Riyadh Probes Interest in Mega-Sized Bank Loan

Saudi Arabian currency is called the riyal

While borrowing for investment purposes is hardly controversial, it can quickly become so when the bank loan represents a lien on state assets. And the borrower is Saudi Arabia. News leaked over recent days that the Kingdom’s Public Investment Fund may draw down as much as $5 billion in a bank loan to accelerate the nation’s steps toward economic diversification.

This approach to building an asset portfolio is aggressive for a sovereign fund based in an emerging market. We see three potential problems:

Investment Risk. The Public Investment Fund is an established institutional investor with deep experience in venture investing. But return expectations can shift suddenly and deals go sour quickly. There is a material difference between borrowing for open-pool allocation decisions and, say, issuing a bond to cover a project outlay, starting with transparency in the use of proceeds.

Market Risk. Saudi Arabia is undergoing a dramatic economic transformation. The outcome is unknown, although officials are unwavering in enthusiasm over catapulting the nation beyond the oil era. Mix that reality with regional political unrest—especially in the volatility of the feud between Riyadh and Tehran—and you could see international confidence in the region falter rapidly.

Political Risk. While Saudi Arabia does not have a strict Shariah-compliant financial system, many institutions embrace tenets of Islamic finance. In this context, simply stated, borrowing for investment purposes is prohibited. Fundamentalist religious leaders could bundle this leveraging activity and other transactions with still-controversial social reforms to paint a picture of a reckless government.

To be fair, details of the bank loan are scant. It lingers in the concept stage. The government, although not the sovereign fund, has borrowed from financial institutions in the past without much controversy. In the current setting, Riyadh may guide a syndicate of players to participate in the arrangement as a type of milestone to affirm market-access privileges in the future.

A bank loan at $5 billion is chunky, but it has context. The still-unconfirmed Saudi borrowing represents a small proportion of the crudely-estimated $230 billion in assets now held by the Public Investment Fund. Importantly, the sovereign fund could be a prime beneficiary of the forthcoming initial public offering of Saudi Aramco, boosting its asset base significantly.

Our Vantage Point: Despite domestic confidence in the economic trajectory, outsized financing activity telegraphs country-risk issues. International investors will likely remain circumspect about Saudi opportunities.

Learn more at Bloomberg.

© 2018 Cranganore Inc. All rights reserved.

Image: Saudi Arabia introduced sweeping economic reforms in April 2016. Credit: Trafawma at Can Stock Photo Inc.

Africa Forges New Billionaires

Shop in Accra displays traditional fabric designs.

Private wealth in Africa continues to gain momentum. According to Forbes, there are now 23 billionaires on the continent. Eight of them reside in South Africa, six in Egypt. The overall number increased by two over the course of 2017. In context, the number of billionaires in Africa is consistent with the number who live in Paris. Forbes estimates that there are over 2,000 billionaires worldwide.

Richest Individual. The wealthiest man in Africa is Aliko Dangote (est. $12.2 billion). His considerable fortune is derived from cement, food processing, and real estate. The Dangote Group runs its operations from Nigeria, but interests stretch throughout West Africa. He is an ethnic Muslim.

New Addition. An interesting newcomer to the list this year is Strive Masiyiwa (est. $1.7 billion). The native Zimbabwean controls Johannesburg-based EcoNet Group. Its subsidiaries include firms in the telecommunications and banking industries. Masiyiwa is active in philanthropic circles worldwide.

Wealthiest Woman. The richest woman in Africa is Angola-based Isabel dos Santos (est. $2.7 billion). Her fortune was largely sourced from her father, José Eduardo dos Santos, the Angolan president between 1979-2017. Known locally as “the princess,” she once ran Sonangol, the flagship conglomerate.

President Trump may want to spend more time befriending his billionaire colleagues in Africa once he leaves office. Assuming that his net worth is valued at near $3.1 billion, he would now rank somewhere between Naguib Sawiris (Egypt) and Koos Bekker (South Africa) on the African list, effectively making him the seventh wealthiest person on the continent by current estimates. Among American tycoons, he ranks only at 248th place, tied with 15 other US billionaires, according to October 2017 data compiled by Forbes.

Our Vantage Point: Like elsewhere, emerging markets in Africa are generating pools of private wealth that are seeping into capital markets. Cliché-ridden views are out-of-place in this increasingly buoyant region.

