The World of Finance in June

This is the first monthly report that we are rolling out at Cambridge Market Insights. It will feature the most important news and events in the world of finance from the month prior and will include a segment on what to look out for in the following month. For June, common themes that we see are governments, firms and investors reacting to the pandemic and trying to get an idea of what the post pandemic world is going to look like. Firstly, we start with Europe. Major deals in Europe - JDE Peet raised €2.25bn after listing on the Amsterdam stock exchange, with JAB Holdings being the main shareholder. Being Europe’s biggest IPO since 2018, €700m of the capital raised from the IPO is being used to reduce the high debt levels and strengthen its balance sheet. - The £31.4bn Liberty Global and Telefonica merger which will see the combination of business from Virgin Media and O2 in the UK market was finalised which should help to consolidate market share and help to compete primarily in the broadband market against bigger players such as BT. - Private equity funds KKR, Providence Equity and Civen have agreed to buy Spanish telecoms operator MasMovil at €22.50 a share with a €3bn valuation but a total €5bn enterprise value (including debt). The deal is the largest acquisition of a public company which will be turned private. The transaction is expected to use leverage of 4.5x EBITDA which is lower than usual but expected given the pandemic caused environment. - The CMA has announced that they are going to review the Viagogo acquisition of StubHub that took place in June under market concentration concerns within the secondary ticket market and the companies are being held separate until the investigation is conclusive. Coronavirus and stimulus packages Coronavirus has increased the demand for both fiscal and monetary stimulus packages in order to alleviate the economic impacts of the pandemic. On June 4th, the ECB announced an extra €600bn in bond purchases under its quantitative easing programme. The ECB also announced an extension of this programme into 2021 with forecasts predicting a total of €1.4trn in bonds being bought by the ECB this year. However, some investors are worried that the ECB’s initial bond buying plan will not be sufficient to soak up the extra €1-1.5trn in additional debt that Eurozone governments are expected to issue this year. Upon the news, Greek and Italian government bonds rallied sharply after the announcement sending their yields to three-month lows and the spread between 10-year German and Italian bonds fell below 1.75%. This spread is used as an indicator of Eurozone political and financial risk. Andrew Bailey, governor of the Bank of England, however, said that he doesn’t want the UK bond purchasing programme to become a permanent feature of the British economy.

Source: Getty Images France unveiled a €15bn stimulus package to alleviate the impacts of the pandemic on its airline industry with €7bn going to Air France, the national airline provider. More surprisingly, ending years of German fiscal orthodoxy, the German government announced a stimulus package worth €130bn. This includes a 3% decrease in the VAT rate and subsidies for electric cars (which were criticised by many German automobile manufacturers). Private equity deal making boom Another trend throughout June and much of this year since the pandemic affected the rest of the world was the increased activity by private equity firms. Private equity firms spent $40bn on acquisitions, many by the largest private equity firms such as The Carlyle Group, KKR and Blackstone. This all occurred whilst deal making activity fell to the lowest level worldwide since Q1 of 2009 after the global financial crisis. However, there does appear to be a silver lining to the deal making situation. Firstly, cash rich firms may want to take advantage of the reduced valuation levels as a result of the economic environment, this has been seen by Uber’s recent acquisition of Postmates. Secondly, now that firms have an idea of what a Covid world looks like, they are making sure that the capital structure is appropriate in firms and then will carry out a greater number of M&A transactions. Also, more EU deals are expected as Vestager of the European Commission has urged companies in the bloc to pursue cross-border transactions and the general court overturned the European Commission’s decision to block the £10.25bn takeover of O2 by Three. The fall of Wirecard Wirecard, the German payments processor and financial services provider filed for insolvency after admitting that $2.1bn of assets in its balance sheet ‘probably’ did not exist. Throughout June, the share price fell 93%. Moreover, there has been a high level of scrutiny towards EY, its auditor, as it failed to track transactions as the banks with whom Wirecard were registered with did not receive any payments of the supposed $2.1bn.

