FT : Fight for French luxury group sheds light on Chinese investor woes

Why Lansdowne may have picked a bad time to quit the short game
London hedge fund said last week that it would shut flagship long/short strategy

Hedge fund Lansdowne Partners has made a big call on the outlook for stock markets by stopping short-selling in its flagship $2.8bn fund. It may be throwing in the towel at the wrong moment — just as opportunities are finally picking up again.

Few would pretend that life has been easy over the past decade for short-selling hedge funds, which borrow shares and then sell them, hoping to buy them back at a lower price.

Trillions of dollars of central-bank stimulus has lifted prices of assets across the board. Companies that might otherwise have gone bust have instead benefited from very cheap financing, making it hard for managers to pick out the next bankruptcy or to bet against overpriced stocks. “Going short on valuation grounds isn’t working”, said David Miller, investment director at Quilter Cheviot.

Last year Lansdowne, which is one of London’s oldest hedge funds, told investors that since the global financial crisis its short positions had not beaten the market in aggregate. In other words, it might as well not have bothered putting the bets on.

But some industry insiders point to signs that conditions for long/short strategies are improving.

Equity market volatility, which for so long has remained stubbornly low, seems to have settled higher in the wake of the sharp sell-off in March. Unlike after past spikes, such as February 2018 or the fourth quarter of that year, the Vix volatility index — known as Wall Street’s “fear gauge” — has not dropped back below 20.

That should throw up more opportunities for traders trying to pick out losing stocks at more favourable prices, said New York-based Dixon Boardman, an industry veteran who set up his firm Optima Fund Management in 1988, when hedge funds were in their infancy.

“Things tend to get overdone on the way up and the way down. Volatility should enable good short-sellers to take advantage of that,” said Mr Boardman, adding that he was starting to see hedge funds make money from shorting again.

Moreover, while the coronavirus crisis has prompted emergency interventions from central banks and governments, it is also heaping pressure on already-threatened business models.

Part of the reason given by Lansdowne’s Peter Davies for stopping shorting was that if the Covid-19 shock does not expose dud companies, then what will? “Although economic recovery from recent events is unlikely to be linear, it is hard to imagine operating conditions which will stress business-models more than those witnessed in recent months,” he wrote.

However, there has already been a noticeable pick-up in corporate defaults this year. Some commentators think the trend could accelerate “as blanket [government] backstops give way to more targeted policy measures and businesses with no viable futures default and restructure,” in the words of Oxford Economics.

One of the best examples of short-sellers picking out a dubious business model came last month, when a number of hedge funds made more than €1bn in a week betting against German fintech Wirecard.

Among those profiting was Mayfair-based hedge fund EOF Partners, which uses forensic accounting to unearth short ideas. It put on its bet when Wirecard’s shares traded at about €120 and covered it at €2.25, according to an investor letter seen by the Financial Times — a 98 per cent return before fees.

And even if funds do not latch on to outright fraud, there now seems plenty of potential for traders to profit from over- and underpriced stocks. According to Morgan Stanley, the gap in valuations between cheap and expensive stocks is at levels last seen at the height of the tech, media and telecoms bubble two decades ago.

“If the market becomes more discerning about valuations, that’s good for short-sellers,” said Fiona Frick, chief executive of investment firm Unigestion.

While Lansdowne may have thrown in the towel, enthusiasm for shorting is undimmed elsewhere. As soon as short-selling bans expired in six European countries in May, funds such as Citadel and Millennium piled in to short bets.

Some funds are already making decent returns, including Chicago-based Balyasny Asset Management, up about 15 per cent so far this year in one of its funds, according to a person familiar with its figures. Others recording gains include Delbrook Capital, a Vancouver-based fund focused on commodity stocks, according to an investor letter, and Barry Norris, chief investment officer at Argonaut Capital.

It may seem odd to suggest that short selling could be on its way back after US stocks just notched their best quarter since 1998.

However, Optima’s Mr Boardman reminisces about the bull market of the 1990s, when stocks rose sharply but short-sellers still profited. “By and large, good companies went up, and bad companies went down.”

