TheChek News Flow

What Could Possibly Ruin Traders’ Summer Vacations?

August is known as a month of quiet markets and sleepy sessions, but investors should know better than to rule out surprises

HONG KONG—It may seem like the dog days of summer for investors. But August is known for offering financial markets a range of surprises.

Trading has slowed as stocks have risen steadily around the world, a reflection of quiet markets and sleepy sessions that have stretched from Asia to Europe to the U.S. Volatility has remained historically low, traders have fled for vacations and pullbacks have been nonexistent.

Two years ago this week, though, China ruined the summers of many foreign-exchange and equity traders with a surprise devaluation of its currency. The move not only stoked fears about the world’s second-largest economy, but it also rippled across Asian markets and sent tremors around the world. Chinese stocks plunged and its forex reserves fell, putting an abrupt end to a sleepy summer.

Few at the moment expect a repeat of such magnitude. In China, reserves rose in July for a sixth straight month and the yuan has gained about 3% against the U.S. dollar this year. A rebound in exports fueled stronger-than-expected economic growth of 6.9% in the year’s first half.

Asian stocks, broadly, have rallied as a result. Hong Kong’s Hang Seng Index, which has risen in 19 of the past 22 trading days, is up 26% this year and is among the world’s top-performing indexes.

The MSCI AC Asia Pacific ex-Japan Index, a broad barometer that counts big Asian companies listed globally, is up 25% and trading at nearly a 10-year high.

Even hedge funds, long criticized for high fees and underperformance, are doing well in the region. Chinese hedge funds gained 16% in the first half of the year, significantly outperforming a benchmark tracked by data provider Hedge Fund Research. In the second quarter, Asia hedge funds collectively attracted their first quarterly asset inflow in two years, HFR said.

“It was a very good first six months for a lot of hedge funds and portfolio managers,” said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management in Hong Kong. “If you made a lot of money in the first half, there’s little reason you need to take extra risk in the summer months.”

The situation in other parts of the world is similar. In the U.S., the Dow Jones Industrial Average rose above 22000 last week for the first time in what has been a methodical move higher. Through last week, the Dow’s average daily move in either direction so far this year has been 0.31%, the smallest swing in 53 years, according to The Wall Street Journal’s Market Data Group. Ten years ago, this average daily move was more than double its current level.

August is typically a time for slow trading volume, too. Average daily activity in early August, measured by NYSE composite volume, has been lower than this year’s daily average, according to FactSet.

History shows that just because markets are quiet now doesn’t mean they will stay that way for the rest of the summer.

In August 2011, Standard & Poor’s surprise downgrade of its U.S. debt rating prompted some of the most volatile days on record for U.S. stocks. In August 2007, the subprime mortgage meltdown in the U.S. was morphing into the global financial crisis. And in the summer of 1997, a financial crisis that started in Thailand eventually spread throughout Asia, as currencies of many of the region’s hardest-hit economies like Thailand, Indonesia, Malaysia and South Korea lost more than 50% of their value against the dollar.

Of course, geopolitical risks remain today. Just this week, North Korea threatened to use nuclear weapons against the U.S. if militarily provoked. Yet the increased nuclear threat from North Korea has repeatedly failed to rattle financial markets.

For now at least, investors say they wouldn’t be surprised if the calm in the markets continued.

“Nowadays, the market is behaving quite differently from the big moves in recent summers,” Mr. Kwong said. “But when everyone comes back from vacation, I’d still expect more volatility in September and October.”

Hotel group’s Keith Barr shows little vision but capital-light strategy pays dividends

Tough first day at the office for Keith Barr, new chief executive of InterContinental Hotels. Mr Barr presented half-year numbers for the first time on Tuesday and shares in IHG, franchiser of Crowne Plaza and Holiday Inns, fell 4 per cent, valuing the group at about £8.3bn.

