14 ★ FINANCIAL TIMES Tuesday28 January 2020
Black letter law is difficult enough. For
federal prosecutors investigating
insider trading, the job includes
determining how friendly the
defendants actually were. America has
never had an outright prohibition
against trading on material non-public
information. The illegality of insider
trading has been awkwardly carved out
of broad securities fraud statutes
whose interpretations depend upon a
particular judge’s opinions.
Preet Bharara, the former high-
profile New York federal prosecutor,
made a habit of flamboyant
prosecutions during his tenure. He has
written a report alling for an overhaulc
that would simplify uch cases for thes
government. The ey reformk ould seew
government lawyers get out of
determining the nature of friendships.
The basis of the US law is not that an
insider profits from material, non-
public information. Rather it is that the
info ame from a breach of a tipper’sc
duty to their employer. Many casesare
easily prosecuted. Othersless so.
Mr Bharara suffered a stinging defeat
when a federal appeals court ruled in
2014 that the prosecution had to show
that the tipper and tippee “had a
meaningfully close personal
relationship” in scenarios involving
complex networking by money
managers. In the wake of that ruling,
the Department of Justice and SEC
became more careful about bringing
cases with complex theories of insider
trading, according to areport last year
fromlaw firm Morrison and Foerster.
The new standard forced both teams
of lawyers to argue about the intimacy
of tippers and tippees. Federal law
could change matters soon. The US
House of Representatives last month
passed a bill that would create a
distinctstatute about wrongfully
obtained information, though it retains
the test of a personal benefit to the
tipper. If following the letter of the law
makes markets fairer and moreInsider trading:
friends with benefitstransparent, that is a noble goal.
However, the law on insider trading is
not yet completely black and white.Earnings season arrives in Silicon
Valley this week with some of the
biggest US tech companies, including
Apple nda Facebook, eleasingr
quarterly reports. Private market
investors will be looking enviously at
profits announced.
Tolerance for lossmaking start-up
models is low after the downbeat
market debut of some hyped tech start-
ups last year. Badly behaved founders,
pumped up private valuations andTech IPOs:
margin callshares sold without voting rights all
played a part. But margins may be the
real culprit.
High gross margins, revenue minus
the cost of goods or services produced,
are back in vogue. Large start-ups must
suggest sound plans for profitability.
Losing money may be par for the
course in new companies but not all
losses are equal. Software companies
spend large sums up front to create the
first version of a product, then sell it to
more users at little or no extra cost.
Software-backed companies such as
Uber nda WeWork ave to keep onh
paying out as they add users. Property
and driver costs cannot be eliminated.
Losses rise with revenue growth.
Gross margins have demarcated
newly listed winners and losers. Cloud-
based video appZoom ad gross profithof $136m, on $167m of revenue, in the
last quarter, an 83 per cent gross profit
margin. Data monitoring company
Datadog as a 78 per cent margin.h
Shares in both have risen since listing
last year. Those listings with sub-50 per
cent gross margins, such asLyft , Uber
and Slack, trade below listing prices.
Start-up investors want it all: the
growth promised by founders and the
presence of a healthy profit margin
buffer. But proving a market exists is
becoming less important than
demonstrating it exists without
investor-led subsidy. Lossmaking
companies in search of multibillion-
dollar valuations need to show they
will not inhale cash forever.
The most successful tech IPOs in
2020 will be those that offer the
highest gross profit margins.From Friday, the B-word is to be
banned. Boris Johnson’sedict s ai
wheeze to stop this year being
dominated by Brexit. Many Brits wish
the taboo could be enforced far beyond
government circles. Businesses — and
their investors — are itching to break
out of a tedious holding pattern.
They should be more confident, say
somehedge fund managers. Investors
worry too much about a possible
no-deal Brexit, they argue. There are
indeed some opportunities. But for the
most part, Brexit uncertainty cannot
be shrugged off so easily.
