Financial Times Weekend 22-23Feb2020

22 ★ 22 February/23 February 2020

currency and virtual items, such as

weapons and life-extending elixirs.

Chinese colleges have delayed the

start of the new school year. Players in

their 20s are NetEase’s main target,

which gets most of its revenue from

domestic games. It once faced criticism

for failing to diversify its revenue base.

That is now working in its favour.

To be sure, gaming companies stand

to lose from curbs on marketing

campaigns as budgets shrink amid the

outbreak. Profits from ad-supported

video and social media platforms are

set to take a hit at Tencent, which

derives almost a fifth of its revenue

from advertising.

But investors are betting that higher

sales from content will offset weaker ad

sales. Shares of both companies have

gained in the past month, with those of

NetEase up 60 per cent in the past year.

Even so, there is room for more upside.

At 22 times forward earnings, they

trade at a discount of about a quarter

to global peers. On the same metric,

Tencent shares remain well below their

three-year high. More than half of the

company’s revenues come from games

and social media.

Locals spending less on going out

should be left with more to spend

online. Just as some movies are

skipping theatre premieres and

releasing on mobile, a longer-term shift

in the industry could result. Companies

have a rare opportunity to sign on

first-time users and hang on to them

long after the epidemic has passed.

than rival mall owner Intu. The owner

of Gateshead shopping centre had a

loan-to-value ratio of 58 per cent last

June — versus 40 per cent at

Hammerson — and is seeking

emergency funding. Gateshead

breached covenants in January.

Hammerson’s latest disposal might

boost its LTV 3-4 percentage points,

think Numis analysts. Where that ratio

now lies depends on the, still unknown,

extent of writedowns to the rest of the

portfolio.

A covenant breach, triggered by

gearing of 150 per cent, is still distant

for Hammerson. Its debt-to-equity

ratio was 61 per cent last year. That

justifies a somewhat higher valuation

than for sickly Intu, with Hammerson’s

shares trading at 35 per cent of net

asset value compared with Intu’s one-

tenth. A yield of 11 per cent, though,

suggests Hammerson’s dividend is at

risk. Those seeking a bargain should

focus on its stores, not its shares.

Too late for the January sales, but
property group Hammerson finally
found a buyer for its remaining British
retail parks yesterday. Touted as the
largest UK portfolio sale in the past
decade, the landlord is selling nine
locations. Largest, perhaps, but the
£455m price tag is still a hefty 22 per
cent below last June’s book value. That
decline mirrors the dire state of British
retailing as tenants struggle to pay
rents rendered excessively high by the
dwindling bands of shoppers.
The proceeds go towards paying
down Hammerson’s net debt, which
stood at £3bn last June. The deal
officially ends the group’s retail parks’
divestment programme that began in

2018. These were among the sector’s
      worst-performing assets, but the
      prospects for Hammerson’s remaining
      shopping centres are not much
      brighter. Expect the worst from full-
      year results due next week.
      Still, in property the important thing
      is to be one-up on the neighbours, and
      Hammerson’s lower property leverage
      puts it in a less precarious position

Jonathan Wheatley

The Long View

Ex-paratrooper Jean Pierre Mustier
may end up parachuting into HSBC as
chief. It would cause consternation in
the Asia-focused bank. The job
typically goes to insiders like Noel
Quinn, interim boss. Modernisers
would cheer the external hire. Which
candidate is right for the job?
It is a choice between cheese and
chalk. Witty and sometimes irreverent,
Mr Mustier runs UniCredit, valued at
less than a quarter of HSBC’s £114bn.
The Italian bank was almost bust when
he took it over. He has put it back on its
feet. The Frenchman has learnt tough
lessons in crisis management. Once
tipped to lead Société Générale, he left
after rogue trader Jérôme Kerviel lost
the bank billions.
Mr Quinn is a down-to-earth Brit.
The former commercial banker wants
to focus HSBC on the entrepreneurs
who are driving Asian economic
growth. He has already set out plans
for some big cost cuts.
Personalities aside, the choice can be
boiled down to whether an outsider
would bring zing to the sprawling
lender. Staff typically believe only
internal candidates can deal with the
complexity of HSBC. But John Flint,
who preceded Mr Quinn, did not work
out. Chairman Mark Tucker evidently
has doubts about Mr Quinn too.
Incomers can sometimes spot
organisational flaws long-serving
executives are blind to.
That might sound like Mr Mustier
should get the job — if all he had to do
was run a bank. But whoever wins
must be a diplomat. One mission is to
repair relations with China. HSBC is
embroiled in a row over the arrest in
Canada of Huawei’s Meng Wanzhou.
Another challenge is to stay friendly
with HSBC’s hard-driving chairman.
Mr Mustier is used to calling the shots.
A case of “neither of the above”?
Gossips moot alternatives such as Jing
Ulrich of JPMorgan and Piyush Gupta
of DBS. Having opted to take his time
in making an appointment, Mr Tucker
should cast his net as widely as he can.

