Category Archives: EU financial crisis

Brexit looming

June 16, 2016 By in Brexit, Uncategorized Tags: , , , , Leave a comment

Voting takes place a week from today in the UK on the question of whether the country should remain in the EU or leave.

If the vote is in favor of Brexit, the government will presumably inform Brussels of its intention to depart, which will start the clock on a two-year waiting period before Britain can officially withdraw.

Recent polls have begun to show for the first time that a majority of citizens favor severing ties with the EU.  This is the reason for recent weakness in London stocks.

My thoughts:

–polls on issues like this are notoriously unreliable.  Some are either tacitly or overtly political, with question design (on the order of “You do favor leaving the EU, don’t you?”) slanted to one side or the other.  As far as internet surveys go, it’s impossible to know whether the respondents are a representative sample of likely voters.  During in-person, and especially during phone, interviews, respondents often tend to be less than truthful, giving instead what they perceive to be expected responses

–Pro voters, who seem to think that exiting the EU will return Britain to its eighteenth-century glory, are delusional

–the two-year waiting period gives both sides time to renegotiate trade agreements (almost half of Britain’s exports are to the rest of the EU).  It’s reasonable, I think, to assume that new agreements will be less favorable than the current ones.  But it’s hard to know whether they’ll make a significant practical difference

–non-EU multinationals who have located operating divisions and general headquarters in the UK because of its being inside the EU will presumably begin to shift operations elsewhere (Ireland?)

–as far as portfolio investors like us are concerned, the main direct economic effect of Britain leaving the union will likely be the weakening of the currency that’s happening now.  So far there has been no counterbalancing positive movement by stocks where the costs incurred by the underlying companies are primarily in sterling but where revenues are in euros or dollars.  Such firms, however, should be star performers if the vote is for Brexit and as the currency stabilizes.

 

My conclusion:  prepare to buy multinationals traded in London on a further selloff that will likely occur if the vote next week is for Brexit.

thinking about Brexit

June 9, 2016 By in Brexit, EU financial crisis, Uncategorized Tags: , , Leave a comment

In two weeks, on the 23rd, the UK will vote on whether to remain in the EU or leave.  Polls show that the leave forces, which were once in the minority, have pulled to just about neck and neck with the remain camp.  One caveat:  I don’t know enough about the national mood in the UK to have a view about whether citizens are likely to reveal their true intentions to pollsters, which is always an issue with controversial topics.  My sense is the leave camp is populated with the same left-behind-by-globalization people as in the rest of the world, who dream that a return to a semi-mythical isolationist past will solve all their problems.

Britain has never been in favor of the ultimate “United States of Europe” destination for the EU project, which imagines an ever-closer union to mimic, and counter, the political/economic power of the US.  Because of this, some have argued (incorrectly, in my view) that a vote to leave will be a long-term political plus.

As investors, though, our task in understanding the implications of a possible Brexit is simpler:  what are the implications of Brexit for publicly traded firms doing business in the UK?

I see two, both negative:

–over the course of the past decades, many non-EU multinationals have decided to make the UK their base of EU operations.  The UK offers a large potential workforce, English as the national language and a legal system less strongly tilted to favor locals than is the case elsewhere in the union.  Also, of course, being inside the EU frontier, the UK is not subject to the tariff and red tape barriers that outsiders might face.

A “leave” vote on Brexit eliminates this last advantage.  At the very least, a period of uncertainty would follow until new trade, travel…agreements are negotiated.  These are unlikely to make the lot of the UK better–the question is how much worst things will be.  For companies without extensive manufacturing in the UK, the best solution may be not to wait but to decamp to, say, Ireland as fast as possible.

–the UK is by a mile the financial capital of the EU.  Same reasons as for multinationals in general.  In addition, the UK pursued a “regulation lite” policy to lure financial firms to its shores in the runup to the banking collapse of almost a decade ago.  (One result of that regrettable policy is that much of the highly unethical behavior of US and foreign banks that led to the financial meltdown, and which would have been against the law elsewhere, was technically ok in the UK.)  Post-Brexit, these firms would be on the outside looking in.  New EU banking policies would determine their fate.

 

My overall guess is that the UK leaving the EU would be bad economically for both sides–although the effect might well be lost in the general malaise (aging populations, generally weak government finances, hometown-favoring legal systems) that characterizes the EU today.  Subsequent action by EU policy makers to favor, or not, exports from the UK (which make up almost half of Britain’s total exports) will determine how badly UK-based multinationals will be hurt.  In the meantime, absent large falls in their stock prices (my guess is that 10% declines, a figure I plucked out of the air, will be the norm), I don’t imagine the firms in question will be drawing much favorable investor interest.

put it in the books–agreement on a third Greek bailout

July 13, 2015 By in EU financial crisis, Greece Tags: , , , , Leave a comment

Kirk Nieuwenhuis, a fine defensive outfielder who had been batting .097, hit home runs in each of his first three at-bats at Citi Field yesterday.  He became the first Met ever to hit three HRs in a single home game.

