev 31.0T v 29.2T y/y; Chip shortage situation will normalize by July 2022
ERICB.SE Reports Q4 (SEK) Net 10.1B v 7.2B y/y, Adj Op 12.3B v 10.0Be, Rev 71.3B v 68.1Be; Expects fundamentals to remain strong in our core mobile infrastructure business during 2022
*(DE) GERMANY JAN IFO BUSINESS CLIMATE SURVEY: 95.7 V 94.5E (1st improvement in 7 months)
NVDA Reportedly preparing to abandon takeover of Arm as it sees little to no progress in winning regulatory approval - press
GE Reports Q4 $0.92 adj v $0.83e, Rev $20.3B v $21.2Be; Guides FY22 adj EPS weak
JNJ Reports Q4 $2.13 adj v $2.12e, Rev $24.8B v $25.3Be
MMM Reports Q4 $2.31 v $2.03e, Rev $8.61B v $8.60Be
RTX Reports Q4 $1.08 v $1.01e, Rev $17.0B v $17.2Be; Guides initial FY22 short of consensus
VZ Reports Q4 $1.31 v $1.28e, Rev $34.1B v $33.8Be; Sees adj EBITDA growth in 2022 to be offset by headwinds from non-cash items
ADM Reports Q4 $1.50 v $1.36e, Rev $23.1B v $20.4Be; Raises dividend 8.1% to $0.40/shr from $0.37/shr (implied yield 2.3%e)
AXP Reports Q4 $2.18 v $1.78e, Rev $12.1B v $11.6Be
AJRD Lockheed believes it is highly likely that the FTC will vote to sue to block the transaction and expect they will make a decision before Jan. 27th; Lockheed could elect to fight the lawsuit or terminate the merger
*(HU) HUNGARY CENTRAL BANK (MNB) RAISES BASE RATE BY 50BPS TO 2.90%; MORE-THAN- EXPECTED
PCAR Reports Q4 $1.47 v $1.31e, Rev $6.69B v $5.38Be
(US) Jan Philadelphia Fed Non-Manufacturing Index: -16.2 v +27.3 prior
VTNR Reports voluntary termination of asset divestiture agreement with Safety-Kleen Systems from CLH unit
(HU) Hungary Central Bank Gov Matolcsy: To continue with rate hikes on a monthly basis until inflation outlook stabilizes and risks turn balanced - post rate decision statement
*(US) JAN RICHMOND FED MANUFACTURING INDEX: 8 V 14E
*(US) JAN CONSUMER CONFIDENCE: 113.8 V 111.1E
MSFT Reports Q2 $2.48 v $2.29e, Rev $51.7B v $50.1Be
TXN Reports Q4 $2.27 v $1.95e, Rev $4.83B v $4.44Be; Guides Q1 strong
(US) SEMI Dec North America-based Manufacturers of Semi Equipment Billings: $3.92B, -0.5% m/m (+5.0% prior) and +46.1% y/y (+50.6% prior)
MSFT Guides Q3 Rev $48.5-49.3B (implied) v $47.7Be
005930.KR Normalizes chip production operations in China Xi'an after COVID-19 measures ease

