FT : ‘Divided’ investors caught in inflation confusion

‘Divided’ investors caught in inflation confusion
Deflation and inflation are both on fund managers’ worry lists

Investors are worried about deflation. That might sound odd, given that the opposite fear — of rising consumer prices — has grabbed attention and fired up assets such as gold.

But the price of options linked to inflation swaps shows that investors are paying up to protect against extreme scenarios at both ends of the spectrum. The probability of price declines in the US has more than quadrupled to 7.5 per cent since the start of this year, those options show, even while the chance of annual inflation running hotter than 2.5 per cent over the next half decade has almost doubled to 8 per cent, according to analysis by NatWest Markets. 

The disparity underlines a growing polarisation among investors on one of the biggest questions facing markets. The simultaneous fears of both inflation and deflation also help to explain the breadth of a rally this summer, which has taken in classic inflation hedges like gold as well as government bonds, which benefit from stagnant or falling prices.

“The market is grappling with the risks of both deflation and high inflation,” said Theo Chapsalis, head of UK rates strategy at NatWest Markets. “I have never seen the investment community so divided.”

In the eurozone and the UK too, although the levels of inflation expected are different, the spread of possible outcomes has increased, Mr Chapsalis said.

When the spread of Covid-19 sent global markets into meltdown in March, investors quickly priced in a deflationary shock in all the world’s big economies as the severity of the hit to demand became clear. Inflation expectations quickly rebounded, driven by the stimulus measures put in place to tackle the crisis, namely government borrowing and central bank purchases on a scale never seen before.


The market for inflation swaps — derivatives that allow traders to bet on where inflation will be in the future — is now pricing in US inflation of 1.68 per cent over the next five years, still below the Fed’s 2 per cent target and a similar level to the start of the year. But that average masks lingering anxieties.

“Investors are trying to work out if this is one of those moments where the fundamentals of markets are completely changed,” said Chris Jeffery, a fixed-income strategist at Legal & General Investment Management. “But they’re doing it in the middle of a unique crisis. There’s this slightly academic debate about the long-term effects of the increase in the money supply. Then there’s the grinding reality of month-on-month inflation figures, and to be honest people have a pretty poor handle on what’s driving that.”

In the US, consumer prices rose 1 per cent in July, faster than expected, following three months of very sluggish gains. 

The relatively hefty premiums to hedge against very high or very low inflation make sense given the plausible arguments for both, according to JPMorgan Asset Management strategist Karen Ward. “On the one hand, central banks are under tremendous political pressure to keep rates low, and governments have lost their fear of debt,” she said. “But once furlough schemes come to an end you can see a scenario where companies say ‘you can come back on 80 per cent of your pay, or we let you go’.”

Many fund managers say they expect prices to remain steady, or even fall, in the short term, before sharper rises kick in as economies recover. But even the longer-term implications of the coronavirus crisis are not clear cut, according to Goldman Sachs Asset Management portfolio manager Hugh Briscoe.

“Some structural disinflationary forces have been fast-tracked by this crisis, like the rise of online retail and automation,” he said.

Kacper Brzezniak, a portfolio manager at Allianz Global Investors, said: “The activity in options markets suggests growing demand among investors for hedges against very high or very low inflation. Investors are right to be concerned, given either of these scenarios has the potential to capsize a broad recovery in assets that has encompassed everything from stocks to precious metals and government bonds.

“When we do client calls it’s always one of the top questions that comes up.”

The recovery in stock markets rests on central bank stimulus, which could be threatened by a sharp rise in inflation. Meanwhile, a slump into lasting deflation would mean investors had overestimated the strength of the economic recovery, according to Mr Brzezniak. 

“If you think of something that could cause everything to go down, it’s a big surprise on inflation,” he said.

FT : BT Group: lawn time coming

BT Group: lawn time coming
Regulation and the need to appease pension plan trustees remain obstacles to any takeover

Even in a dry August, some corporate stories force their way through the parched earth. A rumoured takeover of BT Group is one of the weeds that persist, even if its only possible nutriment is hope. As BT’s share price has drifted lower, the logic of re-evaluating the group’s worth has merit. Yet both regulation and the need to appease BT’s pension plan trustees will prevent this idea from blossoming.

