Financial Times Europe - 09.11.2019 - 10.11.2019

22 ★ 9 November/10 November 2019

IPO market is not what it once was.

The ease with which private money can

be raised means start-ups stay private

for longer. In the US, private equity-

backed companies doubled in number

between 2006 and 2017, according to

research by McKinsey. The number of

publicly traded companies fell 16 per

cent over the same period.

Private investment in the US is

limited to accredited investors with a

net worth of $1m (not including home)

or annual income of at least $200,000.

Opening up private markets might

involve tweaking this definition.

The alternative is to provide access

to non-accredited investors. Mr

Clayton has mused on the merits of a

fund structure that would aggregate

investments.

But just because something can be

done does not mean it should. Private

companies do not have to meet the

disclosure requirements of stock

markets. The risks are far higher.

Witness the catastrophe of UK star

fund manager Neil Woodford’s

Woodford Patient Capital Trust.

About 60 per cent of start-ups fail.

Those that survive can still be cut down

when investors gain access to financial

information. WeWork imploded when

documents submitted ahead of a

planned IPO revealed billions of dollars

of commitments and no convincing

path to profitability. Financial

disclosures remain an effective stress

test. Retail investors should not be

encouraged to dismiss them.

over-reliance on rampant discounting.

Then there are the fashion mis-steps,

such as making blazers with armholes

not big enough for the average woman.

Still, the timing of Mr Peck’s exitis

not ideal, just as theholiday shopping

season gets under way. His exit also

puts in doubt the company’s plans to

spin off the better performing Old

Navy brand next year. An expectation

this will now be scrapped helped drive

down the stock’s share priceyesterday.

Like other mid-tier brands such as

J.Crew and Abercrombie & Fitch, Gap

is being squeezed by cheaper fast-

fashion chains at one end and premium

brands at the other. The rise of social

media and fashion blogs means people

want the latest style as soon as they see

it. That has benefited the likes of Zara,

which has a nimbler supply chain.

The problem for Gap is that its

decline now looks hard to arrest.

Whoever ends up replacing Mr Peck

will have his or her work cut out.

Gap has sent its chief executiveArt
Peck packing. His departure after just
four-and-a-half years should come as
no surprise. Mr Peck is just the latest in
a line of executives who tried and failed
to help the USclothes retailer
recapture the magic of its glory days.
He is unlikely to be the last.
Having defined American casual cool
in the 1990s (remember thosekhaki
swing ads?), Gap lost its way in the
early 2000s. Over the next 15 years it
cycled through two CEOs. Neither had
much in the way of fashion retail
experience. Under Mr Peck, the
company, which also owns Banana
Republic and Old Navy, has continued
its downward spiral. Like-for-like sales
have failed to grow for four consecutive
quarters. Operating margins fell to just
8.2 per cent last year, from 9.6 per cent
in 2015. The stock has shed 60 per cent
of its value under his tenure.
Efforts by Mr Peck to shrinkGap’s
footprint and cut costs were akin to
kicking the can down the road. Neither
really addressed thefundamental
problems: unappealing clothing and an

