MoneyWeek - 13 March 2020 UserUpload Net

44 Pages·2020·54.5 MB·English

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MAKE IT, KEEP IT, SPEND IT 13 MARCH 2020 | ISSUE 990 | £4.50

Drowning tn oil

Why Saudi Arabia and Russia
crashed the market
Pages 4 and 5

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Cover illustration: Hname Here. Photos: Rex Features; Getty Images

13 March 2020 | Issue 990

The arrival of
coronavirus in
China at the
beginning of the
year represented an
immediate supply
shock to the global economy
(the Chinese stopped producing
and exporting). That created its
own demand shock (they weren’t
buying either — and the rest of
us started to get nervous as the
virus spread). This was unusual
enough — you don’t often get
demand and supply shocks at
once. But it’s got a lot weirder
since. First another supply-shock
bomb appeared in the form of
the new oil wars (see page 4).
And then, another whopping demand
shock (a positive one this time) turned up
in the form of massive monetary and fiscal
stimulus in the UK.

On Wednesday, the Bank of England
cut interest rates by 0.5% and took various
measures to make sure credit keeps
flowing (see pages 8 and 12 for more).

The rate cut is more grandstanding than
anything else — and comes with all the
usual downsides (bad news for savers and
terrible news for pension funds). Cheaper
money is also clearly not going to do much
to overcome the virus itself, or indeed to
persuade consumers to nip to the shops
(see page 18 for more on retailers’ woes).

However, the other measures make
sense. The key thing is cash. Keeping
companies alive (making stuff, providing
services and maintaining employment) is
about making sure that they have more

MONEYWEEK

Britain’s best-selling financial magazine

From the editor-in-chief...

Outgoing Bank of England governor Mark Carney

“Once introduced, ‘temporary’ or ‘exceptional’
spending is very hard to roll bac

cash coming in than going out — making
loans easier to give and to get is all part
of that. So was this emergency bout of
monetary policy necessary? Probably —to
send the usual “whatever it takes” message
to nervous markets if nothing else. Was it
ever going to be sufficient to keep us out of
recession alone? Absolutely not.
This brings us to the Budget.
On Wednesday, the chancellor, Rishi
Sunak, announced an extraordinary
package for the support of UK businesses.
We look at some of the measures on
page 12 (see moneyweek.com for more
analysis), but the real point of them is the
same as that of the monetary stimulus —
to help firms keep the show on the road
until what Sunak keeps telling us are
“exceptional circumstances” ease up.
The problem is that it doesn’t come
cheap. We stopped being able to add up

the total of Sunak’s promises
about half an hour into his
Budget. That is not a good
thing — the long-term effects of
overspending are rarely good.
Sunak might be right that these
are exceptional circumstances.
But, as all ex-chancellors
know, once introduced, even
exceptional or “temporary”
spending is very hard to roll
back. The same goes for
ex-governors of the Bank of
England and loose monetary
policy: they all know that cutting
is rather easier than raising rates.
How do you invest into these
exceptional circumstances? With
some difficulty. On page 24 we
look at the possibilities in the new age of
rail. On page 23, David looks at how some
of the big trusts I know a lot of you hold
(as I do) have held up over the last week.
Personal Assets, which we have long held
in anticipation of a new financial crisis,
has done exactly as it should have and
protected our capital. Phew. On page 16
John looks at the investment trusts that are
currently trading on very large discounts.
Some probably should be. Others might
be making their way into buy territory. Be
ready! Finally, in these increasingly tricky
times you need a reliable yield — so turn to
page 30 where Max has some interesting

ideas for you.
Cok A)

w
Lowy Merryn Somerset Webb

[email protected]

Loser of the week
Anthony Levandowski, the
former head of Uber’s
self-driving efforts, has
declared bankruptcy
after being ordered to
pay $179m in

damages related to

his alleged theft of
trade secrets from
Google, says Patrick
McGee in the Financial
Times. Levandowski

(pictured), one of the founders and key engineers

Good week for:

says The Metro. However,

in Google self-driving project Waymo, left Google

in 2016. Shortly after this he co-founded Otto, an
“autonomous trucking company”, alongside

Lior Ron. It was later bought by Uber for $680m.
Waymo sued soon after, accusing Levandowski of
“absconding trade secrets”. He was fired by Uber
in 2017 when he refused to testify. The lawsuit
was settled in 2018, but Levandowski was found

Bad week for:

Hedge fund manager Philip Falcone and his Harbinger Offshore fund’s
assets have been frozen after he failed to pay millions in legal fees
following a high-stakes litigation against US regulators, says Ortenca
Aliaj in the Financial Times. With an estimated net worth of $1bn,
Falcone has defaulted on his debts and sold some of the underlying
collateral, which included art works by Pablo Picasso and Andy Warhol.

liable for $127m. Whether Uber pays for the fines

“is subject to an ongoing dispute”, but the

company said the resolution of the matter “could
result in a possible loss of up to $64m or more”.
Ron, who remains an Uber employee, settled with It bodes ill for this year’s postponed Coachella festival, which was to

Google for $9.7m earlier this year.

moneyweek.com

The South By Southwest arts festival, which was to be held this week in
Austin, Texas, has been cancelled due to concerns about Covid-19.
, Last year it brought in $356m for the local economy, says The Guardian.