On Monday, BT’s share price climbed 5 per cent following reports that private equity groups had run the slide rule over the telecom group’s assets. Rightly so. BT shares touched 11-year lows last week. The group trades cheaply. Its enterprise value to ebitda ratio is 29 per cent below the average of European peers. City analysts think BT’s equity value could be worth up to half again as much as its current £1.07 share price.

However, BT suffers from pressures that many of its other peers do not. Since making peace with watchdog Ofcom, BT has begun to act as a dependable national champion, claims Jefferies. The group has (finally) decided to accelerate its rollout of full-fibre internet to harder-to-reach parts of the country. Capital spending is due to approach £4.4bn by 2022, more than a third higher than 2017. To help pay for that, BT suspended the dividend for the first time in 36 years.

Would private equity owners toe the line so nicely? It seems unlikely. Whether those same investors could convince BT’s pension trustees that their members’ future incomes would be protected is another matter. The trustees will need assurance that BT can continue to cover its obligations. Otherwise they may well demand some compensating payment to the pension plan, adding to the offer price for BT. Do not expect BT’s largest shareholder Deutsche Telekom (which holds 12 per cent) to wade in with a bid. It has enough on its hands funding T-Mobile US’s $59bn acquisition of Sprint.

BT will offer value for those willing to wait for its plans to flower. For now, they remain locked behind high garden walls.

>>> US Gapping down

Gapping down

Other news:

  • MWK -15.7% (prices 3,357,140 shares of its common stock at $7..00/share)
  • GRWG -10.6% (to take action against Hindenburg Research)
  • QTNT -3.1% (files for $200 mln mixed securities shelf offering)
  • VXX -2.9% (trading lower with US futures up nearly 1%)
  • NICE -1.7% (to offer $400 mln of Convertible Senior Notes due 2025)

Analyst comments:

  • PINS -0.7% (downgraded to Neutral from Buy at Citigroup)
  • SCS -0.5% (downgraded to Hold from Buy at The Benchmark Company)

>>> US Gapping up

Gapping up 

Select ETFs showing strength:

  • QQQ +1.1%, DIA +1%, IWM +1%, SPY +0.8%

Other news:

  • ODT +10.3% (announced positive top-line results from CONTESSA, a Phase 3 study of tesetaxel in patients with metastatic breast cancer)
  • TRVN +9.6% (announced Imperial College London has initiated a proof-of-concept study for TRV027 in COVID-19 patients)
  • TLSA +5.6% (receives patent methods and use of Anti-IL-6/IL-6 receptor monoclonal antibodies as prophylactic and therapeutic interventions for COVID-19)
  • PLX +3.9% (announces completion of the treatment period for its Phase III Bright clinical trial of pegunigalsidase alfa (prx-102) for the proposed treatment of fabry disease) SYNA +3.6% (positive article in Barrons)
  • AZN +3.4% (President Trump is considering bypassing regulatory standards to fast track AZN's UK coronavirus vaccine)
  • GM +3.3% (positive article in Barrons)
  • W +1.9% (announces $700 mln stock repurchase authorization -- 8K filing)
  • CWH +1.6% (declares regular and special dividend)
  • UHAL +1.4% (declares special cash dividend on common stock of $0.50/share)
  • LOW +1.2% (increases quarterly cash dividend to $0.60/share from $0.55/share)
  • TJX +1.2% (positive article in Barrons)
  • MSFT +1% (CNBC report co is signing deals with foreign govts to offer cloud-infrastructure packages)

Analyst comments:

  • LI +5.2% (added to Conviction Buy List at Goldman)
  • BLDP +4.9% (initiated with an Outperform at Bernstein)
  • ALVR +3% (initiated with an Overweight at Morgan Stanley)
  • EL +1.5% (upgraded to Outperform from Sector Perform at RBC Capital Mkts)
  • QGEN +1.4% (upgraded to Buy from Neutral at Citigroup)
  • MFA +1.1% (upgraded to Mkt Outperform from Mkt Perform at JMP Securities)

WSJ : Jack Ma’s Ant Group Pushes Ahead With ‘Project Star’ Listing Plans; Invest

Jack Ma’s Ant Group Pushes Ahead With ‘Project Star’ Listing Plans; Investors See Big IPO Gains
In the coming days, Ant could shed light on what has been a secret for years: how it makes money

When Ant Group Co. goes public later this year, the Chinese financial-technology behemoth will likely earn a stratospheric market valuation that would place it at the top of companies listing globally for the first time.