WEDS 1/26
066570.KR Reports final FY21 (KRW) Net 1.42T v 2.07T y/y, Op 3.86T v 3.91T y/y, Rev 74.7T v 58.1T y/y
ANTM Reports Q4 $5.14 v $5.11e, Rev $36.0B v $36.4Be; Raises quarterly dividend by 13% to $1.28/shr from $1.13/shr
T Reports Q4 $0.78 adj v $0.76e, Rev $41.0B v $40.4Be
ADP Reports Q2 $1.65 v $1.63e, Rev $4.03B v $3.98Be; Raises guidance
GD Reports Q4 $3.39 v $3.37e, Rev $10.3B v $10.7Be; Notes highest Gulfstream orders in more than a decade
GLW Reports Q4 $0.54 v $0.51e, Rev $3.68B v $3.61Be; Guides Q1 above estimates
BA Reports Q4 -$9.44** adj v -$0.09e, Rev $14.8B v $17.0Be; 787 program recorded $3.5B pre-tax non-cash charge; Raises 737 Max planned output to 26 from 19
ABT Reports Q4 $1.32 v $1.18e, Rev $11.5B v $10.6Be
BA Guides initial FY22 Rev 'to improve' y/y; Increasing 777/777X production rate to 3 per month in 2022 - earnings slides
3333.HK Said to have told investors Evergrande is actively in communication with creditors; Plans to have preliminary restructuring plan in 6 months - press
*(US) DEC PRELIMINARY WHOLESALE INVENTORIES M/M: 2.1% V 1.2%E
KNX Reports Q4 $1.61 v $1.43e, Rev $1.82B v $1.72Be
(US) Dec New Home Sales: 811K v 760Ke
(DE) Reportedly Nord Stream 2 operator formally registers a German subsidiary; Unable to say when certification process will be resumed - press
UBSG.CH To acquire automated investment co Wealthfront for $1.4B in cash
(US) Atlanta Fed GDPNow: Raises Q4 GDP forecast to 6.5% from 5.1%
(US) Association of American Railroads weekly rail traffic report for week ending Jan 22nd: 477.5K total units, -9.8% y/y
*(US) FOMC LEAVES TARGET RANGE UNCHANGED BETWEEN 0.00-0.25%; AS EXPECTED; SAYS 'IT WILL SOON BE APPROPRIATE' TO RAISE RATES
(US) Fed Chair Powell: With elevated inflation and strong labor market, Fed will continue to adapt policy; Policy has been adapting to an evolving environment - post rate decision statement
(US) Fed Chair Powell: It is not possible to predict the path of policy rates; Will be guided by data and evolving outlook - post rate decision Q&A
INTC Reports Q4 $1.09 adj v $0.90e, Rev $20.5B v $18.3Be; Raises Quarterly dividend 5% to $0.365 from $0.3475 (indicated yield 2.82%)
TSLA Reports Q4 $2.54 v $2.11e, Rev $17.7B v $16.1Be
STX Reports Q2 $2.41 v $2.36e, Rev $3.12B v $3.11Be
005930.KR Reports final Q4 (KRW) Net 10.8T v 6.6T y/y (v 11.1Te); Op 13.9T v 13.8T prelim (v 9.1T y/y) , Rev 76.6T v 76.0T prelim (v 61.6T y/y)

THURS 1/27
SAP.DE Reports final Q4 EPS €1.86 v €1.64e, Op €2.47B v €2.77B y/y, Rev €7.98B v €7.91Be
DBK.DE Reports Q4 Net €145M v €51M y/y, Pretax €82M v €175M y/y, Net Rev €5.90B v €5.68Be
DGE.UK Reports H1 Net £2.09B v £1.66B y/y, Adj Op £2.74B v £2.24B y/y, Rev £7.96B v £6.87B y/y
(US) Money markets currently pricing 5 rate hikes of 25bps for Fed during 2022
(RU) Russia Foreign Min Lavrov: No positive reaction on main points from US on security proposals, but US response gives hope on starting serious dialogue on secondary issues; President Putin to decide next steps
DOW Reports Q4 $2.15 v $2.04e, Rev $14.4B v $14.3Be; In 2022, expects continued demand strength across its end markets
VLO Reports Q4 $2.47 v $1.79e, Rev $35.9B v $28.9Be; Remains optimistic on refining margins
MCD Reports Q4 $2.23 v $2.31e, Rev $6.01B v $6.03Be
CMCSA Reports Q4 $0.77 v $0.73e, Rev $30.3B v $29.6Be
*(US) INITIAL JOBLESS CLAIMS: 260K V 265KE; CONTINUING CLAIMS: 1.675M V 1.67ME
*(US) Q4 ADVANCE GDP ANNUALIZED Q/Q: 6.9% V 5.5%E; PERSONAL CONSUMPTION: 3.3% V 3.4%E
*(US) Q4 ADVANCE GDP PRICE INDEX: 6.9% V 6.0%E; CORE PCE Q/Q: 4.9% V 4.9%E
(US) Nevada reports Dec casino gaming Rev $1.15B, +68% y/y; Las Vegas strip Rev $650.8M, +123% y/y
*(US) DEC PENDING HOME SALES M/M: -3.8% V -0.4%E; Y/Y: -6.6% V -4.0%E
V Reports Q1 $1.81 v $1.69e, Rev $7.06B v $6.77Be; Do not believe the current surge in the pandemic will curtail the recovery
AAPL Reports Q1 $2.10 v $1.89e, Rev $124.0B v $118.1Be; Expect to reach record Q2 Rev this quarter; Sees less supply chain issues in current quarter, Rev loss expected to be less than $6B
(US) Pres Biden reportedly told Ukraine Pres Zelenskiy that a Russian invasion is now virtually certain once the ground freezes - CNN