FT : Fight for French luxury group sheds light on Chinese investor woes

Fight for French luxury group sheds light on Chinese investor woes
Fortune Fountain struggles to keep control of Baccarat Crystal after credit deal goes awry

Chinese investors who claim to trace their lineage to a renowned fourth-century calligrapher are fighting to retain control of a 256-year-old French crystal glassmaker, following a series of defaults and a private credit deal gone wrong.

The troubles for Beijing-based Fortune Fountain Capital and its struggle to hold on to Baccarat Crystal highlight the problems Chinese investors have run into after taking on excessive leverage to buy European brands — sometimes through private credit deals at lending rates far higher than those of bank loans.

Fortune Fountain, which describes itself as a wealth management platform and family office, agreed to buy Baccarat for €164m in June 2017. It promised at the time to also invest up to €30m in the company.

But in 2019, Fortune Fountain defaulted on a loan from two Hong Kong-based private lenders, Tor Investment Management and Sammasan Capital, which financed at least half of the enterprise value of the deal, according to people familiar with the matter.

In March of this year, the Chinese group replaced Baccarat chief executive Daniela Riccardi with Sun Zhen, a shareholder in Fortune Fountain. The change violated terms that required the Chinese company to seek the lenders’ approval for top leadership appointments, the people said.

That has sparked a fight for control over the storied French luxury brand.

The lenders have replaced the sole board member at the holding company that owns about 97 per cent of Baccarat, giving them the right to vote against the reappointment of Mr Sun at an annual general meeting and appoint an executive with experience in the French luxury industry.

“This is being done not only to protect the lenders, but above all to protect the company,” the lending group said of its attempt to appoint a new top executive.

The current board has delayed the annual meeting, scheduled for this month, until September to postpone the vote.

Fortune Fountain did not respond to a request for comment. Baccarat declined to comment. 


Baccarat, which takes its name from the town in eastern France where it was founded in 1764, is known for its jewellery, glassware and lighting. Its champagne coupes can cost more than €2,500 each, and its chandeliers have hung in palaces in Moscow and Istanbul.

Fortune Fountain Capital was established in 2017 as a wealth management service for rich families in China and Hong Kong. It said it had “attracted elite bankers from Goldman Sachs, Merrill Lynch and the City of London”, and that its services include luxury lifestyle experiences such as fine wine, artwork and private jet chartering.

The company’s website says its cumulative investments exceed Rmb50bn ($7.1bn).

Claims that its owners are descendants of Wang Xizhi, one of China’s most famous ancient calligraphers, have featured prominently in Fortune Fountain’s marketing.

The 2017 buyout of Baccarat coincided with a flurry of overseas deals, according to data from Refinitiv. Fortune Fountain purchased a New Zealand-based manuka honey maker the same month. In 2018, it bought a controlling stake in Antiquorum Management, a Swiss watch auctioneer, and a large stake in California-based genetics researcher DiaCarta.

People familiar with the Baccarat deal said Fortune Fountain has been unable to deliver on many of its promises to invest in the French company. Chinese media have said the company has large debts in China.

The default on the loan has added Fortune Fountain to a lengthening list of Chinese investors that have snapped up European luxury assets only to struggle to hold on to them or simply fail to close the deals.

Shandong Ruyi, once hailed as the “LVMH of China”, took over more than a dozen foreign luxury brands but has suffered a credit crunch at home, forcing it to back out of its buyout of Swiss shoe and bag maker Bally. Shanghai-listed Gangtai Group agreed to buy Milanese jewellery brand Buccellati in 2017 but has since sold it to Richemont.

As Beijing clamped down on investors moving money offshore starting in early 2017, companies buying foreign assets took on more loans from private lenders outside China.

Private capital allocation focused on Chinese borrowers rose from $432m in 2017 to $1.25bn by the end of last year, according to PwC. Global and Asia-based funds evaluating and investing in the Chinese market surged to $9.3bn in 2019 from $1.9bn five years earlier.

The terms of private credit deals are rarely disclosed, even when companies default. But a few such situations, such as that surrounding the buyout of football club AC Milan, have come to light. 

In AC Milan’s case, a Chinese investor took a €300m loan with an annual interest rate of more than 11 per cent from US hedge fund Elliott Management, the FT reported. When the investor defaulted, Elliott took over the club.