Michael Mackenzie

The Long View

Amazon, Alibaba, Alphabet, and Saudi
Aramco? Saudi Arabia’s state oil
company has ranked itself alongside
US tech giants in a presentation
promoting its initial public offering.
Such flourishes have failed to excite
western fund managers.A mooted
minimum annual dividend of $75bn
reflects the strain. venE Japanese
refiners, big purchasers f Saudio rudec ,
have no interest in investing. So said
the boss of its largest Japanese partner
JXTGyesterday.Aramco is proving a
tough sell, to the discomfort of bankers
hoping to please ruler Mohammed bin
Salman with a $2tn valuation.
Saudi Aramco rightly argues that its
profitability is way ahead of large
international oil companies such as
ExxonMobil or BP. Even so, Bank of
America has suggested Saudi Aramco
might need to increase that $75bn
dividend sing debt.u
No wonder. At $2tn, the yield would
be 3.75 per cent. That is not enough.
The yield from the largest 15 oil
producers have trended upward for a
decade to 6 per cent, notes Bernstein.
Either the payout goes up or the
valuation must pull back. Lex thinks a
$1.2tn capitalisation makes sense.
The company could allocate
preferential dividends to the sliver of
1-3 per cent of equity to be sold
publicly. But the cosmetic boost to the
wider valuation would fool no one.
Should a company that claims such
fantastic capital returns —at June, 36
per cent on capital employed — allocate
so much capital to dividends, anyway?
The business should perhaps be
investing in its own operations instead.
When Warren Buffett, a fan of value
investments, bought into PetroChina in
the early 2000s, it looked cheap at
six times earnings. The Saudis are
targeting twice that for Saudi Aramco,
on an exchange unfamiliar to most
portfolio managers. They may well get
this by badgering local billionaires nda
friendly wealth funds. But the effort to
achieve numbers acceptable to the
prince re assuming a desperate air.a

Saudi Aramco IPO:

sheikh down

Gap: swinger

through the wringer

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

The Wolf of Wall Street orked hardw

and played harder. His opposite

numbers over in the City of London

wantshorter trading hours o theys

too can have balanced lifestyles —

without the trademark excesses of

broker Jordan Belfort.

Fair play. Traders and brokers on

the London stock market put in

longer hours than peers in other

global trading hotspots, including

New York,Tokyo nd Hong Kong.a

Most of Asia takes a one-hour

lunch break. In Japan, supposedly the

home of long-hours culture, the

market is open for only two-and-a-

half hours before traders down tools

forhirugohan. Of the main equity

markets, only those in Europe have

trading days as long as the UK’s.

London’s market turns over

roughly the same, measured by value,

as Hong Kong’s and — based on year-

to-datedata one-seventh that of—

New York’s.

Computers can do a lot more of the

heavy lifting than was the case in the

days whenMr Belfort as pumpingw

and dumping stocks in the glitzy

offices of Stratton Oakmont. UK-

based data tracking firm Coalition

estimates roughly half of all cash

equities trading is now done

electronically, up from a third around

six years ago.

Robots have no families or parties

to go to; they can work all through the

night and day if need be. But this is

not the case for human traders, who

in London must already contend with

ghastly commutes, Third World

infrastructure and horrid weather.

Exchange bosses should cut them

some slack.

W

hen a market narrative

shifts, investors should

be sure to weigh the

merits of the new mes-

sage. No matter that

much of the current economic data are

murky or that the road toward a trade

resolution between Washington and

Beijingisalongandwindingone.

There is no mistaking the changed

mood of financial markets — the threat

ofahardlandingfortheglobaleconomy

isbehindusandareboundbeckons.

But the extent and scope of an eco-

nomic recovery in 2020 remains very

muchapointofconjecture.

Bullish equity market sentiment ulti-

mately requires a substantial rebound

in business investment that reflates the

global economy. Evidence of such a

surge may not arrive until the spring of

nextyearattheearliest.

November has provided some signs

that the worst of the soft patch is behind

the global economy while reports

emerging from the ongoing US-China

trade talks suggest that both sides can

see plenty to gain from a deal. As a

result,global bond yieldshave climbed

totheirhighestlevelsinmorethanthree

monthswithFrench10-yearyieldsback

abovezeroforthefirsttimesinceJuly.

Record highs for various equity mar-

kets are being characterised by big rota-

tionsbetweensectorsandregions.

Leadership has tilted in favour of

cyclical sectors that tend to do better

wheneconomicactivityisstronger.

So-called “value” shares — typified by

global financials, which have been hit

hard by negative interest rates in Japan

and Europe and then the summer fears

ofrecession—arepoweringup.

