Barron’s weekend summary: positive on gold miners, select healthcare and office REITs
* Cover story: In the second installment of Barron’s Roundtable, 10 investors discuss the big-picture outlook for the economy, interest rates, financial markets, and concerns about tech disruption and government debt; Picks include EDU, NOC, Recruit Holdings, TRP, ICLN (Abby Joseph Cohen); EEM, GDX, VSGBX (Jeffrey Gundlach); WCN, MTN, SSNC (Henry Ellenbogen); HXL, LIN, Takeda, GOOGL, DWDP (William Priest); CCK, SEE, DLTR, ANIP (Oscar Schafer); Lanxess, PKG, OEC, Dart Group (Meryl Witmer); BATRA, FOX, HRI, MGM, NAV, GFF, ENR (Mario Gabelli); USB, ABBV, DIS, LMT, HTGC (Scott Black); CHL, Michelin, GILD, Roche Holding, Telefonika Deutschland (Rupal Bhansali); CDNS, SNPS, CERN, LIN, DIS (Tood Ahlsten).
* Features: 1) Positive on NEM, GOLD: Newmont’s acquisition of GG and the merger between Barrick Gold and Randgold Securities creates the two largest gold miners in the world, offering hope for one of the worst-performing sectors over the past seven years; 2) Positive on ILMN, TMO, DHR, A, TECH: Five companies are a good way for investors to play the healthcare sector—they are poised to capitalize on medical innovation and demand for care in emerging markets; 3) Positive on KRC, VNO: Though office REITs have faced pressure recently, Kilroy Realty and Vornado Realty Trust have solid prospects amid a U.S. economy that continues to grow, buoyed by strong job numbers and a low unemployment rate.
* Tech Trader: Epic Games’ hugely popular Fortnite videogame has stolen the spotlight from EA and ATVI—both of which have underperforming game pipelines and are down nearly 40% from last year’s highs—and even has NFLX concerned.
* Trader: The S&P 500’s rally has taken the index back above its 50-day moving average, and now it just has to stay there, says Randy Watts of William O’Neil; Positive on COST: Retailer has a voracious fan base and a renewal rate of more than 90%, and a slump in the shares since September creates a good buying opportunity; With GE shares up 18% year to date and up 34% from a 52-week low, investors seem happy with the company’s pace of change for the time being.
* Profile: Mark McKenna manages the BlackRock Event Driven Equity fund, which profits off mergers, spinoffs, restructurings, management changes, and other events, a strategy that succeeds because it is largely uncorrelated to the market.
* European Trader: Positive on BAE Systems: Shares of the U.K.-based defense system have taken a hit because of ties to Saudi Arabia, but the drop presents an opportunity for investors to buy shares with good prospects for capital gains and dividend growth.
* Emerging Markets: Cautious on Tencent Holdings: Though the company has a billion regular users and just issued a major upgrade to WeChat, investors aren’t convinced it can maintain the growth spurt its valuation reflects.
* Commodities: “Palladium started the year on a positive note, with futures prices up by more than 10% after hefty gains in the last three years,” and analysts remain upbeat about the metal’s long-term prospects.
* Streetwise: Columnist Lawrence Strauss discusses why he doesn’t bet on sports even as the gaming landscape evolves to include online and mobile-phone platforms.
EU Countries Face a Menu of Challenges
Among them: a slowing economy and a fragmenting political landscape
ROME—During the past decade, the European Union has often entered a new year beset by warnings that it faces an existential crisis.
Its ability to muddle through must have impressed all but the most determined doomsayers, however, because few politicians or pundits are calling 2019 a make-or-break year for the bloc.
That doesn’t mean all is well.
“The challenges on the policy side couldn’t be greater,” says Catherine De Vries, political scientist at the Free University of Amsterdam. “There’s reason to be concerned.”
The EU’s challenges include a wobbling economic recovery, social divisions fueling populist and nativist insurgencies, and a fragmenting political landscape. Parts of Europe are still dealing with the legacies of the financial and migration crises. Other countries are deviating from the model of liberal democracy—based on checks and balances and the rule of law—which the EU was supposed to help promote.
The good news for the EU is that despite all those problems, the organization looks set to survive, thanks to the strong attachment of most Europeans outside the U.K. to remaining members. The bad news is that the EU has much to do to restore Europeans’ confidence that it can deliver its main promises: to spread prosperity and democracy, and find solutions to common problems, via common institutions.