In the coming days, the company controlled by billionaire Jack Ma could shed light on what has been a closely guarded secret for years: how it actually makes money. Ant, which is preparing for blockbuster share sales in Hong Kong and Shanghai, is planning to file its listing documents with exchanges in both cities this week, according to people familiar with the matter, kicking off a process that could have the company go public by October.

The company’s debut will provide a major boost to China’s nascent Nasdaq-style exchange known as the STAR Market, which was created last year to draw listings from the country’s homegrown technology firms. Ant, which unveiled its IPO plans right around the new board’s one-year anniversary, would be by far the biggest and most valuable company to list there. Inside Ant, the code name for the listing plans is “Project Star,” according to people familiar with the company.

Ant’s listing prospectus will for the first time reveal detailed financial and operational data that investors and analysts will use to justify a more than $200 billion market valuation that Ant is said to be seeking with its dual IPOs.

If attained, it would be the highest-ever valuation at the time of a deal pricing for a company going public for the first time on a major exchange, according to data from Dealogic. Back in 2014, Ant’s sister company, Alibaba Group Holding Ltd., was valued at around $168 billion in its record-setting IPO, which ended up raising $25 billion.

Hangzhou-headquartered Ant, formerly Ant Financial Services Group, operates Alipay, a popular payment and lifestyle app that has more than 700 million monthly active users in China. Two years ago, the company was valued at around $150 billion after raising $14 billion in private capital from domestic and global investors.

Ant’s valuation has skyrocketed since it was launched in 2014. The following year, it was valued at around $45 billion in a domestic fundraising round. In 2016 its valuation jumped to $60 billion, based on exchange rates at the time. Among Ant’s current investors are private-equity funds Warburg Pincus, Carlyle Group LP, Silver Lake, General Atlantic and Primavera Capital Group, as well as Singapore and Malaysia’s sovereign-wealth funds.

Ant’s surging value mirrors a sharp run-up in valuations for many U.S. and Chinese technology firms. In many cases, investors have prized rapid expansion and strong market positions over short-term profitability. Some high-growth-focused startups—like We Co. and Uber Technologies Inc. —have recently stumbled and prospective investors will likely want to know how Ant plans to translate its powerful competitive position into higher future profits.

Investors who wrote Ant big checks in 2018—reaching $500 million in some cases—bought into the company expecting its valuation to top $200 billion when it goes public, according to people familiar with the matter and an investor presentation obtained by The Wall Street Journal. That level implied gains of at least 30% on their investments.

Over the past year, some investment funds that bought Ant shares have marked up the value of their investments significantly, according to Wall Street Journal calculations from their regulatory filings.

Two funds managed by Fidelity Investments that hold stocks, bonds and other assets marked their Ant shares at the end of June at prices that implied a company valuation of $305 billion, according to their filings with the U.S. Securities and Exchange Commission.

Other funds managed or subadvised by T. Rowe Price Group Inc. earlier this year marked their Ant shares at prices that implied a $188 billion valuation, the filings showed.

The discrepancies are wide in part because the company hasn’t shared comprehensive financial results with most of its shareholders thus far. In addition, its businesses that meld financial services and technology have proven difficult to value. Mutual funds, hedge funds and other institutional investors use differing or proprietary methods to estimate the value of securities from private companies that are difficult to sell. Inputs into those models include whatever financial information is available as well as valuations of publicly traded companies in similar industries.

In Ant’s case, investors have over the years been able to glean quarterly profit numbers for the company from the results of Alibaba Group, which used to have a profit-sharing agreement with Ant and now owns a third of the company. Earlier this month, Alibaba’s quarterly filings showed that Ant produced about $3.5 billion in profit for the six months ending in March, but provided virtually no explanation as to how the money was made.

Ant previously shared some quarterly financial figures and hosted regular briefings with shareholders, but two of its investors said information from the company was “very limited” and had “some delay.” In addition, no representatives from outside investors were given seats on Ant’s board following its various fundraising rounds. Last week, Ant added three independent directors to its board, according to business-registration records.

“At first look, everyone agrees this is a good company. But it isn’t easy to understand their businesses and advantages,” said David Dai, senior research analyst at Sanford C. Bernstein, who came up with a $210 billion valuation for Ant in November 2019.

“Ant’s businesses are very complex, with a variety of products spanning financial services and technology. You can’t get a full picture from either a financial or a technological perspective,” he added.

