Apr 3, 2019

Axios Markets

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Situational awareness:

  • Scoop via Axios' Jonathan Swan: Trump considered replacing Fed chair Powell with Kevin Warsh. (Axios)
  • 3 of 8 importers granted waivers to buy oil from Iran have cut their shipments to zero, a U.S. official said, adding that improved market conditions would help reduce Iranian crude exports further. (Reuters)
  • Intel announced former Qualcomm CFO George Davis would take over as its new CFO and executive VP. (Axios)
  • Blue Apron CEO and co-founder Brad Dickerson is leaving the company, which announced Linda Findley Kozlowski, former COO of Etsy, will be its third CEO in 21 months since its IPO. (WSJ)
  • Lori Lightfoot, a former prosecutor, became the first black, female, openly gay mayor of Chicago. (Bloomberg)
1 big thing: Why the market is chasing anything with a growth story

Illustration: Aïda Amer/Axios

Stock market investors and huge pension plans in pursuit of boom-era returns are chasing just about anything with a growth story, regardless of whether the underlying company actually makes any money.

Why it matters: The market demand pushing up sky-high valuations for companies like Lyft, Uber, Airbnb and others is akin to the housing bubble in the early aughts, says Karl Dasher, CEO and co-head of fixed income at investment firm Schroders.

  • "The last time we saw that in fixed income was the housing crisis where within asset-backed securities, particularly sub-prime mortgages, there were built-in assumptions about price growth and ability to re-finance," Dasher told Axios during a media reception at the company's headquarters.

The big picture: Last year 81% of American companies were unprofitable in the year leading up to their public offerings, according to data from Jay Ritter, a University of Florida finance professor.

  • The unprofitable companies are so far outperforming the profitable ones — with median returns of 120% on an annualized basis from their IPO price vs 57% for companies that generated a profit.

Between the lines: This latest iteration of investor FOMO has its roots in the Great Recession and the U.S. response to it.

  • The financial crisis drained Americans' home equity and life savings, and it put fund managers overseeing the $27.1 trillion currently in U.S. retirement savings well behind their expected return totals.
  • Quantitative easing was the response. Sold as a palliative to get credit to distressed Main Street homeowners and businesses, the biggest impact of the Fed buying up Treasury bonds to flood the economy with cash was a burst of mega-mergers and the stock market rising to all-time highs.
  • That flood of cash also pushed bond yields to near 0. With stocks booming, investors began moving out of safe-haven bonds and cash holdings and into stocks and alternative assets, starting in 2009.
  • Investors who have taken more risk have been rewarded with higher returns, meaning more clients and higher income. So more investors have followed.
  • And so-called growth stocks have trounced value stocks since the crisis. An index tracking growth stocks — those with high prices compared to the amount of money they're earning — has delivered a cumulative return more than 100% better than the corresponding value stock index from 2007 to 2018.

The bottom line: Companies like Lyft will continue to find a bid as long as they can convince investors of their growth story — at least until there's a crisis or something that changes the current market environment.

2. Investors cooled on emerging markets in March

Despite the dovish shift from the Fed and other developed market central banks, emerging market stocks and bonds attracted positive but relatively modest capital inflows from foreign investors in March, data from the Institute of International Finance shows.

What it means: EM has also been a major consensus trade for top asset managers since late last year. However, after a strong inflows during January and February of $52.6 billion and $31.2 billion, respectively, IIF estimates EM securities attracted just $25.1 billion of foreign capital in March.

  • Many EM currencies have fallen sharply this year, IIF analysts noted, failing to benefit from the dovish central banks.
  • Asia and Latin America saw the highest level of debt flows with $10 billion and $3.9 billion, respectively. For equity flows, investors largely avoided China last month. The reading for EM ex-China was $6.6 billion, while China flows were $1.6 billion.
3. Watching the Aussie dollar after "per-capita" recession

The Australian dollar whipsawed in currency markets following its central bank's latest meeting. It was the weakest major currency in the world Tuesday morning after the Reserve Bank of Australia changed its statement to a more dovish stance.

Why it matters: Australia's GDP growth has shrunk on a per-capita basis in the last 2 quarters, entering a "per-capita recession" for the first time in 13 years. The country hasn't seen an outright growth recession in nearly 30 years, so investors are on high alert.