Europe’s economic upturn has sputtered in recent months. Economists expect only modest growth in 2019. However, unemployment in the euro currency area has dipped below 8%, the lowest level since before the global financial crisis. Consumer and government spending are expected to keep the expansion alive,despite weakness in industry thanks partly to global trade tensions.
Inflation remains too low for the European Central Bank’s comfort. The euro is still an incomplete currency union, leaving weaker members vulnerable to capital flight, as Italy’s recent financial strains showed. French President Emmanuel Macron’s proposals to underpin the euro with a stronger political and fiscal union have petered out thanks to resistance from Germany and a group of North European countries. But the words “European economic crisis” belong to the past, at least for now.
The U.K.’s political rumpus over how, and whether, to carry out its departure from the EU this spring has highlighted the rest of the bloc’s strong commitment to staying in.
“The EU is much more united in the face of Brexit than anyone expected,” says R. Daniel Kelemen, professor of European politics at Rutgers University in New Brunswick, N.J. “There’s no indication of a domino effect. Public support for the EU and the euro is up,” he notes.
Europe’s migration crisis has stabilized but hasn’t been solved. According to United Nations data, Mediterranean crossings by refugees and other migrants from the Middle East and Africa declined 89% in 2018 from their peak in 2015, when more than a million people crossed the sea to Europe in search of safety or a better life. But even today’s slower inflow is enough to maintain political tensions between European countries over who should take in asylum seekers.
Antiestablishment parties, rising since the financial and migration crises, are expected to make further gains in May’s European Parliament elections. Far-right and nationalist parties have mostly dropped talk of leaving the EU or the euro, because it isn’t popular. Nowadays they’re vowing to change the EU from within.
The EU establishment’s latest boogeyman is the prospect of a pact led by Matteo Salvini, Jarosłav Kaczyński and Viktor Orbán, respectively the dominant politicians in Italy, Poland and Hungary, who share hostility to European centrists and non-European migrants.
But the nationalist camp is divided on key issues. Italy wants other EU countries to take some of its migrants. Poland and Hungary adamantly refuse. Nationalists all support closing off the migration routes in Africa and the Middle East—but so do virtually all EU policy makers these days. Nationalists also have clashing instincts and interests when it comes to Russia, the U.S. role in Europe, and where the EU should spend its funds.
Despite such differences, far-right gains could change the tone in EU politics, says Cas Mudde, a political scientist at the University of Georgia. Established center-right parties, such as German Chancellor Angela Merkel’s Christian Democrats, are looking to cooperate with some of their nativist challengers at EU level in the hope of taming them. If taken further, says Mr. Mudde, “this would mean stagnation, some return of national powers, and virtually no further integration, except around immigration and counterterrorism.”
Europe’s traditional center-right and center-left parties are also losing votes to upstart liberal and green parties, as well as to the far-right and far-left. The next European Parliament could be as fragmented as many national parliaments have become, requiring unwieldy coalitions to get anything done.
EU nations’ surprising unity in dealing with Brexit has shown their commitment to maintaining the bloc. But critics say the EU is failing to deliver on a key promise of the post-Cold War era: to promote liberal democracy and the rule of law throughout Europe.
Mr. Orbán has steadily transformed Hungary into a hybrid of democracy and authoritarianism in which the ruling party reshapes the media, judiciary, electoral system, and other laws and institutions to effectively entrench its dominance. Hungary’s defiance of EU norms has encouraged emulation, including by Poland’s ruling nationalists.
Concerns about corruption, political pressure on judicial systems, and the weakening of independent institutions are also rising in Romania, Malta and Greece.
“The rule-of-law crisis is now the most pressing one,” says Mr. Kelemen.
The plan for Pacific Gas and Electric, the California utility, to enter bankruptcy to manage its $30bn wildfire liabilities has sent shockwaves through the US energy industry, raising concerns about the outlook for investment in renewable power in the state and beyond.
Credit ratings for several businesses that supply power to PG&E were cut sharply last week, potentially raising the cost of capital for the industry and creating additional difficulties for California’s plan to source 100 per cent of its electricity from low-carbon technologies by 2045.
Projects that supply PG&E with electricity under long-term contracts at prices that are well above today’s rates face the threat that in bankruptcy the company will reject those contracts, or insist on renegotiating them at lower levels, hurting the projects’ cash flows and their ability to service their debts.