The company known as Ant encompasses Alipay, which handles trillions of dollars worth of payments a year and houses various digital finance operations that include personal credit lines, small-business loans, insurance and investment funds.

The company is also known for coming up with novel ideas, such as Yu’e Bao, a product used for managing spare cash that quickly became the world’s largest money-market mutual fund.


Ant’s entrenched position in China’s payments industry—and the rapid growth of Yu’e Bao—have drawn scrutiny from Chinese banking and securities regulators in recent years. For some time, the company has been trying to shed its image as a provider of financial services. In 2017, then-Chief Executive Eric Jing told investors Ant was a techfin company, rather than a fintech business.

Earlier this year, Ant dropped the word financial from its name, saying it wanted to be known as a technology provider. Outside of payment-processing revenue, Ant makes the bulk of its money from technology service fees that it charges banks, asset managers and other businesses that provide consumer and business loans and sell products to Alipay’s users.

Its myriad products have enabled Ant to diversify its income stream, lowering its reliance on payment processing for most of its revenue. While its payments business is still growing, Ant has in the past lost money after spending heavily to increase its market share. In 2018, the company incurred an annual loss of at least 1.9 billion yuan ($275 million) due to “aggressive marketing and promotion activities,” increased user acquisition and innovation costs, according to Alibaba’s filings.

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • TRVN +7.6%, TLSA +5.4%, PLX +3.9%, AZN +3.4%, SYNA +2.7%, GM +2.7%, UHAL +1.4%, W +1.1%, GS +1.1%, QQQ +1%, DIA +1%, MSFT +0.9%, IWM +0.9%, LOW +0.8%, SPY +0.8%, CWH +0.7%, TJX +0.7%
  • Gapping down:
    • MWK -15%, GRWG -7.7%, QTNT -3.1%, VXX -2.6%

NYT : Electric Vehicle Makers Find a Back Door to Wall Street

Electric Vehicle Makers Find a Back Door to Wall Street
Special purpose acquisition companies, or SPACs, are helping them and other fledgling companies raise money and gain coveted stock listings.

Steve Burns pulled together several pieces of a business venture over the last year: His company, Lordstown Motors, designed an electric pickup truck, acquired a plant and machinery from General Motors, and racked up thousands of orders.

Yet Mr. Burns was still struggling to raise enough capital. This month, he nailed down that critical piece by agreeing to merge Lordstown Motors with a special purpose acquisition company, or SPAC, a transaction that will net the truck maker $675 million and a listing on Nasdaq.

Another upside: Unlike a conventional initial public offering, a SPAC merger will take just a couple of months, Mr. Burns said. “The traditional I.P.O. time is maybe a year and a half,” he said. “We are in a race to be first with electric trucks. We wanted to get it done and get to the business of building the vehicle.”

SPACs are suddenly in the limelight.

These companies have long existed on the sidelines, providing small or distressed companies with capital and the ability to list their shares on a stock exchange — things they might not have access to otherwise. Sometimes called blank-check companies, SPACs raise money from investors without having a detailed business plan. Their sole purpose is to find another business to buy within two years. If that doesn’t happen, the company folds and investors get their money back.

Although industry watchers say SPAC frauds are rare, one SPAC’s purchase last year of Modern Media Acquisition, a music-streaming business whose books were later alleged to be fraudulent, gave some investors pause. And some aspects of the SPAC business model — namely, the fact that sponsors of these acquisition companies are frequently able to buy substantial stakes in the business they merge with at minimal cost — have raised questions about their benefit to typical shareholders.

In recent months, investors behind SPACs have become particularly enamored with electric vehicle businesses amid rising expectation that such cars and trucks will soon begin displacing vehicles powered by fossil fuels. Shares of Tesla, the world’s leading electric carmaker, have soared so much that its market capitalization is nearly twice as big as Toyota Motor’s.

SPAC transactions with automotive businesses have so far totaled nearly $10 billion — a trend that Kristi Marvin, a former investment banker who now runs the data site SPACInsider, called the summer of “deals with wheels.”

In June, Nikola, which intends to make heavy trucks powered by electricity and hydrogen fuel cells, merged with a SPAC. Investors have set its valuation at about $15 billion — more than half of what the market thinks Ford Motor is worth — even though Nikola hasn’t begun commercial production.

Another electric hopeful, Fisker, has agreed to merge with an acquisition company backed by Apollo Global Management, the private equity firm.

