Barron’s Weekend Summary: A Barron’s panel says there’s no recession on the horizon for 2020, but the trade war and election results could spark turbulence
* Cover story: A Barron’s panel says there’s no recession on the horizon for 2020, and companies are likely to see a return to earnings growth that could push stocks slightly higher; “A return to earnings growth will be the force that drives the S&P 500 higher in 2020, with valuation multiples already toward the high ends of their historical ranges”; Still, the coming year raises questions about more than just fundamental asset allocations—shocks from trade war talks and elections could lead to a range of outcomes, a sign turbulence may be in store.
* Tech Trader: Privacy advocates, pundits, and politicians are pushing for more aggressive tech regulation—which involves a range of complex issues—but no matter how the 2020 election plays out, change is already on the way in states such as California, where a bill focusing on improving conditions for “gig” economy workers is creating controversy.
* Trader: Whenever the S&P 500 has closed above 70, it has usually gone on to further gains, says Doug Ramsey, chief investment officer at the Leuthold Group, but he continues to have concerns about the market’s valuation; +/- Saudi Aramco: Though the oil giant briefly reached the $2T valuation sought by Saudi Arabian crown prince Mohammed bin Salman, investors should be skeptical about the stock’s ascent—it remains an intriguing, though overvalued, investment; +/- S, TMUS: Investors seem to agree with states who say the proposed merger will reduce competition and harm consumers, and the market is pricing in a renegotiation of the deal price, or perhaps it falling apart entirely.
* Profile: Ben Barber—co-head of municipal investments for Goldman Sachs Asset Management and the Goldman Sachs Dynamic Municipal Income fund, which focuses on national tax-exempt bonds but has a broad mandate—says state munis offer no shortage of opportunity, but the more interesting area is smaller issuers that only rarely come to market.
* Interview: Bill Nygren of Oakmark talks about banks, NFLX—which he considers a value stock, along with GOOG—the perils of value investing, and his all-time favorite stock, Liberty Media.
* Features: 1) Barron’s annual year-end list of the 10 top stocks for the coming year tilts toward value and includes Berkshire Hathaway, Comcast, Royal Dutch Shell, PFE, VIAC, ANTM, DELL, GOOGL, UHAL, and UTX; the group has an average projected 2020 P/E ratio of 14, against 18 for the S&P 500, while the average dividend yield is 1.8%, in line with the overall market; 2) Positive on DIS: Disney’s movies are thriving at the box office and its streaming service is off to a good start, but “even more remarkable for stock investors is what’s happening to the earnings power of Disney’s parks,” which Wall Street expects will approach $10B in revenue through September 2024; 3) Positive on SCHW: The company’s shareholders stand to benefit from its acquisition of AMTD, but advisors and brokerage customers may not be so fortunate—with equity commissions at zero, reduced competition may make brokers less inclined to reduce fees in the few areas where they remain healthy; 4) Positive on APO, CG, BX: Income investors who’ve dismissed publicly traded alternative-asset managers because of their inconsistent payouts might want to reconsider: Many of these companies have shifted their policies to focus more on steady dividend payments.
* European Trader: Cautious on Kingfisher: The company has struggled to implement “One Kingfisher,” its ambitious five-year plan to sell the same products in all of its territories, unify its infotech system to boost online sales, and improve operational efficiencies.
* Emerging Markets: While China’s economic problems have hogged the headlines, India has seen the most dramatic slowdown in emerging markets—GDP growth has dropped from 8% in mid-2018 to 4.5%, despite the landslide re-election of pro-business prime minister Narendra Modi.
* Commodities: “Predictions calling for hot, dry weather early in 2020 followed by destructive flooding could cause ‘monumental crop failure’ and easily propel wheat prices at least 40% higher within the next few weeks.”
* Streetwise: Positive on PHM, BWA, DISCA, CVS, AMAT, CPRI, REGN: These stocks are among those that have run well ahead of the S&P 500’s median gain of 4.3% over the past three months and have free-cash-flow yields safely above the index’s median of 3.7%, based on current-fiscal-year estimates from FactSet.