James Dilley, a partner in PwC's deals group, says such defaults by Chinese borrowers have become a trend.

“I’d put this down to a combination of many of these deals being closed at high valuations, acquirers experiencing difficulties in refinancing debt, challenges in getting additional liquidity out of China due to the capital controls in place, and in some cases, underperformance of the underlying business or asset,” he said.

>>> US After Hours Summary: MRNA +12.8% jumps after hours on posit

After Hours Summary: MRNA +12.8% jumps after hours on positive vaccine news; SIRI +2.1% higher on share buyback

After Hours Gainers:

Companies trading higher in after hours in reaction to news: MRNA +12.8% (confirms publication of interim results from Phase 1 study of COVID-19 vaccine candidate), PRQR +7.1% (enters into $30 mln convertible debt financing with Pontifax), VBIV +5.3% (extends momentum from Tuesday regular session), SIRI +2.1% (approves $2 bln increase to stock repurchase program), PVH +1.2% (to streamline N American operations, includes exit from Heritage Brands), GSK +1% (FDA advisory committee votes in favor of positive benefit/risk profile)

After Hours Losers:

Companies trading lower in after hours in reaction to news: ZYXI -7.2% (commences public offering by co and selling stockholders), VHC -3.5% (confirms receipt of Patent Trial and Appeal Board decisions), ADPT -1.5% (commences public offering of 8 mln shares, 2 mln of which were from selling shareholder; also files for mixed securities shelf offering), FANG -0.1% (reports 2Q20 production; revises FY20 production guidance lower)

>>> US Close Dow +2.13% S&P +1.34% Nasdaq +0.94% Russell +1.76%

Closing Stock Market Summary

The S&P 500 gained 1.3% on Tuesday, recovering yesterday's decline in a mostly broad-based advance. The Dow Jones Industrial Average (+2.1%) and Russell 2000 (+1.8%) had strong performances with roughly 2% gains, while the Nasdaq Composite (+0.9%) underperformed. 

The market stumbled out of the gate after JPMorgan Chase (JPM 98.21, +0.56, +0.6%), Citigroup (C 50.15, -2.05, -3.9%), and Wells Fargo (WFC 24.25, -1.16, -4.6%) reported large provisions for credit losses in their Q2 earnings reports. While large provisions reflect a challenging economic environment for the banks, investors were willing to stay in the market.

All 11 S&P 500 sectors closed higher, with the best performers found in the cyclical energy (+3.6%), materials (+2.5%), and industrials (+2.2%) sectors. A strong finish in the market carried the consumer discretionary (+0.6%) and financials (+0.7%) sectors into positive territory. 

Shares of Amazon (AMZN 3084.00, -20.00, -0.6%) were down as much as 5.0% in early action alongside many of the mega-cap technology stocks, as money appeared to flow out of these crowded names and into beaten-down stocks. Investors, however, gradually returned to the mega-cap space throughout the day, providing a boost for the major indices and leaving AMZN shares down just 0.6%. 

Separately, Delta Air Lines (DAL 26.11, -0.71, -2.7%) missed top and bottom-line estimates and issued a cautious revenue outlook for its September quarter. Travelers (TRV 118.55, +4.31, +3.8%) said it expects a net loss in Q2, primarily due to catastrophic events and civil unrest. TRV shares still closed higher. 

In the Treasury market, longer-dated tenors saw increased buying interest following the large credit-loss provisions from the banks. The 2-yr yield declined on basis point to 0.15%, and the 10-yr yield declined three basis points to 0.62%. The U.S. Dollar Index declined 0.2% to 96.29. WTI crude increased 0.4%, or $0.16, to $40.24/bbl.

Reviewing Tuesday's economic data:

  • The Consumer Price Index (CPI) for June increased 0.6% m/m (consensus 0.5%) following a 0.1% decline in May. Excluding food and energy, CPI rose 0.2% m/m (consensus 0.1%) after a 0.1% decline in May. This was the first increase in core CPI since February.
    • The key takeaway from the report is that shows inflation at the consumer level remains in a subdued state, evidenced by a 0.6% yr/yr increase in total CPI and a 1.2% yr/yr increase in core CPI.
  • The NFIB Small Business Optimism for June increased to 100.6 from 94.4 in May.

