TheChek News Flow

Foreign-investment fund targets assets that give it access to cash, services, goods and technologies that it is at risk of losing

PLANCY-L’ABBAYE, France—With much fanfare, a French-Iranian scientist recently announced a $3 million plan to invest in a bankrupt medical factory that had become a symbol of France’s troubled economy and revive it.

The majority owner wasn’t disclosed: Iran’s government.

It was the latest example of how Tehran is quietly leveraging its Iran Foreign Investments Co. to loosen the Trump administration’s tightening economic noose. The fund, with dozens of investments and cash accounts in 22 countries worth $5 billion, prioritizes assets that give it access to services, goods and technologies that it is at risk of losing under U.S. sanctions, the fund’s advisers say. Iran’s government also hope to build good will and counter the nation’s isolation. And, it hopes, to make money.

In this case, the fund bought the French medical factory and its weed-strewn grounds in June to ensure Iran can obtain medicine for tuberculosis, bladder cancer and other afflictions—drugs that could become difficult to obtain because of U.S. sanctions, said people familiar with the project.

“Their aim is to make Iran independent” from sanctions, said a fund adviser.

Iran’s already weak economy has worsened since President Trump withdrew in May from a U.S.-led international accord that curbed Tehran’s nuclear-weapons program in exchange for sanctions relief, and restored some financial penalties. The U.S. administration is pressing Iran to abandon its military role in the Middle East and scale back its missile program.

Iran’s currency has plummeted to record lows, foreign investors have fled, and inflation has risen to its highest levels since the previous round of U.S. sanctions ended in 2015. Another round of U.S. sanctions to begin Nov. 5 will ban companies from working both with Iran and the U.S. financial system at the same time.

Iran’s foreign-investment arm is one of several ways Iran is trying to work around U.S. sanctions. Iran is also exploring a barter system with oil buyers taking goods as payment and finding Asian companies to replace the business of departing European companies.

The Iran Foreign Investments Co.’s managers didn’t respond to requests for comment. A U.S. Treasury spokesman declined to comment.

In a January interview with the Oil and Gas Year, a trade publication, the fund’s Chief Executive Farhad Zargari said foreign investments will create “a bridge that allows technology and know-how to flow into” Iran, citing pharmaceuticals as an example. He said the fund was targeting financial services to make it easier for Iranian entities to trade globally.

The fund’s hodgepodge of investments generally aren’t conducted in U.S. dollars. They include stakes in an Afghan trading house, a Brazilian auto-parts plant, a German pipeline company and even an Omani lease finance firm shared with Iran’s regional rival, Saudi Arabia. The fund used its stake in a Dubai company to buy power-generation equipment, said a fund adviser.

Some investments have paid off financially too. Assets held by the fund’s Dusseldorf-based branch rose 16% in three years to €704 million ($814 million) through 2016, according to German corporate records.

But in some the U.S. has limited Iran Foreign Investments Co.’s ability to operate and profit.

The fund, for example, recently considered selling a 4.1% stake in German engineering giant Thyssenkrupp AG but backtracked over worries the proceeds could be seized on behalf of Americans who have sued Iran for alleged terrorism and been granted damages by U.S. courts, said people familiar with the matter.

In Brazil, the fund has debated plans to help buy civilian aircraft with proceeds from the sale of a 40% stake in a Thyssenkrupp unit in São Paulo that exports to the U.S., said another person familiar with the matter. The idea became impossible last month after the Trump administration reinstated a ban on selling planes to Iran, that person said.

A Thyssenkrupp spokesman said the company’s Brazilian subsidiary hasn’t paid dividends to the Iranian fund for almost a decade because of sanctions. He said didn’t know if the fund had received any separate dividends for its stake in the German parent company.

Rio Tinto PLC said in 2010 it had frozen dividend payments to Iran’s fund for its 15% stake in a Namibian uranium mine the Anglo-Australian giant controls because of fears that Tehran could use the production for its nuclear program.

Facing scrutiny, the fund operates discreetly.

In France, it bought the medicine factory in the winemaking region of Champagne through a Paris company Vaccinopole SAS, in which it owns a 60% stake, French corporate records show. The French-Iranian scientist, Raymond Abolhassan, owns the rest.