FRI 1/28
*(FR) FRANCE Q4 PRELIMINARY GDP Q/Q: 0.7% V 0.5%E; Y/Y: 5.4% V 4.9%E
(RU) Russia Foreign Min Lavrov: Russia does not want war but will defend its interests
*(DE) GERMANY Q4 PRELIMINARY GDP Q/Q: -0.7% V -0.3%E; Y/Y: 1.4% V 1.8%E
CAT Reports Q4 $2.69 v $2.22e, Rev $13.8B v $13.3Be
CVX Reports Q4 $2.56 v $3.06e, Rev $48.2B v $45.0Be; Guides Q1 buybacks to top $3-5B annual guidance range
2866.HK Positive profit alert: Prelim FY21 (CNY) Net 5.8-6.8B +172-219% y/y
*(US) Q4 EMPLOYMENT COST INDEX (ECI): 1.0% V 1.2%E
*(US) DEC PCE DEFLATOR M/M: 0.4% V 0.4%E; Y/Y: 5.8% V 5.8%E

>>> US Close Dow +1.65% S&P +2.43% Nasdaq +3.13% Russell +1.93% VIX 27.66 -9.28%

Closing Stock Market Summary

The S&P 500 rose 2.4% on Friday, overcoming an early 0.8% decline, as the market rallied into the close on no specific news while Apple (AAPL 170.33, +11.11, +7.0%) steered the effort following its better-than-expected earnings report. Shares of Apple rose 7%. 

The Nasdaq Composite gained 3.1%, the Dow Jones Industrial Average gained 1.7%, and the Russell 2000 gained 1.9%.

Ten of the 11 S&P 500 sectors closed higher, paced by the information technology sector (+4.3%), which also featured a 10% earnings-driven gain in Visa (V 228.00, +21.85, +10.6%). The energy sector (-0.6%) was the lone exception, pressured by an EPS miss from Chevron (CVX 130.67, -4.70, -3.5%). 

While Apple deserves credit today, it didn't have the level of pull on the market as some would have liked. At one point, declining issues were up by more than a 2:1 margin at the NYSE and Nasdaq, and even the technology sector slipped into negative territory amid early weakness in the semiconductor stocks. 

That might have been due to underlying concerns about the Fed slowing down growth with tighter monetary policy, as well as more companies like Caterpillar (CAT 201.16, -11.01, -5.2%) and Western Digital (WDC 49.90, -3.94, -7.3%) drawing attention to higher costs and supply chain issues. In other words, Apple was more a company-specific event. 

Nevertheless, the market held it together, further supported by month-end rebalancing activity, a bargain-hunting mindset, lower interest rates, a fear of missing out on further rebound gains. Treasury yields declined following the release of inflation reports that were roughly in-line with expectations. 

Briefly, the PCE Price Index increased 0.4% m/m in December, as expected, and was up 5.8% yr/yr. The Q4 Employment Cost Index increased 1.0% ( consensus 1.1%) following a 1.3% increase in the third quarter. Despite hope that inflation rates could soon ease, the PCE data still supported the Fed's case to be more assertive in tightening policy. 

The 2-yr yield decreased two basis points to 1.17%, and the 10-yr yield decreased three basis points to 1.78%. The U.S. Dollar Index was little changed at 97.24. WTI crude futures increased just 0.1%, or $0.12, to $86.74/bbl.

