22 ★ 19 October/20 October 2019
International five years later. Neither
deal — aimed at boostingthe group’s
exposure to a booming US shale oil
market — were bargains.
Their valuations have been even
harder to justify since. Squeezed by
high debt and weak oil prices,
exploration and production companies
have cut back on spending on drilling,
hydraulic fracturing and other services
that Schlumberger provides.
Schlumberger said the writedown
reflects the slide in its share price since
the deals. The stock has shed halfits
value over the past two years.
That also makes the services group
look cheap. Its 19 times forward
earnings multiple sits at a substantial
discount to the five-year average.
But there is also an element of some
good old-fashioned kitchen-sinking. In
taking a writedown worth 6 times astl
year’s net profit, new boss Olivier Le
Peuch may be front-loading bad news
to pave the way for a rebound in profits
later. The tactic has been used by
companies fromAOL Time Warner in
the US to supermarket chain Tesco in
the UK. Taking hefty writedowns now
on Smith and Cameronmay mean a
one-off gain when the assets are sold.
That is hardly guaranteed. And the
writedowns do nothing to tackle
Schlumberger’s underlying problem.
Oil groups are spending less on
hunting hydrocarbons whose value has
been thrown into doubt by global
warming. Unless that changes,
Schlumberger will remain in a hole.Resumption Ordinance to take control
of private land for public use. That can
take up to a decade.
The government would, meanwhile,
relax mortgage borrowing limits for
first-time buyers, after eight years of
curbs. Homes prices would rise.
Subsidies for home seekers on public
housing waiting lists would push up
private rents. The price bubble could
take years to deflate. Most of the 7m sq
m of farmland Mrs Lam wants to buy is
owned by the tycoons. These assets are
illiquid until they are rezoned. The
government buying plan would allow
the property companies to cash out.
Shares in the largest developers —
Henderson Land, CK Asset, Sun Hung
Kai and New World Development —
have risen, but still trade at a discount.
They could rebound further. For now
it seems that the best bet for a Hong
Konger to get closer to affording a
home is to invest in the city’s
developers. Bolder reform is needed.Hong Kong’s housing crisis is
symbolised by its tiny “gnat flats”. The
anger of young people who cannot
afford even these shoeboxes has helped
fuel protests. Carrie Lam, chief
executive of the territory, announced
reforms this week. Paradoxically, the
reforms will mainly benefit the tycoons
who have a stranglehold on the
costliest residential market.
A mid-range two-bedroom flat costs
about $3,700 per sq ft compared with
$2,900 in New York and $2,300 in
London, according to Deutsche Bank.
The alternative, public housing, is
scarce and can take Hong Kongers five
years to find. Ordinary people are
crammed into tower blocks. The elite
live in lux pads on The Peak.
Ms Lam has pledged more affordable
homes by increasing land supply and
easing loan rules. The government
plans to take private land nd builda
public housing on it. On the face of it,
that would hurt developers who own
most of the space. Instead, they should
do nicely. The reform depends on
legislation called the Lands
Michael Mackenzie
The Long View
With its sprawling cast and intricate
plot twists, the Renault saga is a page-
turner. The arrest ofboss Carlos Ghosn
last November was followed by astand-
off with alliance partner Nissan. Paris
then thwarted a mooted €33bn merger
with Italian-American rival FCA. Last
week, chief executive Thierry Bolloré
was “brutally” ousted. Yesterday,
shares fell 12 per cent after a profit
warning, blamed on weakening
markets and ever-increasing regulatory
costs. Its shares have more than halved
in the past 18 months.
The scale of the downgrade
contrasted with Mr Bolloré’s defence of
his record last week. But executives
may well have had too many
distractions. There could be more bad
news to come. Clotilde Delbos, the
former finance chief who is the interim
chief executive, plans to revisit
midterm targets. Renault foresees a
risk of negative automotive operating
cash flow in the full year. It might have
to sell some of its 43 per cent stake in
Nissan — currently worth €10.4bn — to
bolster its balance sheet.