3

Maisie, a wire-haired dachshund, was awarded “Best in Show” at Crufts in

Birmingham. She won her owner, Kim McCalmont, “a modest” £150 in cash,
“the prestige... can earn them extra profits
through advertising and sponsorship”. A “Best of Breed” winner can
also “rake in up to £250,000 in stud fees”, adds the Birmingham Mail.

An appeals court in San Francisco, California, has ruled that Led
Zeppelin did not steal the opening riff to one of their most famous
songs, Stairway To Heaven. In 2014, US band Spirit accused the
British rock icons of ripping off their song, Taurus, which had been
released three years earlier in 1968. Led Zeppelin would have faced
paying millions had they lost. In the time since the case first went to
court, the song is estimated to have grossed $3.4m.

2 feature headline acts such as Travis Scott (pictured), in California next
6 month. Pulling such a high-profile event “could leave a $1bn hole”.

—

13 March 2020 MoneyYWeek
Will an oil price war spark a global crisis?

Alex Rankine
Markets editor

“Now comes the oil shock,” says The

Wall Street Journal. A “game of chicken
between Riyadh and Moscow” has sent
oil prices plunging and produced the worst
day for many equity indices since 2008
(see page 5). Major oil producers led by
the Saudis and the Russians, a grouping
known as “Opec+”, have been cooperating
to limit output and support crude prices
since 2016. The Covid-19 demand slump
saw Opec propose a new 1.5 million
barrels per day (bpd) cut. That plan was
rejected by Moscow, which has grown
critical of an approach that it says only
props up prices for US shale producers.

A nasty break-up

Rather than compromise, Riyadh
retaliated. The Saudis slashed prices
over the weekend in an all-out attempt
to steal market share. The resulting
“price war” could see the global market
saturated with oil. Caroline Bain of
Capital Economics predicts a “huge”
global surplus of 3.2 million bpd in the
second quarter.

The dramatic dissolution of the Opec+
alliance saw crude prices plunge by the
most since the 1991 Gulf War on Monday.
Brent crude fell 24% and is down almost
50% this year to trade at around $35
per barrel. US benchmark West Texas
Intermediate had its second-worst day
on record, losing 24.6%. Oil companies
account for 10% of the UK equity market.
The FTSE 100 had its worst day since the
financial crisis on Monday, plunging 7.7%.

The International Energy Agency
forecasts that demand will fall by 90,000
bpd this year, the first annual decline since

2009, says Andy Critchlow in The Daily
Telegraph. Industry veterans fret that the
“high-stakes game of roulette” between
Moscow and Riyadh could see oil “tumble
below $20” per barrel. The Saudis do not
seem well-placed to win a price war: they
need prices at $80 a barrel to balance their
budget. Russia, with a more diversified
economy, says it only needs $40.

The downsides of cheap oil

This high-stakes strategy is typical of
Crown Prince Mohammed bin Salman,
Saudi Arabia’s de facto leader, writes Julian
Lee on Bloomberg. The prince wants to
“drive oil prices down so far and so fast
that Russia realises it made a terrible
mistake”, but that is unlikely to work. As
with the prince’s bloody intervention in

\
1’s diversified economy only needs an
oil price of $40 a barrel to balance its budget

Yemen, a supposedly short decisive blow
could turn into a protracted conflict that
does damage to all sides. The prince is “a
risk taker... prone to impulsive decisions”,
Greg Brew of Southern Methodist
University told The New York Times.

Yet why is cheaper oil bad news?
Historically, lower prices have been seen
as a “net positive for global demand” as
they boost consumer purchasing power
and lower costs for businesses, says
Jennifer McKeown of Capital Economics.
Yet with coronavirus causing lockdowns
and sowing fear, consumers are unlikely
to rush out to spend, Oil-producing
companies and nations are in for a serious
budget squeeze. “What’s more, the price
crash could put severe financial stress on
the corporate bond market.” (See below.)

Is the corporate credit bubble about to meet its pin?

The bill for America’s energy
boom could now be due. Shale
energy firms have borrowed
billions of dollars over the past
decade to finance the
exploration and drilling of
thousands of wells, says Ryan
Dezember in The Wall Street
Journal. In a world of ultra-low
interest rates investors were
delighted to snap up the higher
yields on offer.

Moody’s Investors Service
reports that North American
oil and gas firms have $200bn
in debt maturing over the next
four years. And now slumping
oil prices are sending jitters
through the bond market. On
Monday energy bonds issued
by smaller operators traded so
low that the market seemed to
have concluded they were
“already out of money”.

13 March 2020

= Oil and gas drillers are
ls starting to struggle” 4

Around 12% of the $936bn of
debt issued by US oil and gas
firms are trading at distressed
levels, notes Joe Rennison in
the Financial Times: their yield
is more than 10% above that of
US Treasuries.

This story is bigger than
US energy, says Alexandra

Scaggs in Barron’s. Energy
bonds make up about 11% of
the US high yield debt market.
Energy sector ructions have
prompted investors to pull a
net $9.3bn from junk bond
funds over the last two weeks.
That is driving up borrowing
costs for all junk bond issuers.
The spread of financial
contagion to the wider high-
yield bond market looks
“inevitable”, said Deutsche
Bank in a note.