Learn more at Forbes.

© 2018 Cranganore Inc. All rights reserved.

Image: Traditional fabric designs convey the diversity of African culture. Credit: Malajski at Can Stock Photo Inc.

Is America on the Cusp of an Infrastructure Plan?

Highway projects linger for months

The White House appears to be making a major shift in its infrastructure approach, somewhat unexpectedly. Rather than roll out infrastructure improvements through public-private partnerships, the president seems prepared to think in terms of outright fiscal expenditure. Details remain sketchy.

That tone should satisfy key Democrats who have been critical of over-emphasizing private-sector cash because of concerns over the widespread impact of user fees. Never mind the fact that some major states would balk at any infrastructure-related federal matching requirements. New Jersey and Illinois, for instance, have some of the lowest state credit ratings in the country.

At its core, infrastructure is a bipartisan issue. Insiders are hopeful that common ground can be found this year for a package that may total at least $200 billion in federal funds. The amount could be much larger by the time Congress repackages any White House proposal. But can the federal government afford such investment? Some economists argue that the just-passed tax bill already causes undue budget pressure over the years ahead.

There are also latent concerns about over-stimulating the economy. With a solid growth trajectory now in place, do policymakers run the risk of cyclical overheating if they dump too much money into the economy too fast? Any plan would presumably have to pace infrastructure outlays over time. Some analysts argue that the government may want to withhold certain investment as an antidote to potentially-weak economic activity in the future.

A brewing issue is one of perception. The Trump administration, which has only offered sweeping generalizations about how it defines infrastructure, is likely to be thinking in terms of outsized greenfield projects. But the real need may be maintaining and improving existing structures, given the age of the nation’s roads and bridges, among other elements of the infrastructure mix. Repairing and managing what we have may be much cheaper and more effective than new construction.

Regardless of what a bipartisan agreement looks like, we should brace for the overt politicalization of any infrastructure bill. Comments by President Trump in January 2018 at the American Farm Bureau Annual Convention in Nashville are a prelude to future rhetoric. He claimed, “We are proposing infrastructure reforms to ensure that our rural communities have access to the best roadways, railways, and waterways anywhere in the world. And that’s what’s happening. We’re going to be spending the necessary funds, and we’re going to get you taken care of. It’s about time.”

Our Vantage Point: Infrastructure may be a bipartisan issue, but we will see months of political wrangling on Capital Hill. The shift away from outsized private-sector funding acknowledges the low-return nature of many infrastructure projects.

Learn more at PBS.

© 2018 Cranganore Inc. All rights reserved.

Image: In America, tight budgets can limit states’ ability to maintain and improve existing infrastructure assets. Credit: Dbvirago at Can Stock Photo Inc.

Geography Lessons Are Expensive

Shanghai has a population of about 24 million

Marriott usually excels in diplomacy. It has hotel properties in more than 120 countries and territories. However, the worldview held by one corner of its marketing department has landed the firm in hot water. Chinese authorities shuttered its local website, albeit only for a week, over an online survey. On the form, Marriott listed Tibet, Taiwan, Hong Kong, and Macau as separate countries.

Nationalist sentiment seems to Lo,k6Kv(r%WOhave overwhelmed Marriott’s attempt at damage control, given the degree of public shaming on Weibo, a Chinese-language service similar to Twitter. Market regulators have opened an investigation into suspected violations of cybersecurity and advertisement laws. Marriott’s chief executive, Arne Sorenson, rallied with an apology: “We don’t support anyone who subverts the sovereignty and territorial integrity of China and we do not intend in any way to encourage or incite any such people or groups.”

Marriott is not alone in this mistake. Coca-Cola, Burberry, and Apple, among others, have stumbled in the treacherous terrain of Chinese sovereignty. Other multinationals may repeat the error in the future. The interesting twist in the Marriott case is the degree of outcry over social-media channels. That sort of groundswell will ultimately impact the bottom line more than a traditional reprimand from public officials.

Our Vantage Point. When operating in emerging markets, multinationals sometimes forget that routine effort can become an act of lèse-majesté. One reason is that developing-world nations are unusually sensitive about Western perceptions of their countries.

Learn more at Asia Times.

© 2018 Cranganore Inc. All rights reserved.