Mr. Abolhassan was greeted in Plancy-L’Abbaye as a savior. The factory had become a symbol of hard times for France after its owner shut the plant and moved its work to China eight years ago. The plant closure drew headlines when staff took hostage a manager in protest.

Mr. Abolhassan said Vaccinopole would start refurbishing the plant this month and start selling its products next year all over the world, including to South America, said Claude Chapelle, the mayor of a nearby village who helped organize the purchase. Mr. Abolhassan declined to comment.

French officials say the factory restart will create at least 40 jobs, positions that will be partly funded by French government subsidies worth €440,000.

“They want to lock up investments, so that the relationship cannot be easily undone,” said a French official familiar with the project.

Asset manager concerned that US stock market is being shrunk by jump in buybacks

BlackRock plans to ramp up its private investment activities, concerned that the US stock market is being shrunk by the surge in buybacks and a dearth of new listings but also enticed by the growing opportunities in the private debt market.

Mark Wiseman, global head of active equities at BlackRock and chairman of the asset manager’s “alternative” investing business — such as private equity, real estate and hedge funds — told the Financial Times that expanding its private investment capabilities had become an “increasingly big priority” for the $6tn investment group.

“I think it’s one of the most exciting things happening in BlackRock today,” Mr Wiseman said. “I think that most investors are heading in that direction. In part they’re heading in that direction . . . [because] the liquid public markets are shrinking.”

“Private markets” is a broad term for any asset that does not trade on an exchange, such as direct loans or unlisted shares. JPMorgan analysts estimate that pension fund allocations to traditional equity investments have shrunk by about 10 per cent over the past two decades, but allocations to private markets have increased by roughly 20 per cent over the same period.

Interest has been particularly strong in recent years, driven by a profound shift. While the value of the US stock market — as measured by the S&P Total Market Index — has roughly doubled over the past decade to $31.6tn, this is primarily because of rising prices rather than an expanding universe of listed companies.

Initial public offerings have sharply slowed since the dotcom boom and US corporations have instead emerged as the single biggest buyers of their own stock, both through mergers and acquisitions and huge share repurchase programmes.

This year’s corporate tax cut has further stirred the buyback frenzy. Bernstein analysts estimate that US companies are on track to repurchase $1.2tn of their own shares this year. That would lift the total since 2010 to more than $5tn — bigger than the Federal Reserve’s entire post-crisis quantitative easing programme.

BlackRock earlier this year announced it would raise up to $10bn for a new “long-term private capital” vehicle, and bought Tennenbaum Capital Partners, a $9bn investment group, to bulk up its private debt investments. Together with infrastructure and real estate, these four areas will be the main “pillars of growth” for BlackRock, said Mr Wiseman.

The Tennenbaum acquisition increased BlackRock’s “illiquid alternative” assets by $9bn to about $76bn, and Mr Wiseman indicated that this was just the start of a broader private market push by the BlackRock Alternative Investors unit led by David Blumer.

“There’s a lot of capital looking for risk and they’re not finding that risk in the public markets so they’re moving into private asset classes,” Mr Wiseman said. “There are huge opportunities.”

While valuations in private markets were “toppy” across the board, that did not mean this was a passing fad, argued Mr Wiseman.

“It’s like saying the public markets are overpriced right now; it doesn’t mean abandon public markets as part of the source of return. You just have to be that much more careful in terms of the positions that you take,” he said.

Relief for embattled May as Salzburg summit set to tackle talks sticking points

The EU is preparing to give its Brexit negotiator new instructions to help close a deal with Britain, in a conciliatory move that will bolster Theresa May as she suffers savage attacks from Brexiters at home.

After a weekend in which Boris Johnson, former UK foreign secretary, lambasted Mrs May’s Brexit strategy as wrapping “a suicide vest around the British constitution”, any positive signals from the EU would provide a rare fillip for the British prime minister.

An informal summit in Salzburg this month between the EU’s 27 remaining leaders is emerging as one of the most significant Brexit discussions since the bloc first set its strategy for talks.