HSBC’s CEO:

leap of faith

Hammerson/Intu:

under the hammer

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

Money laundering has a new twist for

China’s battle with coronavirus.

Banks are being ordered to remove

potentially contaminated notes from

circulation. Only after sterilisation

can they return to general circulation.

The outbreak will further fuel

China’s embrace of digital payments.

The survival time of the virus on

objects like banknotes is thought to

be measured in hours but authorities

are taking no chances. Chinese

citizens are already less reliant on

cash. Mobile payments are ubiquitous

in Chinese cities. One study suggests

98 per cent of residents use them.

Measuring the speed at which notes

change hands is hard. The best proxy

is how long it takes for a note to wear

out. Smaller denominations wear out

faster due to more frequent use. A US

$1 or $5 bill has a lifespan of 1.5 years

while for a $20 bill it is a third lower.

It is smaller for larger denominations.

Fear of cash as a vector for disease

is as old as money itself. In ordinary

circumstances, modern notes carry

similar quantities of bacteria to those

found on a door handle. It is harder

for germs to adhere to polymer notes.

While cash is shrinking as a share

of overall payments globally, it is still

popular for smaller purchases in

places like the US.

Chinese authorities are right to be

cautious. Notes travel long distances.

Website Where’s George? tracks US

banknotes. A dollar bill first tagged in

2008 has travelled at least 15,000

miles or three miles a day on average,

including a trip to Mexico.

Money makes the world go around.

Cash also goes around the world. That

will hasten its decline in China.

E

merging markets have disap-

pointed investors for at least

a decade, failing to deliver

hoped-for rates of economic

growth and portfolio returns.

But bullish analysts are forecasting that

the outperformance will come when the

coronavirus outbreak recedes and

marketsreturntobusinessasusual.

If such hopes depend on a broad

recovery for the asset class, they are

likelytobedashed.Aselectiveapproach

mayworkbetter.

JPMorgan’s Marko Kolanovic is

amongthoseexpectingareboundinEM

stocks. This week he reiterated a call to

sell defensive assets — more expensive

stocks that are less exposed to the eco-

nomic cycle — and rotate into segments

such as value stocks (judged to be

cheap against their fundamentals),

commodity-exposedstocksandEM.

Mr Kolanovic said that his earlier call

for such assets to outperform in the first

quarter had been set back by the

Covid-19 epidemic. The strategist

expects to be vindicated as that threat

fallsawayincomingweeks.

Mark Haefele of UBS Global Wealth

Management also expects the impact of

the coronavirus epidemic to be limited

mainlytothefirstquarter.

He is sticking to his call that EM

equities should outperform on that

basis and in anticipation that risks from

theUS-Chinatradedisputewillrecede.

Such calls assume markets will break

out of a trend that has gripped them for

atleastthepasttwoyears.

That is, an ocean of liquidity provided

by the US Federal Reserve and other

central banks pushing up the value of

developed market bonds and the stocks

of big tech companies and other global

corporations, while cheaper stocks and

marketsflounder.

The calls also assume that the differ-

ence in the rate of economic growth

between emerging and developed econ-

omies — often seen as the biggest single

driver of returns on EM assets — will

begin to widen this year in favour of EM

afteradecadeofcontraction.