Firms grappling with record
levels of corporate debt could
now be hit by falling earnings
caused by Covid-19 on the one
hand and rising borrowing
costs as bond markets take
fright on the other. The OECD
notes that BBB-rated bonds,
one notch away from junk,
made up 52% of all new

investment-grade bond
finance worldwide over the
past three years, says Philip
Aldrick in The Times. Junk
bonds comprise another
quarter of corporate debt.
What’s more, the International
Monetary Fund said late last
year that the money owed by
companies unable to cover
interest payments with profits
could hit 40% of the total in
eight major economies if there
is adownturn half as bad as
the financial crisis.

In short, concludes Aldrick,
we could be in trouble. US
economist Hyman Minsky
argued that a fall in one set of
asset prices can actlikea
domino that knocks over “the
whole debt-funded capitalist
edifice”. Corporate debt could
prove the “first domino.”

moneyweek.com

©Getty Images

©iStockphotos
Get set for the
next euro crisis

Italy suspended mortgage
payments for households and
small firms as the country
entered a coronavirus lockdown
this week. Meanwhile, on
Monday the spread between
Italian and German ten-year
debt (the gap between the
yields on each) went above 2%
for the first time since mid-2019.

That suggests that the
current sovereign bond rally is
not completely indiscriminate,
with investors reassessing the
risks of lending to Europe’s
second most-indebted nation.
The Italian economy now looks
set to contract sharply in the
first and second quarter.

In the world of sovereign
debt risk, Italy is “the elephant
inthe room”, says Hung Tran in
the Financial Times. The
country is almost certainly
heading for its fourth recession
since the global financial crisis.

That will push government
debt above $2.5trn, equivalent
to an utterly unsustainable
135% of GDP. An outright
crisis is unlikely so long as
interest rates remain low. But
the riskis “rising” and it
represents an “existential threat
to the eurozone”.

Europe's leaders have yet to
get a grip, says Peter Goodman
in The New York Times. With
recession looming, French and
Italian politicians this week
called for a coordinated fiscal
response to Covid-19, but debt-
averse northern governments
will be hesitant to get on board.

History suggests it takes a
real crisis to get consensus in
Europe. With Italy locked down
that day may not be far away.

Markets

From panic to hysteria

The stockmarket has passed
from “panic mode into pure
hysteria”, Ayush Ansal of
Crimson Black Capital told
Simon English in the Evening
Standard. Battered by the
spread of coronavirus and the
tumbling oil price, Monday
was the worst day for many
global markets since the 2008
financial crisis.

Losses on Wall Street were
so severe that trading was
halted for 15 minutes on a
day when America’s S&P
500 index plunged 7.6%.

The 30-company Dow Jones
Industrial Average saw a
similarly dramatic collapse.
Italy’s FTSE MIB index lost
nearly 10%. The FTSE 100
and pan-European Stoxx 600
indices both officially entered
bear markets, defined as a 20%
drop from the most recent high.
Australia’s market fell by 7.4%.

Money flooded into safe
havens. Gold briefly rallied
above $1,700 per ounce for
the first time in seven years.
The yield on five-year UK
government bonds fell below
zero for the first time on
record, and that on US 30-year
Treasuries slipped below 1%.
Last Friday marked the 11th
anniversary of the day that
the S&P 500 index bottomed
out at 666 before starting its
long bull run. In a suitably
satanic twist, ten-year Treasury
yields marked the anniversary
by falling to 0.666%, notes
Bloomberg’s John Authers.

——_-.

Piazza del Duomo, Milan: Italy has taken a big hit from Covid-19

Prepare for recession
Crashing stockmarkets and
emergency interest-rate cuts
make it feel like 2008 all over
again, says Neil Shearing of
Capital Economics. Yet today’s
world is quite different.

The 2008 crash was a
financial shock followed
by “an extremely slow
recovery as households and
financial institutions repaired
their balance sheets”. The
coronavirus crisis may provide
a “sharp shock” this quarter
as factories are closed and
cities locked down, with a brief
but nasty recession perfectly
possible. But activity should
rebound quickly “provided
that the virus fades”. Even
more emergency central bank
money will only further juice a
recovery when it arrives.

Emergency rate cuts have
yet to have much impact,

notes Jeremy Warner in The
Daily Telegraph. Action by
the US Federal Reserve, which
delivered a 0.5% rate cut last
week, has failed to calm the
waters; indeed it seems “to
have added to the alarm”. Black
Monday 2020 will go down in
history as the moment when
a “decade of denial finally
ended”, says Larry Elliott in
The Guardian. Perpetually
low rates have long masked
the “underlying fragility of the
global economy”. The era when
asset prices could rocket ever
upwards ona “giant wave of
debt” may finally be at an end.
Two things are needed for
this turmoil to end, says The
Economist. First, “evidence
that virus infection rates” are
peaking. Second, stocks must
become cheap enough to tempt
“bottom-fishing investors”. We
are still a long way from either.