Pictured is Markus Braun, ex CEO of Wirecard. Source: CHRISTOF STACHE/AFP/Getty Images General macroeconomic indicators Throughout June, most markets showed an improvement in their performance as the FTSE 100 was up 0.67% and the DAX 1.99%. The Euro area 10-year interest rate rose from -0.49% to -0.40%. In June, Eurozone unemployment increased from 7.4% and fell from May’s unemployment level of 7.6%. What to look out for in July One of the key things to look out for in July will be the effectiveness of Rishi Sunak’s stimulus package and the effect that it has on unemployment and the change in GDP growth as he attempts to revitalise the economy. Key things to look out for will be how consumer spending reacts and this is one thing that the markets will be keeping a close eye on. Another thing to look out for will be the trend in Biotech/Pharmaceutical deals as firms look to capitalise on the pandemic and aim to work together and benefit from synergies in order to develop vaccines, treatments and test kits to governments and medical providers.

We now turn our attention to the most important events and themes within the United States. The US segment of the report was covered by Tom Bradley. Coronavirus The US continues to be plagued by coronavirus with cases soaring following easing of lockdown measures. Daily new cases surpassed 40,000 by the end of June, taking the US to over 2.5 million confirmed cases, the highest total in the world. Florida, Texas, California and Arizona are amongst states to have rolled back reopening measures in an attempt to curb the spread of the virus following rising infection rates - Texas has seen a 343% rise in new cases a day over June and California a 123% rise over the month. Election 2020 Donald Trump is consistently behind Democrat candidate Joe Biden in all major battleground states according to the polls, largely due to his perceived poor response of coronavirus and his botched handling the killing of George Floyd and the resultant black lives matter movement. Trump has also faced criticism for his foreign policy this month, coming under fire for allegedly dismissing evidence that Russia had put bounties on US soldiers, and claims by former senior advisor John Bolton in his memoirs alleging Trump had asked Xi Jingping for election help and approved the detention of Uighur Muslims in China. In addition to his policy failings Trump saw only 6,000 supporters show up to a rally in Tulsa, Oklahoma despite Republican claims a million had registered for the event. Trade War

US-China Tensions have continued to rise over the past month. There is a bipartisan stance on China – with both Republicans and Democrats criticising China over their handling of coronavirus, human rights abuses and the aggressive stance taken on Hong Kong. Tensions have been further fuelled by the Pentagon which has listed Huawei as a company that is controlled by Chinese military and has made moves to block the firm from using US technology in its products and entering the US consumer market.

Trump and Xi Jinping meeting at the G20 summit. Source: BRENDAN SMIALOWSKI/AFP/Getty Images

Macroeconomic Performance The S&P 500 went positive for the year in early June, eroding the losses incurred in March as a result of coronavirus (although has since dipped slightly below this level). Over the month of June, the S&P 500 gained 2.0%, narrowly exceeding the 1.8% gain of the Dow Jones Industrial index (DJI). Key macroeconomic indicators also paint a positive picture of the US economy for the month with unemployment falling to 11.1%, from an April high of 14.7% with an estimated 4.8m jobs having been added to the US labour market. As well as this retail sales were up 17.7% in June, housing sales up 44.4% and PMI exceeding expectations to hit 52.6.

Monetary Policy The Fed entered the individual corporate bond market in an attempt to increase liquidity with Jerome Powell, chair of the Fed confirming they will continue to provide a stimulus to aid the economic recovery. The Fed’s balance sheet hit a peak of $7.2 trillion in early June. Business The IPO market has seen improvement in June and as a result of high demand in the capital markets Warner Music, Vroom and ZoomInfo have enjoyed impressive share price performances upon listing this month. Nikola is also in the headlines after an unconventional listing via a merger with a SPAC preceding a 104% 3-day gain in share price. The manufacturer of low-emission trucks is set to be a direct challenger to Tesla over the coming years who have also had a good month with their market capitalisation eclipsing that of Toyota to make them the most valuable automaker globally. M&A activity remains muted but is on the rise – Mastercard is set to expand further into the Fintech space through a $1bn acquisition of Finicity and European Just Eat have entered the US food delivery market through beating Uber to a $7.3bn acquisition of Grubhub. Tech firms have enjoyed a good month in the equity markets averaging a 7.1% gain according to Nasdaq data. However, Facebook and Twitter encountered issues at the end of the month as a number of major brands, including Unilever, Starbucks and Coca-Cola have pulled their advertising from the platforms over concerns of hate speech.