It might have been his persistent references to “guest love scores and premiums,” and “filling white space” and “breakfast solutions”. More probably it was disappointment that Mr Barr is less a new broom than a duster, trained up by his canny predecessor Richard Solomons, who has quit just as the hotel cycle has peaked.

IHG is holding on to its spot as one of the world’s biggest hotel operators with 1m rooms. But occupancy and revenue per room rates were pretty much flat in the six months to June. In IHG’s main market in the US, revenue per chamber fell in the second quarter. And Mr Barr does not have a grand new vision on how to reverse the slowdown.

He says there won’t be a change in direction unless there is a big macro economic shift. It is all about accelerating the old strategy of increasing rooms and, yes, “filling in the white space”, that is plugging gaps in the group’s portfolio. More luxury hotels, online check-ins, better beds, grab-and-go breakfasts, possibly electronic chamber maids and fewer hotel receptionists. But no big acquisitions. IHG is not about to enter the consolidation race to compete with profligate rivals such as Accor of France, which has hoovered up Fairmont, Raffles and Swissôtel, or Marriott, which bought Starwood last year. That deal propelled Marriott into the top slot, overtaking IHG as the world’s biggest hotel group.

Investors will find it hard to bear a grudge for long, though. Mr Solomon’s capital-light strategy of generating cash and keeping capital outlay down has lifted the shares steadily for the past decade. Net debt remains at 2.5 times earnings before nasty bits such as interest. The company raised the dividend by 10 per cent on Tuesday on top of the special dividend of $400m in May. That will continue.

And if that makes IHG, which trades at about 22 times 2018 earnings, a target for rivals rather than an acquirer, that is all the better.

The deal gives Netflix more content if and when its Disney deal runs out.

Apple’s spending on research and development totaled $2.9 billion for the third fiscal quarter ended July 1, rising 15% year-over-year against a revenue gain of just 7% for the same period. That brought Apple’s R&D spending to $11.2 billion for the trailing 12 months, which is about 5% of the company’s revenue for the period. Apple hasn’t expended a greater portion of its revenue on R&D on an annual basis since 2004—three years before the first iPhone launched.

That suggests other big things on the horizon, though what exactly is anyone’s guess. Apple only claims “an increase in headcount-related expenses to support expanded R&D activities” in its quarterly filing. The company is widely reported to be working on projects related to self-driving cars, health-care monitoring and augmented reality, to name just a few.

Apple, of course, is always loath to discuss any products it has in the works. But the company’s pipeline is a salient question for investors who may rightfully be wondering what to do with the stock once this year’s new iPhones see the light of day. Apple’s market value has surged 35% this year to $820 billion—adding $45 billion since last week’s earnings report, which all but confirmed that some new iPhones will indeed launch this quarter. And it is hard to forget that the stock has seen significant downturns twice in the last five years following big iPhone launches.

It is also worth noting that Apple is competing with other deep pockets willing to dig even deeper. The company’s R&D spending over the last 12 months trails that of Microsoft , Amazon.com and Google-parent Alphabet Inc . As a percentage of revenue, Apple’s R&D expenditures rank the lowest among big tech companies save for HP Inc. Of course, spending gobs of money now is never a guarantee of future success, but Apple has a distinct need to make its billions count.

Move by the ride-hailing company is due to unsustainably high losses

Uber Technologies Inc. plans to wind down its U.S. subprime car-leasing division to stem unsustainably high losses, according to people familiar with the matter, a major retreat just two years after starting the business.

The ride-hailing company is aiming to close out or sell most of the business by year-end, these people said. As many as 500 jobs could be affected by the exit of the Xchange Leasing program, representing roughly 3% of Uber’s 15,000-employee staff.

Uber executives were prompted to pull the plug on the auto-leasing unit in part because they recently came to a stunning realization: The average loss per vehicle was about 18 times what they had thought.

The Xchange Leasing division had been estimating modest losses of around $500 per auto on average, these people said. But managers recently informed Uber executives that the losses were actually about $9,000 per car—about half the sticker price of a typical leased vehicle.