Yet there are good reasons to think

thiswillnothappen.RobinBrooks,chief

economist at the Institute of Interna-

tional Finance, believes emerging

economies are in the grip of so-called

secular stagnation — a long-term

slowdowningrowth.

In some countries such as Argentina

and Turkey, this has been caused by

clearly identifiable crises. In others, it is

a result of weak investment after the fall

incommoditypricessince2014.

Mr Brooks said that, while consump-

tion has held up in many large EMs, this

might not be sustainable. Households

could be “looking through” any down-

turn and borrowing or using their sav-

ings to maintain consumption, he said,

adding: “If the perception grows that

thisisapermanentshock,foreigninves-

torsmaypulltheirmoneyout.”

Even some analysts advocating

investment in EMs are not doing so on

thebasisofasignificantgrowthrecovery.

Justin Leverenz at Invesco is in this

camp. In a recent note to clients, he

wrote that, after a decade of collapsing

growth, deglobalisation and the implo-

sion of the Brics “myth” — that Brazil,

Russia, India, China and South Africa

would grow strongly as a group — any

recovery in emerging economies is

likelytobeslowandmoderate.

Nevertheless, Mr Leverenz expects a

mean reversion towards value stocks in

EM.Thesestockshaveunderperformed

growth stocks since about 2012, mirror-

ing their developed markets counter-

parts, with the divergence widening for

muchofthepastthreeyears.

Mr Leverenz also thinks that the US

dollar will weaken against other curren-

cies, allowing EM central banks to ease

policymoreaggressively.

In China, he expects the shift to con-

sumption and private investment to be

backed by social spending. Even if this

moderately rosy prognosis is not ful-

filled,theremaystillbeopportunities.

Per Hammarlund, chief EM currency

strategist at SEB, said EM currencies

were in an uncomfortable position of

beingneitherparticularlyweaknorpar-

ticularly strong. “Valuations are not

attractive enough. If the growth story

fails, there is no other really compelling

reasonforEMstodowell.”

The carry trade — borrowing in cur-

rencies where interest rates are low to

invest where they are high — has also

disappeared from traditionally lucra-

tive markets such as Brazil, following

dramaticeasingofmonetarypolicy.

The best strategy at times like these,

Mr Hammarlund said, was to exploit

different valuations within EM rather

than between emerging and developed

markets. One example is the tendency

of currencies of countries with strong

macroeconomic fundamentals to out-

performthosewithweakerones.

But currently the data suggest it is

easier to gain from differences in

interest rates by buying higher yielding

EM currencies to sell lower yielding

ones,saidMrHammarlund.

“In a global risk-off environment,

they both go down against everything

else but you still make money from the

carry,”hesaid.

Not a ringing endorsement of these

markets, perhaps, but one way to avoid

furtherdisappointment.

[email protected]

Emerging markets

growth story is not

uplifting reading

FT graphic Sources: Where’s George?; Swift

Banknotes: dirty money

Most tracked dollar bill (journey since )

MEXICO

ATLANTIC

OCEAN

PACIFIC

OCEAN

km

Gulf of

Mexico

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San

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Start:Start:

MinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolisMinneapolis

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US

CANADA

Number of times a

banknote changes hands

Single note, per year





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Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:Finish:

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Binge-watching and playing online

games have become global pastimes.

These are some of the only diversions

for more than 780m people at home in

China under travel restrictions. In the

absence of Netflix,gaming giant Tencent

and peer NetEase help while away the

hours. They also provide a silver lining

for investors in Chinese equities.

Blockbuster titles such as Tencent’s

battle gameHonour of Kingshave

attracted a record number of gamers.

Longer hours spent playing have led to

a surge in in-game purchases of

Coronavirus/gaming:

distractions, transactions

Twitter:@FTLex

‘Valuations are not

attractive enough. There is

no other really compelling

reason for EMs to do well’

FEBRUARY 22 2020 Section:FrontBack Time: 21/2/2020 - 18: 31 User: stephen.smith Page Name: 1BACK, Part,Page,Edition: LON, 22, 1