Japan govt proposes law that would require major information technology firms to report contract terms with online vendors and app developers - Nikkei
- The proposal is aimed at cracking down on unfair practices at Amazon and other large tech firms, and it will be submitted to the parliament in 2020
Shale Slowdown Takes Economic Toll
U.S. regions that benefited as fracking boomed are seeing declines in economic activity as producers reduce employment, spending
MIDLAND, Texas—America’s hottest oil-drilling regions—such as this one at the heart of the Permian Basin—are seeing their economies soften as shale producers slash spending, leading to emptier hotels, choosier employers and less overtime for workers.
Early this year, demand for the tubing, bolts and valves used in fracking was so high that Homer Daniels’s oil-field equipment company, RK Supply, in the Midland area was on track to easily beat its annual revenue forecast. But by August, Mr. Daniels had to impose a hiring freeze as customers delayed projects.
“It affects everybody’s bottom lines,” Mr. Daniels said.
Fracking has made the U.S. the world’s top oil producer, buoyed the national economy and helped the country become a net exporter of crude and petroleum products for the first time in decades. But the rapid production growth of recent years is waning as shale companies, many of which have struggled to make money, focus on profits over expansion to satisfy unhappy investors.
“The boom time is done at this point, unless oil prices go up significantly,” said Michael Plante, senior economist at the Federal Reserve Bank of Dallas
Already, that shift is taking an economic toll. National nonresidential fixed investment—which tracks spending on software, research and development, equipment and structures—fell at an annualized rate of 2.66% in the third quarter and 1.01% in the second quarter, due in large part to declines in oil and gas spending, according to the Dallas Fed.
Spending is expected to decline further next year. North American shale investment, or spending on drilling and fracking, is forecast to fall about 6% this year, then tumble another 14% in 2020, adjusted for inflation, according to energy analytics firm Rystad Energy.
Companies also are trimming jobs, leading to a 5% decline in seasonally adjusted oil-field service employment in the 12 months ended in October, according to Bureau of Labor Statistics data.
In Texas, the nation’s top oil-producing state, energy industry employment has dropped at an annualized rate of 2.1% in the year to date through September, Dallas Fed data show. Such granular figures weren’t available in other oil-producing states, but BLS data show that in North Dakota, seasonally adjusted employment in mining and logging, which includes the oil-and-gas industry, fell about 9% from January through October. Employment has been steadier in Colorado and New Mexico.
The changes are evident in the Permian, the region straddling Texas and New Mexico that has been the heart of the fracking boom. Trucks carrying sand, water and crude still clog the highways, new homes continue to be built, and regional unemployment was 2.4% in October, up from a recent low of 1.9% in April but below the national average of 3.3%, not seasonally adjusted, according to the Texas Workforce Commission.
Still, oil-and-gas workers have begun to see their hours cut, and hotel occupancy in Midland has fallen 14% through the first 10 months of the year from a year earlier, according to hospitality benchmarking firm STR Inc. Occupancy had tightened during the boom, leading to high prices and a building frenzy throughout the Permian. The average cost of a room in Midland was about 55% higher last year than in 2017, STR data show.
For Jose Urteaga, a supervisor for a bulk fuel supplier, the softness has meant that his company doesn’t have to worry as much about employee turnover.
“In the past, we were just getting every warm body we could,” Mr. Urteaga said at a recent cookout in Midland. “Because it’s leveled off some, we’re able to check references, make sure guys have the experience they’re putting on their résumés.”
The slowdown is unusual because it hasn’t been driven by a sharp decline in crude prices, which have hovered around $57 a barrel this year. Rather, U.S. oil producers are paring growth and spending largely because many have struggled mightily to generate returns for shareholders and are facing tightening access to capital. Including reinvested dividends, a broad index of U.S. oil-and-gas companies’ share prices has fallen about 47% in the past three years as the S&P 500 index soared roughly 49%, according to FactSet.
“Investors are playing a large role here, and that’s the biggest driver of this cycle,” said Chris Wright, chief executive of Denver-based Liberty Oilfield Services Inc., which specializes in hydraulic fracturing. Companies such as Liberty that provide services or parts to shale producers have been among the hardest-hit by the pullback.