Looking ahead to Wednesday, investors will receive Industrial Production and Capacity Utilization for June, Export and Import Prices for June, the Empire State Manufacturing Index for July, and the weekly MBA Mortgage Applications Index. 

  • Nasdaq Composite +16.9% YTD
  • S&P 500 -1.0% YTD
  • Dow Jones Industrial Average -6.6% YTD
  • Russell 2000 -14.4% YTD

NYT : Caught in ‘Ideological Spiral,’ U.S. and China Drift Toward Cold War

Caught in ‘Ideological Spiral,’ U.S. and China Drift Toward Cold War
Relations are in free fall. Lines are being drawn. As the two superpowers clash over technology, territory and clout, a new geopolitical era is dawning.

One by one, the United States has hit at the core tenets of Xi Jinping’s vision for a rising China ready to assume the mantle of superpower.

In a matter of weeks, the Trump administration has imposed sanctions over punitive policies in Hong Kong and China’s western region of Xinjiang. It took new measures to suffocate Chinese innovation by cutting it off from American technology and pushing allies to look elsewhere. Then, on Monday, it tore up China’s claims in the South China Sea, setting the stage for sharper confrontation.

“The power gap is closing, and the ideological gap is widening,” said Rush Doshi, director of the China Strategy Initiative at the Brookings Institution in Washington, adding that China and the United States had entered a downward “ideological spiral” years in the making.

“Where’s the bottom?” he asked.

For years, officials and historians have dismissed the idea that a new Cold War was emerging between the United States and China. The contours of today’s world, the argument went, are simply incomparable to the decades when the United States and the Soviet Union squared off in an existential struggle for supremacy. The world was said to be too interconnected to easily divide into ideological blocs.

Now, lines are being drawn and relations are in free fall, laying the foundation for a confrontation that will have many of the characteristics of the Cold War — and the dangers. As the two superpowers clash over technology, territory and clout, they face the same risk of small disputes escalating into military conflict.

The relationship is increasingly imbued with deep distrust and animosity, as well as the fraught tensions that come with two powers jockeying for primacy, especially in areas where their interests collide: in cyberspace and outer space, in the Taiwan Strait and the South China Sea, and even in the Persian Gulf.

And the coronavirus pandemic, coupled with China’s recent aggressive actions on its borders — from the Pacific to the Himalayas — has turned existing fissures into chasms that could be difficult to overcome, no matter the outcome of this year’s American presidential election.

From Beijing’s perspective, it is the United States that has plunged relations to what China’s foreign minister, Wang Yi, said last week was their lowest point since the countries re-established diplomatic relations in 1979.

“The current China policy of the United States is based on ill-informed strategic miscalculation and is fraught with emotions and whims and McCarthyist bigotry,” Mr. Wang said, evoking the Cold War himself to describe the current level of tensions.

“It seems as if every Chinese investment is politically driven, every Chinese student is a spy and every cooperation initiative is a scheme with a hidden agenda,” he added.

Domestic politics in both countries have hardened views and given ammunition to hawks. The pandemic, too, has inflamed tensions, especially in the United States. President Trump refers to the coronavirus with racist tropes, while Beijing accuses his administration of attacking China to detract from its failures to contain the virus.

“What cooperation is there between China and the United States right now?” said Zheng Yongnian, director of the East Asian Institute at the National University of Singapore. “I can’t see any substantial cooperation.”

Both countries are forcing other nations to take sides, even if they are disinclined to do so. The Trump administration, for example, has pressed allies — with some success in Australia and, on Tuesday, in Britain — to forswear the Chinese tech giant Huawei as they develop 5G networks. China, facing condemnation over its policies in Xinjiang and Hong Kong, has rallied countries to make public demonstrations of support for them.

At the United Nations Humans Rights Council in Geneva, 53 nations — from Belarus to Zimbabwe — signed a statement supporting China’s new security law for Hong Kong. Only 27 nations on the council criticized it, most of them European democracies, along with Japan, Australia and New Zealand. Such blocs would not have been unfamiliar at the height of the Cold War.

