18 ★ 17 August/18 August 2019revenue. Cloudflare’s services —
keeping the internet ticking and
providing cyber security protection —
are in demand. In the first six months
of the year, Cloudflare lost $37m on
revenue of $129m, up from a loss of
$32m on revenue of $87m last year.
Bets are small and growth is steady.
What Cloudflare needs are bigger
customers. Of about 75,000 paying
users, just 400 pay more than
$100,000 per year.
Like rival Fastly, Cloudflare was
developed with designers in mind.
Market leader Akamai already helps
large companies, routing traffic via its
network of data centres.
Fastly joined the market in May and
its shares trade below the IPO
price. Cloudflare is better known for its
services. But its ability to attract
unwanted attention has been rightly
flagged in its filing as a potential risk.
If it is a utility, it cannot afford to be
heavy-handed with customers. Yet the
company’s activism, including a project
offering free services to sites facing
political threat, suggests it believes it
should take a stand. Removing services
from messaging board 8chan, used by
gunmen before shootings in Texas and
New Zealand, was the right decision.
Yet co-founder and chief executive
Matthew Prince still seems uncertain.
His opinion matters. Cloudflare plans
to issue dual-class shares and Mr
Prince is a top shareholder, with a 17
per cent stake. He will need to be clear
about the sort of company he runs.Elsewhere, an overemphasis on volume
watered down the brand. That filtered
through to weaker operating margins,
which hit a low of 12 per cent in 2015.
Carlsberg has since invested in craft
and non-alcoholic beer brands. These
both had growth rates in the high teens
in the first half. Investments have been
funded by cost-cutting. Overheads
have fallen since 2016, lifting
profitability to more than 15 per cent.
Debt has also been paid down. Net debt
is just 1.3 times ebitda, compared with
5 times at Heineken and AB InBev.
Then again, its rivals’ acquisitions
have bolstered their exposure to faster-
growing emerging markets. While
Carlsberg’s Asian sales were up 13 per
cent, it relies on contracting western
European markets for 60 per cent of its
top line. Drinking is falling out of
fashion with health-conscious
Europeans, but non-alcohol beer sales
will help. Investors looking for a cheap
pint should seek value elsewhere.In the UK Carlsberg has publicly
reversed out of an advertising claim of
making “probably” the best beer in the
world. It still has a great recipe for
profitable brewing, even in flat
European markets. Chief executive
Cees ’t Harthas overseen a turnround
at the Danish brewer since taking over
in 2015. Its shares reached fresh highs
this week after strong half-year results.
They are up 30 per cent compared with
a year ago. Shares of many global rivals
have done little.
While rivals AB InBev and Heineken
have expanded aggressively with large
acquisitions, Mr ’t Hart has focused on
refining Carlsberg’s recipe. Operating
profits grew almost a fifth in the first
half of the year. But at close to 22 times
forward earnings, a two-decade high,
its valuation is too frothy.
Once, Carlsberg too had a thirst for
expansion. The company’s 2008 £7.8bn
joint acquisition with Heineken of
Scottish & Newcastle led to large
exposure to Russia for Carlsberg.
Russia’s decision to increase sharply
the tax on beer soured that deal.Tommy Stubbington
The Long View
Control your own destiny or someone
else will. So said Jack Welch, erstwhile
leader of General Electric.
Unfortunately for GE that someone
may have arrived. Harry Markopolos,
best known for flagging Bernard
Madoff’s Ponzi scheme, claims GE has a
$38bn gap in its accounts. This week he
accused it of running an accounting
fraud that is “bigger than Enron and
WorldCom combined”. He makes some
good points, though none is new.
Analysts have bemoaned the way the
strugglingconglomerate presents its
accounts — which at best were
confusing and, at worst, the subject of
US regulatory probes. Mr Markopolos’s
claims centre on two issues. First, GE
has not fully accounted for losses
related to its legacy US healthcare
insurance liabilities. In addition, GE
has yet properly to value losses related
to selling down a holding in oilfield
services provider Baker Hughes.