What oil's plunge means for investors

The collapse in the oil price has wrought
havoc on the share prices of oil companies
everywhere - with double-digit drops in
the share prices of FTSE 100 stalwarts BP
and Royal Dutch Shell, and the spreads on
US shale oil companies debt exploding
higher (see page 4). So what does it mean
for your portfolio?

The first question is: will the oil price
stay here, or perhaps fall further? This
depends on several factors, none of which
look especially promising for oil bulls. On
the demand side, coronavirus will have a
huge impact. The International Energy
Agency reckons that global oil demand
will fall this year for the first time since
2009. On the supply side, Saudi Arabia
and Russia have flung the taps open, with
Saudi upping the stakes even further mid-
week, by saying it aims to pump 13 million
barrels a day—a record level. The hope
might be to put US shale producers out of
business, but that will take time, especially
if the US steps in to defend the sector. So

moneyweek.com

in the short-to-medium term, it does look
as though low prices are here to stay.

But what does this mean for oil
producers? It’s certainly not good news,
but on the other hand, oil producers were

already being shunned by global markets.

Asa proportion of the S&P 500 for
example, the energy sector has never
before been this lowly valued. Part of that
is scepticism over shale producers ever
making any money (quite possibly
justified) but some of itis arguably down
to over-optimism on how rapidly we'll
replace fossil fuels with less polluting
resources. So oil companies were
dropping from low valuations.

The outlook for US shale producers
looks too uncertain for our liking. But the
oil majors look more interesting. As
Rupert Hargreaves notes on Motley Fool,
BP (LSE: BP) has a healthy balance sheet
with low borrowing and plenty of scope
for cutting spending if necessary. The
majors have also demonstrated in past

crises (such as the 2014 slump in the oil
price) that maintaining their dividends is
of utmost importance. With BP currently
yielding more than 9%, that looks worth
betting on. Shell (LSE: RDSB) has a higher
breakeven cost of production but it’s also
viewed as unlikely to cut its dividend.
Meanwhile, a slump in the oil price is
unequivocally good for some sectors and
countries — cheap petrol is good news for
consumers and it’s very good news for the
beleaguered travel industry in general.
The difficulty is that low oil prices are
unlikely to benefit the latter immediately —
it’s still not clear just how badly damaged
airlines and cruise companies will be by
the slump. If you are feeling very brave
you might want to consider a small dip
into cruise giant Carnival (LSE: CCL). It’s
currently yielding more than 9% — we
wouldn't bet on that being paid out, but
given that the US government has been
making noises about assisting the travel
industry, it might be worth a bet.

13 March 2020 =MonevWeek
6

Shares

MoneyWeek's comprehensive guide to this week's share tips

Three to buy

Admiral

The Times

This motor-insurance business
has operations in the UK,
Europe and the United States
and also owns the
Confused.com price-comparison
website. Admiral prides

itself on its strong culture,
happy workforce and steady
management. These priorities
have yielded results: a 10%
jump in 2019 pre-tax profit
compares favourably with
falling earnings at rivals Direct
Line and Hastings and enabled
Admiral to raise the full-year

Three to sell

dividend by 11%. The stock is a
long-term buy. 2,238p

Ocado

The Sunday Telegraph

The online grocery specialist’s
critics say it is loss-making
and overvalued, but fans insist
it will profit from the future
of retail. Ocado’s proprietary
technology is much in demand
in the UK and overseas,

which is why it is valued like
an international technology
business rather than a mere
supermarket. The proportion
of British consumers who buy

groceries online has doubled
over the past decade and today
sits at 30%. Globally, online
grocery sales are set to grow
by 15% a year through 2024.
Ocado offers compelling
growth prospects. 1,122p

<
js

Moneysupermarket.com

Shares

Shares in this price comparison
website surged last month on
the back of an encouraging
full-year trading update. The
“indiscriminate sell-off” in
the UK market has seen the
price return to earth. But

this is a firm with little direct
exposure to the coronavirus
fallout: house-bound people
can still shop online for energy
providers and insurance. This
seems an opportunity to buy
into a healthy business at its
pre-rally price. 313p

The Restaurant Group

The Sunday Times
Coronavirus-related disruption
to cinema scheduling is the last
thing that management at this
struggling restaurant portfolio
needed. The shares have halved
since it announced the £559m
takeover of Wagamama in
2018. “Tired” legacy brands
such as Chiquito and Frankie
& Benny’s have been hit by
falling demand at retail and
leisure parks. Wagamama itself
is performing well, but until
the firm finds a way to ditch

its “fading” brands and pay

...and the rest

down debt the shares are best
avoided. 87p

Capital & Counties
Investors Chronicle

This West End-focused
property developer’s portfolio
consists of a mixture of retail,

food and beverage, office

and residential property.
Approximately 95% of
CapCo’s holdings are in
London’s Covent Garden,
where property values fell 1.4%
in 2019. A conservative loan-
to-value ratio of 16% means

> the balance sheet is solid,

but that is outweighed by the
fact that half of group assets
are let out to retailers. “In an
environment where retail rents
are in decline” there is little
upside in prospect. A lack of
dividend growth is a final bear
point. Sell. 196p