Image: Shanghai is among those Chinese cities where Marriott is rolling out its Fairfield brand. Credit: SeanPavonePhoto at Can Stock Photo Inc.

Let’s Do Crypto. Or Blockchain. Or Both.

Kodak joins the fintech revolution

Kodak declared this week that it was getting into the cryptocurrency and blockchain business. The announcement was thin on details and big on splash, suggesting that the investor relations staff was far ahead of the corporate strategy team. The move is a daring one for the Rochester, New York-based company. Its total miss of the digital-photography revolution was probably one of the great corporate blunders of all time. Apparently, its current management is dead set on reversing that legacy.

Investors gorged themselves on the move. Kodak stock closed at $10.70 after the announcement, representing a more than 300% gain over its previous value. The frenzy suggests that some investors have gone off the rails. Implementation of a blockchain-based photographer rights platform is unproven; the company is merely licensing its name to another firm to develop it. And the use of soon-to-be minted KodakCoin to pay for those usage rights seems to be a stretch, when traditional payment mechanisms or broadly-accepted cryptocurrencies would suffice.

The parody-like development appears to be an act of desperation for the faltered company. Jeff Clarke, Kodak’s chief executive officer, was a c-suite executive with Compaq at the peak of the dot-com bubble in 2000. His high-risk fintech strategy is informed by those dizzying years in which investors shoveled money at internet-related firms. What he may not recall is that those companies that survived the dot-com crash were largely those that eschewed hype and micro-managed their profit margins.

Our Vantage Point: Issuers and investors seem to be drinking the same potion, as they maneuver to exploit the crypto-craze. A likely meltdown in the market will set back fintech innovation by many years.

Learn more at The Verge.

© 2018 Cranganore Inc. All rights reserved.

Image: Fast-evolving cryptocurrencies are a controversial asset class. Credit: Violka08 at Can Stock Photo Inc.

US Dollar Outlook Lacks Spirit

Greenback is set to remain under pressure

Currency traders may have a dull year in 2018, with the US dollar seeing sluggish movement. Optimists anticipate that rate hikes by the Federal Reserve will buoy the currency. That information, however, appears to have already been digested by the market. And developments surrounding the Trump administration are likely to cast a pall over any latent demand for the greenback.

Many currency specialists missed the downside in the US dollar last year. Indices that measure activity against the major currencies saw a decline of about 10% in 2017, delivering the worst annual return since 2003. One key reason is that attention shifted to Europe, where domestic demand led to unanticipated strong activity. According to the IMF, real GDP estimates for the European Union will moderate from 2.4% in 2017 to 2.1% in 2018, but there may continue to be healthy growth revisions.

The relatively weak US dollar is good news for equity investors. US corporates will continue to benefit from ongoing pricing power in global markets. That benefit will be mirrored in those emerging markets where currencies closely track the US dollar, such as those in Asia.

We do not see an impact on bond markets over the year ahead. US inflation remains persistently low because of globalization; currency weakness will not change that reality. Most interest-rate pundits expect the Federal Reserve to roll out tighter policy in a predictable manner, although there is lingering debate on the number of rate increases to be seen in 2018.

We are puzzled by the argument that US tax reform will drive currency strength. Some cash will make its way back to America, as US corporates consider the benefits of earnings repatriation. The tax on overseas income is now reduced from 35% to 15.5%. But most of that offshore capital is already banked in US dollars. At best, the repatriation argument could impact economic growth, leading to more enthusiasm for domestic opportunities, but the tax measure is not a tax holiday. Repatriation moves are likely to be drawn out over time.

The medium-term outlook for the US dollar is even more murky. The currency may turn volatile over a two-to-four year span as investors fret over federal borrowing and political vagary. Those issues may drive foreign investors exposed to US assets to liquidate their historically-high positions.

Perhaps the most interesting aspect of US dollar analysis right now is academic. Can Bitcoin and other cryptocurrencies take the shine off the currency as a reserve unit? While it is easy to discount moves in these assets as faddish, we look beyond now-thin activity to see if a larger trend evolves. Momentum could be driven by a greater willingness in the developing world to use cryptocurrencies as a replacement for national fiat currencies.

