>>> Asian Update

Asia Market Update: Asian indices trade generally higher after losses on prior session, US markets closed off of session lows; Shanghai trades near the 3,000 level, PBOC expected to cut loan prime rates on Thursday


General Trend:
- Apple suppliers trade generally higher in Asia after losses on prior session
- Early gainers in Shanghai include IT companies and financials
- HK gaming companies move generally higher in early trading, Macau has said casinos can reopen on Thursday (Feb 20th) but the process could also be delayed
- Commonwealth Bank’s ex-dividend weighs on financial sector in Australia; Consumer Discretionary index outperforms amid earnings from Wesfarmers
- Gainers in Japan include electronics and drug companies
- Japan’s Jan exports had the slowest decline since July
- PBOC set the yuan weaker than the ‘7’ level against the USD for the first time since Dec 25th
- Aussie Q4 wage data was in line with expectations, public sector wage growth was the lowest since the commencement of the index in 1997; Aussie Jan jobs data due on Thursday

***Headlines/Economic Data***
Australia/New Zealand
-ASX 200 opened -0.1%
- (NZ) Reserve Bank of New Zealand (RBNZ) Gov Orr: Economy and policy are in a good position especially employment and inflation it at the midpoint; ORC while low is still higher than other countries - speaking at parliament
- CTX.AU Receives A$3.9B cash and share offer from EG Group (A$15.62/shr and 1 share in Ampol for every Caltex share held) for convenience retail business
- FMG.AU Reports H1 Net $2.45B v $644M y/y, underlying EBITDA 4.23B v 1.63B y/y; Rev $6.49B v $3.54B y/y
- WES.AU Reports H1 (A$) adj Net 1.13B v 1.1B y/y; adj EBIT 1.73B v 1.6B y/y; Rev 15.3B v 14.4B y/y (post AASB 16)
- WBC.AU Gives Q1 update: CET1 capital ratio 10.8% v 10.7% q/q; Guides FY20 Expect to incur additional expenses associated with work in regards to regulatory investigation
- (AU) AUSTRALIA Q4 WAGE PRICE INDEX Q/Q: 0.5% V 0.5%E; Y/Y: 2.2% V 2.2%E
- (AU) Australia prices A$2.0B in May 21 2.75% 2041 bonds through syndication, yield to maturity 1.535%, bid to cover: 3.05x

Japan
-Nikkei 225 opened +0.6%
- (JP) Japan Govt expected to maintain assessment that the economy is recovering in its monthly report Thursday may make slight tweaks to language to describe the economy as "recovering moderately despite continued weakness in exports" - press
- (JP) JAPAN DEC CORE MACHINE ORDERS M/M: -12.5% V -8.9%E; Y/Y: -3.5% V -0.7%E
- (JP) JAPAN JAN TRADE BALANCE: -¥1.31T V -¥1.68TE (14th consecutive trade deficit); ADJ TRADE BALANCE: -¥224.1B V -¥550BE; Exports Y/Y: -2.6% v -7.0%e (best reading since July)
- 2802.JP Targeting to keep dividend payout ratio ~40% or raise in the future; see max ¥600M in costs if China plants remain closed for 3-months

Korea
-Kospi opened +0.6%
- (KR) South Korea Fin Min Hong: will provide liquidity to exporters impacted by virus; planning to announce prelim stimulus measures by the end of Feb - Yonhap