Apollo is just one of several prominent investors that have embraced SPACs. In late July, Pershing Square Tontine Holdings, which is run by the hedge fund manager Bill Ackman, raised $4 billion in an offering on the New York Stock Exchange. Social Capital, which is run by a former Facebook executive, Chamath Palihapitiya, has backed a handful, including one that merged with Virgin Galactic last year.

Michael Klein, a former Citigroup executive, has raised a handful of acquisition companies under the name Churchill Capital. Last month, one of his firms announced a $11 billion deal with the health care services provider MultiPlan.

So far this year, SPAC activity by dollar volume has almost doubled from all of last year, setting a record of $31.3 billion, according to SPACInsider. Credit Suisse has been the most active bank in underwriting the deals, SPACInsider reports, followed by Goldman Sachs and Citigroup.

“It’s always challenging to do a big I.P.O. above $1 billion, especially in today’s volatile environment and the time it takes to file and tell your story to investors,” said Boon Sim, the founder and managing partner of Artius Capital Partners, a private equity firm. Last year, for example, WeWork shelved its I.P.O. after investors grew wary about the office-space company’s management and financial prospects.

In June, Mr. Sim teamed up with Charles Drucker, a former chief executive of the payments company Worldpay, to start a $525 million SPAC that is looking to buy a technology or fintech company.

Pension funds, mutual funds and other investors have warmed to SPACs partly because low interest rates have forced them to search for higher returns.

Since 2018, SPACs have primarily acquired tech and industrial businesses, followed by energy and finance companies, with a typical deal value of close to $1 billion, according to a recent analysis by Goldman Sachs. Soon after offerings were announced, the average SPAC outperformed the stock market, Goldman found, but lagged the broad market after it completed an acquisition.

Mr. Ackman’s SPAC is the largest ever. His company says that because it has the right to buy additional shares of the target business, Pershing Square Tontine’s buying power could be as high as $7 billion. To make the deal more attractive to future investors, Pershing plans to eliminate a feature typical of acquisition companies that allows the sponsor — in this case Pershing — to buy 20 percent of the company it has merged with practically for free.

Mr. Ackman’s seven-person investment team is prospecting broadly for an acquisition target. It is looking for what it calls a “mature unicorn”: a high-quality, venture capital-backed business that was considering an I.P.O.; a distressed company owned by private equity backers; or perhaps a family-owned business. Pershing hopes to sign a deal by next summer.

“There are more large-cap private companies today than ever before,” Mr. Ackman said. In contrast to some of the more speculative deals he has observed, he contended, “we’re trying to merge with a business we can own for a decade.”

Mr. Burns of Lordstown Motors said his deal had come together after he made little headway raising money from investors through conventional means. Many people he spoke to were reluctant to take a chance on an untested company, especially once the coronavirus pandemic took hold this spring.

Executives at Goldman Sachs connected him to David Hamamoto, a Goldman alumnus who had a successful run in real estate investing. Mr. Hamamoto’s SPAC, DiamondPeak Holdings, had considered more than 150 companies for a potential deal.

Meeting early June, the two men traveled to Los Angeles to see a prototype of Lordstown Motors’ truck, the Endurance, and toured the company’s factory, a former G.M. plant in Lordstown, Ohio. In July, they began holding six to eight Zoom calls a day with institutional investors. After three weeks they had raised some $500 million in what is known as a private investment in a public entity, from companies like G.M., Fidelity, BlackRock and Wellington Management.

The deal gives Lordstown Motors an estimated valuation of $1.6 billion, and Mr. Burns said the company was now planning to start cranking out pickups next year.

Mr. Hamamoto said he was keen to invest in electric vehicles. He acknowledged that electric cars made up only about 2 percent of the U.S. market, but added that number could climb to more than 50 percent within 20 years, according to some analysts.

“You see what Tesla has done over the past year, and now everybody is taking note of this secular shift to electric,” he said.

Other start-ups are trying to compete head to head with Tesla, which also plans to make an electric pickup, but Lordstown Motors is focusing on what for now is a relatively uncrowded space — work trucks bought by electric utilities, construction companies and other businesses.

“The fact that we are going after the commercial fleet market is a differentiated value proposition,” Mr. Hamamoto said.

Lordstown Motors had orders for 15,000 trucks before the SPAC deal was announced at the start of this month, a number that quickly shot up to 27,000, or about $1.4 billion in potential sales, Mr. Burns said.