Robinhood Markets (HOOD 12.73, +1.12, +9.7%), which was down 14% at the open on disappointing earnings news/guidance, turned around with the broader market and closed higher by 10% -- further exemplifying the volatile conditions in the market. 

Interestingly, the S&P 500 closed three points below its 200-day moving average (4435). 

Reviewing Friday's economic data:

  • Personal income increased 0.3% month-over-month in December (consensus 0.5%) while personal spending declined 0.6% (consensus -0.6%). The PCE Price Index increased 0.4% month-over-month, as expected, and was up 5.8% year-over-year versus 5.7% in November. The core PCE Price Index jumped 0.5% ( consensus 0.4%) and was up 4.9% year-over-year versus 4.7% in November.
    • The key takeaway from the report is the recognition that the inflation rate in the Fed's preferred inflation gauge is still rising, which should of course mean that the target range for the fed funds rate should soon be doing the same.
  • The final January reading for the University of Michigan Index of Consumer Sentiment dropped to 67.2 (consensus 68.5) from the preliminary reading of 68.8. The final December reading was 70.6. The January reading is the lowest level for the index since November 2012.
    • The key takeaway from the report is that consumer sentiment is dropping as inflation pressures increase, raising concerns about falling real incomes that are apt to translate into lower levels of spending.
  • The Q4 Employment Cost Index increased 1.0% (consensus 1.1%) for the three-month period ending in December 2021 following a 1.3% increase in the third quarter. Wages and salaries, which account for about 70% of compensation costs, increased 1.1%, while benefit costs, which make up the remainder of compensation costs, increased 0.9%.
    • The key takeaway from the report is that wages and salaries for workers were up from the same period a year ago, yet those gains have increasingly been subsumed by inflation, evidenced by the 6.5% increase in the PCE Price Index seen in the advance Q4 GDP report.

Looking ahead, investors will receive the Chicago PMI for January on Monday.

  • Dow Jones Industrial Average -4.4% YTD
  • S&P 500 -7.0% YTD
  • Nasdaq Composite -12.3% YTD
  • Russell 2000 -13.1% YTD

>>> US Gapping down

Gapping down
In reaction to earnings/guidance:

  • HOOD -14.3%, WDC -11.3% (also names new CFO), BAH -6.8%, WAL -5.2%, ALV -3.8%, CVX -3.7%, SYK -3.3%, KLAC -3.3%, NRIX -3.1%, OLN -2.8%, MDLZ -2.7%, RHI -2.7%, VFC -2.7%, RMD -2.4%, CAT -2.1%, LYB -2%, FIBK -1.6%, FICO -1.4%, CL -1.2%, WY -1%, CHD -0.7%, SYF -0.5%

Other news:

  • STLA -2.8% (provides 2021 business performance update in China)
  • PENN -2.3% (receives approval from Louisiana to offer online sports betting)
  • ALXO -1.3% (FDA grants orphan drug designation to evorpacept)
  • HD -0.9% (names COO Ted Decker as new CEO)

Analyst comments:

  • KR -3.5% (downgraded to Sell from Neutral at Citigroup)
  • CRTX -2.9% (downgraded to Hold from Buy at Canaccord Genuity)
  • OLLI -2.4% (downgraded to Sector Perform from Outperform at RBC Capital Mkts)

>>> Gapping up

Gapping up
In reaction to earnings/guidance:

  • CLFD +10.8% (also reinstates and increases repurchase program to $22 mln), FFBC +8.9%, TEAM +7.3%, NATI +7%, OSCR +6.9%, BZH +5.1%, V +3.4%, MITK +3.3%, ETD +3.1%, AAPL +2.4%, CP +1.8%, X +0.9% (also authorizes new $500 mln stock repurchase program)

Other news:

  • PRVB +13.5% (to resubmit BLA application for delay of clinical type 1 diabetes following FDA meeting)
  • WTFC +7.4% (increases dividend)
  • FIXX +4% (Oxford Biomedica broadens leading viral vector offerings by incorporating Homology Medicines' established AAV capabilities into a newly formed AAV Manufacturing and Innovation Business in the U.S. with Homology Medicines as 20% owner)
  • MATX +2.7% (adds 3 mln shares to existing share repurchase authorization)
  • OHI +1.1% (authorizes new $500 mln share repurchase program)