China/Hong Kong
-Hang Seng opened -0.2%; Shanghai Composite opened -0.2%
- (CN) China govt policy adviser Zhang Yansheng: China may adjust 2020 GDP growth target due to coronavirus [in line with prior speculation] – SCMP
- (CN) US State Dept imposes restrictions and new requirements on 5 Chinese media outlets operating in the US including Xinhua and the China Daily
- (CN) China Hubei province coronavirus update for Feb 18th: 1.7K additional cases v 1.8K prior, Additional deaths 132 v 93 prior
- (CN) China National Health Commission Coronavirus Update for Feb 18th: 1.7K additional cases v 1.9K prior; Additional death 136 v 98 prior
- (CN) China PBoC Open Market Operation (OMO): Skips reverse repo operations for the 2nd consecutive time, Net drain CNY0B v drains CNY220B prior
- (CN) China PBOC sets Yuan Reference Rate: 7.0012 v 6.9826 prior (First setting above 7 since Dec 25th)
- (CN) China considering using cash injections and mergers in order to support airlines
- (CN) China sets first batch of 2020 rare earth mining quota at 66.0K metric tonne v 60K y/y

Other
- (SG) Singapore Fin Min Heng: Global impact of coronavirus remains unclear; must prepare for economic impact that could be worse than expected; To introduce two special packages valued at SG$5.6B to support jobs and cost of living - budget speech
- (SG) Singapore Fin Min Heng: We have enough firepower to tackle impact of coronavirus

North America
- BA Plans to inspect undelivered 737 MAX aircraft for 'foreign object debris' – CNBC
- (US) DEC NET LONG-TERM TIC FLOWS: $85.6B V $22.9B PRIOR TOTAL NET TIC FLOWS: $78.2B V $73.1B PRIOR
- A Reports Q1 $0.81 v $0.81e, Rev $1.28B v $1.35Be; Affirms FY guidance
- (US) Attorney General (AG) Barr said to have considered quitting over Trump tweets about ongoing cases - Washington Post

Europe
- (NL) Netherlands Foreign Investment Agency: 140 companies have moved to the Netherlands since Brexit - UK press

***Levels as of 12:15ET***
- Hang Seng +0.3%; Shanghai Composite +0.2%; Kospi -0.2%; Nikkei225 +1.0%; ASX 200 +0.4%
- Equity Futures: S&P500 +0.3%; Nasdaq100 +0.3%, Dax +0.3%; FTSE100 +0.3%
- EUR 1.0804-1.0791; JPY 110.09-109.86; AUD 0.6702-0.6683; NZD 0.6401-0.6385
- Commodity Futures: Gold +0.1% at $1,605/oz; Crude Oil +0.9% at $52.77/brl; Copper +0.3% at $2.62/lb

FT : Active managers hope for a Legg up from consolidation

Active managers hope for a Legg up from consolidation

One huge thing to start: Donald Trump extended clemency to several high-profile white-collar criminals on Tuesday including granting a pardon to one-time ‘junk-bond king’ Michael Milken. Read more here.

Now to today’s main item . . .


If DD had to sum up the survival guide for active fund managers, it would be pretty short: get big or go home.

Asset growth among midsize active managers has largely ground to a halt, with some blue-chip institutional investors experiencing something worse: outflows as clients pull money and plough that cash into cheaper, passive alternatives.


The writing has been on the wall since the aftermath of the financial crisis, when index-tracking funds exploded in popularity. That boom has meant that asset managers relying on star traders — who for generations were a key factor in whether assets flowed to one fund house or another — have had to look elsewhere for growth.

The solution for many asset managers, as pitched by their Wall Street advisers, has been to consolidate. And that means either buying a competitor, or stomach being swallowed up by one.

Franklin Templeton on Tuesday chose to do the former when it announced that it would buy Legg Mason for $6.5bn, including debt. The combined business will manage $1.5tn, catapulting the company into one of the very largest asset managers, behind juggernauts such as Vanguard and Fidelity. Franklin chief executive Jenny Johnson (pictured above) told the FT she’s playing “offence” not “defence”.

Fund managers in Europe have followed the same playbook.


On Monday Jupiter Asset Management agreed to buy rival Merian Global Investors for £419m in a deal that, with a total of £65bn in assets, will create Britain’s second-largest manager of retail funds. The FT’s Owen Walker has the inside story on Jupiter and Merian’s marriage of convenience.