HSBC

Investors Chronicle

HSBC is trying to redeploy
capital from underperforming
developed markets towards
higher-growth regions in Asia
and Mexico. This “painful”
process will mean 35,000 job
losses, but should save billions
annually. The trouble is that
with the Covid-19 outbreak
slashing global growth
estimates and provoking
emergency interest-rate cuts the
outlook for interest margins
and shareholder returns has
taken a big hit. Sell. 555p

The Daily Telegraph
Slumping markets are creating
buying opportunities. We
suggest that bargain hunters
take a look at foreign-exchange
firm Equals, cruise liner
Carnival, Jet2 owner Dart

Group, easyJet, WH Smith,
Whitbread, InterContinental
Hotels and Legal & General
(39.75p; 2,33 5p; 1,18 6p;
1,074. 5p; 1,948p; 3,758p;
4,253.5p; 264p). A share-price
slide at energy and healthcare
distribution specialist DCC is
a reminder that rich valuations
are vulnerable in a market
slump. There is still no reason
to jump in (5,554p).

Investors Chronicle
Premium food producer
Cranswick has been
capitalising on pork shortages

A German view

The market meltdown has given investors the opportunity to pick
up first-rate German technology stocks on the cheap, says
Christof Schtrmann in WirtschaftsWoche. One to consider is
Secunet Security Networks, a cybersecurity outfit. It protects
sectors including carmakers and energy suppliers in addition to
key public infrastructure such as border controls. Sales have
jumped from €91m in 2015 to €227m last year; earnings per share
jumped by 94% over the same period. The structural growth
outlook is compelling: as the global economy digitises, the need
for cybersecurity will rocket. The market is expected to grow

sixfold between 2011 and 2025.
MoneYWeek = 13 March 2020

in China to boost its exports
and the dividend has increased
for 29 consecutive years. Buy
(3,352p). Rising gold prices
mean that prospects are
brightening at African miner
Hummingbird Resources (23p).

Shares

Mid Wynd International
Investment Trust, which
focuses on high-quality
businesses with “fortress
balance sheets”, offers a
diversified way to bet on

a global market recovery
(579p). Investment trust Law

Debenture boasts defensive
qualities, low charges and a
good long-term record —
buy (610p).

The Times

Shares in Legal & General
look cheap and the group has
growth opportunities from
infrastructure investment. There
isalsoa “juicy” 7% dividend
yield (249. 5p). Struggling
industrials conglomerate
General Electric’s “mammoth
turnaround” won’t be made
any easier by disruption from
Covid-19. Avoid ($10).

Defying the slowing Indian economy and jittery global
stockmarkets, the State Bank of India’s credit-card company is
going public, say Benjamin Parkin and Henny Sender in the
Financial Times. SBI Cards plans to raise Rs103.5bn ($1.4bn).
Last week's four-day share sale was more than 20 times
oversubscribed. Investors appear to be taking a long-term view
and are counting on India’s second-largest card issuer to “ride a
wave of newly financially literate Indians taking out cards for the
first time”. The firm’s sales have jumped by over 40% a year
since 2017. There is ample scope for further growth. India had
two credit cards per 100 people in 2017; China, 42.

moneyweek.com
@ Boeing's shares have lost
30% in a month, double the
S&P 500’s slide, says Robert
Cyran on Breakingviews. The
company faces a war on two
different fronts. The Federal
Aviation Authority’s rejection
of Boeing’s assurances about
wiring will further delay the
737 Max’s return to the sky.
And the Covid-19 virus means
that people and firms are
“cutting back on travel”, so
airlines will “cut orders or
payments”. With Boeing
burning through $2.7bn in
cash last quarter and with
debt over $27bn, no wonder
new CEO Dave Calhoun has
admitted that “the company’s
problems are “worse than

he imagined”.

@ Twitter CEO Jack Dorsey
(pictured) is claiming “victory”
after an agreement between
the social network, activist
fund Elliott Management
Corporation and private-
equity group Silver Lake
ensured that he will remain
CEO “for now”, says Casey
Newton in The Verge. Silver
Lake will put $1bn into the
company, enabling Twitter to
launch a $2bn share buyback,
in return for Twitter giving up
three seats on the board.

But Dorsey has been given
“aggressive new goals”, such
as “growing its user base by
at least 20% this year”.

And Silver Lake is likely to
push for Twitter to be taken
private. “The barbarians
once at the gate are nowin
the boardroom.”

@ Premier Oil's shareholders
may be fuming after the stock
fell by 60% on Monday, but
this collapse was “merited”,
says Jim Armitage in the
Evening Standard. Despite
grappling with almost £2bn
of debt, Premier recently
persuaded its stakeholders to
let it issue $500m in new
shares to buy “a bunch of
ageing oil and gas fields”.
But thanks to a “legal monkey
wrench” from hedge fund
ARCM and the drop in the

oil price, the rights issue

is “surely dead”. The board
now needs to “work outa
major restructure” - and

that “won't be pretty” for the
company’s for shareholders.

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Shares

Aramco's appeal dwindles

The Saudi oil behemoth has lost a fifth of its value since it peaked last
December. It still looks unattractive, says Matthew Partridge

©Getty Images

The Saudi oil giant Aramco is to slash the cost of
a barrel of oil by up to $8, reports Benoit Faucon
and Summer Said in The Wall Street Journal.

At the same time the company is prepared to
increase its output to its maximum capacity of
13 million barrels a day if needed.

