Ingham Analytics Weekly Letter on Sunday - 25 April 2021

Sunday, 25 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, there is enough of that about. As we indicated in our previous Letter, we shall be taking a sabbatical from the end of April and will then be refocusing our activities. A big thank you to all of you for following us, we've had generous feedback, and we hope to engage again in the future. 

First off Karooooo (that's five o's) had its inward secondary listing on the JSE this Wednesday having had its primary listing on the Nasdaq in America at the end of March.

The Singapore domiciled real-time mobility data analytics provider, better known by its operating subsidiary name of Cartrack, closed on Friday at $38.29 and was $39.00 after hours, translating to a market capitalisation of over $1 billion. To clarify, the ratio between the previously listed Cartrack and the new Karooooo is 1:10, hence the larger nominal JSE price compared to what it would have been.

The Nasdaq listing gives this innovative, fast growing company access to a deep pool of capital as it expands internationally. The US markets also typically ascribed a higher rating than is the case on the JSE. We wish the team well.

This week football fan outrage, and a pushback by Mr Boris Johnson, was the deciding factor in a breakaway Super League plan, consisting of 12 top clubs in Europe, collapsing. It took a mere 48 hours for the high and mighty to beat a grovelling retreat.

When six clubs in the English Premier league did a collective mea culpa it was the end of the road as without English money the league was a non-starter anyway. Victory for the little chaps. Has shades of the GameStop/hedge fund saga in the US recently.

English football is the most lucrative in the world because it is the most open. There are no controls on who can own a club. 13 of the 20 Premier League clubs were majority foreign-owned. Non-UK players and managers are all over the show. English football is global, broadcast to 643 million homes in 212 countries. British politicians too understand its value, both commercially and to community, so do what they can to smooth things along.

But the fact that the Super League hasn't got off the ground doesn't mean that football everywhere doesn't need to adapt. In a world of various distractions and with attention spans microscopic, maybe a 90-minute match isn't quite as relevant in a post-COVID world or those magnificent stadiums.

In December 2015, Steinhoff, to much fanfare, had a prime standard stock exchange listing in Frankfurt. Two years later there was nothing prime standard about it. Another prime standard listed company that today is primely insolvent was Wirecard.

This week a German parliamentary enquiry concluded with the prime (there is that word again) minister and her finance minister grilled. Wirecard is a sorry tale of malfeasance, audit failures, regulatory blundering and political self-interest. Seems the German's can give some lessons to the Sicilian mafia.

Back to Steinhoff, the embattled group this week flagged the separate listing of Pepco, which operates cheap and cheerful shops. Pepco is a discounter but as the Yorkshire saying goes, where there'' muck there's brass.

The retailer we estimate will do around EUR4 billion in revenue post pandemic at a decidedly not too shabby normalised margin of over 10%. An enterprise value, which includes debt, north of EUR4 billion is mooted. A Warsaw Stock Exchange listing is rumoured. For Poland this could be a big deal. 

On the topic of regulation and stock exchanges, the EU continues to shoot itself in both feet by refusing to budge on granting the City of London supervisory equivalence. This is protectionism laced with vindictiveness. That Britain is doing just fine outside the EU is too much to swallow for Brussels.

Not that the denizens of the square mile are losing any sleep over it. In the week that the City of London Corporation announced its new "Justice Quarter" - designed to last 125 years no less - it also announced a regulatory technology initiative.

RegTech is designed to be at the cutting edge of regulatory oversight worldwide. Artificial intelligence, machine learning, cloud computing and data analytics all have a role to play in making financial markets smarter and more efficient. The thinking is to be real-time on surveillance, predicate of risk, reduce compliance costs and make supervision preventative rather than after the fact, as we've seen above with Wirecard. 

In our 7 February Letter we referenced Jes Staley, the American chief executive of Barclays who spent three decades at US powerhouse JPMorgan, who argued that the City was likely to come out ahead now that the UK has removed the shackles with a focus not on the EU but New York and Asia generally. The strategic objective of the City, backed by the Conservative government, is to switch the City back to its historic global role.

Brexit scare stories continue to be debunked. This week trade figures showed that UK exports to the EU are back to where they were, and this despite COVID-19 and border paperwork. Imports aren't quite as strong but that is also because you'll see an increasing shift to other territories.

So long as politicians embrace regulatory divergence and minimise red tape the UK should do well. Free trade benefits both parties.

Other than the financial markets aspects we refer to above, the EU's general data protection regulation for example helps in making the place an artificial intelligence graveyard, designed for a pre-digital era. A recent report from the Centre for Data Innovation looking at AI concluded that the US continues to lead the way, followed by China whilst the UK's departure from the bloc will further diminish EU AI capabilities, both in absolute terms and on a per-capita basis.

This week a deal was agreed that effectively does way with any trade friction between the UK and Australia. A new survey from the German-British Chamber of Commerce shows that 35% of such firms now plan to increase investment in Britain, up from just 5% last year, more intend to hire and few plan to relocate activities due to Brexit.

The latest QS university rankings of the world's top medical schools were out this week. It almost reads like the top ranks of football. The rich get richer. In the top ten, the US and England dominate with a college in Sweden a solitary outlier at number six. The US claims five places, England four. Harvard is number one for the sixth year. Oxford comes in at number two. 650 institutions are ranked. Well done to the University of Cape Town's medical school, ranked a very respectable 87 - with the damage done by recent fires this is a rare bit of good news to celebrate.

In "Shapley gold" we point out that the benefits of trading gold futures include possessing a very liquid contract that you can exit at any time. Gold futures contracts of various maturities have a positively shaped curve. The options market is saying that large and sudden moves are unanticipated in the short to medium-term future. That barbarous relic has life in it yet.

In "There's a coach comin' in, hear those wheels spin" this week our theme is that US company profits this year will surprise by their buoyancy. We explain that the annual percent change in earnings is better understood by the percentage point change in the annual percent change of real GDP. And we think that GDP will be stronger as the US exits the COVID-19 strictures, the strongest since the 1950s. Capacity utilisation will rise. Operating leverage will be higher.

Running the correlation math means we get to profit percentage growth in the mid-twenties for all US companies and mid-thirties for nonfinancial firms. 

Fun fact: we also see excess savings being a boost too, coincidentally the same magnitude as the Biden stimulus package - $1.9 trillion. Of the $1.9 trillion in excess savings the fifth quintile of the income distribution accounts for 75% of excess savings but this quintile makes the biggest contribution to the tax take, almost 80% with the richest decile at 58% alone. Be nice to the 1%, or maybe the 0.1%, after all they could be coming to a football club near you. Money, money, money it's a rich person's world.   

We'll see you around.

Fans 1, bosses 0 - football Super League plan collapses within 48 hours this week   

Thank you all for visiting us. 

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