>>> Barron’s Weekend Summar

Barron’s Weekend Summary: if Omicron cases grow rapidly without a proportionate jump in hospitalizations and deaths, then the early 2020-style shutdown scenarios should be avoided.


Cover Story:
For stock investors, daily new Omicron case counts matter to the extent that they spur governments to impose economically harmful restrictions on movement and in-person activities, which in turn hurt corporate earnings. But if cases grow rapidly without a proportionate jump in hospitalizations and deaths, then the early 2020-style shutdown scenarios should be avoided.

Interview:
-Arnold Donald, the CEO of Carnival since 2013, has had a lifetime of managerial tests packed into the past two years as he steered the company through the pandemic. He’s confident that Omicron’s effects on travel demand will be milder: “I can talk about variants in general. As we said in our last business update in September, we did not see any evidence that the variants would take us away from our plans to return our fleet to full service in the summer of 2022. We don’t see anything from the variants—and the reactions to them—that would suggest that would be impossible.”

Tech Trader:
With the year drawing to a close, Barron’s tech editor Erc J. Savitz evaluates his calls, taking creit for the good calls and admitting to the misses, and most importantly, assess whether the advice still holds up.
“Throughout the year, I wrote bullishly about Amazon.com. In a Feb. 8 column, I said investors were overthinking the CEO change, as AWS chief Andy Jassy took over for founder Jeff Bezos. I wrote at least three more bullish takes over the course of the year. But Amazon is up just 5% year to date, underperforming the S&P 500 by 20 percentage points. The stock has been hampered by a slowdown in the growth of its flagship e-commerce arm as the world began to emerge from the worst of the pandemic and shifted some spending back to physical stores.”

The Trader:
-As Omicron becomes the dominant variant in new Covid infections, investors took heart from growing evidence that it is contagious but less severe than earlier strains—if you’ve been vaccinated. Infections from the fast-moving coronavirus have apparently peaked in their hot spot of South Africa. Moreover, President Joe Biden’s plan to distribute the newly authorized antiviral pills from Pfizer and Merck should prevent repeats of last year’s hospital overflows.

Features:
-Airlines canceled more than 1,000 flights by December 26 afternoon and delayed nearly 4,000 others to, from and within the U.S. as bad weather in some regions and Covid combined to create staffing shortages. This has had an effect on airlines. FlightAware, which tracks delays and cancellations in real-time, said JetBlue had canceled about 10% of its flights Sunday and delayed 32% more as of 4:30 p.m. Sunday.
-Holiday spending jumped 8.5% this year, with retail sales up both in-store and online compared with 2020, according to Mastercard Spending Pulse, which tracks purchases across all forms of payment. Retail sales rose 10.7% over prepandemic spending figures in 2019. Mastercard’s figures, released Sunday, include retailers and food services merchants, but not automotive purchases, airline travel or lodging.
-The continued surge in coronavirus cases, many now caused by the Omicron variant, has forced many European countries to impose more restrictions on movement and entertainment.

European Trader:
“European consumer stocks have staged a dramatic recovery and are back to pre-Covid levels,” says CFRA analyst Andrew Tam. The year of the “reopening trade” was boosted by earnings, fiscal stimulus, pent-up consumer demand, and vacation budgets that were redirected toward consumer goods, he adds. Luxury goods were a standout sector—the stocks on average are up 42% year to date to Dec. 7, according to Tam.

Emerging Markets:
-Mercurial politics affected the4 performance of financial markets in China and other emerging markets. “The bad news from 2021 was that mercurial politics will continue to upend the best-laid emerging market plans and analyses. Joe Biden’s presidency hasn’t eased U.S.-China tensions. Instead, President Xi Jinping went on a regulatory tear of his own. Global vendors like Taiwan Semi and Samsung Electronics (005930.Korea) are increasingly caught between the two, and/or forced to make expensive investments in both.”

Commodities:
“Anyone wanting a calm commodities market in 2021 would have been disappointed. It produced surprises that would have shocked even the most jaded market veterans.
Wheat, coffee, sugar, lumber, and energy prices all shot up. Perhaps most shocking was that the price jumps were driven by different factors. It wasn’t all upward: gold puzzled some investors, as prices slumped even while inflation surged.”