Of course, the company still faces challenges. Each wheel of the Endurance is powered and controlled by its own electric motor. That eliminates many moving parts like drive shafts and axles, but the design is relatively untested. Mr. Burns also has to hire engineers, line up suppliers and set up an assembly line.

Few start-ups have succeeded in the auto industry. Tesla, for example, struggled for years before recently reporting four consecutive profitable quarters. In 2019, its stock tumbled as sales sputtered.

Lordstown Motors’ transaction with DiamondPeak is scheduled to close in October. Mr. Burns said he hoped that the infusion of capital would be enough to get trucks rolling off the assembly line.

“We want enough upfront to get us all the way to the promised land,” he said.

FT : Botswana’s ex-president rejects claims of $10bn theft

Botswana’s ex-president rejects claims of $10bn theft
Scandal intensifies as Ian Khama says new administration fabricated claims to smear him

Botswana’s former president has accused his successor’s government of using stolen bank records from around the world to fabricate claims that he looted billions of dollars from the southern African nation’s central bank, in a case that has cast a shadow on one of Africa’s most stable democracies.

Ian Khama said allegations by prosecutors that he stole $10bn from the world’s second-biggest diamond producer had been “straightforward politically motivated” by President Mokgweetsi Masisi.

Prosecutors implicated Mr Khama and Bridgette Motsepe, a South African businesswoman, in the alleged financing of political unrest against Mr Masisi in a money laundering case brought last year against a former intelligence official, codenamed “Butterfly”. Neither has been charged.

A forensic report by the law firm of Cherie Blair — commissioned by Ms Motsepe, who is the sister in law of South Africa’s President Cyril Ramaphosa — found that the claims were false and used illicitly-obtained data to appear real. There was a “striking pattern of fabrication”, said the report by Omnia, Mrs Blair’s firm.

“These people have used stolen data to fabricate this affidavit,” Mr Khama said in an interview with the FT. The case showed how Mr Masisi “has proven to be extremely intolerant of opponents” and that law enforcement was being used to target political foes, he said. 

The saga has already clouded Botswana’s otherwise strong reputation on the continent for the health of its democracy and rule of law, and has its roots in the estrangement of Mr Khama and Mr Masisi, his former deputy who took over when Mr Khama stepped down in 2018.


But they rapidly fell out, to the point of Mr Khama departing the Botswana Democratic Party that his father, the country’s first post-independence president, founded and that has held power for decades.

Ahead of elections last year Mr Khama became the patron of a breakaway group that worked with the main opposition political alliance Umbrella for Democratic Change. The ruling party still secured more than double the seats of the UDC.

The case implicating Mr Khama and Ms Motsepe was launched within days of the vote. The state said Mr Khama ordered Botswana’s central bank to set up bank accounts “sourced from our country’s revenue on foreign investments” and channelled the funds abroad including to Ms Motsepe, in order to ultimately finance unrest at home.

But the investigation by Mrs Blair’s firm indicated that alleged international transfers were fictitious, appearing to show a series of basic errors and South Africa’s central bank denying knowledge of key funds.

According to Omnia’s investigation, some accounts at HSBC, Citibank and Deutsche Bank were real, but the owners said that the alleged transfers to them from Botswana did not take place, and their details appeared to have been stolen. 

“We know these things do go on, but we don’t expect them to go on in Botswana . . . I hope that Botswana has sufficient adherence to the rule of law that the prosecutors will withdraw their case,” Mrs Blair told the FT. Mr Khama plans to bring perjury and defamation cases against the state.

Even without the issue of the apparently stolen data and the other discrepancies identified in the report, the alleged theft of $10bn from the central bank, an amount equivalent to more than half Botswana’s GDP, was never plausible, Mr Khama said. 

“We didn’t have [$10bn] in the central bank in 2009 — and we don’t have it now,” Mr Khama said, adding that the bank’s audited annual reports had never revealed missing funds. “I didn’t walk into the vaults and walk out with the money on my shoulder.”

Moses Pelaelo, the Bank of Botswana’s governor, told lawmakers last year that the bank was not missing billions of dollars.

In office Mr Khama was also accused by opposition parties of having authoritarian tendencies. He denied that the institutional rot started under his presidency, but he said that he took full responsibility for picking a successor who became “power-drunk”.