Certainly the UK market is little
loved, even though a post-election rally
helped narrow the valuation gap
between the FTSE All-Share and the
STOXX Europe 600 by a quarter since
early November. The price-to-forward
earnings ratio of the UK market is still
more than a tenth lower than Europe’s.
The opportunities will be domestically
focused. Construction stocks already
trade at multiyear highs but could go
higher if the government increases
fiscal stimulus at next month’s budget.
Infrastructure spending could rise
28 per cent, says Berenberg.
The bulls betting on Britain’s
resurgence are also right to dismiss the
chance of a no-deal exit. Such an
outcome would benefit nobody. But a
government deal will not necessarily
suit all industries. A bare-bones deal
would offer little for services, which
account for40 per cent of the UK’s
exports to the EU. New regulatory
hurdles could follow. Businesses in the
auto, aerospace, pharmaceuticals and
chemicals sectors are right to worry.
A disruptive exit would hit jobs in
constituencies newly won by the
Tories. That might argue for a softer
Brexit. Mr Johnson’smajority gives him
freedom of manoeuvre. But do not
count on a last-minute swerve towards
a business-friendly deal. With four
years before he facesvoters,
Mr Johnson could well go for a hard-
and-fast Brexitwithhefty spending ot
ease the pain. Boosterism might
become the next overused B-word.UK shares/Brexit:
taboo to-doBritain’s expected decision to grant
Huawei restricted role in its 5Ga
network lobs a political grenade into
the US-led camp decrying the Chinese
kit vendor. But mobile operators,
which might otherwise have been faced
with a duopoly of providers, have
dodged a bullet.
The economics of 5G are about as
ugly as the politics. Industry body
GSMA Intelligence reckons operators
will spend about $1tn on 5G over the
next seven years to upgrade networks.
Recall, this is an industry that spent far
too much in the 3G licence auction in
- In the UK, academics compared
the magnitude to when the Praetorian
guardflogged he Roman empire tot
Didius Julianus in 193AD, heralding an
era of indebtedness and job cuts. Plus,
operators have yet to see decent
returns from 4G. The case for 5G may
well be bright — with trillions of
connected “IoT” devices and entire
factories controlled by phone — but it
remains futuristic. So far, the most
compelling usage is downloading
movies faster.
That means spending wisely, which
argues for choice of suppliers. Huawei
is the biggest of the big three kit
providers, ahead ofNokia nda
Ericsson. By excluding it rom thef
“core” network — the software linchpin
— the UK still leaves Huawei a big
playground. The requirement for
denser coverage means more base
stations and antennas; 86 per cent of
capital expenditure will go into radio
access networks by 2025, up from
62 per cent in 2018, GSMA estimates.
Attempts to further crimp Huawei
by capping its market share in any city
or region are slightly more
troublesome for the Chinese provider,
but much more so for UK telecoms
groups given one fewer supplier. In any
case, government-mandated
diversification is not strictly necessary:
savvy operators prefer to hedge their
bets (and bargaining smarts) by having
at least two vendors on their books.
Huawei had a 28 per cent share of the
global telecoms equipment market in
the first half of 2019,according o thet
Dell’Oro Group, almost as much as
Nokia and Ericsson added together.