In Hobbs, N.M., just 5 miles from the Texas border, Kevin Mattingly, who owns Shiloh Machine, is seeing customers that used to consistently pay him within 60 days wait 90 or 100 days to do so. Meanwhile, the pile of tubing and other tools that companies have asked the machinist to repair is dwindling.
“There is a crunch on our cash,” Mr. Mattingly said. He recently asked employees to stop working overtime, a key source of income in oil boomtowns, where costs run high and housing can be difficult to find.
On the Texas side of the Permian, Scott Chaffin is planning to go back to school in January for welding, after seeing his weekly hours at a pipe-inspection company fall to about 50, from more than 80 earlier this year.
“You’ve got to pay attention a lot more to your spending,” said Mr. Chaffin, 34 years old, who has cut back on expenses such as new clothes and eating out.
UK dealmaker Robey tops £100m in pay since leaving Morgan Stanley
Latest results for Robey Warshaw show M&A trio earned £48m last year
Simon Robey has personally earned more than £100m since leaving Morgan Stanley to start a rival corporate advisory firm that has worked on some of the biggest UK mergers and acquisitions.
An FT analysis of five years of results from Robey Warshaw, the 13-person firm he runs with two partners, shows that profits paid out to the former senior Morgan Stanley investment banker have reached £104.6m.
Total profits to the firm’s three partners reached £189.1m in that period, meaning Sir Simon’s colleagues — ex-UBS banker Simon Warshaw and former Morgan Stanley banker Philip Apostolides — have divided the remaining £84.5m.
The results make the trio some of London’s highest earning bankers over that time and highlight why several veteran investment bankers have taken their prized Rolodexes from Wall Street institutions and set up their own private advisory firms.
In the UK Robey Warshaw has emerged as the most successful of these so-called advisory kiosks, winning several high-profile FTSE 100 advisory mandates on large scale takeovers.
That work has typically flowed to top investment banks such as Goldman Sachs or JPMorgan Chase, which are staffed with teams of bankers. But the smaller kiosks led by dealmakers with senior corporate relationships have been able to nibble away at their dominance and land blockbuster payouts for their work.
Other successful examples include firms started in New York by ex-Citigroup banker Michael Klein and former Goldman Sachs banker Gordon Dyal.
Most recently, Robey Warshaw has been advising the London Stock Exchange Group on its $27bn acquisition of data provider Refinitiv and the subsequent defence of the LSE from a hostile takeover bid by Hong Kong Exchanges & Clearing.
The FT calculation for Sir Simon’s earnings include his most recent payout of £27.7m in the year to the end of March 2019, up from £12.1m a year ago.
That figure was released in Robey Warshaw’s most recent annual accounts, which provides a breakdown of the sum “provisionally attributable to the Member with the largest entitlement to profit for the year” without making direct reference to Sir Simon.
Sir Simon has the largest stake in the firm and is the member in question, the FT understands. Robey Warshaw declined to comment.
The firm’s full-year profits climbed to £48.4m in the year to the end of March, up from £21.3m. Turnover in the period rose to £60m from £29.6m.
The Robey Warshaw partnership is not liable for any tax due on profits, the filing states, adding that each man must settle any liabilities arising from his share of the profits.
The latest results do not include pay from Robey Warshaw’s work on the LSE deal, instead it captures fees earned from its work advising US cable group Comcast on its £30.6bn takeover of UK broadcaster Sky.
Other Robey Warshaw deals from last year included the £2.2bn takeover of Zoopla Property Group by US buyout firm Silver Lake and BP’s $10.5bn acquisition of US shale assets from mining group BHP.
Sir Simon left Morgan Stanley in 2012 where he spent the previous 25 years and built a reputation as one of the City’s top advisers.
He partnered with Sir Simon Robertson, a former Goldman Sachs banker, to form Robertson Robey Associates in 2013. Mr Warshaw joined them later that year. Mr Robertson split from the group in 2014, leaving Sir Simon and Mr Warshaw to rebrand the firm.
Sir Simon, former chairman of the Royal Opera House, was knighted in 2016 for services to music.
