Italian vote with current election law would yield no winner - polls
Italy's three biggest parties are pushing for a national election this year, nine months ahead of schedule, but simulations published on Friday show no clear winner would emerge if the current voting system is used.
On Wednesday the Constitutional Court scrapped part of the lower house election law and left in its place a proportional system similar to the one that gave Italy 50 governments in 50 years after World War Two.
Three different newspapers published simulations that used recent polls to project the results of a hypothetical snap election using the lower-house law created by the court ruling, and all three show no party and none of the conceivable post-vote alliances would win a majority of seats.
"No plausible majority emerges," Roberto D'Alimonte, a leading Italian expert on electoral systems, wrote in Il Sole 24 Ore newspaper.
President Sergio Mattarella, who is the only person with the power to dissolve parliament, has said that before an election is called the lower house rules should be aligned with the upper house's slightly different proportional system.
Friday's simulations may contribute to delaying a vote until the end of the legislature in 2018 because there is no agreement in parliament over what alternative election law to adopt.
But the country's three biggest parties - Matteo Renzi's Democratic Party (PD), Beppe Grillo's anti-establishment 5-Star Movement, and the far-right Northern League - want a vote this year and have said it could be held with the current rules.
In 1993, Italy had abandoned a pure proportional system for one that was largely first-past-the-post. The PD and the Northern League have proposed reviving the 1993 law, but the idea so far has not garnered broad parliamentary backing.
Shell set to sell $3 billion North Sea assets to Chrysaor - sources
Royal Dutch Shell (RDSa.L) is nearing the sale of a large part of its North Sea oil and gas assets for $3 billion (2.39 billion pounds) to a private equity-backed firm, several banking sources said.
The deal will mark a major milestone in the Anglo-Dutch company's drive to reduce its heavy debt pile following the $54 billion acquisition of BG Group in February 2016.
Chrysaor, a North Sea-focused oil company backed by private equity fund EIG Partners, will acquire from Shell a mix of older fields, new developments and infrastructure in a move that could breath new life into one of the world's oldest offshore basins where production has been in a steady decline since the late 1990s.
The deal is expected to be announced in the coming days to coincide with Shell's full-year results on Feb. 2, several sources said.
People are worried about Chinese property bond market liquidity*
Or at least they’re worried about what it will look like in the second half of this year, when we might start running into a funding “crisis”.
That’s what Andrew Collier of Orient Capital Research is suggesting, with our emphasis:
Based on our interviews, we believe the property sector will face a liquidity crisis when the peak of debts come due in the second half of 2017 and beginning of 2018. According to the Centaline Group, China’s property developers raised Rmb1.14trn in 2016 through privately raised company bonds, corporate bonds, medium term notes and related sources. This was a 26% increase YoY, for the first time breaking Rmb1trn. However, both domestic and foreign financing channels have been blocked since last October due to tightening regulations on capital raising, along with a strong U.S. dollar As a result, property developers are confronting a significant increase in the cost of financing that could cause them to reach crisis levels in the near future. We estimate Rmb544 billion in corporate bonds alone will come due in 2H 2017 and early in 2018.
Screen Shot 2017-01-27 at 14.09.35
As was widely reported, there was indeed a chill cast over Chinese property funding in the third quarter of 2016 as regulators looked to cool an overheating market. “All the relevant [national] regulators and government departments have intervened to curb developers’ financing,” said Jonas Short at NSBO, a policy research group, to the FT. “It’s an example of the concerted action that you get when [Beijing] is convinced something must be done.” More so, from the same FT report in November:
Corporate bond sales by real estate developers have come to a complete halt this month while their issuance of trust products fell by a quarter in October compared with September. Trust products bundle corporate loans and other assets that are sold on to a variety of investors including bank depositors.
Now, before going on, do please remember that China’s property market is effectively the foundation of the country’s economy. As Citi said before, “property-related tax revenues and land sales proceeds jointly account for 42% of local governments’ direct income (fiscal revenues + local government funds). The property market, in short, has become the critical income source for local governments. This is the key reason why we believe a property market collapse could be ill afforded by central/local governments, though they do hope for a cooling of the property market.”
Then there’s the normal industry involved in the… industry: construction and real estate made up a fifth of real gross domestic product growth in the first half of 2016, according to China International Capital Corporation (via the FT). There’s also the very real issue of banks investing in property bonds and/or investing in shadow banking products (WMPs) which are in turn invested in property bonds.
You get the picture: it’s an important sector that they won’t want to see crash even if credit growth can’t keep going forever. China is, as has been widely explained, very probably pushing against its debt-capacity limits.
Remember too then, that what the regulators have tightened can by the same regulators be loosened.
So, yeah, the PBoC etc are clearly worried about over-investment into the bubbling property sector but it’s very very unlikely that they will keep credit so tight that they allow a crisis. While allowing some defaults to instil some sense of credit risk is part of the plan, anything that endangers financial stability is not.