China has also wielded its vast economic power as a tool of political coercion, cutting off imports of beef and barley from Australia because its government called for an international investigation into the origins of the pandemic. On Tuesday, Beijing said it would sanction the American aerospace manufacturer Lockheed Martin over recent weapons sales to Taiwan.

With the world distracted by the pandemic, China has also wielded its military might, as it did by testing its disputed frontier with India in April and May. That led to the first deadly clash there since 1975. The damage to the relationship could take years to repair.

Increasingly, China seems willing to accept the risks of such actions. Only weeks later, it asserted a new territorial claim in Bhutan, the mountain kingdom that is closely allied with India.

With China menacing vessels from Vietnam, Malaysia and Indonesia in the South China Sea, the United States dispatched two aircraft carriers through the waters last month in an aggressive show of strength. Further brinkmanship appears inevitable now that the State Department has declared China’s claims there illegal.

A spokesman for China’s foreign ministry, Zhao Lijian, said on Tuesday that the American declaration would undermine regional peace and stability, asserting that China had controlled the islands in the sea “for thousands of years,” which is not true. As he stated, the Republic of China — then controlled by the Nationalist forces of Chiang Kai-shek — only made a formal claim in 1948.

“China is committed to resolving territorial and jurisdictional disputes with directly related sovereign states through negotiations and consultations,” he said.

That is not how its neighbors see things. Japan warned this week that China was attempting to “alter the status quo in the East China Sea and the South China Sea.” It called China a more serious long-term threat than a nuclear-armed North Korea.

Michael A. McFaul, a former American ambassador to Russia, said China’s recent maneuvering appeared to be “overextended and overreaching,” likening it to one of the most fraught moments of the Cold War.

“It does remind me of Khrushchev,” he said. “He’s lashing out, and suddenly he’s in a Cuban missile crisis with the U.S.”

A backlash against Beijing appears to be growing. The tensions are particularly clear in tech, where China has sought to compete with the world in cutting-edge technologies like artificial intelligence and microchips, while harshly restricting what people can read, watch or listen to inside the country.

If the Berlin Wall was the physical symbol of the first Cold War, the Great Firewall could well be the virtual symbol of the new one.

What began as a divide in cyberspace to insulate Chinese citizens from views not authorized by the Communist Party has now proved to be a prescient indicator of the deeper fissures between China and much of the Western world.

Mr. Wang, in his speech, said China had never sought to impose its way on other countries. But it has done exactly that by getting Zoom to censor talks that were being held in the United States and by launching cyberattacks on Uighurs across the globe.

Its controls have been hugely successful at home in stifling dissent and helping to seed domestic internet giants, but they have won China little influence abroad. India’s move to block 59 Chinese apps threatens to hobble China’s biggest overseas internet success to date, the meme-laden short-video app TikTok.

Last week, TikTok also shut down in Hong Kong because of China’s new national security law there. The American tech giants Facebook, Google and Twitter said they would stop reviewing data requests from the Hong Kong authorities as they assessed the law’s restrictions.

“China is big, it will be successful, it will develop its own tech, but there are limits to what it can do,” said James A. Lewis, a former American official who writes on cybersecurity and espionage for the Center for Strategic Studies in Washington.

Even in places where China has succeeded in selling its technology, the tide appears to be turning.

Beijing’s recent truculence has now led the United Kingdom to block new Huawei equipment from going into its networks, and the Trump administration is determined to cut the company off from microchips and other components it needs. To counter, Beijing has redoubled efforts to build homegrown options.

Calls for a total decoupling of China’s supply chain from American tech companies are unrealistic in the short term, and would prove massively expensive in the longer term. Still, the United States has moved to pull Taiwan’s microchip manufacturing — crucial to the supply chains of Huawei and other Chinese tech companies — closer to its backyard, with plans to support a new Taiwan Semiconductor Manufacturing plant in Arizona.

Mr. Wang, the foreign minister, urged the United States to step back and seek areas where the two countries can work together. Pessimism about the relationship is nonetheless widespread, though most Chinese officials and analysts blame the Trump administration for trying to deflect attention from its failure to control the pandemic.