Our Vantage Point: Those searching for prominent investment ideals should look beyond the US dollar, at least over the year ahead. Aside from a meltdown in Washington politics, there appear to be few currency-market surprises on the horizon.

Learn more at Reuters.

© 2018 Cranganore Inc. All rights reserved.

Image: US corporates will continue to benefit from the weak dollar. Credit: Feverpitched at Can Stock Photo Inc.

Investors Find Comfort in Turkish Equities

Battle of Manzikert paved the way for Muslim control of Anatolia

Populism may sustain stock prices on the Istanbul stock exchange, despite the 45% gain in US dollar terms since the beginning of the year. Our logic is tethered to the view that President Erdogan is looking for a decisive victory in the November 2019 election. That vote seems like a distant prospect. The campaign, however, will inform ongoing fiscal stimulus, regardless of any attendant economic imbalances. Skeptics should take a closer look at Erdogan’s speech this week in the eastern Turkish city of Mus, commemorating the anniversary of the Battle of Manzikert. The victory of the Seljuks over the Byzantines in 1071 paved the way for Muslim control over Anatolia. The speech was both populist fodder and a dramatic reminder of Erdogan’s nationalist agenda. Granted, economists may fret over domestic inflation figures, which in turn could lead to tighter monetary policy. But investors are likely to overlook those fundamentals in favor of a measured growth trajectory. One reason for that stance is the lackluster setting on other regional bourses, including the UAE, Egypt, and Saudi Arabia.

Our Vantage Point: We acknowledge that Turkish equities appear to be overbought. But our worst-case scenario calls for consolidation, rather than outright correction.

Learn more at A News.

© 2017 Cranganore Inc. All rights reserved.

Image: Diorama at the Istanbul Military Museum depicts the Manzikert battlefield. Credit: O. Mustafin at Wikimedia Commons.

Cybersecurity is the New Deal Metric

Pacemaker business in the US is regulated by the Food and Drug Administration

The intersection between cybersecurity and medical technology is the pacemaker, at least this week. The Food and Drug Administration has forced NYSE-traded Abbott Laboratories to recall some 465,000 pacemakers due to software vulnerabilities. It seems that the black hat across town could actually change a heartbeat. The news is not a windfall for hospitals; a programming patch can be installed wirelessly at a cardiologist’s office. But the headline emphasizes a new area of technology-based business risks. Abbott just acquired its pacemaker business from St. Jude Medical for some $25 billion. The liability could be extreme in the case of hacked pacemakers, never mind the direct and indirect costs of the outsized, if not embarrassing recall. Board members and shareholders alike may be asking uncomfortable questions about what the firm discovered—or chose to ignore—in conducting due diligence on the transaction. Perhaps Abbott should have paid closer attention to its white-hat allies. The health-care giant responded obliquely this week by asserting, “We are resolving all old St. Jude medical issues.”

Our Vantage Point: Due diligence once centered on governance and profit analysis. Executives ignored cybersecurity, in part because they did not understand it. They now do so at their peril.

Learn more at the Chicago Tribune.

© 2017 Cranganore Inc. All rights reserved.

Image: Three companies—Abbott, Boston Scientific, and Medtronic—control the US market for pacemakers. Credit: Khuruzero at Can Stock Photo Inc.

Robots Streamline Air Travel

Check-in queue frustrate passengers

Airlines are getting serious about robots. Think ticketing kiosks on wheels, turbocharged with Siri. Air New Zealand just finished a test that involved using a robot to check-in passengers. The flag carrier is not the first to use robots to revamp customer service. There have been similar experiments in Seattle and Amsterdam. Eva Air uses them routinely in Taiwan. The idea is to help airlines manage the ebb-and-flow of flight schedules and the chaos of flight disruptions. Robots are programmed to issue boarding passes, answer flight questions, and provide gate directions, among other tasks. The story, however, may be less about tech-based investment and more about airline cost savings. Replacing customer-service agents with robots has allure for airlines, given the replicable and predictable nature of many requirements. But the use of robots may decimate any lingering pretense of brand loyalty among consumers, at least with economy-class passengers. The day is nigh when only premium ticket holders will have ready access to traditional ground staff.

Our Vantage Point: Robots provide a further opportunity for airlines to cut costs, er, manage passenger-related operations. But we are not sure how their widespread adoption will grow corporate revenue.

Learn more at the New Zealand Herald.