Head of Bundesbank warns against ‘fetish’ of balanced federal budget
Political mood is shifting against long-running attachment to fiscal surpluses
The head of Germany’s central bank has added his weight to growing pressure for the country’s government to increase public investment and warned its commitment to a balanced federal budget should not become “a fetish”.
The comments by Jens Weidmann in an interview with Süddeutsche Zeitung published on Saturday underline how the political mood in Germany is shifting against its long-running attachment to fiscal surpluses after the economy slowed down markedly this year.
The government’s promise to maintain a budget surplus has come under fire from economists and from the ECB. But recently the political debate on the issue of the “schwarze null”, or “black zero”, has intensified.
Finance minister Olaf Scholz said recently that he supported the new leaders of his Social Democratic party in their push for higher public investment that should not be impeded by the promise to maintain fiscal prudence.
Mr Weidmann’s interview indicates he is becoming more supportive of the ECB’s policies under its new president Christine Lagarde than he was under her predecessor Mario Draghi as he made rare statements about the benefits of negative interest rates.
“One must also ask what would have happened if monetary policy had not been expansionary,” he said. “It is important that we do not remain trapped longer than necessary in this low-interest phase.”
Widely considered a leading opponent to the ECB’s ultra-loose monetary policy, Mr Weidmann pointed out that Berlin was saving €55bn a year on servicing its debt compared to what it would have paid if interest rates had stayed at 2007 levels.
“Yes, it is difficult to invest money safely and profitably,” he said. “But monetary policy has a broader effect. It has supported the economy and helped to raise employment and wages.”
He added that “at times there were negative real interest rates on [German] short-term savings deposits in the 1970s, 1980s, 1990s and 2000s”.
Having previously sounded sceptical about Ms Lagarde’s promise to make tackling climate change a priority for the ECB under her presidency, the Bundesbank boss sounded a more positive note.
“I agree with Christine Lagarde that we must better understand how climate change and climate policy affect our core tasks,” he said, while adding: “But central banks cannot make climate policy themselves. That is up to governments and parliaments.”
Once dismissed by Mr Draghi as Nein zu Allum — No to everything — Mr Weidmann has spent many years resisting the ECB’s increasingly unconventional policies that have flooded markets with cheap money.
But he appeared to soften his opposition to key ECB policies on Saturday, adding his voice to calls by Ms Lagarde for countries with strong fiscal positions to use them to increase public investment, a move she says would make monetary policy more effective.
“There is nothing to be said against using short-term budgetary leeway to strengthen the basic conditions for growth through investment or to relieve the burden on citizens,” said the Bundesbank boss.
“It’s about good transport networks, but also about an efficient digital infrastructure and a climate-friendly energy supply,” he said. “Both public and private investment is needed here. There is certainly also a need for higher spending on education.”
Officials in Berlin complain that existing budgets are not being spent fully due to construction and planning bottlenecks. Mr Weidmann agreed but said: “The goal should also not be the highest possible expenditure budget, but the implementation of meaningful projects.”
He said “black zero” had served its purpose of ensuring sound finances, adding: “This has been achieved so far. Of course we should not make a fetish out of the black zero.”
Felix Rohatyn: banker who rescued New York dies at 91
Quintessential ‘trusted adviser’ at Lazard guided chief executives and politicians
Felix Rohatyn, who twice fled the Nazis as a child and went on to reach the highest echelons of Wall Street and the New York establishment, has died at age 91.
Rohatyn, over a nearly 50-year career at the financial boutique Lazard, invented the model of the “trusted adviser” investment banker — counselling chief executives and boards of such blue-chips as ITT and Pfizer in their most sensitive matters. Rohatyn used his financial acumen, connections and diplomatic savvy to move between high finance and elite civic and government posts. He emerged as a public figure in the 1970s shepherding New York City through its fiscal crisis. Between 1997 and 2000 Rohatyn served as the US ambassador to France for President Bill Clinton.
Felix Rohatyn was born in Vienna in 1928 to Alexander and Edith Rohatyn. In 1935 with the rise of the Nazi party, the family fled Austria for France. In 1940, with his parents divorced, Rohatyn, his mother and stepfather once again escaped the Nazis, leaving France for Casablanca with visas provided by Luis Martins de Souza Dantas, Brazil’s ambassador to France.