“It is not difficult to see that under the impact of the coronavirus in this U.S. election year various powers in the U.S. are focused on China,” Zhao Kejin, a professor of international relations at Tsinghua University, wrote in a recent paper. “The China-U.S. relationship faces the most serious moment since the establishment of diplomatic relations.”

While he eschewed the idea of a new Cold War, his alternative phrasing was no more reassuring: “The new reality is China-U.S. relations are not entering ‘a new Cold War’ but sliding into a ‘soft war.’”

WSJ : JPMorgan Sets Aside More Than $10 Billion to Cover Coronavirus Loan Losses

JPMorgan Sets Aside More Than $10 Billion to Cover Coronavirus Loan Losses
America’s biggest bank posted a second-quarter profit of $4.7 billion, a 51% drop

JPMorgan Chase JPM +0.59% & Co. set aside $10.47 billion to cover potential losses on loans to borrowers hurt by the coronavirus pandemic, cutting its second-quarter profit in half.

The nation’s biggest bank by assets is stockpiling reserves, worried about how the pandemic will affect the financial health of its consumer and corporate clients. JPMorgan put aside more than $8 billion for potential loan losses in the first quarter, which ended just weeks into the crisis.

The New York bank posted a profit of $4.69 billion, down from $9.65 billion a year earlier. At $1.38 a share, the results exceeded the average analyst estimate of $1.15 a share, according to FactSet. Per-share earnings were $2.82 a year ago.

Revenue rose 15% to $33 billion.

The pandemic also took a toll on two other big U.S. lenders. Wells Fargo & Co. posted its first quarterly loss in more than a decade and socked away $9.57 billion to prepare for a wave of loan defaults. Citigroup Inc.’s second-quarter profit fell 73%, weighed down by the $7.9 billion the bank set aside for an expected increase in soured loans.

JPMorgan’s outlook for the economy has darkened since the bank reported first-quarter earnings, and its increased loan-loss provisions reflect that view. The bank put aside extra to prepare for unemployment to remain above 10% through the first half of next year, said Chief Financial Officer Jennifer Piepszak.

JPMorgan Chief Executive James Dimon said a massive government-stimulus effort and expanded unemployment benefits are keeping U.S. consumers and businesses afloat for now, but they won’t last forever.

“This is not a normal recession,” Mr. Dimon said. “The recessionary part of this you’re going to see down the road.”

JPMorgan’s second-quarter loan-loss provision included $1.56 billion in net charge-offs and $8.9 billion it added to its reserves for loans that might default in the future. Analysts had expected the total to be $8.37 billion.

The bank’s models predict a wave of defaults over the coming year, especially if the virus cripples the economy for longer than expected.

The biggest portion of the quarter’s provision—$5.83 billion—came from the consumer bank, while $2 billion came from the corporate and investment bank and another $2.43 billion came from the commercial bank.

The provisions boosted the bank’s total allowance for potential credit losses to $34.3 billion as of the end of June.

JPMorgan’s shares have fallen 30% this year, slightly better than its big-bank rivals but far worse than the overall market. Banks have been hammered on fears that their profits will be eaten by loan losses and that margins will be dragged down if interest rates stay low for the foreseeable future.

In premarket trading, shares rose 2.4% to $100.

The bank’s net interest margin, the difference between what it charges borrowers and pays depositors, fell to 1.99% from 2.37% in the first quarter.

In a bright spot, JPMorgan’s corporate and investment bank posted a 66% surge in revenue, with its trading division up 79%. The bank’s fixed-income trading unit recorded $7.34 billion in revenue, double from a year ago, and equities trading posted $2.38 billion in revenue, up 38%. Investment-banking revenue also nearly doubled to $3.4 billion, including gains on some positions.

The results were boosted by a volatile stock market and investors seeking yield, as well as companies of all sizes raising funds from stock and bond offerings.

In the consumer and small-business banking operations, revenue fell 9% and the provisions it set aside for loan losses sent it to a $176 million loss. Spending volume on the bank’s credit cards fell 23%.

The commercial bank slid to a $691 million loss for the quarter. In asset and wealth management, profit fell 8% to $658 million on flat revenue.