Could that be a twist that leads
towards a satisfying conclusion?
Reducing the Nissan stake could help
reset the troubled relationship. The
lopsided capital structure — Nissan
only has a 15 per cent non-voting stake
in Renault — is a source of tension.
Management changes should help too.
The departure of Mr Bolloré draws a
line under the Ghosn era, while some of
thenew team unning Nissan arer
reportedly to Renault’s liking.
A healthier Franco-Japanese alliance
could create the conditions for a
successful tie-up with FCA. That deal is
as attractive as ever, according to Ms
Delbos. Industrial consolidation makes
sense at a time of intense competition
and soaring product development
costs. But FCA itself needs to make big
strategic decisions. It cannot wait long
for Renault to sort itself out.
A happy ending is possible. But too
many plot holes need to be fixed first.
Renault is not yet a best-seller.
Renault:
perpetual commotion
Hong Kong apartments:
gnatty dread
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexThis year’s Booker Prize furore
put more noses out of joint than
Nikolai Gogol’s novel about an
autonomous proboscis. But will
splitting the literary prize also
rip up the economics associated
with it?
The Booker — whose sponsorship
by, respectively, a wholesaler of
foodstuffs, a hedge fund and a
venture capitalist itself tracks the
modern history of capitalism — is
worth £50,000 to the winner and, in
theory, a big boost to sales. This week,
judges broke the rules and anointed
two winners: Margaret Atwood’sThe
Testaments nd Bernardine Evaristo’sa
Girl, Woman, Other.
You would expect this to fragment
the extra sales.Milkman, last year’s
winner, sold well and delivered
publisher Faber a big boost toturnover. But the reading public is
fickle. Prizes — and accompanying
marketing budgets — can fail to
deliver sustainable boosts.
In the year after winning the prize
in 2009, Hilary Mantel’sWolf Hall, a
gripping tale of Tudor politics, sold
under half a million copies.Lincoln in
the Bardo, by George Saunders, which
perplexed many readers, sold fewer
copies the week after it carried off the
crown in 2017, according to data from
Nielsen Bookscan.
Don’t hang too much on the
knock-on effects either. Ms Atwood
spun her much-lovedThe Handmaid’s
Tale nto a TV serial, which wasi
hugely popular. But she reaped little
benefit, having sold the TV rights to
MGM in 1990. In real life, the big-
buck happy endings accrue to
corporations rather than novelists.T
his year has been peppered
with nasty surprises for
investors. But there are
several potential triggers
for a broader rally in
equities in the closing weeks of 2019.
Topping the wishlist of institutional
investors by a considerable margin is a
trade agreement etween the US andb
China, according to the latest monthly
survey compiled by Bank of America
Merrill Lynch, which gathered the views
of 175 global institutions managing
$507bn of assets.
Further down the list, investors
would also welcome a burst of greater
spending by Germany and China, along
with a further half a percentage point of
“insurance easing” by the US Federal
Reserve. A smoothBrexit ransitiont
between the UK and EU is also seen as
fuel to drive equities higher in the next
six months.
Should a case of deal euphoria erupt,
there is considerable scope for a strong
market reaction. It would also run
against much of the defensive position-
ing that dominates portfolios at the
moment, generating potentially big
shifts in asset prices.
Outcomes could include a kick higher
in long maturity bond yields and a
weaker US dollar, particularly against
emerging market currencies. Equities
would see stronger leadership from
cyclicals, or companies exposed to the
economy, which means share markets
in emerging economies and Europe
would rally more than Wall Street.
Higher long-dated bond yields would
also favour financials, rather than other
cyclicals such as industrial companies.
Of late, we have seen hints of such
reactions whenever upbeat headlines
over trade, Brexit and German fiscal
stimulus have cropped up, so investors
are on notice that bigger shifts loiter on
the horizon. Notably, eurozone and UK
domestic equities have outperformedother big markets in the past month
while the recession signal from the US
bond market has faded. The 10-year
Treasury yield has moved back above
that of three-month bills after this rela-
tionship turned negative in late May.