Ambassadors in Brussels have been told that, as well as the planned timing of any deal and sticking points such as the Irish border, the meeting will discuss whether to issue additional guidance to Michel Barnier, the EU’s chief negotiator.

If approved, the move to update Mr Barnier’s instructions would help to “serve as a sort of mandate to do the deal” according to a senior EU diplomat.

Senior British officials have long complained that Mr Barnier has interpreted his instructions too rigidly, leaving talks deadlocked. Dominic Raab, Brexit secretary, has blamed “dogmatic legalism” for limiting progress in talks.

EU member states insist they remain firmly behind Mr Barnier. “I don’t know how much you need to change, frankly speaking,” said the EU diplomat, adding that the most important point of new guidelines was “the symbolism.”

Two other officials on the EU side confirmed the planned discussion in Salzburg on supplementing the guidelines for Mr Barnier. One EU diplomat dubbed it a “save Theresa” operation.

While the EU continues to have fundamental reservations about Mrs May’s Chequers plan for close integration with the EU after Brexit, the bloc’s main priority is concluding a withdrawal deal with the UK, including guarantees to avoid a hard border across the island of Ireland. Diplomats expect many hard choices over future relations to be left until after Brexit.

EU leaders have issued instructions to their negotiator three times since the 2016 Brexit referendum, framing the union’s collective response to divorce issues, the transition, and the terms of a non-binding “political declaration” on future relations.

If leaders agree at the September 20 meeting, diplomats expect a final set of guidelines to be formally adopted at the October summit of EU leaders, setting the stage for a special Brexit summit in November, where the two sides would aim to conclude talks.

Mrs May’s domestic problems in delivering Brexit were thrown into stark relief on Sunday as Mr Johnson — who quit as foreign secretary over her Brexit plan — launched his frontal attack on her leadership.

He claimed Mrs May’s strategy amounted to a “humiliation” and that she had been “mad” to put the Northern Ireland border at the heart of negotiations.

The prime minister faces a torrid Conservative conference in Birmingham in early October, with Mr Johnson planning to address up to 1,000 party activists at a “Chuck Chequers” rally.

She is hoping that EU leaders will throw her a lifeline by making clear that they want Mr Barnier to show enough flexibility to achieve a final deal. “We aren’t expecting the EU to change Barnier’s guidelines, but we hope the leaders will tell them to interpret them in such a way as to make a deal possible,” said one senior British official.

EU negotiators and diplomats dismiss the idea that the present guidelines are too inflexibly drafted and say no core principles will be revised.

One negotiator said the revised guidelines might acknowledge Britain’s openness to a bigger role for the European Court of Justice, particularly in areas of justice and security affairs.

One of the most important topics of the Salzburg discussion will be the form of the “political declaration” planned on future relations, and the level of detail and precision that is required.

Angela Merkel, the German chancellor, originally pushed for an unambiguous and clear statement, which would underscore what Britain would lose as a non-member of the union.

However in private discussions Berlin has since signalled it would be willing to see the a more fudged statement, which principally aims to help Mrs May secure support for the accompanying withdrawal treaty in the House of Commons.

“It all depends on what they think they can sell back home,” said an EU diplomat involved in Brexit talks. “There are some things that will not work. We do have a requirement for a legally operable backstop [for the Irish border]. The rest is solvable.”

Many EU officials see the Chequers plan as unworkable, riven with contradictions and in certain parts antithetical to the EU’s founding principles.

But to date the EU side has avoided aggressive attacks on Chequers, seeking to emphasise points of convergence. An important question for EU leaders is whether they are happy to leave some issues — such as customs arrangements — ambiguous so they are resolved only after Brexit day.