The move - which comes after a “long-
standing partnership” between some of the
world’s largest oil producers, including Saudi
Arabia and Russia, “splintered” at the end of last
week — has helped send oil prices down by more
than 20% toa four year low of $33 a barrel (see
page 4).

Aramco’s move is partially prompted by
“tensions” between the Saudi government
and the Russians, says the Financial Times. In
particular, the Saudis complain that the Russian
government has been “shirking” its share of
existing supply curbs intended to compensate
for the reduction in global demand prompted
by the coronavirus outbreak. Some experts
believe that the latest move is part of a “game of
brinkmanship” intended to “lure producers back
round the negotiating table”. However, another
motivation is to hit US shale producers, who had
indirectly benefited from the stabilised prices.

No longer defying gravity
Whatever the reasons for the latest move, the fall
in oil prices has been disastrous for Aramco’s
share price, which has “largely defied gravity”
since part of the company was listed on the Saudi
exchange last December, says Filipe Pacheco on
Bloomberg. Not only did the shares surge by
20% in the aftermath of the flotation late last
year, despite a lack of demand from foreigners,
but they remained above the initial price, “even
as the coronavirus led to a slump in crude”.
However, the latest fall means that more than
$400bn of Aramco’s market value has vanished.
It was worth$2trn at the peak.

In theory, Aramco’s minority shareholders are

ee

protected by “inducements such as guaranteed

J

The group is ready to produce
13 million barrels per day

dividends” for five years, says Liam Denning

on Bloomberg. The stock is now yielding 5%.
Yet the average yield of the big five Western
majors has jumped from 5.5% to 8.6% since
Aramco listed. What’s more, its free cash flow,
which finances the dividend, was expected to
dwindle before the latest oil-price fall. There’s no
guarantee that oil prices will bounce back, so the
yield isn’t high enough to justify the risk.

Given that it will take at least six months for
shale producers to cut back production, the price
of crude oil could remain at $35 a barrel for
some time, says George Hay for Breakingviews.
Under this scenario, Aramco “would be worth
barely half” its current $1.5trn market cap. Still,
at least shareholders wouldn’t be suffering alone,
since the Saudi government, which still controls
virtually all Aramco’s shares, “requires an oil
price of $83 a barrel to balance its budget”. The
resulting deficit will make it harder for Crown
Prince Mohammed bin Salman to “pursue his
Vision 2030 scheme to overhaul the economy”.

Tesco checks out of Thailand

Tesco shares escaped the
dramatic falls suffered by the
rest of the FTSE 100 this week,
say John Reed and Jonathan
Eley in the Financial Times.
That's because it agreed to sell
its southeast Asian operations
to Thai conglomerate Charoen
Pokphand for $10.6bn in cash.
This will produce a “lavish”
special dividend of £2.5bn; the
remainder will be used to
eliminate Tesco’s pension
deficit. The deal, the biggest in
Thailand's history, sees Tesco
return its 2,000 stores in
Thailand and 74 in Malaysia to
CP Group, who sold its Lotus
supermarket group to Tesco for
$180m during the Asian crisis.
There’s no doubt that the
owner of CP Group “has got his

hands ona fine business”, says
Ben Marlow in The Daily
Telegraph. Of all Tesco’s
attempts at expansion
overseas, Thailand “was far
and away the biggest success”.
What's more, the sale not only
represents a U-Turn from
Tesco's plans to add another
750 stores in Thailand, but it

also leaves Tesco “focused
almost entirely on the UK”,
where growth is “elusive”.

Nonsense, say Clara Ferreira
Marques and Nisha Gopalan
on Bloomberg. Not only did
the Asian business amount to
a “modest 9% of Tesco’s total
revenue in the first half of
last year”, but it also “needed
investment” at atime
when Thailand's economy
is “flatlining”.

Tesco also achieved a high
price of 12.5 times earnings.
The only concern is that Thai
regulators may block the deal
because it allows CP Group to
grab “too much of the market”,
so Tesco’s shareholders
shouldn't celebrate “until
they get delivery”.

13 March 2020 MoneyYWeek
Virus wreaks global havoc

Italy is in lockdown and Britain is preparing for the worst. But Is ie being done? Emily Hohler reports

The coronavirus continues to spread,
prompting “lockdown” across Italy and
“emergency measures worldwide”, says
Jessie Yeung on CNN. According to official
figures, Covid-19 has infected around
113,000 people, resulting in more than
4,000 deaths. The majority of cases are in
mainland China, but the infection rate there
has slowed, while it “wreaks havoc” in the
West. On Monday, Italy’s prime minister,
Giuseppe Conte, announced “sweeping
quarantine measures” for the entire
population of 60 million: “blanket travel
restrictions, a ban on all public events, the

closure of schools and public spaces”. So far,

Italy has 9,172 cases and 463 deaths, the
most of any country outside China.