All the more so since the shadow market — which is another funding avenue for the property developers — would not look pretty if those defaults were to cascade. An illustrative example from Michael Pettis’s latest newsletter:
The market “inefficiency” that allows WMP investors to earn higher yields than they would on bank deposits, while believing that they are taking no greater credit, maturity or liquidity risk, is simply calculated obfuscation. We will only know once the WMP markets faces its first major test whether WMP investors were the ones who were able to “arbitrage” this inefficiency, because banks were forced to absorb the credit and liquidity risks, or banks were the ones who benefitted from the “arbitrage” as they walk away from WMP, and forced investors to absorb the credit and liquidity risk…
While most market participants understand the credit risk distortions implied by WMP, they may be less clear about the liquidity risk distortions. By regularly buying and selling corporate bonds the SPIVs create liquidity in Chinese corporate bond markets as a function of the expansion of the WMP market. This liquidity creation can be highly self-reinforcing, however, and investors should be aware of the risk of liquidity gapping, i.e. a sudden sharp contraction in trading volume and market liquidity.
Gapping risk is exacerbated by the fact that while a lot of WMPs are backed by the very simple form of securitization described above, an increasing number of WMPs may be backed by more complex securitizations. Among them are those in which the SPIV invests in the stubs of other SPIVs, thus leveraging up products that are already levered, and in which there is a structural mechanism that links WMP redemptions far more directly than the normal contagion mechanisms.
So how will this particular liquidity worry turn out?
As Collier says: “PBOC, could, however, intervene on a case-by-case basis, particularly when the developer or project is sufficiently large to cause economic distress in a politically important location.” Which seems about right.
Brighter future despite ongoing promotional pressure
* Q4 sales confirmed further promotional pressure in France, especially from the main hypermarkets, Leclerc and Carrefour
* This is likely to weigh on profitability but will be offset by smaller formats and profits outside France, especially LatAm
* Buy rating on Carrefour (TP EUR28), Casino (TP EUR60 vs. EUR53); Reduce on Rallye (TP EUR17 vs. EUR12)
We maintain our ratings: Buy on Carrefour (TP EUR28 unchanged) and Casino new TP EUR60 vs EUR53), Reduce on Rallye (TP EUR17 vs. EUR12): We roll over our DCF base for Carrefour and Casino and change our estimates for Carrefour (-5% EPS 2016-18e) and Casino (+5.9%). We cut our estimates for Carrefour France slightly but still expect +15bps margin in 2017 and 2018 (Dia). We do not change our profit forecasts for LatAm but expect further losses in Asia in FY17. For Casino our estimates exclude Via Varejo with Cnova now discontinued. This has an impact not only on the operating profit lines but also on financial charges and minority interests.
Merging for strategic reasons, not out of weakness; Luxottica upgraded to Buy
* An Essilor-Luxottica combination very likely to materialise at parity agreed on 13 January 2017 in our opinion
* Short-term newsflow un-supportive for both stocks, but absolutely not the reason for merging
* Essilor Buy, raise TP to EUR132 (from EUR125); upgrade Luxottica to Buy (from Hold), raise TP to EUR61 (from EUR54)
Maintain Buy on Essilor, upgrade Luxottica to Buy: Our new TPs for Essilor and Luxottica are based on (i) valuing the NewCo by adding the net present value of synergies to our standalone valuations of Essilor and Luxottica (unchanged), and (ii) using the exchange ratio accepted by Luxottica’s controlling shareholder Delfin: 0.461 Essilor share for 1 Luxottica share. Based on our new TPs (EUR132 from EUR125 for Essilor, EUR61 from EUR54 for Luxottica), Essilor and Luxottica imply 23% and 21% upside respectively
Industrivarden chairman under investigation for ‘bribery’
Prosecutors are investigating hunts hosted by Fredrik Lundberg at Holmen
Fredrik Lundberg, one of Sweden’s leading businesspeople, has been questioned by prosecutors on suspicion of bribery in a big blow to his efforts to clean up large parts of Swedish industry.
Mr Lundberg, who as chairman and the biggest owner of investment company Industrivarden helps control companies including Handelsbanken, Ericsson and Volvo Group, is under investigation for suspected bribery relating to a series of hunts.
The probe is the latest setback for Industrivarden. Two years ago allegations about the frivolous use of business jets by managers, both of Industrivarden and the groups that the investment company has stakes in, led to wide-ranging personnel changes. In the spring of 2015, the chairman of Industrivarden was ousted, leaving Mr Lundberg to take up that role.
Mr Lundberg hosts two to three hunts a year at Holmen, the Swedish forestry group where he is also chairman, according to the company, and prosecutors have been investigating these events since 2015.
They interviewed him on Thursday, according to a statement from Holmen. It added that, regarding Mr Lundberg, prosecutors have “reasonable suspicion of giving a bribe”.
Mr Lundberg and Holmen strenuously denied any wrongdoing. “I am convinced that both Holmen and I have managed everything correctly and that no violations have occurred,” Mr Lundberg said in a statement through his family holding company.
“Hunting arranged by Holmen on lands in the Norrköping area is a decades-long tradition and provides an opportunity to meet with Holmen’s employees as well as with external participants,” he added.
Holmen said he had led the hunts in a similar manner for more than 20 years.
Mr Lundberg has cemented his power in Sweden on the back of the separate corporate jet scandal, which partly revolved around allegations of lavish hospitality, including hunting.
Since becoming chairman of Industrivarden he has led big changes across the sphere of groups the investment company is the largest investor in, including replacing management and unwinding cross-shareholdings.
In a recent interview with the Financial Times, Mr Lundberg described his role: “I try to concentrate on trying to do a good job and act in a way that is value-creating,” he said. “To be able to create value in the way we do, you have to take a long-term view.”