After a time in Rio de Janeiro, the family made its way to New York City in 1942. Seven years later, Rohatyn graduated from Middlebury College in Vermont with a degree in physics. After being drafted by the army, he served in Germany during the Korean war.
Before his military service, Rohatyn had been introduced to Andre Meyer, the legendary Frenchman who ran Lazard’s New York office. After several years at the firm, Rohatyn became a Lazard partner in 1961. The big Wall Street houses like Goldman Sachs and Morgan Stanley were at the time more interested in securities offerings than mergers and acquisitions. But as the corporate conglomerate wave accelerated in the 1960s, buying and selling companies became a business that the modestly sized Lazard could compete in.
Rohatyn’s most storied and controversial relationship was with ITT Corp, originally a telecom company that would become the archetypal conglomerate under chief executive Harold Geneen. Geneen and Rohatyn took walks together in Manhattan in the middle of the night discussing ITT’s latest acquisition targets. ITT became the subject of a federal antitrust investigation that the company would settle. Later there were accusations, never proved, that ITT had offered the Republican Party administration $400,000 in exchange for dropping the case.
Most seriously, ITT was accused of funding anti-leftist forces in Chile where the company had business interests. Mr Rohatyn testified to Congress about his ties to ITT and faced harsh criticism for his close relationship with Geneen. He resigned from the board of ITT in 1981 after serving as a director for 13 years. Lazard and Rohatyn continued to work with the company for decades.
By the mid-1970s, New York City was suffering from a constant budgetary shortfall, reduced public services and deteriorating infrastructure. The city had become reliant on accounting gimmicks and short-term bank financing to fund its bills. Governor Hugh Carey asked Rohatyn to join a commission to address the city’s financial problems. The commission created a new agency called the Municipal Assistance Corporation that had the power to sell debt and tap city revenue. Rohatyn served as chair of the MAC, helping it negotiate a short-term, multibillion-dollar bailout and austerity package with Washington, banks, the city, unions, and municipal workers. The belt-tightening was felt in the form of reduced public services and quality of life in New York for years, but by the early 1980s the city was back on a solid financial footing.
In the 1980s, Lazard and Rohatyn were prime players in the junk bond-driven takeover boom. Rohatyn represented the RJR Nabisco board that ultimately agreed to sell the company to KKR in a record-shattering $25bn leveraged buyout chronicled in the book Barbarians at the Gate.
Rohatyn, a longtime Democrat, initially supported Ross Perot’s 1992 presidential bid. After Bill Clinton won the presidency, Rohatyn was tapped for vice-chairman of the Fed, a bid that failed in a Republican-controlled Senate. His post as Ambassador to France was seen as a come down for a man who aspired to be Treasury secretary. Still, Rohatyn was moved by the chance to serve in the country he had fled as a child and he would become a Commander of the French Legion of Honour. He would also serve on the board of such French stalwarts as Publicis and Schlumberger.
By the time he finished his stint in Paris in 2000, Lazard, his home for nearly 50 years was in turmoil. Fighting between its “houses” in Paris, London, and New York had reached nearly intolerable levels and many of its top rainmakers had departed. Michel-David Weill, the then Lazard boss and member of the founding family, would recruit Rohatyn’s one-time rival Bruce Wasserstein to lead a revival of the firm.
Rohatyn started his own boutique, Rohatyn Associates, in 2001. He also later served as an adviser to Rothschild, Lazard’s arch-rival, and Lehman Brothers, a firm Lazard once nearly merged with at the turn of the century. After Wasserstein died in 2009, new Lazard chief executive Ken Jacobs brought Rohatyn back to Lazard as an adviser.
“Felix Rohatyn was a seminal figure in the history of Lazard and more broadly, served clients with profound wisdom, judgment and discretion, and guided those of us fortunate enough to have known him with intelligence and sensitivity,” said Mr Jacobs.
“He had a unique ability to deal with the CEOs of the major corporations,” said Marty Lipton, co-founder of New York-based corporate law firm Wachtell, Lipton, Rosen & Katz. “His handling of the NYSE financial crisis and later the NYC financial crisis were among the most significant accomplishments by any banker in the 20th century.”