PG&E said last Monday that it intended to enter bankruptcy on or around January 29. It argued that this would be the best way to address the liabilities, estimated at $30bn-plus, which it faces as a result of its involvement in the devastating wildfires in northern California in 2017 and 2018.
Topaz Solar Farms, owned by Warren Buffett’s Berkshire Hathaway Energy, Genesis Solar, owned by NextEra Energy, and ExGen Renewables IV, owned by Exelon, are among the renewable energy businesses that have been downgraded by rating agencies, along with other suppliers to PG&E including the Panoche Energy Center, a gas-fired “peaker” plant used at times of high demand, and Kinder Morgan’s Ruby gas pipeline.
Some energy yieldcos, listed companies structured to pay dividends from regular cash flows, have also been hit. Shares in Clearway Energy, which earned 23 per cent of its revenue from PG&E in 2017, fell sharply when the company announced its bankruptcy plan, although they recovered in subsequent days and ended the week down only 6 per cent.
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Wildfires are too hot for one utility to handle
A bankruptcy of a US regulated utility is a rare event, and companies that agreed to supply PG&E did so on the basis that it was unlikely to fail to meet its obligations. Until this month, PG&E was rated as investment grade by S&P Global, Moody’s and Fitch. Its decision to seek Chapter 11 bankruptcy protection has overturned the assumptions used by its suppliers to finance their projects.
PG&E said in its annual report for 2017 that its commitments under long-term power purchase agreements were about $3.1bn for this year, about $2.2bn in renewable energy, and analysts said it could make substantial savings if it rejected or renegotiated those contracts, which it may be able to do when in bankruptcy. The Genesis and Topaz solar projects were approved and started construction in 2010-11, when solar power costs were much higher than they are today.
Clifford Kim of Moody’s said it was not certain that PG&E would reject its higher-cost long-term contracts, because the law was not fully settled, and California’s government and regulators might step in to support the state’s energy policy goals. But in economic terms the company had a clear incentive to try to reject or renegotiate them, he added.
Topaz Solar, which runs a large photovoltaic plant in central California that sells power only to PG&E, was last week downgraded by Moody’s from Baa2 to Caa2, a drop of nine steps from “moderate credit risk” to “very high credit risk”.
Gregory Remec of Fitch, which also downgraded Topaz sharply last week, said it was a basic principle that a project’s rating “will never exceed the rating of its counterparty”.
Fitch last week cut its rating for PG&E to CC/RR3, meaning that “default of some kind appears probable”, and unsecured creditors were likely to recover 51-70 per cent of their principal plus interest.
Michael Wara, a specialist in energy and climate policy at Stanford Law School, said bankruptcy for PG&E would “throw into doubt” the future of the developers that have been central to the development of renewable generation in California. The best solution, he argued, would be to fix the underlying problem with large-scale investment in rooftop solar and local battery storage, to reduce customers’ dependence on the grid.
Asian stocks built on their January rally as investors demonstrated continued confidence that trade tensions ultimately will subside and policy makers will refrain from growth-damaging monetary tightening.
Shares in Tokyo, Hong Kong and Sydney climbed after the S&P 500 Index hit its highest since early December on Friday. Spurring the gains was optimism around the next round of U.S.-China trade talks at month-end and data from China that alleviated concerns of a continued deterioration in China’s slowing economy. Not all was sunny on Monday, however, with S&P 500 futures dipping and the yen strengthening after Bloomberg reported that the two sides are making little progress on the key issue of intellectual property protection. U.S. markets are closed Monday.
