France is more likely to elect a moderate rather than an antieuro president. And a fragmented parliament, but still one
where the mainstream parties are the largest, is likely to mitigate tail risk even if Marine Le Pen were to win. We discuss what it all means for the economy and markets.
Strategy implications:
OATs and European stocks are our preferred longs and priced to have the best probability-weighted risk/reward and reasonable upside in our highly likely base case scenario (85% probability that Le Pen loses). BTPs, EURUSD and iTraxx Main have the worst probability-weighted risk/reward and limited upside in the base case. Low implied volatility in EUR and iTraxx Main also offers an opportunity to set downside hedges. In terms of French bank equity, BNP and Soc Gen have an appealing risk/reward, with 15-20% upside potential on a probability-weighted basis.
Ghosn to cede chief’s role at Nissan to focus on three-way alliance
Saikawa named successor as Ghosn seeks to boost ties with Renault and Mitsubishi
Carlos Ghosn is to relinquish the chief executive role that he has held for 16 years at Nissan as he turns to focus on strengthening an expanded alliance involving France’s Renault and scandal-bruised Mitsubishi Motors.
Hiroto Saikawa, who was appointed as co-CEO in November, will take over as chief executive in April while Mr Ghosn will remain chairman of Nissan’s board of directors, chief executive of Renault, and chairman of Mitsubishi.
The reshuffling of the roles leaves few people in doubt that the 62-year-old will remain in full command as he aspires to catapult the three-way alliance to the top league of global car giants alongside Volkswagen and Toyota.
“You can see pressures for consolidation everywhere,” Mr Ghosn told the Financial Times. “We really want to make sure that this alliance . . . continues to extend the scale and the synergies possible, not only between the three companies but eventually with other companies.”
The expansion of the Franco-Japanese alliance, which is nearly two decades old, comes as the car industry faces new technological and cost challenges in autonomous driving and electric vehicles. Toyota is expanding its ties with Suzuki Motor and Mazda, while PSA, the maker of Peugeot and Citroën cars, is in talks to buy the European operations of General Motors.
Mr Ghosn is also grappling with fraught relations between Renault and the French government, which commands about 20 per cent of voting rights in the company. The state voted last April against Mr Ghosn’s pay package at Renault, which wields effective control over Nissan through a 43 per cent stake.
Mr Ghosn, born in Brazil to Lebanese parents and educated in France, stressed on Thursday that he would remain the chief executive of Renault as he completes its transformation.
The change at Nissan had been expected as Mr Ghosn has said in October that he wanted to focus on turning round Mitsubishi, which suffered a plunge in domestic sales after admitting to cheating on its vehicles’ fuel economy data last year. Following the scandal, Nissan purchased a 34 per cent stake in Mitsubishi.
Analysts say closer ties between Nissan and Mitsubishi, makers of the Leaf and i-MiEV electric vehicles respectively, will give them the scale to cut costs to compete against rival Tesla, while helping Nissan address its weakness in Southeast Asia where Mitsubishi has a robust network.
Takaki Nakanishi, a former Merrill Lynch analyst who now runs his own research group, says the enlarged alliance, with global annual sales of nearly 10m vehicles, is unlikely to threaten the two-way competition between Volkswagen and Toyota unless they can find strengths beyond scale.
“Mr Ghosn built scale with the Renault-Nissan alliance but the next step is to foster a robust automotive group that can reign over the global industry on a sustainable basis. That will still take time,” Mr Nakanishi said.
Mr Saikawa, a 40-year veteran at Nissan, has long been viewed as the frontrunner to succeed Mr Ghosn. The two men met in 1999, the year Mr Ghosn joined Nissan to implement a drastic restructuring plan that saw the Japanese carmaker rebound from near collapse.
As Nissan’s representative on the Renault board until last year, Mr Saikawa, 63, built his name as a tough negotiator with the French government in 2015 after Paris moved to increase the voting rights it holds in the Japanese carmaker.