Covering Asia Pacific is Yashwanth Tenneti and Ryan Patel. US-China tensions drive firms to Hong Kong Rising tensions between the two nations are driving new market listings by Chinese companies, through America’s efforts to push Chinese companies out of their capital markets. Hence, Chinese companies view secondary listings in Hong Kong as a desirable opportunity, which is particularly facilitated by Hong Kong easing restrictions on dual-class share voting – something that Hong Kong did not previously allow. Consequently, China’s JD.com raised over £3bn in a secondary offering in its return to Hong Kong. NetEase, a Chinese gaming company also starting trading on the 18th of June in Hong Kong following its secondary listing, illustrating the wave of firms moving their bases towards China.

Hong Kong anti government protests last year. Source: Getty Images India-China Tensions India and China engaged in a deadly encounter on the border in the third week of June. The clash took the lives of 20 Indian soldiers in the Galwan Valley and was a consequence of Chinese soldiers crossing the contested “line of actual control”. This move by China was yet another sign of the county’s attempts to showcase its assertive power and has prompted India to take very clear sides in the tensions between the USA and China. Following the events in the Himalayan border, there is now an established anti-China sentiment amongst the people of India and the policy-making elite. This is despite the efforts of Narendra Modi, India’s Prime Minister, to establish an era of cooperation with China in the past.

In retaliation to the events on the border, India is delaying clearing customs at the border for Chinese imports and will look to reduce economic dependence on Chinese trade. In further retaliation, India’s Ministry of Electronics and IT has banned 59 of China’s biggest mobile phone apps, which include the likes of TikTok and WeChat, due to their imminent security threats and their use for breaching the privacy of Indian users. This is a particularly heavy blow for TikTok given its 200million strong user base in India, and it comes at a time when its parent group wished to expand into banking in Singapore. India-China tensions are unlikely to smooth over in the very near future, but this act of conflict does indeed illustrate China’s fight to show its control and raises global tensions. Investments into Asia Large US tech firms and investors are driving Asia’s markets. Mukesh Ambani’s Reliance Jio has received a $5.7bn investment from Facebook, as well as from US private equity firms such as Silver Lake and KKR. These investments support Ambani’s efforts to boost Reliance’s balance sheets, whilst also facilitating access for large tech firms to India’s fast-growing digital market. Facebook continued its focus into Asia by investing into Gojek – a digital payments technology group. China’s National Security Law China’s new national security law was imposed towards the end of June – Beijing claims that the law intends to tackle subversion, foreign interference and terrorism in the city. However, many critics agree that the law undermines the promised autonomy to Hong Kong under the People’s Republic of China, and investors fear that the new security law will increase self-censorship, thus raising questions over the city’s future as a global finance hub. The law has been publicly supported by the likes of HSBC and Standard Chartered despite international condemnation and the fact that it may encourage more fraudulent activity by Hong Kong listed firms. This is of great importance given the influx of stock market listings by Chinese companies into Hong Kong.

Tokyo Stock Exchange volatility The Tokyo Stock Exchange Mothers Index was up nearly 90% from its March lows due to speculative rises in the prices of small cap companies. This was particularly a consequences of the government stimulus packages. However, as the PE values of these firms continue to rise amidst an upcoming recession, there is only scope for a significantly larger crash and grows the risk profile of many small cap companies. Tokyo is also seeking to capitalise off the movement of firms out of America by trying to lure financial groups from Hong Kong. They are aiming to do this through potential visa-waivers, tax advice and by offering up free office space for financial organisations such as asset managers and trading firms.