In 2010, Rohatyn published his memoirs, Dealings. He maintained an interest in public policy, writing a book and authoring op-eds in the Financial Times. Rohatyn’s first marriage ended in divorce. His second wife, Elizabeth, a prominent Manhattan socialite, died in 2016. Rohatyn is survived by three sons, a stepdaughter, and six grandchildren.
Ronan Farrow reveals how he built the case against Harvey Weinstein in new podcast
The Catch and Kill Podcast is a fascinating portrait of the power wielded by the film mogul
Podcast Link :
In The Catch and Kill Podcast with Ronan Farrow we learn how a reporter took on one of the most powerful men in Hollywood and helped launch a movement. The series is a companion piece to Farrow’s book, Catch and Kill, which details the case he built against the film mogul Harvey Weinstein (who denies the allegations which include rape and sexual assault) and is, Farrow says, “about the systems that protect powerful men accused of terrible crimes in Hollywood, Washington and beyond”. If there is something faintly uncomfortable about Farrow’s name appearing in lights in the title — many of the stories told here belong to the victims, who risked everything in speaking out about what happened to them — the series itself is a fascinating portrait of the power wielded by Weinstein and the lengths he went to in order to keep a lid on Farrow’s investigation.
Like this year’s Hunting Warhead and Bellingcat podcasts, both of which deal with the minutiae of investigative journalism, this is the tale of how major stories are broken as well as the personal cost to those at the centre of them. Farrow’s story was first published in The New Yorker but here he explains how he had the story earlier in 2015 when he was working for the TV network NBC, but executives there refused to air the story.
As revealed in the opening episode (there have been three so far), Farrow was the focus of a counter-operation to thwart his investigations via Black Cube, an agency based in Israel with links to Mossad. Most startling are his conversations with Igor Ostrovskiy, a private investigator from Ukraine who was contracted to follow Farrow, and who, on realising that he was engaged in a task to thwart press freedom, alerted Farrow to what was happening. Much of Ostrovskiy’s testimony has the feel of a far-fetched spy thriller, though there are flashes of comedy too, such as the time he ended up following the wrong man. Such is his charisma and extraordinary life experience, Ostrovskiy really needs a podcast of his own.
The latest episode is called The Wire and focuses on Ambra Gutierrez, a young model who told police in 2015 that Harvey Weinstein had assaulted her. Their response was to ask her to participate in a sting operation which required her to meet Weinstein while wearing a wire. Here she talks to Farrow about the terror of that encounter and how, rather than signalling the end of her dealings with Weinstein, it proved to be just the beginning as he fought to stop the tape of their conversation from being made public.
Both she and Farrow paint a grim picture of a system that isolates the most vulnerable and is built to protect rich men. Nonetheless, their bravery, tenacity and self-possession take the breath away. Most of all, the series shows how, in the darkest of circumstances, perseverance can pay off.
Gildo Zegna: responding to the challenges of evolving masculinity
The head of the menswear brand says family ties provide stability in difficult times
In the foothills of the Italian Alps, where rhododendrons bloom in May, a steam funnel towers over the landscape with the words Lanificio Zegna emblazoned on it.
The funnel marks the location of both the wool mill and the home of the fourth generation of the Zegna family textile business, which owns the world’s largest luxury menswear brand, Ermenegildo Zegna.
For Gildo Zegna, chief executive of Ermenegildo Zegna, family ties provide stability in trying times. “It gives you strength coming back to the family in a moment of great disruption,” says Mr Zegna, 64. He will meet 30 other members of the dynasty at the family villa for Christmas as they do every year, a gathering that is both a celebration and an annual shareholder meeting.
Mr Zegna, who takes ultimate responsibility for decisions, says the family reunion is about listening to views and then translating the listening into action. “The vision has to be clear and then the challenge is how do you get there and how quickly and what resources do you need to get there.”
Mr Zegna’s salute to family-owned businesses comes as the luxury goods industry is feeling the heat of technological disruption, social upheaval and identity politics. Furthermore, within the high end fashion industry few items of clothing are facing more pressure from falling consumer demand than the one that made the Zegna family rich: the traditional men’s suit. “The big challenge we face is a rethinking of masculinity,” he says.