Analyst comments:

  • CFR +6% (upgraded to Outperform from Mkt Perform at Raymond James)
  • CHPT +2.9% (upgraded to Overweight from Neutral at JP Morgan)
  • CMBM +2.7% (upgraded to Strong Buy from Mkt Perform at Raymond James)
  • IOVA +1.7% (upgraded to Buy from Hold at Stifel)
  • CALX +1.6% (upgraded to Buy from Hold at Craig Hallum)

FT : Oaktree takes control of sprawling Evergrande building project near Shangha

Oaktree takes control of sprawling Evergrande building project near Shanghai
Loan default gives US distressed debt specialist ownership of one of the developer’s most-prized assets

Oaktree Capital has seized one of Evergrande’s most-prized assets in mainland China, a rare intrusion by a global investor in a domestic crisis caused by the biggest ever collapse of a property developer.

The move by the US distressed debt specialist — which now controls the sprawling “Venice” residential development on the Yellow Sea coast near Shanghai — is a first for an international investor affected by Evergrande’s spiralling $300bn crisis.

The finances of the world’s most indebted developer started to unravel last year, prompting a wave of defaults across China’s real estate industry, which has for decades underpinned its economy.

The Venice project defaulted on a secured loan provided by Oaktree late last year, according to two people with knowledge of the details. The loan was around $400m, one of the people said.

The default allowed Oaktree — a $158bn asset manager run by Howard Marks in Los Angeles — to take control of the project’s equity, restart construction and begin selling its apartments, the person said.

Official business records in China confirm that Oaktree’s Hong Kong-based managing director Raymond Chan became the legal representative of Qidong Hengmei Real Estate Co, the company that runs the Venice project in October.

Oaktree declined to comment and Evergrande did not immediately respond to a request for comment.

Oaktree’s highly unusual control over the huge mainland development shines a light on the otherwise opaque problems of Evergrande, which is expected to require the largest restructuring in China’s history. The legal strength of foreign claims on Chinese assets has long been unclear, but there are no signs of any challenge from Beijing or other authorities to Oaktree’s move.

Venice is one of hundreds of developments launched by Evergrande, which borrowed heavily on international markets and in China to fund its expansion before eventually succumbing last year to a combination of construction delays, litigation and the pressures of its vast debts.

The group officially defaulted on its bonds in December after months of missing payments.

The Financial Times revealed this week that Oaktree had made secured loans to two major Evergrande projects, including the Venice development and a large plot of land in Hong Kong called “Castle”, where Evergrande had intended to build a Versailles-like mansion. Oaktree seized the Hong Kong asset this week.

Oaktree’s control of both projects means Evergrande cannot sell them to raise cash as part of its restructuring; this will be an important test of Beijing’s response to foreign involvement in a largely domestic crisis.

Faced with a painful slowdown across the property sector and a wave of developer defaults on bond markets, Chinese authorities have prioritised finishing construction and transferring properties to customers, who often buy in advance.

Evergrande has invested Rmb30bn ($4.7bn) in Venice since it started the project around a decade ago. Construction included cordoning off several kilometres of the ocean to dye it a brighter shade of blue. The project is currently marketing 294 apartments and has 66m sq ft of residential space.

Oaktree referred to both loans last year in a letter to investors seen by the FT, which stated each was around 60 to 70 per cent of the asset’s total value.

Offshore bond investors with around $20bn in exposure have been largely left in the dark since Evergrande began missing interest payments in September. The developer said this week that it is aiming to come up with a preliminary restructuring proposal within six months.

FT : De La Rue’s top investor calls for sale or break-up after profit warning

De La Rue’s top investor calls for sale or break-up after profit warning
Activist Crystal Amber says banknote maker has focused on volume sales rather than profit

The largest shareholder in De La Rue has criticised management strategy and pushed the board to consider a break-up or sale of the British currency printer after a profit warning this week.