The incident exposed the limits of the alliance’s cross-shareholding system with the French group now the smaller partner in terms of annual production, market capitalisation and operating margin. Nissan has no voting rights at Renault, despite outgrowing its French parent and holding a 15 per cent stake in the company,
Mr Ghosn reiterated that the two companies “do not relate to each other through shareholding.” But analysts say Mr Saikawa, whom Mr Ghosn has described as “very loyal to the company”, is a safe choice in a period of tension, since he is unlikely to challenge Mr Ghosn’s authority and is expected to run day-to-day operations without a major shift in policy.
“I’ve always said my wish is to one day pass the baton to a Japanese CEO so it’s done. It’s a change of person but it is a change in continuity,” Mr Ghosn said.
Treasury Secretary Steven Mnuchin Sees Tax Overhaul by August
Economic growth at 3% or higher is also among Trump administration’s ambitious goals, he says
Treasury Secretary Steven Mnuchin laid out ambitious goals to secure a U.S. tax-code overhaul by August and to deliver economic growth at rates not seen in more than a decade.
Mr. Mnuchin, in his first interview since his confirmation last week as Treasury secretary, said slower economic growth since the financial crisis had primarily been an anomaly and a result of Obama administration policies that can be reversed. He said the Trump administration is aiming for a sustained 3% or higher annual growth rate, a projection not widely shared by other forecasters.
“We think it’s critical that we get back to more normalized economic growth. More normalized economic growth is 3% or higher,” Mr. Mnuchin said.
Sustained growth at rates above 3% could be difficult to achieve. The Federal Reserve projects a long-run annual growth rate of 1.8% and the Congressional Budget Office has a similar view.
The U.S. faces slower economic growth in part because the labor force is expanding less briskly than in the past as baby boomers retire. Slow worker productivity growth has also held back the economy. Output has grown about 2% on average annually over the past decade, and other wealthy economies facing similar demographic challenges have seen slower growth rates.
Still, a strong reversal of weak productivity growth or an upturn in labor force growth could send output growth higher. The Trump administration is betting tax and regulatory reform could spark such changes.
Stronger growth would make it easier for the Trump administration to balance competing goals of cutting taxes and boosting spending on the military and infrastructure without sending deficits much higher. The new administration is working on a budget blueprint due out next month that will be a first step toward reconciling its objectives.
“We will have our own set of financial projections,” he said.
Mr. Mnuchin said the administration was working with House and Senate Republicans to smooth over differences among them on tax policy, with the aim of passing major legislation before Congress leaves for its August recess. He added, “that’s an ambitious timeline. It could slip to later in the year.”
In his first week on the job, Mr. Mnuchin has spoken with around 10 foreign counterparts and other leaders, including International Monetary Fund Director Christine Lagarde. He also has met with Mel Watt, the director of the Federal Housing Finance Agency, the independent regulator of mortgage companies Fannie Mae and Freddie Mac, which are under the effective control of that agency and the U.S. Treasury as a result of their 2008 bailouts.
Mr. Mnuchin, whose confirmation process was the longest for a Treasury secretary of a new administration in U.S. history, brought a handful of advisers to the agency with him, but it will likely be months before other senior positions that require Senate confirmation are filled. The White House hasn’t nominated anyone for other posts at the department that require Senate approval.
The secretary has been in close contact with National Economic Council director Gary Cohn, his former colleague at Goldman Sachs Group Inc., who emerged as a powerful economic policy maker while Mr. Mnuchin awaited confirmation. The two men have a close relationship, a Treasury official said.
One big question is whether the Trump administration will go along with House Republican plans to make a tax overhaul revenue neutral—meaning lower tax rates won’t add to the deficit. Mr. Mnuchin wouldn’t discuss the administration’s view on that question and instead pointed to stronger economic growth as an engine that will reduce the urgency for major trade-offs in any tax bill.
The House GOP plan doesn’t count solely on growth. It also features limited deductions and a border-adjustment provision that taxes imports and removes taxes from U.S. exports. The plan is projected to generate about $1 trillion over a decade.
The border adjustment provision has run into criticism from large retailers and other importers. U.S. Senators have piled on, too, leaving the idea in trouble without a major presidential push that hasn’t happened and might never come.
