Financial Times Europe - 02.11.2019 - 03.11.2019

20 ★ 2 November/3 November 2019

Pokémon eries titles. A cut made littles

sense when the launch of the Switch

Lite nd its new games pointed toa

growth.

Shares are up 46 per cent this year,

partly reflecting growth expectations

for China. But even a partnership with

Chinese gaming giant Tencent will not

help Nintendo bypass Beijing’s new

games censorship regulations. Stricter

approval requirements and a cap on

new games have dented Tencent’s

shares by almost a fifth since then.

Even with a green light, most Chinese

gamers play on mobile. Less than 1 per

cent play console games.

This is a problem for Nintendo which

relies on consoles and games for more

than 90 per cent of its sales. Game

streaming services are another

incoming threat. Its recently launched

mobile version of theMario Kart acingr

game,Mario Kart Tour oasts moreb

than 120m downloads, according to US

analytics firm Sensor Tower. But with

average revenue per player at less than

2 per cent its previous mobile game

Dragalia Lost ecorded in the firstr

month, signs are not promising.

Nintendo shares trade at 20 times

forward earnings, a 30 per cent

premium to ival Sony. That looksr

steep when the latter posted a third-

quarter record, despite weak sales of its

PlayStation 4 console. Investors should

not reward Nintendo for setting feeble

targets and jumping undemanding

hurdles. Instead, more attention

should be paid to looming risks.

pioneered in China — wants to turn to

ecommerce and other features to build

revenue streams. Given the slowdown

in US advertising growth, that is

sensible but does not address the real

issue: Pinterest lacks heft. With 322m

monthly active users it has just one-

ninth the audience of Facebook.

The US company is seeking to swell

these numbers overseas. But while

exotic locales make for pretty

pinboards, they are less attractive as

business propositions. Expanding to

countries such as Poland, Romania and

Slovakia helped lift active monthly

users by 28 per cent. But these users

generate far less revenues than their

US peers. Average revenue per user

internationally was just $0.13 in the

quarter, a tiny fraction of the $2.

generated by the average US Pinner.

Pinterest, like all its breed, started

life as a niche product serving a

circumscribed market. As a Pinner

might put it, East West, Home’s Best.

Put a pin in it. Pinterest, which fills
millions of inboxes with online
pinboards of rustic home decor,
wedding frocks and other hippy happy
claptrap, listed on the New York Stock
Exchange earlier this year. A
resounding debut left it with a market
value of$16bn n day one. Nowo
revenue growth is slowing, losses are
mounting and shares are fast returning
to the listing price of $19 per share.
So far, so familiar: you could fill
several pinboards with once racy
unicorns that have beenhobbled yb
public markets (aka newly rational
investors). But Pinterest's share price
stayed up for longer than its peers.
After all, it is the perfect place for
advertisers. It offers a kinder, gentler
world, free of flashy influencers and
the political rants that besmirch
Twitter and Facebook. Users, known as
Pinners, cluster around niche interests
— be it books, salads, flowers or
Hermeticism — making the site an
advertiser’s dream.
Pinterest, following its US peers —
who in turn have followed the path

Michael Mackenzie

The Long View

Jeremy Corbyn scares the City of
London witless. UK prime minister
Boris Johnson only attacks business in
frustrated asides. Mr Corbyn, hard-left
leader of Labour, this weeklaunched
his party’s election campaign with
attacks on named businessmen.
There is a subtler retaliation for City
investors than calling Mr Corbyn “not
only a liar, but clueless,” as sportswear
retailerMike Ashley did. It is to make
money from this enemy of capitalism.
The challenge is tougher than
profiting from Boris Johnson. Some
investors have already done nicely
from him. The Bunterish ex-mayor has
made better progress towards aBrexit
deal han expected. Shares have soaredt
in companies with heavy exposure to
sterling and the UK economy.
Land Securities and British Land are
up by almost a third since August, for
example. The problem with Mr Corbyn
is multi-layered. He is unlikely to win
power nd even if he does, he woulda
struggle to trash business aswidely as
promised. Expropriations proposed by
Labour leaders, valued at more than
£350bn by Lex, are probably illegal.
And Mr Corbyn is too much of a
ditherer to make the seizures.
Nevertheless, short positions inthese
businesses would still do well if the
party rises in the polls. These include
Severn Trent, United Utilities, National
Grid and Centrica. Labour has made
vague threats to “requisition”
properties for housing. Real estate
groups could therefore drop further
than their lack of foreign earnings
would alone justify. The spread
between gilts and Treasuries would
widen. Panmure’s Simon French
estimates additional issuance of
£250bn is possible under Labour.
Long positions would include
multinationals with limited UK
earnings and investor bases.
Manufacturing groups look safest,
given Labour’s attachment to the
sector. The conclusion? The markets
can deliver a harsher critique of Mr
Corbyn than Mr Ashley ever will.

UK investment:

the Corbyn trade

Pinterest:

photo retouch

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

Whirling wind turbines send critics

into a spin. “Diabolical forests of

metal” they fume, challenging bullish

energy output projections. They

received validation this week from an

unlikely source: Danish renewables

group Orsted.

This darling of green investors said

its offshore turbines generated less

power than it had hoped. It turns out

that wind is very difficult to model.

Profits from it are unpredictable, too.

Orsted says it underestimated two

effects. First,“blocking”where a

baffle of decelerating air builds up in

front of turbines. Second, the

disrupted“wake” railing behindt

each unit.

Shares in Orsted, up 35 per cent

this year, dropped 7 per cent. Lower

power from turbines means lower

returns. The load factor — the time

the turbines are actually working —

fell to a maximum of 48 per cent,

from 50 per cent previously.