Richard Bernstein, head of activist investor Crystal Amber, said the company had lost money for shareholders by focusing on volume sales of its currency rather than on gross profit.

Close to a quarter was wiped off the value of De La Rue after it said on Monday its turnround would take a year longer than planned and that pandemic-induced supply chain disruption would hit full-year profits.

Bernstein said the company had sacrificed most of its £36m of cost savings by reducing prices, leading to a commodification of its banknotes.

The industry required consolidation, he told the Financial Times, saying it was “highly likely” that in the coming months De La Rue “will be the subject of a takeover bid from one or more of its overseas competitors”. 

Bernstein said he had held talks with a number of rival groups about a potential bid. Crystal Amber had been in talks with De La Rue’s chief executive Clive Vacher and chair Kevin Loosemore, he added.

Bernstein predicted that a sale of the company’s authentication business alone would generate significantly more than the company was worth after this week’s share price slump.

Shares in De La Rue fell sharply on Tuesday to 111p, a level last hit in June 2020. During 2021, Crystal Amber reduced its shareholding in De La Rue from 15.1 per cent to 10 per cent.

De La Rue said on Monday that adjusted operating profit would probably be £36m-£40m for the year to March 26, broadly similar to the previous financial year but below the market consensus of £45m-£47m.

The company’s travails come after it brought in new management in 2019 to oversee a three-year turnround plan having been forced to warn over its future.

Bernstein also urged the board to resolve issues with its pension scheme to reduce future contributions and increase free cash flow, and to strengthen the teams internally to push gross profits rather than volume sales.

Vacher told the FT the board had confidence in its strategy, and rejected the criticism of its sales policy.

He added that it was not reasonable to compare profits with 2010, when the business had five divisions, and that there would still be “substantial” growth in its core businesses of currency and authentication of 35-45 per cent this year.

“We do not have a strategy to drive down prices. We have driven competence at De La Rue so that we are a force to be reckoned with in the market.”

He declined to comment on takeover rumours or progress on its pension talks.

FT Lex : UniCredit/Russia: Orcel favours less risk over greater return

UniCredit/Russia: Orcel favours less risk over greater return
Italian bank could have added scale with Otkritie deal but chief executive has other priorities

High returns come with elevated risks. Take Russia. Some European banks have happily set up and maintained operations in the country. Italy’s UniCredit is one of them, and indeed sought to expand there. Partly due to tensions over Ukraine, discussions with Otkritie — Russia’s sixth-largest bank by assets — have ended, UniCredit said as it reported full-year results on Friday.

Chief executive Andrea Orcel, recently arrived from UBS, has decided that risk outweighed any rewards from a combination with Otkritie.

US sanctions could knock Russian banks for six. But ironically Okritie is much less risky than it once was, if geopolitical risks are discounted. The state nationalised Okritie in 2017 after its supercharged growth made it Russia’s top privately held lender, backed by overvalued assets. Five years on and the Russian central bank wants to list Otkritie to get its money back.

To be fair, UniCredit’s Russia subsidiary has delivered good profitability since 2007, recently beating the unit’s mid-teens cost of capital. Even adjusting for the rouble’s depreciation against the euro over the past five years, those kinds of annual returns on capital look worthwhile against UniCredit's single-digit return on equity. But Russia contributed just 6 per cent of pre-tax profit to UniCredit group earnings. That is more than Société Générale’s 4 per cent, but far behind leader Austria’s Raiffeisen at 35 per cent, according to JPMorgan.

UniCredit could have added scale with Otkritie and curried some favour with Russia’s central bank, were it not for tensions in Ukraine. But frankly Orcel has other priorities. He has promised to return €16bn of excess capital to shareholders by 2024, worth over half its market value. Given the better than expected gross (pre-provisioning) operating profit in the fourth quarter, Orcel can feel satisfied so far. He confirmed a payout of €3.75bn payout against last year’s earnings, slightly better than expected.

Orcel has wisely sidestepped Russian expansion. UniCredit’s strong share price run in the past year shows he must not lose the love of shareholders through risky takeovers in Russia — or closer to home.