Nikkei +0.26% Hang Seng +0.17% CSI +0.30% Shanghai +0.33% Shenzen +0,35%
Eur$ 1.1377 CNY 6.7893 CNH 6.7982 JPY 109.56 GBP 1.2870 CHF 0.9954 TRY 5.3375 RUB 66.3123 WTI$ 54.01
S&P -0.25% EuroStoxx -0.25% FTSE -0.07% DAX -0.14%
Macro :
- U.S.-China Trade Talks Falling Short on Make-Or-Break IP Issues
- Palladium Is Now More Valuable Than Gold - Barron's : http://bit.ly/2Dmg7Tu
- Central Banks Struggle With Policy Settings, ECB outlook reflects a global shift in central banking - WSJ : https://on.wsj.com/2RF0WO7
- Here's How Europe's Nationalist Parties View The EU - Zero Hedge - http://bit.ly/2QZYdJD
- Luxury Headwinds Increase, Be Selective, Citi Says; Prada Raised
Keep an eye on :
- AC FP : Accor has 33.1%, EUR 337m additional stake in Orbis - preliminary results
- ADP FP : ADP bid interest confirmed by Vinci CEO, Ardian raises new EUR 6bn fund
- AZA IM : Air France-KLM and Delta could buy joint 40% stake in Alitalia - Il Sole 24
- ALO FP : EU Regulators to Block Siemens/Alstom Rail Deal, Reuters Says
- ALO FP : Chinese competition no ‘excuse’ for Siemens-Alstom rail tie-up - FT - https://on.ft.com/2RW7kQl
- BA/ LN : Battered British Defense Stock Will Mount New Charge - Barron's : http://bit.ly/2Dl4GLL
- BMW GY : *DAIMLER, BMW MULL EXTENSIVE ALLIANCES: HANDELSBLATT
- BNP FP : BNP Paribas Will Not Get Fund Admin Business From DWS: HB
- CRG IM : Banca Carige Asks for State Guarantee on Bonds Up to EU2b
- BMPS IM : Italy Mulls M&A Options for Monte dei Paschi, Carige: Reuters
- BRK/A US : Berkshire Unit Denies Report on Lithium Extraction Deal: Reuters
- EN FP : Bouygues Telecom Acquires 43.6% Stake in Keyyo
- CO FP : Casino to Sell Properties Worth EU501M to Fortress
- CGG FP : CGG to Carry Out New Survey in Unexplored Deepwater Off Gabon
- DAI GY : LG Is Said to Supply Gesture-Reading System for Mercedes-Benz
- DBK GY : A Truly Terrible Idea for Deutsche Bank: Ferdinando Giugliano
- DBK GY : Deutsche Bank Hires Credit Suisse’s Tan for Asia-Pacific Wealth
- DTE GY : T-Mobile US Says Ulf Ewaldsson SVP to Lead 5G Evolution Strategy
- EDF FP : Europe’s new-generation nuclear plants stagger over the start line - http://bit.ly/2MjHIaI
- FB US : F.T.C. Is Said to Be Considering Large Facebook Fines - NYT - https://nyti.ms/2FPc43T
- EUCAR FP : Europcar Appoints Blanco as Low-Cost Unit’s Dep. General Manager
- HMV LN : HMV bidders believed to include Elliott Advisors; Sunrise Records tipped to bid for shops
- HOME SM : Neinor Confirms It Will Meet 2018 Targets: Filing
- IFF US : International Flavors Plans More Acquisitions, CEO Says: Globes
- ILD FP : Iliad: Acquires Stake in Jaguar Network for Close to EU100M
- ITV LN : *ITV SEEKS TO RAISE GBP150M FROM SALE OF HEADQUARTERS: FT
- KBC BB : KBC to Call Added Tier-1 Securities of EU1.4b Issued in 2014
- KINVB SS : Kinnevik’s Stenbeck to Remain Active Owner, Dagens Industri Says
- MC FP : Luxury Headwinds Increase, Be Selective, Citi Says; Prada Raised
- MC FP : LVMH Said Eyeing Stake in New Guards Group, The fashion group includes Virgil Abloh's Off-White label.
- RAKP NO : RAK Petroleum to Buy Back Up to $15M in Shares Via SpareBank 1
- RNO FP : Paris tells Tokyo it wants Renault-Nissan integration - French side seeks to name Japanese automaker's next chairman - Nikkei - https://s.nikkei.com/2FLEvj0
- RNO FP : Nissan Committee Blames Ethical Issue, Power Concentration
- RNO FP : Nissan CEO Says Not Ready to Discuss Revision of Renault Tie-Up
- RR/ LN : *ROLLS-ROYCE IN TALKS TO SUPPLY CGN NUCLEAR PLANT IN ESSEX: FT
- STAN LN : *TEMASEK FLOATED TAKING STANCHART BOARD SEAT LAST YEAR: FT
- RIO LN : Rio Can Add $4.4 Billion More to Shareholder Returns, UBS Says
- 700 HK : With a Billion Users, Tencent Faces Middle Age. That’s a Worry for the Stock. - Barron's - http://bit.ly/2FDhmQC
- TSLA US : Tesla Plans to Raise Supercharger Prices, Electrek Reports- TIT IM : Tel. Italia Says Results Reflect Mgmt Chosen by Vivendi
- VOD LN : EU Seeks Further Info in Review of Vodafone/Liberty Global Deal
- WIE AV : Wienerberger to Raise Payout by 70% as Results on Upper End