One question is whether a burst of
optimism would generate just a short-
term portfolio rotation or whether
theglobal economy s poised for ani
upswing that stretches out an already
lengthy economic cycle and dodges
recessionary forecasts.
Precedents for a more upbeat out-
come include the rebound during the
late 1990s, the rise in activity after the
eurozone crisis and the bounce back
from the growth scare of 2015-16.
It is striking, given the number offactors that could go right, just how
many investment managers are none-
theless sticking to defensive portfolios.
Many seek comfort in having scope to
liquidate their holdings in a relatively
short span — say around 20 days.
This betrays a lack of conviction
about theoutlook, hardly a surprising
conclusion given that memories of 2008
run very deep.
As for a trade deal, the views of inves-
tors fall into several main camps. Cour-
tesy of Bank Of America Merrill Lynch’s
survey this week, one group (43 per
cent) thinks any flickers of optimism,
such as those generated by the recent
meeting in Washington between trade
teams, are destined to fizzle out.
On this reading, the reality framing
the next decade is that a combative and
cold war rivalry between the two pow-ers constitutes a “new normal”.A rival
view (pegged at 36 per cent by the sur-
vey), and one that helps explain some of
the resilience seen in equities for much
of this year, is that a deal will probably
be struck before the macro climate
turns wintry. This entails a series of
phases towards a compact before next
year’s US elections.
The idea that macro deals will arrive,
ranging from trade to German fiscal
stimulus and Brexit, reflects a sense
among investors that officials will strive
to defer the next recession.
Whether relief arrives in time to avert
a harder landing only heightens the cur-
rent anxiety among asset managers
about their portfolio choices.
Kristina Hooper at Invesco sums up
the prevailing mood over trade rela-
tions: “The fog of trade uncertainty has
thinned but it is far from having lifted.
Investors should remain diversified for
the rest of the year and heading into
2020 — a year expected to be fraught
with geopolitical and trade volatility.”
That may be a wise course as there is
another unwelcome side to deal eupho-
ria as it will arrive when there are
already signs of rich asset valuations.
This week, theIMF warned hat “equityt
markets appear to be overvalued in the
US and Japan’’ and noted credit risk pre-
miums “also seem to be too compressed
relative to fundamentals’’.
The current environment, as recently
noted by Chris Iggo at Axa Investment
Management, is challenging for all
investors and not just from trying to
ascertain the best “combination of
assets and risk profiles”.
There might yet be a sting in this tale.
As Mr Iggo puts it: “It would be ironic if
the market reaction to clearing of policy
and geopolitical uncertainties was
higher rates and a more typical financial
squeeze-led recession.”[email protected]Equity investors see
potential triggers
for end-of-year surge
Booker Prize: words’ worth
Booker prize sales, week before and after winning (’ )Source: Nielsen Bookscan data Week prior Week after winning Milkman The Narrow Road
to the Deep North The Luminaries Bring Up the Bodies
A Brief History of
Seven Killings Lincoln in the Bardo The SelloutSome oil wells come up bone dry.
Schlumberger’s foray into US onshore
oil services did just that. The Houston
oilfield services giant has announced a
$12.7bn charge for thethird
quarter artly for past acquisitions.p
As a result, Schlumberger plunged to
a $11.4bn net loss for the period, its
biggest in over a decade.
The bulk of the writedown relates to
goodwill from the Schlumberger’s 2010
$12.4bn all-stock purchase of Smith
International and its $14.3bn cash-and-
stock acquisition of CameronSchlumberger:
that sinking feelingTwitter: FTLex@
‘Fog of trade uncertainty
has thinned but it is far
from lifted. Investorsshould remain diversified’
OCTOBER 19 2019 Section:FrontBack Time: 10/201918/ - 18:34 User:stephen.smith Page Name:1BACK, Part,Page,Edition:EUR , 22, 1