More testing is key
Italy is copying China’s “draconian
methods”, the “gold standard for how
to contain the disease”, says Jeremy
Warner in The Daily Telegraph. Britain,
Germany and France will probably soon
follow suit. “Similarly unconventional
methods” are needed to limit wider
economic damage. For Italy, already
“crippled by the banking and sovereign-
debt crisis of 2010-2012”, these measures
are going to be particularly important.
Any economic contraction will have
“serious consequences for the rest of
Europe”. Italy’s government has asked
that eurozone stability pact rules limiting
the size of deficits are temporarily lifted
and, since this is a global emergency,
the request will be hard to refuse. The
European Central Bank will also come
under “intense pressure” to renew its
monetisation of Italian sovereign debt.
A “fully fledged transfer union, with each
state guaranteeing the debts of others”,
could move a “step closer” as a result.

As for Britain, we have been “preparing

for the next crisis ever since the last one”
and our banks now have “mountains
of capital”, says Tim Wallace in The
Daily Telegraph. But nobody anticipated
Covid-19, which is a “real economy
shock”, with a likely “hunkering down”
and people “working and spending less”.
Its arrival happens to coincide with
Rishi Sunak’s first Budget (see page 12)
and the goal is likely to be to give a “short-
term boost to the economy to ensure
businesses can weather the storm” (see
below).

The number of cases in the UK rose
by 54 to 373 on Tuesday and a sixth
patient has died. News that junior health
minister Nadine Dorries has tested
positive increases the pressure to “tighten”
access to Parliament as authorities “ramp
up” preparations in anticipations of the
epidemic’s peak within a few weeks,
says the Financial Times. The NHS is to
increase the tests it is processing to 10,000
daily, a move that should help patients

Donald Trump: intensely
relaxed in his Katrina moment

seek treatment and self-quarantine more
quickly — “the bedrock of an effective
medical response”.

Testing is key, agrees The Economist
and the inability or unwillingness to test
may explain why in countries outside
China or South Korea, where testing rates
are much lower, the mortality rate appears
to be up to five times higher. In the US,
where cases leapt by almost 50% within
24 hours to 1,030 on Tuesday night, only
1,700 people had been tested as of 8 March,
says Martin Farrer in The Guardian.
Covid-19 has become a highly politicised
issue there, with critics calling it President
Trump’s Katrina moment. Democrats
have criticised him for “reacting slowly”,
contradicting expert advice and “spreading
misinformation”, says Michael Tesler in The
Washington Post. Trump counters that the
media and Democrats are “exaggerating
health risks” to damage his chances of
re-election. Unless the virus is contained by
election day, it probably will.

Bank deploys its bazooka against Covid-19

The Bank has more in the arsenal &

13 March 2020

In central-banking circles, the
package of measures unveiled
by the Bank of England on
Wednesday is called a “big
bazooka”, says Philip Aldrick in
The Times. To “bridge the
economy” over Covid-19 and
shore up confidence, the Bank
has cut interest rates by 0.5
percentage points, back toa
record low of 0.25%;
announced a £100bn cheap
funding scheme for banks to
support small businesses and
cut the countercyclical capital
buffer so much that “lenders
will be able to pump an extra
£200bn of credit into the
economy”. The Bank’s
Prudential Regulation
Authority also sent astern

5 warning to banks not to

increase bonuses or dividends
in response to its policy
actions, notes Paul Dales in
Capital Economics.

Gratifyingly, lessons learned
from the previous crisis are
being applied, says Mark
Bathgate in The Spectator. The
Bank and the Treasury — unlike
in 2007 - are co-ordinating
policy,and the Bank is wise to be
taking advantage of a “decade
of rebuilding bank balance
sheets” to raise the availability
of lending. It “materially”
reduces the “risk of a credit
shock to the economy”.

The Bank's “willingness to be
seen to be doing something is
understandable”, says AJ Bell,
but if the global economy tips
into a recession, despite 12

years of “extraordinarily loose
policy”, where will central
banks turn next? If markets
head south along with the
economy, claims that these
were “just emergency
measures” will look “pretty
threadbare. Trying to solve a
debt crisis by encouraging more
borrowing... has perhaps kept
the plates spinning for a bit
longer, but it has not provided a
sustainable base for the real
economy or financial markets”.
Well, at least the bazooka
“has not emptied the Bank’s
arsenal”, says Aldrick.
Bank boss Mark Carney has
previously suggested that there
is room for a further £120bn of
quantitative easing; interest
rates can be lowered to 0.1%.

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10

Politics & economics

Joe Biden poised for victory

The septuagenarian stages a surprising turnaround. Matthew Partridge reports

Following a “string of
commanding primary
victories”, Joe Biden,

77, the candidate for the
Democratic nomination
for US president, appears
poised to complete “one
of the most striking
turnarounds in recent
campaign memory”,
finding himself “in a
dominant position only
ten days after the first
state victory of his three
presidential runs”, say
Matt Flegenheimer and
Katie Glueck in The New
York Times. Having
won in the south, in

the northeast and in the midwest, as well in large
states and small ones, the former vice-president’s
position is so strong that any collapse “would
probably require a political U-turn as sharp as the
one that precipitated his rise”.

a

Fa
2)
E
5
oo)
6

Sanders wins the argument

The strength of Biden’s coalition and his “lopsided”
victories have prompted many Democrats to declare
the primary race over and call for Bernie Sanders,
Biden’s remaining opponent, to drop out, says Jim
Newell on Slate. Some have even suggested that the
party should “shut this primary down” and cancel
the remaining debates. If so, this would be a big
mistake. Although Biden’s victory is almost assured,
Sanders still has a lot of support among younger
voters and Latinos. Given that both blocs are
“integral” to victory in November, giving Sanders

a little time to make his own decision would be
something that they “will remember”.