Shortly thereafter, Greece accomplished a similar reversal of form.  It agreed to a (third) sovereign debt bailout from the EU/IMF–under terms that were far more rigorous than those it had rejected in a voter referendum a week ago.

That referendum appears to have convinced the EU that Greece would never abide by the bailout terms it had previously proposed.  So, despite pleas for a softer line from France and Italy (both presumably thinking of their own structural problems), the EU opted for tougher terms and a stark choice:  either immediately pass laws breaking down anti-competitive barriers and nullifying ones enshrining vested interests; or leave the EU for five years, with reconsideration of membership at the end of that time.  The unwritten subtext–left to its own devices Greece would go from bad to worse and never qualify for reentry.

The ruling left-far left coalition in Greece has dissolved and been replaced by a left-center one whose primary goal is to retain EU membership.  The legislative changes demanded by the EU are apparently going to be passed this week.  The domestic political strategy will likely be to blame the “evil” EU for changes in the status quo.  Whether Prime Minister Tsipras, who will be the public face of capitulation, survives in office is an open question.  Nevertheless, the outcome is much more favorable for the EU, and  ultimately for Greece, than anyone would have imagined when negotiations started.

three weird things that happened this week

July 10, 2015 By in China, Current Market Thoughts, emerging markets, EU financial crisis, Greece, Hong Kong, Macau, Recent Market Action, Stock Connect Tags: , , , , , , , , 4 Comments

1.  Greece  After months of vitriolic negotiations and after calling a referendum in which it successfully campaigned to have Greece vote against accepting a financial bailout from the EU/IMF, the Greek government appears today to have accepted that bailout.

2.  Chinese stocks  After plunging for a month, Chinese stocks have risen by 10% over the past two trading days.  The world is breathing a sigh of relief.  I’m not sure what’s weirder–that this happened or that foreigners believed for a short while that in a country where doing anti-social stuff can get you either a long prison term or beheading, rather than the cover of Forbes, China would be unable to achieve this outcome.  Actually, the foreign belief is way weirder.

3.  Microsoft/Nokia  Less than fifteen months after acquiring the cellphones business of Nokia, MSFT has discovered that what it bought for over $7 billion (led by mastermind Steve Ballmer) is essentially worthless and is writing off virtually the entire purchase price.  The stock went up on the news.

Which is weirder:  that the MSFT board that rubber-stamped this disaster is still intact?  …or that people are still buying Clippers season tickets?   I suppose you could argue that Nokia was the price for getting rid of Ballmer, which would imply that the behavior of Clippers fans is weirder.

negotiating: Casio, China and Greece

July 9, 2015 By in economic problems in emerging countries, economics, EU financial crisis, Greece Tags: , , , , 1 Comment

requesting an investment banking client meeting

Years ago, so long ago in fact that Tokyo was by a wide measure the largest stock market in the world, I received a call from a broker asking whether I wanted to meet with the top management of electronics maker Casio in my office in Manhattan the next day.

I knew the company a bit.  I’d visited it in Japan.  It wasn’t a particularly well-run firm.  And it was an exporter, a weak yen beneficiary, at a time when the yen was soaring and only domestic-oriented companies went up.  So I had little interest.

But I said yes anyway.

The broker was in a bind.  He was supposed to be showing Casio the power of his firm’s client list in New York and some manager had cancelled at the last minute, creating a potential loss of face for both the broker and Casio.  I had only a small pool of money under management and my acceptance would obligate the broker to provide me a return service that my commission volume alone couldn’t buy.

Apparently, the CEO of Casio felt under the same sort of obligation.  The meeting was interesting and informative, although it gave me no reason to want to buy the stock.

negotiations with China

The main topic was the company’s negotiations at that time to increase manufacturing capacity in China.

Casio met with Chinese government officials over several sessions and came to a preliminary agreement.  When the two sides met again, ostensibly to cross the ts and dot the is, the Chinese side reopened the negotiations, demanding substantial new concessions.   What Casio expected to be the end point turned out to be the new starting point for further haggling.  It went along because it figured the costs of starting again elsewhere from scratch were too high.

This happened several more times.

Then a contract signing was scheduled.  At that meeting, the Chinese side accused Casio of complicity in the rape of Nanking and demanded still more concessions as a form of reparation.  Casio did so, even though the last contract changes removed all chance of profit from the new plant.

With some distance, the CEO’s main conclusion from this experience was that the long-term relationship of mutual respect and trust that he hoped to find in China was simply not there.  He’d already decided to cut his losses and do no more expansion in China.

Greece today

I was already quite familiar with this negotiating style, which might be described as death (of the other guy) by a thousand cuts.  I’d seen a former boss to the same thing to Lehman.  In that case, however, Lehman eventually picked up and left in disgust.

In its negotiations with the rest of the EU, Greece has been following the same playbook Casio described to me decades ago, down to the accusation of wartime atrocities.  The main casualty in this approach is the loss of trust between the parties, once the Casio-side party realizes the other has no interest in a solution that brings mutual benefit.

It seems clear to me that we’ve passed that point in the Greece-EU discussions.  We’ll find out over the weekend whether this precludes any agreement from being reached.