This trend is amplified by rising long-

dated government bond yields, which

normally benefit banks as they can lend

at higher rates while their cost of fund-

ing is negligible. The recovery in global

financial stocks has mirrored the rise in

global bond yields since mid-August,

prompting talk that the rotation

towards value, the bargain bin of equi-

ties,hasmoreroomtorun.

Equity markets in Europe and the

Asia-Pacific region — with their big

weightings of financials and value can-

didates — have outperformed even a

record-setting Wall Street. Investors are

overlooking quarterly results which

show profits falling for both S&P 500

and Stoxx 600 companies, preferring to

focusonsunnierforecastsfornextyear.

True, equities have endured periods

of falling earnings in the past. At the

moment, the S&P 500 is on course to

match the fallow run recorded over four

consecutivequartersspanning2015and

2016. The current bullish sentiment
      reflects plenty of faith that the squeez-

ing of profit margins will abate for both

European and US companies next year

asgrowthpicksup.

The shift in mood is illustrated by the

25 per cent jump in the share price of

Caterpillaroverthepastmonth.

The stock of the heavy-machinery

maker, which is often seen as a barome-

teroftheglobalindustrialeconomy,was

lower for the year by some 7 per cent in

early October. That was before the com-

pany reported disappointing earnings

andloweredguidanceforthefullyear.

Nomatter—thisweekthestockregis-

teredafresh52-weekhigh.Asaninvest-

ment manager explained to me, the

resurgence in the stock tells us that

earnings and recession fears were over-

done.Thependulumisswingingback.

Another consideration is that the

brighter signs over trade mask a much

more powerful driver of longer-term

bullish sentiment — expectations of fis-

calstimulus.

Greater government spending is cer-

tainly on the agenda for the UK econ-

omyandanequitymarketthathasbeen

largely ignored by foreign investors,

who have favoured gilts since the 2016

Brexit referendum. It is not difficult to

build a case for a rotation into stocks

and out of government debt as the UK

Treasuryrampsupspendingin2020.

Across the channel, the recent per-

formance of European shares and cycli-

cals also reflects in part expectations of

greater state spending — even from a

reluctantGermany—andagrowingrec-

ognition of the damage inflicted by neg-

ative interest rates in some policymak-

ingcircles.

The prospect of fiscal ammunition

being deployed, along with fading pros-

pects of an escalation in the trade war,

explains much of the current enthusi-

asmwithinequitymarkets.

Not everyone is convinced that this

marks the start of a radical change for

investment strategies that have grown

dependent on high-quality bonds and

stocks. The trends of modest economic

growth in mature economies and slow-

ing momentum across the emerging

worldappearwellentrenched.

DavidBianco,chiefinvestmentofficer

for the Americas at DWS, the asset man-

ager, said that he and his colleagues still

find it hard to “abandon our longstand-

ing preference for profitable growth

stocksovercyclicalvaluestocks”.

As a clearing house of countless infor-

mation and investment decisions,

markets generate plenty of noise and, at

times,misleadingsignals.

Responding to the right ones is the

challenge facing investors as they tweak

portfoliosfortheyearahead.

[email protected]

Investors need to

sift the signals

from the noise

Market hours: pack pleaser

Current stock exchange trading hours

     

Frankfurt

Euronext

London

New York

Mumbai

Hong Kong

Tokyo

Proposed

cut in

trading

hours

Source: FT research

Do retail investors still want to invest

in gigantic private technology

companies after witnessing the

humiliation suffered by overweening

office rental start-up WeWork?

The US Securities and Exchange

Commission seems tothink so. Jay

Clayton, chairman of the SEC, has

called lack of investor access to private

companies a “growing concern”.

It is true that the only way most

investors can access Silicon Valley

start-ups is by waiting for an initial

public offering. It is also true that the

Unlisted companies:

private party

Twitter: FTLex@

Greater government

spending is certainly

on the agenda for

the UK economy

NOVEMBER 9 2019 Section:FrontBack Time: 8/11/2019- 19:00 User:nick.miller Page Name:1BACK, Part,Page,Edition:EUR, 22, 1