Mr Zegna became sole CEO in 2006, having joined the group in the 1980s after an economics degree in London and a stint as an assistant buyer at Bloomingdale's in New York. Under his leadership, group sales have risen to €1.2bn.
When we meet, Mr Zegna’s attire provides some insight into how Zegna is responding to changing male dress codes and the suit’s decline in popularity in a more gender-nuanced world.
He is wearing a lightweight cashmere blazer which, he explains as he takes it off and turns it inside out, is unlined, making it easier to wear while travelling. It looks like a chic, more expensive cousin of the cardigan. A decade ago he would have been wearing a three-piece suit.
The company is vertically integrated — from sheep to store. This kind of product innovation has been a mainstay since it was founded by his grandfather in 1910. It allows the group to continually refine its products. But in an age when social media is driving luxury consumption, product innovation is no longer enough, he admits.
“Italians are in love with what they make with their hands and sometimes they have a hard time to explain to the world why they are so unique,” he says.
Zegna, like other luxury goods companies, is having to rewrite its strategy to appeal to Gen X and Gen Z consumers whose tastes and expectations are different. A survey undertaken for Zegna by Kantar revealed that about half of the 3,000 men interviewed globally felt “under pressure to conform to a masculine ideal”. This fed into a recent Zegna advertising campaign which featured US actor Mahershala Ali from the film Moonlight asking: “What does it mean to be a man today?”
“Women liked it very much,” Mr Zegna says of the response to the campaign on social media. I ask if that was the intention. “We are looking at a more feminine side of men, but we are not starting a women’s line. That said, we wish we could see more women buying in our Zegna stores,” he answers.
His hope isn’t without foundation. The management consultancy Bain & Co says one of the key growth categories for menswear is women buying and wearing men’s clothes as part of a trend of more gender fluid dressing. Consumers are increasingly refusing to be pigeonholed by big brands.
Nonetheless, according to Bain, the main driver of growth in luxury nowadays isn’t gender but geography: Asian customers (mainly Chinese) drove much of the growth in luxury fashionin 2019. “You have to be very, very flexible. Being in luxury today is very much related to how a brand can follow the desires and wishes of the Chinese customers,” says Mr Zegna, who opened the group’s first boutique in China in 1991 in Beijing. It now has 62 stores in China. He argues the most important thing is to have a strong retail presence in China and also to open stores in the countries and cities where the Chinese go on holiday.
Mr Zegna is also doubling down on the family’s roots as a textile manufacturer. The company has bought several top end manufacturers of technical fabrics and leather goods as a hedge against the looming scarcity of quality raw materials (due to climate change) and skilled artisans (due to demography). It also means Zegna is able to personalise its entire menswear range, which is very popular with customers.
In a move attract millennial consumers, Zegna last summer paid nearly €500m to acquire US luxury label Thom Browne, a designer of shrunken-look suits. It is popular with Asian shoppers.
“We want to be in control of our destiny and for that the best defence is to attack,” he says. He is keenly aware of the need to respond to the increasing velocity of the luxury market. “Once you define your strategy you need to do it quickly and do it extremely well because details matter a lot. The difference between brands’ [success] is speed and execution,” he says.
He says the family has no interest in going public. Instead, it is welcoming the next generation. Edoardo Zegna, Mr Zegna’s son, returned to the family company three years ago to lead innovation and content, after a stint as head of product at US online clothing brand Everlane. Mr Zegna says his son has brought an understanding about consumers’ demand for “traceability, service and speed”, which will help the company to innovate and prosper in tough times.
“This is the cultural strength of Italy. This is what keeps Italy going. In the end it is about roots and it is about family roots. It is about respect for what has been created in the past,” Mr Zegna says.
Vague detente in US-China trade war hinges on tricky implementation
Pause cheers markets but relations between Washington and Beijing remain stressed
Even in the euphoria of finally reaching a trade deal with China following months of tempestuous talks, US trade representative Robert Lighthizer struck a wary tone on whether Beijing would follow through on the pledges it had just agreed.