Streetwise:
Jack Hough learns about canned cocktails, or RTD cocktails, and the industry they have spawned. “Now, I learn that ready-to-drink, or RTD, cocktails, as distributors call them, are suddenly the industry’s fastest grower. No word yet on a hot dog spike, but we’ll see. This comes as a dark period for merrymaking shows signs of lifting. Not the Covid-19 pandemic—that’s still keeping many drinkers at home. I’m talking about the epidemic of hard seltzers, or bubble water mixed with malt liquor and just a rumor of fruit. Sales of the top brand, White Claw, are declining. No. 2 player Boston Beer has had to chuck millions of unsold cases of its Truly brand.

Barrons : Alibaba’s Stock Is Cheap, but for Good Reason. Investors Should Be War

Alibaba’s Stock Is Cheap, but for Good Reason. Investors Should Be Wary.

Alibaba Group Holding looks tempting. Shares of the Chinese e-commerce giant are cheap—year to date, the U.S.-listed shares, at $118.66 on Thursday, are off 49% with a 15 multiple—after a year of crackdowns and shake-ups. But investors should resist the urge to pounce.

Some money managers have begun buying the shares. Of the analysts tracked by Bloomberg, 56 have Buy ratings, five have Hold ratings, and one a Sell; as a group, they have an average target price of $202 for the shares.

And Alibaba executives were upbeat at a recent investor day. They set a $100 billion gross merchandise value target for its Southeast Asia marketplace, Lazada, and outlined plans that align it more closely with Beijing’s priorities, such as catering to consumers in lower-tier cities and becoming carbon-neutral by 2030. They also discussed changes in the e-commerce channel as a response to new competition.

Alibaba will undoubtedly remain a dominant force in China. But Alibaba’s investments, says Mizhou analyst James Lee, may take some time to pay back. A delay, coupled with a slowing economy and supply-chain woes, could hobble short-term growth.

Meanwhile, U.S. and Chinese regulators are both trying to force some Chinese companies off U.S. exchanges. “[Alibaba] is a company more exposed to regulatory issues in all the areas where regulators have concerns,” says Phillip Wool, a managing director of Rayliant, who now favors onshore Chinese companies earlier in their growth trajectories. Even before the pandemic and crackdowns, China’s internet giants struggled to maintain rapid growth. Now, it’s a bigger problem.

>>> China PBoC quarterly meeting: Pledges more support for the real economy alon

China PBoC quarterly meeting: Pledges more support for the real economy along with more "proactive" use of policy tools, which is more targeted and autonomous; reiterates prudent policy to be flexible and appropriate
- To make policy more forward looking
- Reiterates to protect home buyers rights and promote healthy growth in property sector- Will keep macro leverage ratio basically stable
- Reiterates targeting to better meet reasonable housing demand

Barron's : European Luxury Goods Stocks Were Back in Fashion in 2021

European Luxury Goods Stocks Were Back in Fashion in 2021

The relaxation of Covid-19 restrictions, the availability of vaccines, and cash accumulated by consumers during lockdowns fueled an extraordinary 12 months of growth in Europe across a number of sectors.

Top- and bottom-line recoveries in 2021 saw earnings rebound strongly, helping European consumer discretionary stocks rise 31.4% from December 2020 through Dec. 7, outperforming the broader S&P Europe 350 index, which climbed 16.3%, according to independent research firm CFRA.

“European consumer stocks have staged a dramatic recovery and are back to pre-Covid levels,” says CFRA analyst Andrew Tam. The year of the “reopening trade” was boosted by earnings, fiscal stimulus, pent-up consumer demand, and vacation budgets that were redirected toward consumer goods, he adds.

Luxury goods were a standout sector—the stocks on average are up 42% year to date to Dec. 7, according to Tam.

The larger, more-diversified luxury groups has outperformed with above-peer earnings and share price growth, he adds. Cartier owner Compagnie Financière Richemont (ticker: CFR.Switzerland) is up 66%. French fashion house Hermès International (RMS.France) has increased 75%.