Uber executives last month briefed a board committee on the unit’s growing losses and agreed to put an end to it, the people said.

After investing billions of dollars to rapidly expand its app into more than 70 countries, Uber has recently sought to tame losses that totaled more than $3 billion last year. Last month, Uber merged its Russian operation with the more popular ride-hailing app in that country, Yandex.Taxi.

Investors have exerted pressure on Uber to rein in costs and prepare for a possible initial public offering following the ouster of Travis Kalanick as chief executive in June. As Uber’s board searches for a new CEO, a 14-member executive committee is making weighty decisions while also dealing with the aftermath of a monthslong investigation into its culture, a trade-secret lawsuit from Alphabet Inc. and fierce ride-hailing battles around the world.

Demerger could give investors stake in faster growing telco amid regional shake-up

Liberty Global says it remains on track for a spin-off of its Latin American arm known as LiLAC by the end of the year, as it readies the division for an expected industry shake-up in the region.

The move to split Liberty Global, predominantly a European cable company, and LiLAC, which comprises the merged Cable & Wireless Communications and Columbus networks in the Caribbean and Latin America, comes as the company prepares for the next stage of consolidation in the regions where it operates.

In a review of its second quarter on Tuesday, Mike Fries, chief executive of Liberty Global, said: “We believe the spin-off will benefit LiLAC shareholders by creating a standalone, asset-backed equity, while enhancing its potential attractiveness as an acquisition currency for consolidation opportunities in the highly-fragmented Latin American and Caribbean telecommunications markets.”

The company submitted a draft registration statement for LiLAC with the Securities and Exchange Commission in July. Mr Fries has talked about the possibility of spinning off LiLAC during investor calls, as a way of giving shareholders an opportunity to invest directly in the higher-growth Latin American businesses, as opposed to the more mature European assets. The demerger would also allow LiLAC to raise capital independently of the broader group.

The move would help to clear up Liberty Global’s complex structure. LiLAC was launched as a tracking stock, created in 2015 ahead of the £5.4bn takeover of Cable & Wireless Communications. The deal was largely paid for in Liberty Global stock, but John Malone, who controls Liberty Global and owned 13 per cent of Cable & Wireless, was paid in LiLAC shares. The billionaire bought an additional $16.3m of LiLAC stock on the open market in July, increasing his personal exposure to the Latin American operations.

The old Cable & Wireless assets, which date back to the first transatlantic cables laid between Britain and the rest of the world, account for around two-thirds of LiLAC’s cash flow and revenue. Revenue in the second quarter increased 2 per cent to $941m while operating cash flow grew 10 per cent to $368m.

That was faster than growth in Liberty Global’s European operations, where revenue grew 1.6 per cent to $3.6bn, slightly below expectations, while operating cash flow rose 6 per cent to $1.7bn.

Revenue in the UK, where it operates as Virgin Media, dropped 8.8 per cent in the three months to the end of June. Excluding foreign exchange movements, revenue increased 0.9 per cent.

Operating profit fell by £1.5m to £77.5m, despite a one-off £22.5m payment from BT’s Openreach to compensate Virgin Media, because of historic issues related to delayed connections. Openreach was fined £42m by Ofcom in March over the company’s use of loopholes to reduce compensation payments to other broadband companies, when lines were not connected in time. It is paying £300m to the industry as a result, putting a strain on BT’s cash flow.

Dhananjay Mirchandani, an analyst with Bernstein, noted that Virgin Media’s net customer adds had slowed to 31,000 in the second quarter, from 81,000 in the first quarter and 43,000 in the same period a year before. He said growth in Germany, where Liberty Global’s UPC put on 32,000 users, was “worryingly soft”.

Virgin Media is spending £3bn on new fibre as part of its “Project Lightning” programme, which has been beset by delays this year. It passed an additional 127,000 homes in the quarter