Mr. Mnuchin said the administration is “looking seriously” at the House plan that includes border adjustment and was well aware of concerns raised by specific industries. The Treasury Department had its own concerns, he added, “about what the impact may be on the dollar” from a border-adjusted tax.
His comments underscored the challenge the new administration and congressional Republicans face reconciling competing objectives.
With the House plan in potential trouble, a Senate plan nonexistent and the Trump plan incomplete, the GOP’s tax agenda is in search of a guidepost at a crucial moment. Mr. Mnuchin called for a combined plan that would address developing fractures in the party over tax policy.
As Treasury secretary, Mr. Mnuchin also takes on the role as the Trump administration’s leading voice on U.S. currency policy, meaning his every word on the dollar will be closely followed in financial markets.
Mr. Trump has expressed frustration that other countries—most notably China—have used weak currency policies to boost exports. The comments during his campaign and since his election carried with them an implication that the new administration might favor a weaker currency to support the U.S. trade position.
But Mr. Mnuchin avoided taking confrontational positions on the dollar. He said the strong U.S. dollar is a reflection of confidence in the U.S. economy and its performance compared with the rest of the world and was a “good thing” in the long run. The comments echoed remarks Mr. Mnuchin made in a confirmation hearing last month.
The dollar has appreciated by 23% over the past three years and added to those gains since the November election.
“I think the strength of the dollar has a lot to do with kind of where our economy is relative to the rest of the world, and that the dollar continues to be the leading currency in the world, the leading reserve currency and a reflection of the confidence that people have in the U.S. economy,” Mr. Mnuchin said.
The past several administrations have for the most part signaled support for a strong dollar, even though at times an appreciation of the currency has hurt exports.
Mr. Mnuchin demurred when asked about China’s currency and said he looked forward to “healthy bilateral relations” with the world’s second- largest economy.
“There’s trade issues that will make sense to look at, and I think there’s investment issues that will make sense to look at,” he said. “There are many things that we will need to collaborate on.”
During the campaign, Mr. Trump repeatedly promised to brand China as a currency manipulator, but over the past 18 months, China has taken steps to bolster its currency. The Obama administration said that was a sign Beijing had moved away from seeking an unfair trading advantage by keeping the yuan undervalued.
Mr. Mnuchin said those were two separate issues. “One is the issue of currency manipulation, and then one is the issue of whether there’s unfair trading advantages,” he said Wednesday. “They may or may not be related.”
For Professional and Institutional Investors Only
iShares Follow the Flow
Exclusive report on ETP market trends
Highlights from the week ending
February 17th, 2017
Factoring in the flows into Value
Equity ETPs attracted $14.7bn (77% of the total inflows), this means that equity inflows have been greater than fixed income for 14 out of the last 15 weeks.
Fixed income and commodity ETPs took in $3.2bn and $1.1bn respectively; U.S. investment grade and gold dominated these asset classes.
The two themes of the week are factor rotation into value and out of minimum volatility, and IG credit vs EM debt.
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AccorHotels considers making acquisitions in South America, regional CEO says
22 FEB 2017
AccorHotels (AC:EN), the French hotel giant, considers making acquisitions to expand its brand portfolio in South America, Patrick Mendes, South America CEO, said.
When asked if the Paris-based group was currently in talks with South American hotel brands, Mendes said he could not answer the question. Accor operates 16 hotel brands, including low-cost Ibis, midscale Mercure and upscale Sofitel.
Brazil is the group’s main market in South America and is still a country of interest, Mendes said. Argentina, Chile, Colombia, and Peru are also under the group’s radar, he added.
The French company has 289 hotels in South America, 252 of them in Brazil, 12 in Argentina, eight in Chile, seven in Colombia and five in Peru. By 2020, AccorHotels plans to have 500 hotels in the region and part of this expansion will be made through acquisitions, Mendes said.
The executive did not specify a minimum size for potential regional targets, but noted that Accor does not rule out buying small hotel chains “with three or four” units, as long as they own appealing brands in the luxury and lifestyle segments, which cater to consumers that look for a more intimate and authentic travel experience.