© 2017 Cranganore Inc. All rights reserved.

Image: Robots are set to take over many airport check-in formalities. Credit: Casanowe at Can Stock Photo Inc.

Beijing Closes Cash Spigot

Gambling is the primary industry in Macau

China is now a less hospitable destination, at least for certain dealmakers. Ernst & Young estimates that Chinese outbound investment is set to reach $100 billion in 2017, representing a sharp decline from the $183 billion seen last year. Beijing blames this decline in part on growing hostility toward Chinese firms in the US and Europe. There is some truth to that point. The bigger issue is that officials are resolved to mitigate the volume of leveraged deals and address attendant imbalances in the domestic economy. Earlier this month, regulators outlined new rules on outbound investment. They specifically targeted excesses in property, film, entertainment, and sports, while advocated investment in infrastructure, oil and mining, agriculture, and technology. This policy clarification streamlines the deal-making process in favor of traditional industries, if not lower risk alternatives. But the macroeconomic context suggests that Chinese investors are likely to move forward at a far more measured pace than in the past.

Our Vantage Point: China remains a dominant player in cross-border investments worldwide. But the integrity of the domestic finance sector is a primary concern, given the muted outlook for economic growth.

Learn more at the Nikkei Asian Review.

© 2017 Cranganore Inc. All rights reserved.

Image: Investment in Macau-based companies has raised the ire of Chinese officials. Credit: Vichie81 at Can Stock Photo Inc.

Bikinis Deflected From Indonesian Airspace

Indonesia is the largest economy in Southeast Asia

Vietnam-based Vietjet is no ordinary airline. It has carved out consumer awareness of its brand by featuring bikini-clad flight attendants. The gimmick has worked for its female founder; Nguyen Thi Phuong Thao became a billionaire after the airline’s initial public offering in February. But minimalist uniforms are not export-friendly, at least to the Islamic world. In tandem with growing Vietnamese-Indonesian ties, Jakarta airport authorities looked for assurances that bikini-clad flight attendants will stay grounded on Vietjet’s soon-to-launch Ho Chi Minh City-Jakarta route. Vietjet obliged—and announced it will include halal meals in the service mix. While the lesson may be deference to cultural values, it is also one in business strategy. Vietnam is chasing Indonesia to propel its torrid growth rate of 6%-to-7%. Tourism is a key component in the mix. According to Mastercard, outbound Indonesian travel is one of the fastest growing hospitality segments in Asia, with outbound trips set to grow by almost 9% a year over each of the next few years.

Our Vantage Point: Wealth generation trends in the Islamic world offer enormous profit potential to multinationals. But the character of that business needs to side with conservative halal lifestyles.

Learn more at The Jakarta Post.

© 2017 Cranganore Inc. All rights reserved.

Image: Stable rupiah is one outgrowth of Indonesian economic wherewithal. Credit: Caputrelight at Can Stock Photo Inc.

Tech Metals Ignite Mining Industry

Salar de Uyuni is the largest salt flat in the world

There may not be enough tech metals worldwide to meet soaring demand. In most cases, mobile phones and solar panels are produced with lithium or indium. Other essential metals for tech-related industries include cobalt and lanthanum; the list is perplexing. The problem is that most of these resources do not trade freely in liquid markets. Rather, they are controlled narrowly by government or commercial interests. Even China—a dominant player in this corner of the commodities business—has resorted to deep-sea mining to meet demand. Does that mean investors should jump at the next neodymium deal? There is merit to diversification. Tech-metal opportunities are red-hot at this time, but tech manufacturers are looking hard at production alternatives. And supply metrics can change abruptly. Consider that aluminum was more valuable than gold throughout the 1800s. Then prices collapsed, as supply soared, when aluminum foil came into common use.

Our Vantage Point: Tech-metal deals should be viewed as high-risk opportunities. Apparently-generous returns could evaporate quickly, as advances in manufacturing up-end demand.

Learn more at the Financial Times.

Note: We use the term “tech metals” generally. It includes so-called rare-earth metals, such as neodymium, as well as those metals that are by-products of base-metal production, such as cobalt.

© 2017 Cranganore Inc. All rights reserved.

Image: Lithium does not occur freely in nature, but is commonly extracted from brine. Shown here is Salar de Uyuni in Bolivia. Credit: Cristiborda at Can Stock Photo Inc.