GE said last year it would need to pay
an additional $15bn to cover legacy
liabilities related to the insurance
businesses it sold. Worse, the US
Securities and Exchange Commission
began an investigation into this sudden
charge. More recently, GE said it faces a
potential loss of about $7.4bn from a
Baker Hughes revaluation.
Mr Markopolos argues the amounts
in both cases are grossly understated.
Covering all of the insurance loss would
require $29bn in new reserves,
including $18.5bn in cash immediately.
Hesays the Baker Hughes revaluation
loss should be higher, at $9.1bn. While
that latter claim looks more tenuous,
he is right that GE lacks enough cash to
cover these sums, if correct. However,
GE could still borrow, given that its net
debt to ebitda ratio of 2.5 times is not
outlandishly high.
GE said the allegations were false and
misleading. That Mr Markopolos is
working with an unnamed hedge fund
and would profit from GE’s woes will
raise eyebrows.GE no doubt has
problems. Whether it is on the path
towards bankruptcy is another matter.General Electric:
held to accountCarlsberg:
probably notLex on the web
For notes on today’s breaking
stories go towww.ft.com/lexA no-deal Brexit grows more likely as
the UK’s October 31 deadline
approaches. Calm descends on busy
Channel sea freight routes. Danish
ferry operator DFDS this week
warned of lower profits, in part due to
UK freight arrivals on its roll-on roll-
off ferries falling 8 per cent in the
second quarter.
Prime Minister Boris Johnson’s
“doomsters” will see this as the first
of many wounds that will cripple
Britain’s economy. Disentangling the
effects of a global economic slowdown
are hard, however. Signs of weakness
abound. The UK and German
economies contracted in the second
quarter. Brexiters could dismiss
collapsing UK freight volumes as
another sign that the cycle is turning.
Before March, volumes to Britain
soared. Fears over post-Brexittransition arrangements led to
stockpiling ahead of an initial March
leave date. Freight traffic through
Dover, the UK’s busiest roll-on roll-off
port, as well as trucks using the
Channel tunnel, mirrored that
pattern: a strong first quarter
followed by a slowdown.
Businesses have adopted a wait-
and-see attitude. DFDS noted
particular weakness in vehicle
component shipments. But the UK
cannot be blamed entirely for a global
automotive downturn.
UK officials say a smooth transition
is possible. French port officials have
offered similar reassurances. Fearing
bottlenecks, hauliers are nevertheless
seeking alternative routes. In
economies, forecasts of slowdowns
become self-fulfilling. The same
applies to Dover traffic.W
ith a currency plumbing
new depths in the face
of unprecedented polit-
ical instability, it has
become fashionable to
compare the UK to an emerging market.
But even if a no-deal Brexit were to
propel sterling to parity with the dollar
— as some analysts have predicted — in
one crucial sense Britain remains firmly
rooted in the developed world.
Nobody, it seems, is betting on a
simultaneous meltdown of the currency
and the domestic bond market — as
frequently happens in a proper emerg-
ing market crisis.
Investors are also reluctant to believe
that the Bank of England would raise
interest rates to prop up the pound
(which would capsize the bond market),
even though the Bank suggested in its
Brexit analysislate last year that it could
conceivably be forced to do exactly that.
Markets are pricing in a better-than-
even chance of a rate cutby year-end.
After a no-deal Brexit, most traders
think it would be a racing certainty.
That is why every Brexit-induced
swoon for the pound is accompanied by
a rally in UK government bonds.
Sterling sank to just above $1.20 this
week, its lowest against the dollar in
nearly three years, before rebounding a
little, while gilt yields tumbled to record
lows. The investor playbook is straight-
forward: crashing out without a deal will
hurt growth, forcing the BoE to respond
with rate cuts or even a renewed bond-
buyingprogramme.
Political risks have only added to the
hunger for UK government bonds.
Investors at home and abroad are des-
perate for any bonds with a positive
yield and gilts retain their haven status.