Sanders’ supporters won’t come away empty
handed, as they have won the argument on many
issues, says Richard Wolffe in The Guardian. On
the key issue of health, for example, Sanders has
moved Biden further to the left on a publicly funded

Biden: they think it’s all over... it probably soon will be

healthcare option “than
he and Barack Obama
had ever supported

in office or on the
campaign trail in two
elections”. Indeed, if
the current coronavirus
crisis continues, the idea
of “widely available
public healthcare” may
well end up attracting
“overwhelming
support across the
political spectrum”.

Cometh the hour...
While the outcome

of the Democratic
primaries “is no
longer in much doubt”, the national contest is
only starting to hot up, says Edward Luce in

the Financial Times. Donald Trump and his
supporters have started flinging slurs about Biden’s
“mental health”, claiming that he “doesn’t know
where he is or what he’s doing”. This despite the
fact that there is no evidence Biden is suffering
from “anything other than ageing combined with
a life-long stutter”. Biden has responded in kind,
ridiculing Trump’s hyperbole.

As well as “incoming fire” from Trump and
his supporters, who claim Biden is “bumbling
and past his prime”, he may also face further
attempts by Republican senators to investigate his
son’s dealings in Ukraine, says Stephen Collinson
on CNN. Still, Biden is betting that the political
demands of the moment with respect to the
coronavirus outbreak might finally be lining up
for a “competent Washington veteran” with the
“lind of empathy that the current president lacks”.
At the risk of antagonising Sanders’ supporters,
he is moving his campaign onto a “presidential
footing” with speeches about the “gravity of the
moment”. He appears to believe he could “benefit
from a case of cometh the hour, cometh the man”.

Who will suffer from the oil glut?

Saudi ene:
Abdula.

OGetty Images

yin Salman Al Saud

Saudi Arabia’s decision to raise
oil production and sell it at
sharply discounted prices ata
time of declining oil demand “has
sent shock waves” through the
oil and stock markets, says Karen
Young in The Washington Post.
The price fall will hit Middle
Eastern countries that rely on
crude exports particularly hard.
Most Gulf nations have tried to

MonevWeek = 13 March 2020

end their dependence on oil, but
they have few alternative sources
of revenue. And the price falls
coincide with the Covid-19 crisis,
which “has seized business and
tourism activity globally”,
creating “a simultaneous
demand and supply shock”.

The oil-price collapse may
have “set a timebomb
underneath the economy” of
Saudi Arabia’s neighbours, but
ironically its old enemy Iran will
be less affected, says the
Financial Times. lran has bitterly
criticised the Saudi decision, but
Iranian production is already
severely constrained by US
sanctions, meaning the price war
is “less consequential” than it
would otherwise have been. Iran
analysts estimate that oil

shipments last year “probably
amounted to only a few
hundreds of thousands of
dollars, mostly to China”.

Oil producers across the
region will hope for a deal that
sends prices higher, but they
may be in for along wait, says
Clifford Krauss in The New York
Times. Saudi Arabia has the
lowest production costs of any
oil producer, meaning it can
operate profitably at low prices,
at least for a while. And Russia,
which Saudi claims undermined
the previous Opec agreement by
producing too much, can afford
to sit it out too. The “sudden
upheaval” in oil will claim victims
around the world, but who will
suffer most may yet “take
months to assess”.

Betting on
politics

Joe Biden’s triumph (see
left), combined with
Donald Trump’s
controversial handling of
the coronavirus
outbreak, have seen both
punters and bookies start
to edge away from the
incumbent US president.
The implied chances of
Trump’s re-election have
fallen from around 60% a
few weeks ago to
essentially being at even
money (50%). With
£18.3m matched, Betfair
has him at 1.99 (50.2%) to
be the next president,
while Ladbrokes has him
at 10/11 (52.3%).

While the state-by-
state markets aren't very
liquid at the moment,
they also seem to be
predicting a close
outcome in the electoral
college. Smarkets
currently has Trump as
favourite in several swing
states, putting him at
1.36 (73.5%) to win Ohio,
1.37 (73%) to win North
Carolina and 1.71 (58.4%)
to win Florida. It also put
the Democratic

candidate as favourite to
regain several rustbelt
states that voted for
Trump in 2016, putting
them at 1.49 (67.1%) in
Michigan, 1.67 (59.8%)
to win Pennsylvania

and 1.74 (57.4%) to

win Wisconsin.

It's always hard to
predict what will happen
in eight months’ time,
but I've always been
sceptical that Trump
could ever be re-elected
given his consistently
low approval ratings.

I suggest you take
Ladbrokes’ 2/7 (77.8%) on
the Democrats winning
Minnesota. The last time
this state voted
Republican in a presiden-
tial election was during
the Nixon landslide of
1972, with Hillary Clinton
comfortably defeating
Trump in 2016. The last
head-to-head poll, which
was taken back in
October, showed Biden
with a double-digit lead.

moneyweek.com