But do not expect any of these deals to curtail the giant that is BlackRock. The world’s largest asset manager is in touching distance of also becoming Britain’s biggest in a sign that the UK — one of the strongest bastions of stockpicking — is following in the footsteps of the US with its embrace of low-cost, index-tracking funds. More on that from the FT’s Siobhan Riding and Chris Flood here.


Across the English Channel, the French fund management group Amundi bought the €23bn asset management business of Spanish bank Sabadell last month for €430m. It’s a tried and tested method for Amundi, which has routinely turned to acquisitions.

Investors received the latest active manager tie-up with glee on Tuesday. Shares in Legg Mason inched above the $50 offer price after the deal was announced, which puts the company’s shareholders in prime position to demand a better offer.

One investor has already given the deal his blessing. Nelson Peltz (above), whose activist hedge fund Trian Partners owns a 4.5 per cent stake in Legg Mason, called the deal “compelling”.

The billionaire is set to make $70m, according to Bloomberg. Not bad for a second go. Peltz joined the fund manager’s board again last year, having already had a stint from 2009 to 2014

FT : Business counts more than family in Italian family businesses

Business counts more than family in Italian family businesses

Why dynastic multinationals outperform listed companies by often eye-popping margins

The past decade has been a miserable one for anyone investing in the average Italian listed company. Since February 2010, the country’s FTSE MIB index has returned a meagre 1.5 per cent compounded per year, or less than if an investor had simply bought a 10-year Italian government bond and headed off for a decade-long excursion to the beach.

The explanations for this dire performance may seem obvious. The Italian economy has been stagnant for decades, the country’s banking sector went through a painful crisis, and a succession of weak governments have failed to push through reforms.

But simply glancing at the terrible aggregate performance of the Italian stock market over the past 10 years misses the bonanza that has been enjoyed by many of the country’s largest family-owned empires, which have outperformed by an often eye-popping margin.


Exor, the Agnelli family holding company, has increased its value by almost seven times over the past decade. Davide Campari Milano, majority owned by the Garavoglia family, is up nearly five times over that period. All of these performances exclude dividends, which would make the gap between the average Italian company and these business dynasties starker still.

The pharmaceuticals group Recordati, which until 2018 was still majority owned by its founding family, has increased its value by almost eight times, while Leonardo Del Vecchio’s Luxottica, now merged with France’s Essilor with Mr Del Vecchio still as the largest single shareholder, is up more than three times.

Then there are a number of privately held Italian family multinational businesses, such as Ferrero or Barilla, which have managed healthy profit growth through international expansion as the domestic economy has flatlined. If they were listed, they would be among the most valuable in their sectors globally.

There are of course notable exceptions. Ex-prime minister Silvio Berlusconi’s Mediaset has lost more than half its value in a decade, mirroring Mr Berlusconi’s own political fortunes. Other once-wealthy families with money concentrated in industries unable to escape Italy’s downturn and debt crisis, such as construction and banking, have not enjoyed the last 10 years at all.

The clear outperformance of certain large family-controlled companies has piqued the interest of academics and investors. A type of capitalism that was once viewed as encouraging nepotism and poor governance is now cited by some business school professors as a model for long-term thinking and sustainable practices.

Credit Suisse has complied research that argues family-controlled businesses — defined as founders or their dependants controlling at least 20 per cent of the equity — generate faster sales growth, higher margins, and use less debt to achieve this than regular listed companies.

Family owners, the argument goes, can take a more long-term view because they do not need to worry themselves with month-to-month management of the fickle concerns of the stock market.

Most importantly, their vast fortunes depend on not blowing up their business. Outside investors can buy shares in their companies safe in the knowledge that if they wake up one morning to news of some ugly event, such as an accounting fraud, it will cost the family far more than a minority shareholder.

Yet investors who conclude that just because a business happens to be family-owned, it will do better than average are making a risky bet.

The reason many of these family-owned multinationals do so well is often because they are great businesses, with valuable brands, high barriers to entry, large returns on capital and are hugely cash generative.