The currency vigilantes might be tak-
ing sterling to the woodshed but the
bond vigilantes are nowhere to be seen.
So all those jibes that the pound
should be renamed the “North Atlanticpeso” are, for now, just a bit of fun. Any
attempt to draw parallels with a South
Atlantic namesake in Argentinasounds
like hyperbole.
Even so, market correlations are not
set in stone. A chaotic Brexit is currently
seen as positive for gilts today but what
about in three months’ time?
It is far from a consensus view but
some investors are questioning the con-
ventional wisdom. Gene Frieda, a
London-based strategist at Pimco, said
there was a lively debate currently tak-
ing place within the firm, which is one of
the world’s biggest bond investors.
Mr Frieda, whose background is in
emerging market investing, is one of the
pessimists. “People who have dealt with
EM see a wider range of possibilitiesthan people who have dealt mainly with
developed markets,” he said. “Britain is
a country that looks EM-like in that it
has a large external borrowing require-
ment. That creates a certain volatility.”
A current account deficit of 5.6 per
cent of GDP is a vulnerability also high-
lighted by Mark Carney, BoE governor,
who has warned that Britain is reliant on
the “kindness of strangers” to fund it.
Mr Frieda said a messy no-deal Brexit
could test this kindness to breaking
point by undermining foreign direct
investment in the UK. The resulting
weakness in the currency could create
an inflationary spike that the BoE would
be unable to ignore. Market expecta-
tions of inflation in the UK are already
well above those in the US or the euro-
zone. At some point, they would be too
much for bond investors to bear.At the same time, sterling’s status as a
reserve currency could be threatened,
particularly if Brexit turmoil is followed
by a Jeremy Corbyn-led government.
For many investors, the leftwing pro-
gramme of Mr Corbyn’s Labour party
has shades of the 1970s, a reminder of an
era when a currency meltdown saw
Britain going cap in hand to the IMF.
Even without a change of govern-
ment, Boris Johnson’s pledge as prime
minister to spend big to offset the eco-
nomic impact of Brexit — funded by a
borrowing spree — is leading some
investors to question whether gilts are
vulnerable to a sell-off.
There are powerful forces acting
against such an outcome. Roughly a
quarter of UK government debt is in the
hands of foreign investors — a much
lower proportion than France or Ger-
many, where the comparable figure is
about half. It is difficult to see those
investors heading to the exiten massein
a world where almost $17tn of bonds are
trading with negative yields.
Even if they did beat a retreat, the UK
— unlike a typical emerging market
economy — has a large and stable base of
domestic investors. An exodus of for-
eigners could be offset, in theory, by a
flight to safety within sterling assets.
Moreover, when it comes to the BoE,
the bar to raising rates to defend the cur-
rency — and thus upsetting the bond
market — would probably be very high.
Recall the long period of above-target
inflation (topping out at more than 5 per
cent) in the wake of the financial crisis
that the BoE was happy to tolerate while
holding rates at record lows.
Still, it is remarkable that heavy-
weight investors are even debating the
idea of the UK as an emerging market. If
it does come to pass, the proof will not
be in a turbulent currency but in the
bond market.[email protected]No-deal Brexit would
test UK’s reliance on
kindness of strangers
Brexit/ferries: all at sea
UK ferry freight arrivals (rebased)Sources: DFDS; Port of Dover
Q DFDS, Channel freight volumesRoad haulage vehicles, port of DoverUS cyber security company
Cloudflare’s decision to file for an
initial public offeringjust one day after
office-sharing group The We Company
is a good idea. Yield curve inversion in
US Treasuries has sounded the alarm.
If recession is coming, it is a good idea
to square away listings while stocks are
still trading at high valuations.
Since launching in 2010 the company
has been lossmaking — but losses are
modest compared with consumer-
facing tech companies seeking listings,
and are falling as a percentage ofCloudflare/IPOs:
clear the fogTwitter:@FTLexAll those jibes that the
pound should be renamed
the ‘North Atlantic peso’are, for now, just a bit of fun
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