Barron’s recently wrote that gains are likely to continue at the world’s largest luxury group, LVMH Moët Hennessy Louis Vuitton (MC.France), which is up 37%. Two stocks mentioned in the column this year also excelled. Barron’s highlighted Italian luxury retailer Moncler (MONC.Italy) in March, when shares reached 49.55 euros ($55.90) on the back of strong online sales and better-than-expected growth in China.

Sales in that key market, as well as in South Korea and the U.S. were behind a 55% jump in sales in the third quarter, Moncler said in October. The stock has since gained 26%, to €62.46.

Barron’s wrote in July that Ray-Ban and Oakley eyewear maker EssilorLuxottica (EL.France) was in a strong position to transform its business on the promise of cost cutting, new products, and possible acquisitions. By September, one of those products was launched: a pair of Ray-Ban’s (in partnership with Facebook parent Meta Platforms [FB]) that comes with built-in cameras and microphones. Shares, which were at €152.23, have jumped 19.4%, to €181.80.

Food, drinks, and tobacco companies lost their lockdown boost as consumers headed back out, but that was mitigated by customers drinking in bars and restaurants, which generates higher margins. British American Tobacco (BTI) was at £25.36 in October when this column highlighted it in October for its investments in new products. It’s now up 9%, to £27.65.

Not all of our recommendations hit the target. In February, United Kingdom online fashion and cosmetics giant ASOS (ASC.UK) was viewed as a big winner during lockdowns over rivals with bricks-and-mortar stores. Its stock was at 57.78 pounds sterling ($76.33), and ASOS appeared on track for international expansion.

But shoppers then headed back to physical stores, and mounting supply-chain problems led ASOS to issue a profit warning in October. The stock has since slumped 60%, to £22.99.

Car makers, faced with supply-chain issues that led to chip shortages, tried to benefit by directing scarce resources to high-margin premium vehicles. For its part, German auto giant Daimler (DAI.Germany) used the slowdown to accelerate its restructuring plan and make a bigger push into electric vehicles, Barron’s wrote in May. It wasn’t enough to boost the stock, which has slid 5.6%, to €69.27.

FT : German carmakers enjoy record prices for luxury models as production falls

German carmakers enjoy record prices for luxury models as production falls
Supply constraints and soaring demand boost prices for Audi, BMW and Mercedes

Germany’s premium car manufacturers enjoyed record high prices for their luxury models in 2021 as a shortage of semiconductors restricted the supply of vehicles to major markets just as consumer demand was soaring.

Revenues per car at BMW, Audi and Mercedes-Benz increased by an average of almost 25 per cent when compared to pre-pandemic 2019, analysis carried out by Stifel bank for the Financial Times has shown.

The increase has been caused by a reversal of a decades-long trend, in which the industry produced more cars than it sold. Carmakers then offered ever higher discounts to push excess cars on to forecourts, so that sales volume targets could be reached in time for accounting deadlines.

Since 2019, when the global economy weakened, manufacturers have begun to make fewer cars than they can sell, with the gap widening to roughly 4m vehicles this year. Although there was a similar deficit following the financial crisis in 2009, it was an anomaly amid years of overcapacity.

“We’ve seen an inventory reduction for three years, driven by [restricted] supply,” said Daniel Schwarz, an analyst at Stifel. “That has not happened before.”

As a result, revenues at Mercedes-Benz have risen from almost €38,000 per car in 2019 to more than €54,000 in 2021 up to the end of the third quarter, while Audi’s has increased from more than €46,000 to approximately €57,500, according to Stifel’s calculations.


BMW, which has managed the chips crisis better than its peers, and lost less production time overall, experienced a more modest rise, from just over €36,000 per vehicle in 2019 to more than €38,000 in 2021 up to the end of the third quarter.

Much of this has been achieved by manufacturers prioritising the production of more profitable models.

Sales at Mercedes, for example, were down 30 per cent in the three months to the end of September, but revenues were down just 1 per cent.