Anti-turbine campaigners should

take a deep breath. Iberdrola said it

was well aware of the issues. The

Spanish utility group said its offshore

wind farms had outperformed its

conservative assumptions. The

International Energy Agency stood by

its projections, too.

The real takeaway concerns human

nature, which never changes, rather

than energy generation, which is in

transition. Orsted chief executive

Henrik Poulsen got a little carried

away in his promises. His huffing and

puffing was an attempt to save face.

Wind turbines produce slightly less

electricity than bulls imagined. Their

capacity to inspire hot air is

undimmed.

C

entral banks have really

stepped up to the challenge

this year, delivering a signifi-

cant loosening of monetary

policy — and the charge

higher in global equities in October

shows that investors are lapping it up.

It is not just lower benchmark rates

providing the boost; the US Federal

Reserve has restarted its expansion of

its balance sheet and the European Cen-

tral Bank has revived its bond-buying

programme, both keeping liquidity

sloshing into the financial system.

This makes life difficult for bears, who

still cannot enjoy their moment in the

sun despite slower earnings growth for

big US and European companies and

despite the warning flagsover profit

forecasts for 2020. Equity dividends —

an important part of the bull argument

for choosing shares over the meagre

fixed rate returns provided by bond

yields — may not be as solid as hoped.

But worries continue to fester around

credit markets, where many companies

have gorged on low borrowing costs for

the past decade. Fitch Ratings notes

how the US investment grade universe

of corporate debt has climbed to $4tn,

up6 per cent over the past 12 months.

Companies with triple B rated debt,

the lowest credit quality of investment

grade paper, now account for nearly 60

per cent of the entire market, up from a

share of one-third in 2008. In every

sense, this is a market on edge.

The next economic contraction could

easily spark a wave of downgrades from

the lower reaches of the investment

grade world into a speculative market

that lacks the scope to smoothly absorb

big chunks of debt.

Compounding the pain of so-called

“fallen angels” is that many institu-

tional holders would be required to sell,

as their mandates do not allow them to

own non-investment grade paper.

Forced sales in a one-way market is a

song we heard in 2008 — hardly a com-

forting outcome.

The importance of credit for the

broader financial system and invest-

ment portfolios has become further

entrenched a decade on from the crisis.

Serving as ill omens for financial mar-

kets were credit scares in 2015 and 2016,

spurred by China and triggering a nasty

slide in commodity prices, and then late

last year as Fed tightening pushed real

yields sharply higher.

Themood in US credit markets cer-

tainly warrants monitoring, particu-

larly across riskier triple C debt and the

$1.15bn leveraged loan market.

It is notable that a weaker tone in the

more leveraged sectorspervades during

a time of strong performance for other

risk assets in general. It could well be

that the doomsayers are wrong and that

this market presents a big buying

opportunity if the Fed is right and we

trundle on with moderate growth and

no need for further easing in 2020.

The rationale for shunning triple C

rated debt is highlighted by the fact that

some 45 per cent of debt in the sector is

in some form of distress, according to

Bank of America Merrill Lynch, reflect-

ing the hefty weighting of troubled

energy names. Caution has led some

investors to hop up one rung of the rat-

ings scale to single B with a little more

safety but still some precious yield.

For all the signs of apprehension, there

is an understandable reluctance to leave

the credit party as fixed income in this

area still pays a lot more than what you

glean from government bonds and also

European credit, where around €1tn of

investment grade paper trades with a

negative yield, according to Tradeweb.

This highlights the likelihood that

central banks have truly distorted the

credit market, particularly in Europe.

Bullish views on equities from here

rest on a corporate bond market that

expects smooth sailing and suggests the

risk of a deeper economic contraction is

overstated. But there is a case that slum-

bering Treasury yields, influenced in

turn by the mountain of negative yield-

ing global debt, have dulled the pain sig-

nals from the credit market.

This is highlighted by how the rela-

tionship between the bulge of triple B

investment grade credit and single B,

the highest quality sector in high yield,

has narrowed to levels seen in 2007,

2005, and in 2001, just before the risk

party music faded.

A sudden and pronounced drop in

credit prices should not be ruled out and

a likely catalyst for such a move is eco-

nomic data showing cracks in the con-

sumer. What should worry credit inves-

tors and indeed cast a pall over equities

is the scenario of much weaker eco-

nomic activity that derails an expected

rebound in corporate profit growth and

transcends thebalm of central bank

liquidity and cheap borrowing costs.

Market sentiment and positioning in

credit reflects expectations of a mid-

cycle slowdown abating into 2020. But

the long-term concern is that such an

outcome only delays an inevitable

deleveraging wave for indebted corpo-

rate balance sheets.

[email protected]

Look to credit

instead of stocks

for signs of nerves

Wind turbines/Orsted: with less gusto

Sources: DNV GL  - - - -

Wind turbines

Wind turbines (seen from above)

Blocking eect:

wind approaching

turbines slows

Wake eect - wind passing

through turbines slows

 change in wind speed due to turbine presence

Investors with short memories are

fuelling a Nintendo rally. Shares in the

games group rose more than 7 per cent

yesterday, asthird-quarter earnings

beat expectations. Many appear to

have forgotten that an earnings

forecast had been set absurdly low in

April. Not only that, but their hopes

that moving into China will offset

structural challenges are overdone.

ame sales growth forecasts hadG

been set at just 5 per cent, despite this

year’s launch of several blockbuster

games includingSuper Mario nda

Nintendo:

consolation prize

Twitter: FTLex@

The tiers of lower-rated credit

Yields on ICE BofA US corporate

bond indices ()

Source: Federal Reserve







    

BBB

BB

B

CCC or

below

NOVEMBER 2 2019 Section:FrontBack Time: 11/20191/ - 18:38 User:stephen.smith Page Name:1BACK, Part,Page,Edition:EUR, 20, 1