Caribbean Passport Programs Hit Speed Bump

Marigot Bay is popular destination in St. Lucia

Many nations have citizenship-by-investment policies to entice deep pockets, but Caribbean nations have been under fire for their relatively low hurdles. The tiny island of Dominica, for example, offers its passport to globetrotters for $100,000. While these policies have been a cash drop for smaller economies, Western governments have been less enamored by their propensity, at least in theory, to attract tax cheats and terrorists. Canada just made headlines by terminating visa-free travel from Antigua and Barbuda, requiring nationals to apply for their visas through a regional embassy in Trinidad. The lawyer-dominated citizenship-by-investment industry is likely to dismiss the Canadian decision as caprice, but high-net-worth investors should be less cavalier. Shifting geopolitical sentiment suggests that a so-called “golden passport” may be a less prominent reason to allocate funds to the Caribbean. The good news is that the return-on-investment on many projects in the region justifies the allocation risk, regardless of citizenship dividends.

Our Vantage Point: Investors based in the developing world should focus their Caribbean deal activity on project due diligence, rather than potentially-mutable passport benefits.

Learn more at Antillean Media Group.

© 2017 Cranganore Inc. All rights reserved.

Image: St. Lucia is among those Caribbean nations which attracts foreign investment. Credit: Dbvirago at Can Stock Photo Inc.

Pakistan Lures Bargain Hunters

Agriculture is about 20% of Pakistani GDP

Currency-depreciation rumors are playing out in Pakistan, with the rupee tumbling over 3.0% in mid-week trading. The realignment is provoked, at least fundamentally, by a deteriorating external account. But it is exacerbated by faltering confidence in the government. Prime Minister Sharif is under investigation for money-laundering allegations. There is good news behind the veil of volatility. Prior to this week, the IMF targeted economic growth at 5.0% in 2017 and 5.2% in 2018. A weaker rupee could bolster that momentum, given a lively export sector, although the impact of higher local interest rates is unclear. We suggest that cross-border investors actually sharpen their focus on Pakistan. Foreign-exchange shocks often depress private- and public-sector valuations; they can lead to outsized discounts. We acknowledge that a perpetual obstacle to deal-making here is ad hoc headline analysis. A cover story from The Atlantic in December 2011 lingers vividly: “The Ally From Hell: What to Do About Pakistan.” There are other examples. In this market, the risk tolerant are best served by maneuvering to the front of the economic cycle, rather than centering attention on international affairs.

Our Vantage Point: In Pakistan, like other emerging markets, asset volatility can be unnerving. But that skittishness may cultivate widespread opportunity.

Learn more at Bloomberg.

© 2017 Cranganore Inc. All rights reserved.

Image: Pakistan is a major player in agricultural exports, ranking eighth globally in farm output.. Credit: Paop at Can Stock Photo Inc.

Can a Major Firm Be a Venture Capitalist?

The maneki neko is a cultural icon in Japan

Tokyo-based Trend Micro—a force in the cybersecurity industry—announced last week that it is rolling out a $100 million venture capital effort, apparently to fund startups in the internet-of-things space. The idea, in its own words, is “to dive into new areas without disrupting core business resources.” However exciting for the publicly-listed firm, the focus is likely to have a greater impact on its balance sheet than its business operations, at least for the foreseeable future. Corporate venture capital units often invest alongside top-tier funds until they can sort out their own priorities and strategies. The theoretical danger in that scenario is that underlying valuations of target companies get pushed higher and higher, leading to awkward re-pricing on an eventual exit. Trend Micro might serve its commercial interests better by creating a smaller funding pool that centers on still-fledgling opportunities. Of course the hazard there is that a $1-to-$5 million investment can easily get lost in the c-suite. We offer Trend Micro the benefit of doubt, but sustaining an effective corporate venture capital unit demands more than a pool of cash.

Our Vantage Point: Silicon Valley may laud corporate venture capital for adding depth to the startup scene. But the actual dividend to investors and entrepreneurs is unclear.

Learn more at DealStreetAsia.

© 2017 Cranganore Inc. All rights reserved.

Image: In Japanese tradition, the maneki neko is a good luck talisman. Credit: Icenando at Can Stock Photo Inc.