It is precisely for this reason that these businesses are able to stay under family control. Bad businesses in general consume capital and require constant access to it. Businesses that require ever greater amounts of capital are forced to either take on large amounts of debt, or dilute their shareholders, meaning founders eventually lose control.

It is no coincidence that many of Europe’s largest family-controlled companies are in structurally more profitable industries, such as luxury goods and consumer products. Far less remain in the world of banking, where successive crises have washed out controlling families in countries such as Spain, Portugal and Italy.

Backing a family business while ignoring the industry they are in, can have terrible results. The Botin family, perhaps the most celebrated banking dynasty in modern Europe, barely control a sliver of the equity of Santander after successive capital increases.

They may have survived while many of their rivals did not, but they no longer own much of what they spent generations building. And the shareholders who invested alongside them since the turn of the millennium have lost just over 4 per cent a year compounded per year over 20 years.

The best family-owned companies will continue to outperform the rest of the market. This will not be because they succeed simply because they are owned and managed by families, but because they are among the best businesses in the world. The dynasties that control them are far too shrewd to ever give them away.

>>> US After Hours Summary: Earnings movers include ENPH +11%, HLF +5.

After Hours Summary: Earnings movers include ENPH +11%, HLF +5.5%; on downside, GRPN -26%, SGMS -11%, AMED -10%

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: SSTI +22.7%, ENPH +11%, HLF +5.5%, SCPL +4.7%, HQY +3.5%, LZB +3.5%, FANG +2.2%, DVN +2%, CXO +1.2%, RPAI +0.4%, DOOR +0.3%, HVT +0.2%, ROIC +0.1%, TIVO +0.1%

Companies trading higher in after hours in reaction to news: BBBY +3.1% (discusses recent transactions and $1 bln capital allocation strategy), ARGO +0.1% (names new CEO)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: GRPN -25.9%, SGMS -10.6%, AMED -9.7%, TXG -4.9%, KAR -3.4%, NTR -2.9%, LC -2% (also to acquire Radius Bank for $185 mln in cash and stock), HSTM -1.4%, BLUE -1.4% (also announces mixed shelf offering), INVH -1%, AWK -0.9%, EVBG -0.9%, PLMR -0.9%, KRG -0.4%, CHE -0.2%, TPH -0.2%, TX -0.2%, ACC -0.1%, BKD -0.1%, NP -0.1%, SOI -0.1%

Companies trading lower in after hours in reaction to news: DT -3.4% (launches 25 mln share offering by selling stockholders ), NEE -2.2% (announces intended sale of $2.5 bln of equity units), IAG -0.7% (reports total attributable proven and probable reserves)

WSJ : Bombardier Shed Snowmobiles for Jetliners, Trains. Now, It’s Giving Up Bot

Bombardier Shed Snowmobiles for Jetliners, Trains. Now, It’s Giving Up Both.
‘Things were piling one on top of the other, it was a very tough situation,’ says CEO Alain Bellmare

TORONTO— Bombardier Inc. BDRBF -10.08% tried to take on much bigger players in the global market for trains and commercial jetliners. Having shed both those businesses in as many weeks, it now plans to pare the debt that forced those retreats, and navigate a much smaller industry: business jets.

The Canadian company said earlier this week it would sell its train business—a maker of high speed trains and New York City subway cars—to French giant Alstom SA, ALO -3.18% netting as much as $4.5 billion. It has promised to deploy that cash to significantly reduce $9.3 billion in long-term debt, much of which was borrowed to finance an ill-fated effort to break into the commercial plane market. It separately agreed to sell its remaining stake in that business last week to Airbus SE.

Bombardier had been engaged in parallel talks to sell the business-jet unit, too, in case a train deal was derailed. Those talks, with Textron Inc., TXT -0.92% are now over.

“We had to reduce debt,” Bombardier Chief Executive Officer Alain Bellemare said in an interview. “We had two great businesses, and one had to go.”

