Ingham Analytics Weekly Letter on Sunday - 11 April 2021

Sunday, 11 April 2021

Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees, taking stock of things that grabbed our attention during the week that was. Not too seriously and with what we hope is seen as a balanced perspective.

A towering individual who called a spade a spade and had a mischievous sense of humour was HRH, The Prince Philip, Duke of Edinburgh. Prince Philip, who sadly passed this Friday, was the embodiment of accomplishment, dedication to royal duties and stoicism whilst at the same time being a force for good, the Duke of Edinburgh's Awards for youth being a flagship. And he was a rock as consort to Her Majesty, Queen Elizabeth 11 during their more than seven decades as a couple.

This is a person who during the 100 years of his life had a front window on change throughout the world and yet remained true to old-fashioned values whilst being thoroughly with the times. Prince Phillip was a consummate public servant and despite his perspicuous, often witty, commentary on the passing scene played within the rules as an apolitical royal. He treated everyone the same, regardless of their station in life, and the outpouring of sadness and remembrance from around the world this weekend is testament to that abiding impression he made internationally. He was the genuine article. Prince Philip, a life well lived.

For investors in Alibaba, we've cautioned that the one macro they've little influence on is the political crosshairs out of Beijing. At first, the ANT Group listing was nixed, then in December an antitrust probe was opened. Last month, the Chinese government asked Alibaba to flog its media assets, concerned about the company's influence over public opinion. Yesterday, the State Administration for Market Regulation levied a fine equivalent to $2.8 billion for the supposed abuse of a dominant position through e-commerce platforms.

The investor relations website of Alibaba posted a letter to customers and the community on Saturday. The Board of Directors is playing it cool. "We accept the penalty with sincerity and will ensure our compliance with determination." That tells you all you need to know about who calls the shots in China. In the US there would be a posse of lawyers in the skirmish. The fine is relatively light at 4% of domestic sales, less than 3% of total sales, whilst cash and near-cash on the balance sheet of $70 billion easily covers it.

The political winds in China do change. Jack Ma was the Chinese champion to take on Amazon and was supported by the powers that be. Our sense is that the last thing Beijing wants is to hobble Alibaba. Toe the line and you'll be ok is the message. We like the fundamentals of the business and the price retreat makes the valuation look interesting in relation to several hyped US tech shares.

Going back to Amazon, this week seven out of ten employees in Alabama voted not to unionise. The common refrain was that employees didn't see how the trade union in question could make a substantial difference to their package and that a chat with management from time to time was all that was needed. Whilst Alabama isn't traditionally pro union there is no other representation at Amazon elsewhere in the US. Not only does Amazon meet Federal minimums but it offers healthcare plans. And it creates jobs, 1 million in the US and counting and 500,000 new hires around the world in 2020.

This no vote is a vote for common sense and what we hope will be a continued balanced dialogue between staff and management. Unionisation in the private sector has in any event been in steep decline in the US. The Amazon stock price has been range bound for months now but the vote this week is probably a small fillip for the e-commerce juggernaut. Whilst the business model is different, in February Uber lost a court battle in the UK and had to reclassify ride-hailing drivers as workers.

This week, Prosus once again tapped the Tencent piggy bank. Following the sale of yet another 2% of Tencent, Prosus now holds 28.9%. Before March 2018, the stake was 33.2%. That 4.3% is equal to $33 billion at the current Tencent share price of HK$620. Prosus has little to nothing to show for it. Continued loss-makers and a fruitless share buyback in Naspers and Prosus continue to detract from shareholder value. The discount is as wide as ever, 17% on a see-through basis to the Tencent valuation and 35% for Naspers, both as of Friday.

We've said before and reiterate that the risk of holding Prosus is that the discount could widen further, indeed it has since listing in Amsterdam in September 2019 to much fanfare and expense. Should losses continue unabated the negative value of those assets will grow. Prosus and Naspers are not a "cheap" entry to Tencent, quite the opposite. Up until 2012 Naspers (pre Prosus) traded at a 25% to 30% premium to the see-through-value of the Tencent measured in USD but that steadily degraded to parity and then a 25% to 30% discount.
The saga of Archegos Capital Management, which we have previously referenced, is a stark reminder of how stocks can run away from reality because of speculation and leverage. For us, knowing where fundamental value lies is imperative. If there is a divergence, you're better off staying away. Momentum northbound can just as quickly become momentum southbound. 

Fuelling this are the banks and brokerages with the largest speculative activity in the US markets. The biggest source of banks' equities-trading revenue was once cash trading, executing client trades. With commissions falling so-called prime brokerage had become an appealing source of income. Prime brokers provide financing for trading clients like hedge funds, leading to both lending income and trading activity. In 2020, prime services generated $15 billion in revenue for the largest global investment banks. Retail investors too have geared themselves to dizzying levels, and it doesn't come cheap.

During COVID-19, banks have had an influx of deposits. Don't want to increase your capital requirements? No sweat. Enter total return swaps. These are derivatives used to bet on a stock without owning it. Synthetic financing can carry a lower balance-sheet cost for a bank than a repurchase agreement or stock loan. Half of this prime broking revenue is now synthetic. The trouble is there is no transparency, and one bank hasn't a clue what its competitor is up to, which is what happened with Archegos as six banks were all funding the same trade.   

We also picked up this week that retail trading activity in the US is slowing sharply. The decline in enthusiasm marks a sharp reversal from just a few months ago. By the end of March, purchases by individuals were 60% lower than peak at the end of January. Robinhood Markets had a 35% drop in traffic in March. With the US economy opening up, more cash will go into the real economy which suggests that stock market gambling, the cabin fever thing of the pandemic, will be less.

Perhaps the last gasp of all this craziness is GameStop which this Monday announced it wants to cash in by selling 3.5 million shares at market. Never mind that "at market" is all over the place. On Monday 3.5 million shares could maybe have raised $700 million at one point. On Friday, $550 million. A prospectus supplement has been filed with the SEC. We'll see who is crazy enough to stump up fresh cash.

Bond markets worldwide have had a sharp sell-off although that seems to have stabilised for now with the US ten-year Treasury easing back on Friday to 1.66% from 1.77% last week. If you'd bought into the US Treasury 10-20 Year Index late last year, you'd have lost 20% in capital whilst year-to-date it is down 13%. We're of the view that a yield north of 2% remains a possibility on the ten-year, with a negative knock-on for equities too.

This week we issued "Archegos goes down, banks blow themselves up", "Is there an attachment point for equities?" and "Turkey shoot?" The first looks at the mechanics of the ViacomCBS trade, the second on the signal that the bond markets are sending for equities, with the last note on why strongman politics and central banking don't mix.

And finally, some Prince Philip quips to end off with.

"You have mosquitoes. I have the Press" as said to a hospital matron in the Caribbean in 1966
"It's a vast waste of space" he said at the 2000 reception of a new British Embassy in Berlin, which the Queen had just opened
At his understated diplomatic best "It's a pleasant change to be in a country that isn't ruled by its people" he said to Paraguayan dictator Alfredo Stroessner
"I wish he'd turn the microphone off" during an Elton John performance at the 73rd Royal Variety Show in 2001 whilst the following year he asked, "Are we going to need ear plugs?" on being told that Madonna was singing the James Bond theme tune
"I declare this thing open, whatever it is" while opening a site on a visit to Canada in 1969
"I would like to go to Russia very much - although the bastards murdered half my family" when asked in 1967 if he would like to visit the then Soviet Union

Beijing shows who runs the show in China with yet another slap on Alibaba's wrist   

Thank you all for visiting us

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