In Brazil, Accor is interested in resorts in traditional leisure destinations, such as the beach towns of Costa do Sauipe, in Bahia state, and Guaruja, in Sao Paulo state, and also in “urban resorts” located in large cities like Sao Paulo and Rio de Janeiro, Mendes said. Unlike traditional urban hotels, urban resorts attract people that not only want to enjoy the destination, but also are looking for a pleasing stay, with perks like clubs, restaurants, bars and health spas, he explained.
The company is also eyeing regional technology businesses that offer solutions to hotel chains and travelers, Mendes said. Potential targets are not limited to firms that can add features to the company’s booking platform Fastbooking, but also apps that can make its guests’ stay easier, he said. As an example, Mendes mentioned a solution that allows guests to open their rooms with their mobile phones.
Regional strategy
Accor’s M&A strategy in South America, Mendes explained, is closely linked to the company’s inorganic worldwide growth plans that are founded in three pillars: diversifying the group’s brand portfolio, especially in the luxury and lifestyle segments; expanding its concierge services offering; and enhancing its technological platform to be in a better position to market itself directly to guests through the Internet.
But unlike with past acquisitions, where Accor would purchase hotels and later incorporate them into one of its hotel brands, the company’s current M&A strategy focuses on “acquiring skills and preserving the targets’ DNA,” Mendes said.
As a way to illustrate this, the executive cited the group’s 2014 purchase of a 35% stake in the French hotel chain Mama Shelter, which enabled Accor to venture into the design-oriented lifestyle brand. As part of the deal, Mama Shelter preserved its original brand name and their solid reputation helped AccorHotels gain knowledge and credibility in this niche market, he said.
On 19 January, Accor also announced it had signed a “master franchise” agreement to convert eight hotels of family-owned Colombian hotel chain German Morales e Hijos (GMH) to its Mercure brand, as reported. As part of the deal, the eight hotels will preserve part of its name and will continue to be operated by GMH.
Accor plans to fund future acquisitions primarily through the sale of a majority stake in its HotelInvest property business, which owns and operates 1,000 hotels, said Mendes. Hotelinvest's portfolio was valued at EUR 7.3bn at the end of June 2016, according to a published report.
On 16 January, the group announced it was already in talks with potential buyers for a stake in HotelInvest. Mendes said Accor plans to sell a 60% stake in the property business by June.
Proceeds from the sale would also help the company finance greenfield projects and hotel renovations worldwide, he added.
The French hotel group also considers teaming up with regional private equity firms or family offices interested in funding the build of lifestyle hotels or luxury hotel chains, Mendes added.
Carlos Ghosn Steps Back From Nissan CEO Role
Co-CEO Hiroto Saikawa to replace Ghosn, who will remain chairman of auto maker
Carlos Ghosn is leaving his chief executive role at Nissan Motor Co., a company he rescued from near-collapse and led for nearly two decades, to take a broader oversight role of the alliance that links Nissan with Renault SA and Mitsubishi Motors Corp.
Mr. Ghosn, 62, will hand the reins at Nissan in April to Hiroto Saikawa, his recently appointed co-CEO, the company said Thursday in Japan. Mr. Ghosn will remain chairman of the Japanese auto company and is expected to stay active in charting Nissan’s path.
“There comes a time where you have to make some choices. I chose to pass the baton at Nissan,” Mr. Ghosn said in an interview Thursday in Tokyo.
Born in Brazil to Lebanese parents and educated in France, Mr. Ghosn is revered in the global auto industry for engineering Nissan’s comeback and its alliance with Renault, a model in the car industry where the need for investment in new technology has increasingly outpaced the ability of any single company to respond.
The Nissan CEO handover addresses one part of the transition to a post-Ghosn era at the alliance, but the largest questions remain unresolved. One is whether the current shareholding arrangement—in which Renault holds 43% of Nissan and Nissan holds 15% of Renault—is sustainable. The other is whether anyone can replicate the role Mr. Ghosn has built as a globe-trotting leader of both companies.
Pressure is likely to grow on Nissan and Renault to merge, analysts say. “That pressure is coming from the French government, and Renault management people. but Ghosn has been protecting Nissan,” said Takaki Nakanishi, a Japanese auto analyst who owns his own research firm.