The political brouhaha, fuelled by
fears of communist spies and leaky
Huawei/5G:
still plenty to play for
lines, will rage on. The real problem for
those keen to ban Huaweiis there is
precious little choice beyond the
Chinese group. Consigning telecoms
operators to a round of big spending
will only create more casualties.CROSSWORD
No. 16,385 Set by FALCON
JOTTER PAD
ACROSS
1 Discount kindness as a
redeeming feature (6,5)
7 Preserve stuff (3)
9 Martial art expert in competition
in Japan (5)
10 Awkward choice ahead of
crucial game (3,6)
11 Comic opera upset kid at home
(3,6)
12 Big boat left for Belgium (5)
13 Object in lorry heading for
Leicester East (7)
15 Pitcher, not as old, missing lid
(4)
18 Henry getting female a small
beer (4)
20 A prerequisite when around
fruit (7)
23 Have fun by a Spanish beach (5)
24 Put on once more with some
pride at sea (9)
26 Scold a German crashing in TT
(9)
27 Business area on one island
resort (5)
28 President, on leaving, gets
nothing (3)
29 Top rate required to protect
new heir to the throne (5,6)
DOWN
1 Son with hook, a hazard on the
links (4,4)
2 Sell Tate off causing feud (8)
3 Inside taverna, a fine place to
eat (5)4 Formidable expert may make
one pull a face (7)
5 Formidable article – only part
we absorbed (7)
6 Relieving girl in hospital
department (9)
7 Wags, they may be wild (6)
8 Month on edge in madhouse (6)
14 Cleaner, by a stop, caught early
coach (9)
16 Dispute in grill (8)
17 Fellow explorer finds a
poisonous plant (8)
19 Dog’s breakfast for a mongrel
guy kept inside (7)
20 Small list as regards cheese (7)
21 Boy bags trophy? Exactly right
(4-2)
22 Network former PM dodges, we
hear (6)
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For notes on today’s breaking
stories go towww.ft.com/lexTwitter: @FTLex
China is sneezing. How sick is the rest
of the world going to get? Reports
that the coronavirus is contagious
prior to doctors detecting any
symptoms pummeled stock prices
yesterday. The threat of a pandemic
grows with cases in France, the US
and Canada detected.
In Europe the share prices of
groups in the travel, leisure and
luxury sectors allfell sharply.
Luxury’s reliance on China,
combined with record high
valuations, means the sector is
among the most exposed.
True, European luxury groups
have shrugged off the protests in
Hong Kong, continuing to rise even
as mainland visitors shunned the
territory and its shops. Thatimmunity is unlikely to last long if the
mainland experiences a prolonged
crisis. At almost 25 times earnings, the
sector is aspricey s it has been sincea- Worse, forward earnings growth
for the MSCI World Luxury index has
already slowed to just 2 per cent, a 10th
of the pace one year ago.
Any impact on the sector now will
depend on the infectiousness of the
virus. Academics at the University of
Lancaster estimated last week that
only 5 per cent of infections in Wuhan
had been discovered. In the worst
scenario, the researchers believe that
could mean 200,000 cases in the city
alone by February 4, a jump of more
than 70 times. Their latest estimates
point to a transmission rate at least as
fast as China’s Sars epidemic in 2003,
which was not infectious during
incubation.
Some companies depend more on
China than others.Ferragamo, Gucci
(owned byKering) andBurberry
have the largest exposure to the
mainland by number of stores,
according to Jefferies. And while
Chinese consumers account for
40 per cent of global luxury
spending, they make up 80 per cent
of the growth in demand. Any halt to
Chinese tourism will mean fewer
purchases abroad as well.
China’s woes have caused feverish
debate about travel bans and
screening. With economic growth
near multi-decade lows, Chinese
shoppers are already spending less.
Time to cash in on luxury’s bull run.FT graphic Sources: Jon Read et al; Shi Zhao et al; FT Research;(^020406080)
Ferragamo
Feb
Feb
Gucci
Burberry
Louis Vuitton
Prada
China luxury exposure
Number of mainland stores
Predicted cases in Wuhan
’
Wuhan - all*
Reproductive rates of selected infectious diseases
R basic reproduction number
Smallpox
Polio
Rubella
Mumps
HIV/Aids
Sars
Low High
R number of new cases generated by infected person
Estimate
- When R
Coronavirus/luxury: a new consumption
Researchers think the actual number of cases of Wuhan coronavirus could be far higher than being reported.
That is bad news for luxury goods companies reliant on China for growth. A wider outbreak would compound
an existing economic slowdown and hit luxury company share prices which are near record high valuations.
JANUARY 28 2020 Section:FrontBack Time: 1/202027/ - 19:04 User:andy.puttnam Page Name:1BACK, Part,Page,Edition:LON, 14, 1