Tokyo Stock Exchange. Source: AFP Tourism drought causes economic damage Australia and New Zealand have both suppressed the spread of Covid-19 and are opening a travel bubble in Early September in hopes of slowly benefitting from the re-opening tourism industry. However, many pacific nations such as Fiji, whose revenues are dependent on the tourism industry are struggling to stay afloat during the pandemic, and so are lobbying to join the proposed travel bubble. Locusts vs. food production in India Swarms of locusts are threatening livelihoods in India as their invasions constrict food supplies. This is particularly damaging given the lockdown measures imposed in India, which further constrict food supplies and complicate the ability to mobilise resources for battling health threats. This invasion has been linked to climate change as it drives the invasive insects from east Africa to south Asia. Other Highlights: - Growing global tensions could see the UK move supply chains away from China to ensure access to critical goods in the longer term. - The diamond industry has come to a stand-still due to cancellation of marriages and postponed engagements and proposals. - Covid-19 has seen the gaming industry boom, most significantly in June we saw a surge in Nintendo’s shares as the stock has rose above 50,000 yuan for the first time since 2008. - Chinese demand for copper surged following an ease of lockdown restrictions, as the metal is used in almost all construction projects. - Chinese markets’ standards are rising as a result of China’s green bond market becoming too large for institutional investors to ignore. However, success of the bond depends on China’s ability to align its policies to adhere with international ‘green finance’ guidelines. Kiran Modi covers Asia, excluding China and India. Coronavirus - South East and Eastern Asia has remained remarkably in control of coronavirus with countries such as Vietnam and Thailand only reporting lone cases sporadically. - Japan appears on the cusp of a 2nd wave but given that daily new cases are only of a magnitude of a couple of hundred and that the country has maintained a mysteriously low death rate the situation is not massively concerning to financial markets, which finished the month marginally in the green. - The situation is different in the Indian subcontinent with Pakistan and Bangladesh reporting thousands of new cases a day. However, in terms of fatalities both countries have suffered less than Western countries with a similar number of cases; Pakistan has slightly less confirmed cases than Italy but a death toll of 4,922 compared to Italy’s 34,889 - New Zealand’s and in particular Arden’s handling of the pandemic has remained exemplary by global standards and the country, in a domestic sense at least, has returned to near normality. The situation in Australia, whilst more controlled than most countries has had a mini resurgence in the state of Victoria forcing Australian authorities to place five million residents of Australia’s 2nd largest city, Melbourne, back into lockdown for 6 more weeks. Macroeconomic performance As of June 30th the unemployment rate in Japan, though increasing for a 3rd consecutive month stood at just 2.9%. However, these low unemployment figures mask greater problems in the Japanese economy. Millions of people are on temporary contracts. Also, given Japan’s extremely old population, firms are unwilling to lay people off, even during a recession, as they fear that they will struggle to recruit when the crisis passes. Japanese labour laws also makes it hard to hire and fire in large numbers. The Roy Morgan Institute has found that in June, Australian unemployment decreased slightly to 14.5% suggesting that the worst is over regarding job losses but underemployment increased within the economy. South Korea, a country which has managed to avoid widespread economic lockdowns due to its prudent and effective methods of dealing with coronavirus is widely expected to experience economic growth at 0%, a real accomplishment given that the IMF predict global economic growth to be -4.9%. This has been managed through vast fiscal stimulus to consumers with each household receiving $832 which has largely offset the decreases in manufacturing output and exports. Fiscal and Monetary policy - South Korea announced a $29 billion and third fiscal stimulus to help the economy cope with coronavirus. - The Reserve Bank of Australia kept its policy settings on hold for this month; keeping stock markets stable. Politics - The Australian government have blocked the involvement of Huawei in building their 5G network, citing national security concerns. China has also invoked some import tariffs on Australian agriculture. Relations between the two countries appear to be on a slow and steady decline rather than seismically shifting downwards - South Korean President Moon Jae-in, strengthened by electoral success and success in combatting coronavirus is attempting to reignite talks between the North and the South. Business - Huawei continues to have a rough year in international markets with Britain now weighing up whether to withdraw its invitation to Huawei to help build its 5G network. - Samsung is expected to increase its quarterly profits by 23% despite the pandemic according to the Financial Times. - The Nikkei 225 saw a month slightly in the green with the index opening at 22,062 and finishing at 22,288 - The ASX 200 also saw a marginally positive month, opening at 5,819 and closing at 5,897 Our forthcoming July report will feature much of the same, primarily on how the financial world and governments deal with the pandemic and what a post pandemic financial landscape could look like.