S&P 500 ended the week with a loss of 1.0%, while the tech-heavy Nasdaq Composite dropped 2.6%. The Dow Jones Industrial Average showed relative strength, but still finished lower by 0.2%. Oil prices rallied in anticipation of the storm disrupting crude production, but gave back all of those gains after the storm turned out to be less damaging than feared. Oil prices then fell further on Thursday when the EIA's weekly inventory report showed a 4.3 million barrel drop in crude stockpiles, but a 1.8 million barrel jump in inventories of gasoline. In total, WTI crude futures lost 2.9% this week, settling Friday at $67.76/bbl, and the oil-sensitive energy sector lost 2.3%. U.S.-China trade tensions resurfaced at the tail end of the week, as many thought the White House would impose tariffs on $200 billion worth of Chinese goods on Thursday at midnight following the end of a public comment period. That didn't happen, but President Trump did raise the stakes on Friday, saying that he's got another tranche of tariffs on $267 billion of Chinese goods "ready to go" if Beijing retaliates to the $200 billion tranche. As for the Fed, Friday's jobs report virtually locked in a September rate hike and increased the chances of a December rate hike to 79.8% from 72.8% on Thursday.

Macro :

- China Aug. Trade Surplus Against U.S. $31.05B (China Aug. exports to U.S. was $44.3851b and imports from U.S. was $13.3302b)

- Greece to Provide EU w. Plan to Avoid Pension Cuts: Tsipras

- Hedge Fund Balyasny Hires Chris Chesney as COO of Macro Business

- Le Maire: France to Propose Sunset Clause for Digital Tax

- Trump Says Days of U.S. Being Ripped Off By Other Nations Over

- Middle East Luxury Spending the Next Oil Rush for Premium Brands

Keep an eye on :

- AF FP : Air France KLM CEO To Get EU4.5M If Forced to Leave

- AZA IM : Italy Could Seek EasyJet or Delta Deal for Alitalia: Repubblica

- BABA US : *ALIBABA SHARES FALL 1.4% ON REPORT CHAIRMAN JACK MA TO RETIRE

- AAPL US : Trump Urges Apple to Make Products in U.S. Instead of China

- Aston Marti IPO : Aston Martin May Name Penny Hughes as Chair Before IPO: Sky News

- BBVA SM : BBVA Mexico Unit to Cut About 1,500 Jobs, EL Economista Reports

- CBS US : CBS Is Said to Be Close to Cutting Ties With Moonves: CNBC

- DTE GY : German Minister Wants to Keep Deutsche Telekom Stake: FAS

- ENI IM : Eni Says It Reached Zohr Field Production Target

- FCA IM : Brazil Jeep Output Stopped on Demand, Maintenance: Fiat Chrysler

- FCT IM : Fincantieri-STX Success is a Priority: France’s Le Maire

- G IM : Galateri Says He’s Not Worried About Takeovers: Radiocor

- GSK LN : Glaxo’s Mepolizumab Needs More Clinical Data for FDA Approval

- INTC US : *INTEL SAYS PROPOSED U.S. TARIFFS WOULD `STIFLE' 5G GROWTH: RTRS

- LDO IM : Leonardo CEO: Helicopters Division Performing Very Well

- VOW3 GY : More Former VW Managers Claim Unfair Dismissal: Handelsblatt

- WTW US : *WEIGHT WATCHERS GAINS 4.3% POST-MARKET ON S&P MIDCAP INCLUSION

- ZAL GY : Zalando Founders Don’t Plan to Sell Shares: BamS

For 32 years, Chuck Gabriel has advised investors about how politics will affect their portfolios, most recently from the firm he co-founded, Capital Alpha Partners. Gabriel and his colleagues are a canny lot, widely sought after for views like this one: Though they thought Donald Trump would lose the 2016 presidential election, they argued that his victory would drive stocks higher, as investors smelled tax cuts and deregulation.

“Gabriel’s insights are extremely valuable for making investment decisions that depend on how this crazy town dysfunctions,” says Ed Yardeni, the well-known market strategist.

The political outlook has never been more riveting. Economic growth has percolated, and stocks have hit new highs. Yet the odds of a Democratic House of Representatives in the 116th Congress are 70%, Gabriel says. Blame—or thank—energized Democrats, who have outperformed expectations in special elections and fund raising, “making hay with Trump’s decision not to rest on the laurels of his tax cuts and 4% GDP growth” but to pursue a trade war instead.