“We think it was a good negotiation and will make a real difference. A sceptic would say we’ll see, that’s probably a wise position to take,” Mr Lighthizer told reporters on Friday. “But our expectation is they will keep their obligations.”
The limited agreement between Washington and Beijing to pause their trade war has cheered markets and lifted a huge cloud hanging over the global economy heading into 2020.
For Mr Trump, it offered political respite from the impeachment proceedings and another economic accomplishment after sealing a separate deal with Democrats to allow congressional ratification of a new trade pact with Canada and Mexico, replacing Nafta.
But the Chinese detente is heavily dependent on the success of a tricky implementation phase over coming months — during which the Trump administration will scrutinise every economic step taken by Beijing to make sure it is consistent with their pact.
This could determine whether the truce evolves into a much more ambitious and comprehensive trade deal, or breaks down in some manner. Few observers are betting on the former.
“Any improvement in relations is likely to be temporary with tensions, on both trade and other issues like technology, continuing to wax and wane for the foreseeable future,” said Elena Duggar, associate managing director at Moody’s Investor Service. “Any partial deal in the short term will not resolve the fundamental differences in the two countries’ economic, political and strategic interests.”
US officials have only released a short summary of the agreement, not the full 86 pages that will be signed with China in early January. Even if no strains emerge before then as the text is put through translation and legal review, potential flashpoints are already apparent.
The US has set a target of at least $40bn in annual farm sales to China, which is crucial to hit for Mr Trump’s reputation with Midwestern farmers, but Chinese officials have not confirmed any numbers and are insisting that any purchases should be based on market forces and be consistent with WTO rules.
A second source of strain will be that the other limited concessions made by Beijing — on protecting US intellectual property and stopping the forced transfer of technology away from US companies — still have to be reflected in practical steps with regards to US investments, which could disappoint.
At that point, any hope of a quick move to a second stage deal tackling the biggest US concerns regarding trade with China — from industrial subsidies to the use of state-owned enterprises, to cybertheft and digital trade — would falter.
A few months of relative bonhomie are still likely between the US and China, however — a marked contrast with recent frostiness that will be a relief for both countries.
Mr Lighthizer said he had “no expectation” that the US would return to raise tariffs against Chinese goods in a new flare-up, and that the planned levies due to hit a batch of Chinese imports on Sunday had been delayed indefinitely.
“I think the deal will stick. I think there will be some problems, but I think both sides will have an incentive to resolve them before they go ahead with any new tariffs,” said Wendy Cutler, a former US trade negotiator now at the Asia Society Policy Institute.
While China will maintain retaliatory tariffs that have already been imposed on US imports, the country’s Ministry of Finance said on Sunday it would temporarily suspend planned 5 per cent and 10 per cent tariffs on 3,361 categories of goods ranging from caviar to scooters that were scheduled to take effect at the weekend.
Although Mr Trump remains supremely unpredictable, Ms Cutler suggested that in combination with last week’s agreement with congressional Democrats to approve the Nafta replacement, and an agreement with Japan reached in September, the administration seemed to have moved to a more “pragmatic and realistic” approach on trade.
“They had to recognise the red lines of our trading partners and work around them,” she said.
On a trip to Qatar Steven Mnuchin, the US Treasury secretary, seemed to bask in the unfamiliar feeling that the US might actually be reducing uncertainty around the world.
“These agreements will not only be good for the US, but will be very good for global growth,” Mr Mnuchin said.
Yet the bilateral economic relationship between the US and China is still highly stressed. Even though the business community cheered the pause in the trade war, there are still US levies on $360bn of goods, with less than one-third of them benefiting from tariff reduction under the agreement.
The US has not retreated from any of its export control measures targeting Chinese companies such as Huawei, and China has not backed away from scripting a controversial list of “unreliable entities” that could threaten some American companies.
Although Trump administration officials will claim that they have already achieved more with China on trade than previous administrations, the question is whether the limited and thus far vague results have been worth the commercial disruption inflicted.
“The costs have been substantial and far reaching, the benefits narrow and ephemeral,” wrote Scott Kennedy, senior adviser in Chinese business and economics at the Center for Strategic and International Studies.