After the Alstom and Airbus deals, Bombardier is left as one of several players in a much smaller industry, the roughly $20 billion global market for new business jets. It competes at the top end with General Dynamics Corp. ’s Gulfstream and France’s Dassault Aviation SA, and with Textron and Brazil’s Embraer SA in the market for small and medium-size planes.

Bombardier makes the Challenger, Learjet and Global brands, and says it has a backlog of orders worth $14.4 billion. Growth in the sector is expected to be driven by demand for bigger jets that travel longer distances. Bombardier’s new Global 7500 ranks as the world’s largest and longest-range jet. Its Global 6000 made headlines earlier this year as the deluxe aircraft that ferried former auto executive Carlos Ghosn in his clandestine escape from bail in Japan.

The train divestiture is expected to reduce Bombardier’s annual revenue, which stood at $15.8 billion in 2019, by more than 50%. Its employee count is expected to shrink by more than 70% to 18,000.

The retrenchment represents the most profound pivot yet for the iconic Canadian company, which started off in 1942, in a small township east of Montreal as a manufacturer of passenger and commercial snowmobiles. It has reinvented itself, over almost a century, with international expansion and deal-making.

Bombardier was founded by Quebec inventor Joseph-Armand Bombardier, who rolled out the world’s first ski-steered snowmobile in 1937. His son-in-law, Laurent Beaudoin, took over in 1966 and steered the business through more than four decades of sales growth and acquisitions, many of them of industry castoffs. He snapped up North American and European train businesses through the 1970s, and then expanded into aviation in the 1980s

There were also divestitures. The company jettisoned its legacy product—the snowmobile—in 2003, when it spun off its recreational unit, which included the Ski-Doo snowmobile, to a group of investors that included the Bombardier family. A year later, Mr. Beaudoin set out to break into the manufacture of big commercial jets, a business dominated by Boeing and Airbus.

On paper, a fuel-efficient narrow body jet in the 100-seat range made sense. Airlines were gravitating to smaller planes that could more flexibly shuttle fewer passengers to more direct destinations. Neither Boeing nor Airbus had a jet small enough at the time to accommodate the booming regional market.

After a series of foreign takeovers of Canadian corporate giants, the collapse of Nortel Networks and the sharp decline of BlackBerry Ltd., Bombardier held on to its mantle of a Canadian national champion. The Bombardier family, through multiple voting shares, continues to control the business.

Its global ambitions, though, began to falter several years ago, when Bombardier’s new commercial plane, called the CSeries, was plagued by cost overruns and delays. The reversals forced the company to significantly increase its debts and seek financial aid from the province of Quebec and the Canadian federal government. The financial woes deterred potential CSeries customers, and in 2017 Bombardier yielded control of the plane program to Airbus.

The company’s resources were also stretched by its launch of the Global 7500 business jet and production setbacks at is train unit.

“Things were piling one on top of the other, it was a very tough situation,” said Mr. Bellmare, who was appointed CEO in 2015. “People underestimated the challenge. We didn’t have the balance sheet to support this.”

While the CSeries sale improved Bombardier’s financial health, its global train business, which had generated enough profits to finance Bombardier’s expansion into business jets, was hitting obstacles.

Bombardier’s train orders surged about 50% in 2011 to $14.3 billion as the company was struggling with the CSeries program. Many of the new contracts added to Bombardier’s burden. They involved complicated work upgrading and automating aging networks, some of which still have operating issues because of mechanical and software problems.

“Bombardier sold us lemons,” New York City Comptroller Scott Stringer said in a statement last month after the city pulled hundreds of new subway cars from service because of malfunctioning doors. A Bombardier spokesman said the company has addressed the problem and the cars are back in service.

The company was also years late delivering street cars to Toronto and San Francisco. It has only delivered about half of the 60 cars ordered in 2011 for an intercity train in Switzerland. Deliveries were delayed by software and other automation challenges, the spokesman said.

“They bit off more than they could manage,” said Cameron Doerksen, an analyst with National Bank Financial.