Here’s the math. A House majority requires 218 seats. The Democrats must add 23 for control. Gabriel expects Democrats to gain 28 to 35 seats, and as many as 40. Less likely is a Democratic victory in the Senate—Gabriel gives odds of this of 40%. While the GOP needs to defend just nine seats, Democrats are defending 26, 10 of them in states that Trump carried.

Much of the market’s direction depends, of course, on Robert Mueller’s investigation and U.S. trade talks, but in general, a blue House, red Senate would be positive for stocks. “The markets will be relieved,” says Gabriel. If both chambers go blue, he predicts a selloff in bonds, the dollar, and stocks. But this may be a buying opportunity, since Democrats, he says, “are not unified around anything.”

Least likely is the status quo, with Republicans hanging on to both chambers. If that occurs, expect Tax Cuts 2.0, which would make the individual side of the code permanent. They might also try to legislate indexing capital gains to inflation, a cause dear to the president’s heart. A red sweep would lift “red stocks” such as drug companies, managed-care companies like Aetna(ticker: AET), and sectors like biotech, banking, credit cards, insurance, asset management, student loans, autos, airlines, trucking, telecom, defense, and the internet. By contrast, “blue stocks” may trail, including auto suppliers, hospitals, financial exchanges, home builders, railroads, and construction companies.

If Democrats win the House, don’t expect a flurry of legislation. Typically, legislative activity declines after the first midterm when the president’s party loses control of Congress, according to Morgan Stanley. There will be no traction on Tax Cuts 2.0. Divisions in the Democratic Party will also hinder its agenda. First, it faces a leadership fight, although the party will probably “align around [former House Speaker Nancy] Pelosi,” says Gabriel. Second, the party is riven by divisions between its left and right flanks.

Consider health care. Big issues range from drug pricing to bolstering the insurance markets of the Affordable Care Act, to “Medicare for All.” The last has a price tag of $33 trillion and is likely to terrify health-care investors, says Gabriel, as it threatens to do away with commercial and employer-sponsored health insurance and assumes big reimbursement cuts. A smaller plan that would allow retirees to buy into Medicare, or include a government-run health-insurance agency option for the ACA markets, could threaten hospital and managed-care stocks, because reimbursement is pegged to Medicare. Whether Democrats can line up behind this is a big if. And, of course, any proposal must pass a GOP-controlled Senate. “It will be like a tree falling in the woods,” says Gabriel.

With new committee chairs, expect more headline risk about defense, too. The ranking Democrat on the House Armed Services Committee, Rep. Adam Smith (D., Wash.), “will question the administration’s priorities on strategic programs,” causing problems for defense shares, which outperformed the U.S. market this year. These might include a replacement for the Minuteman III intercontinental ballistic missile, which will affect Boeing(BA) and Northrop Grumman(NOC), as well as the long-range standoff cruise missile, which would affect Raytheon(RTN) and Lockheed Martin(LMT).

The outlook for funding the National Institutes of Health and National Science Foundation improves in a blue House—good for genetic-testing companies like Illumina(ILMN) or lab equipment companies like Danaher(DHR), he says.

What if both chambers go blue? Expect a reversal of the Trump tax cuts and deregulation agenda, as well as tax relief for families and lower-income taxpayers. Companies would reconsider capital spending. And expect more health-care legislation.

Another likely effect of a Democratic sweep: an immediate focus on the 2020 election cycle and a desire not to hand the Trump administration any victories. Here come impeachment hearings if the special counsel’s report suggests wrongdoing. That will pose risk to the markets.

The House is also “overdue to reauthorize the Higher Education Act,” Gabriel says, which authorizes major programs dealing with federal financial aid. That could hurt lenders and student-loan servicers, he adds. Banks, however, will be fine, because Dodd-Frank is “mostly settled business” after an overhaul last spring.

Also, don’t count out initiatives from the 115th Congress’ lame-duck session.

One could be the Retirement Enhancement & Savings Act, which aims to expand access to multiple-employer pension plans. Recently, Trump signed an executive order for Labor and Treasury to consider such plans, benefiting asset gatherers, broker-dealers, and investment advisers, says Gabriel. Another is an infrastructure deal. “In the ninth year of an expansion, unless we really see more capital spending, we could fear a recession next year,” he says.