Analysis by Stifel shows that in just one quarter, Mercedes’ earnings before interest and taxes were boosted by €1.4bn merely by better pricing and by putting available chips into higher-end, higher-margin vehicles.

With investors noticing the change, executives say they will continue to pursue this strategy even when supply constraints ease.

“There is no pressure to chase volume,” Ola Kallenius, Mercedes boss, told the Financial Times this month, while Harald Wilhelm, chief financial officer, pledged to “focus on where the money sits”.

“This overriding strategy of not looking downwards in [market] segments where we are but looking upwards, that will continue,” Kallenius added.

Luxury carmakers were also helped by record rises in second-hand car prices. This has not only made buying new cars more attractive, but has boosted the balance sheets of the premium manufacturers’ finance arms, which run large leasing businesses.

“The cars are being returned [to the manufacturer] after 12-36 months and the re-sale price is much higher than initially assumed,” said Schwarz.

“From a short-term perspective, the lack of new cars today will make used cars scarce for at least the next two years,” he added. “That should support the pricing for new cars, too.”

FT : Private equity groups spend $42bn buying companies from themselves

Private equity groups spend $42bn buying companies from themselves
Value of ‘continuation fund’ deals rises 180% since 2019 as competition for new targets threatens to curb returns

Private equity groups this year struck $42bn worth of deals in which they sold portfolio companies to their own funds, a sharp increase over 2020 in a once-niche type of transaction that can generate handsome payouts to executives.

The deals, known as “continuation fund” sales, involve a buyout group selling a company it has owned for several years to a new fund it has more recently raised. That allows it to return cash to earlier investors within the agreed timeframe, while keeping hold of a company that either has potential to grow or is proving difficult to sell.

Many buyout groups turned to such deals for the first time in the early days of the coronavirus pandemic, when a freeze in dealmaking and stock market listings left them with few other exit routes, and have since ramped up their use.

Having spent the past few years raising their biggest-ever pools of cash for deals, private equity firms are under pressure to invest. Buying from their own funds offers an alternative opportunity as competition for external targets becomes increasingly fierce.

“The pandemic really spurred private equity firms to evaluate continuation funds”, said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

That prompted several to ask, “why should I have another [rival] private equity fund buy one of my best-performing companies from me and make the profits, when I could do that myself?” she said. “That’s really the ‘aha’ moment.”

This year’s $42bn deal total, calculated by Raymond James’ Cebile Capital unit, is a 180 per cent increase on the 2019 level, and 55 per cent above 2020. The figure represents the value of the stakes sold, plus any additional capital raised to inject into the companies.

When selling a company to their own newer fund, private equity dealmakers still stand to receive payouts of carried interest — a 20 per cent share of profits. They can then receive a second chunk of carried interest cash later, when the newer fund eventually sells the company.

Selling companies to their own funds also helps juice private equity firms’ fee income, because they can continue taking fees from the investors in the new fund that buys it, and in some cases from the portfolio company itself.

Critics have warned that conflicts of interest are inherent in the model and that it can be difficult to make sure a fair process takes place to agree a price.

US buyout group Clayton, Dubilier & Rice struck one of the year’s largest continuation fund deals this month when it sold part of its stake in Belron, a car windscreen repair company, to its own newer $4bn fund in a deal that valued the business at €21bn.

CD&R had already taken a bumper dividend from Belron this spring, funded by loading the company with additional debt, in one of the biggest dividend deals of its kind on record.

General Atlantic sold four of its existing portfolio companies — insurance group Howden, Mexican pharmaceutical group Sanfer, media company Red Ventures and price index provider Argus Media — to its own $3bn continuation fund in July.

Continuation funds typically have a five-year lifespan and are backed by a group of external investors known as secondaries businesses, which raise money from pension and sovereign wealth funds to invest in the transactions.

Sinha Haldea said she had this year seen the emergence of “continuation funds of continuation funds” for the first time, when companies that were sold into one such fund a few years ago are now being sold into a second one. She predicts the total value of continuation fund deals will top $400bn in 10 years’ time.

“It’s potentially cannibalistic to M&A markets,” she said. “That’s a lot of [external] deals that will not be happening.”