“Nobody can be more confused than I am because I put him there. I just didn’t see it,” he said. “We have wiped out our democratic credentials through foolishness, victimisation and political intolerance.”

A spokesperson for Mr Masisi did not respond to a request for comment. The country’s director of public prosecutions could not be reached for comment. On Thursday Gerrie Nel, a South African lawyer appointed by Botswana to seek legal help from the South African authorities in the case, said the investigation was “unofficial” and “untested”.

WSJ : This Market Is a Tech Market. If Bond Yields Rise, Watch Out.

This Market Is a Tech Market. If Bond Yields Rise, Watch Out.
There is danger in a market overly reliant on a group of companies that are so similar

There has been a lot of concern recently about the stock market being top-heavy, dominated by just a handful of companies, and that this might spell trouble for future returns. But really what we should worry about isn’t that the market is reliant on a few stocks. It’s that the market is reliant on a few very similar stocks.

The five biggest companies today—Apple, which passed $2 trillion in market value this week, Amazon, Microsoft, Alphabet and Facebook —make up 25% of the market value of the S&P 500. That is the most since 1970, but stocks managed a stellar performance during the 1960s despite being even more top-heavy. The difference is that in 1970 the biggest companies did quite different things: computers ( IBM), telephony ( AT&T), car making ( General Motors), oil ( Exxon ) and cameras ( Kodak ).


The danger now is that the market is overly reliant on a group of companies that are all a bet on disruptive innovation—the big five and a wider circle including other fast-expanding growth companies such as Netflix and Nvidia. They have thrived since the pandemic began because so much of their lifetime profits lie far in the future, meaning their valuations benefit from low rates while short-term pandemic-related hits matter less.

Anything that hurts this group could drag down the wider market, even if other stocks are fine. And because this group has done so well from low bond yields, it should be especially susceptible to pain if those yields were to rise.

Earlier this week highlighted how two types of rising yields could be a risk for the broader market.

The first risk is that yields go up because the economy is healing. The opposite happened on Tuesday, when bond yields fell as investors became more cautious about economic recovery. Not surprisingly, twice as many stocks fell as rose, and the average stock fell. Yet the S&P 500 passed its February high because the ones that did rise were far bigger: the 168 gainers on the day averaged a market value of $103 billion, while the 332 losers were worth an average $40 billion.

Reverse this position, and it is easy to see how improving economic optimism could result in the market as a whole falling. The average stock should still go up, but the top-heavy nature of the market will leave more big stocks exposed, and so could drag down the S&P.

The second risk is that yields go up because the Federal Reserve becomes more hawkish. Earlier this week we had a dry run when the Fed minutes disappointed many hoping for explicit guidance on rates soon. Investors changed their view on how the Fed will react in future, and stocks dropped—with the biggest falling by more than the rest. Growth stocks underperformed, but the mass of the rest did badly too, with again twice as many losers as winners.

I don’t think the Fed is likely to abandon its super-dovish stance any time soon, despite Wednesday’s minor disappointment. And while I would love to see a V-shaped economic recovery lift bond yields, the obstacles are huge. My reason for raising this issue now is that the price moves of the big stocks and the rest have begun to diverge much as they did in advance of several prior corrections—as the relationship between stocks and bonds has begun to shift.


The simplest way to compare the moves of the big stocks and the rest of the market is to look at the correlation between daily rises and falls in the ordinary capitalization-weighted S&P and the equal-weighted version. When the market is working normally the two are closely linked, but when the biggest stocks move differently from the rest they have more effect on the ordinary S&P than the equal-weighted version, so the correlation falls.

The correlation fell sharply in the late stages of the dot-com bubble in 1999 and 2000, the housing bubble in 2006, the volatility bubble of 2017 and the excesses before the recession fears of late 2018, and it has fallen sharply again. When the biggest and most fashionable stocks start behaving differently from the rest, it is often an early warning that things are getting out of kilter, although it may be months before trouble becomes obvious.

The stock-bond correlation hasn’t moved as much, but suggests that the big tech stocks and growth stocks are becoming much more sensitive to bond yields than the rest of the market. Short-term correlations are volatile, so this could quickly return to normal. But if the trend continues it would threaten a pattern of higher yields typically being good for stocks that has been in place since the early 2000s.

It’s too early to say that things are going wrong, and certainly this is not evidence of a bubble. But it wouldn’t be a surprise that a market reliant on central bank and government support should be threatened by rising yields, even when they start out so low.