  • It was the first rewrite of the final paragraphs of the RBA's statement "in ages," NAB foreign exchange strategist Rodrigo Catril told Australia's ABC News.
  • "Traders are starting to position for a series of easing actions from Asian central banks," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management.
  • "Australian rates markets are now pricing in as much as 80% possibility that a rate cut will take place before the end of the year."

The big picture: Australia is seen as a proxy for China because of how much its major industries rely on trade with the world's No. 2 economy. Movements in the Australian dollar tend to reflect views on China, as its yuan currency is still far less traded on global FX markets.

4. M&A activity in Europe slows to an all-time low
Expand chart
Adapted from a Mergermarket report; Chart: Axios Visuals

Europe was home to just 15.3% of global M&A activity in the first quarter of 2019, the lowest percentage on record, according to a survey released Tuesday by Mergermarket. Deals have fallen by 20.7% since the fourth quarter of 2018.

Go deeper: So far this year, none of the 10 largest deals globally have targeted Europe, with no takeovers above $10 billion announced. The largest deal in the first quarter saw ZF Friedrichshafen acquire Swiss brake technology manufacturer WABCO for $7.2 billion.

  • Despite holding record levels of dry powder, European firms have slowed buying as the continent's top economies flirt with recession and Britain remains mired in uncertainty over Brexit.
  • European M&A plummeted to its lowest quarterly value since the third quarter of 2012, with a total of $122.9 billion changing hands across 1,387 deals.

The big picture: Globally, M&A deals rose to $801.5 billion in the first quarter, an 15% increase from Q1 2018. The U.S. saw a 29% increase year-over-year.

"The uncertainty has hit domestic European M&A," Mergermarket analysts wrote in the study. "In total, intra-European dealmaking amounted to $64.2 billion (1,169 deals), signifying that domestic activity has failed to reach the $100 billion mark for three successive quarters."

  • However, analysts note, in recent weeks rumors of banking consolidation have re-emerged with Deutsche Bank and Commerzbank in talks.
5. Reframing the frontier: Mongolia and Uzbekistan

Uzbekistani President Shavkat Mirziyoyev in the presence of Federal President Frank-Walter Steinmeier, signs the guest book of Bellevue Castle. Bernd von Jutrczenka/picture alliance via Getty Images

Two frontier markets are making moves in opposing directions.

On one hand: Former soviet nation Uzbekistan is opening up to democracy and international markets. After its first ever international bond sale was 5.5 times oversubscribed (a $1 billion offering with just a 4.75% coupon on 5-year notes holding a BB- rating), the country is plowing forward toward capitalism after 20 years under ruler Islam Karimov.

  • Uzbekistan jumped 90 places on the World Bank's ease of doing business rankings, from 166th in 2012 to 76th in 2019.
  • The country's Tashkent stock exchange is growing from a $3 billion experiment with only $300 million of shares available to investors.
  • Current President Shavkat Mirziyoyev and the country's Capital Markets Development Agency have been pushing for further market liberalization, including a minimum 20% float for state-owned enterprises.
  • In October the Tashkent reportedly saw 180 transactions, with 69.8 million shares worth around $10.4 million sold, a record high.

Further, the Financial Times notes, "Political prisoners have been released, exchange restrictions lifted and political debate encouraged — though U.S. campaign group Freedom House still rates Uzbekistan as one of the world's least free countries."

On the other hand: Mongolia, a longtime darling of frontier market investors, is moving towards autocracy.

Anand Tumurtogoo at Foreign Policy writes, "President Khaltmaa Battulga started his career as a wrestler — and he's just forced Mongolian democracy into submission."

  • At a time when the world's most sparsely populated sovereign nation has the economic wind at its back — a $5.5 billion IMF bailout package in 2017, increasing trade and a boom in its coal industry — Battulga has taken over the courts and suppressed democratic institutions, Tumurtogoo says.
  • Mongolia's "democracy is in peril — swept away by a charismatic president riding public anger about widespread corruption and using it to protect his own allies against the consequences of that corruption."

The Mongolia Stock Exchange Top 20 Index has fallen 5% year to date and is 26% lower since touching all-time highs in early December.

But, but, but: While authoritarianism has traditionally scared away foreign investment, recently in places like Brazil, Egypt and Turkey, investors have embraced autocrats who embrace the market.