To market, to market to buy a fat pig. Saved at the 11th hour. Or even 12th hour. Cyprus is what we are talking about, a deal was struck last evening in Brussels, that still needs to be ironed out over the coming weeks it looks like. It looks ugly for the deposits over 100 thousand Euros who could be facing a haircut of as much as 40 percent. Wow. That is amazing. But I think that there is a message that is being sent here. The message from the developed world and established and large economies to tax havens and offshore financial centres is, beware. That is why I think that the aggressive nature against depositors is being pushed by the Europeans as a collective.
Effectively the second largest bank, Laiki, will see insured deposits of 100 thousand Euros or less transferred to a bank that will be fully capitalised and the "bad assets" will be wound down. The whole idea is to say, hey, your dodgy deposits (presuming that they are), are not welcome in this Europe. Find somewhere else. This is only good from a credibility point of view for the rest of Europe, but not so great for the depositors, dodgy or not. The depositors, who now are stuck with the almost certainty that they will lose a substantial amount of money in this process. Laiki is not of course in any way attached to Laika, translated to "barker" in English from Russian. That was the Russian dog that had a one way ticket to space. Much like Russian depositors who have a one way ticket to a haircut on their deposits to the Cypriot treasury.
The truth is that nobody complained whilst the Cypriots enjoyed their economy doubling in 15 years, having positioned themselves as an offshore financial centre. And at the core of the problem was that there was no central European banking regulator to wag their finger and shake a big stick at the banks. The 10 percent corporate tax rate attracted a whole lot of offshore businesses being relocated there. Building activity went nuts, from being 8 odd percent of their economy in 2000 to nearly 15 percent in 2008. The contribution of the public sector is really noticeable, that became really bloated, doubling in size in a decade. In 2012 it was the second biggest contributor to GDP.
But hey, what was not to like? The weather is good, and more importantly, you are inside of the Eurozone. That was the main attraction for deposits from places like Russia, it is better to have a bank account denominated in Euros than Roubles, right? Correct. Forget it if it was Cypriot Pounds, that would NOT have happened. The conclusion of a wonderful piece from the FT on Friday: Cyprus - just pop the red pill, please is exactly the sad and sorry option that the small country is now faced with:
- "Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable."
Think of it this way. And this is why the Russians rejected the Cypriot efforts last week to drum up some more support. If you were sitting in the Kremlin and you saw capital move offshore to avoid local scrutiny, how are you likely to view that money? With disdain. In the same way that the US tax authorities view the BVI, Bermuda or the Cayman Islands. All lovely places to vacation, but essentially rich people and corporations that are trying to not pay taxes back home. Quite crudely, that is how I think that Russians viewed it. So, oligarchs and rich Russians, you are on your own there in Cyprus.
I suspect that the economy and financial services in particular in Cyprus are going to suffer, and suffer badly. I thought to myself last week, well at least the Germans can go and vacation again in Greece, because there is another sunny place in Europe where they are hated more. And that is Cyprus. It cannot be easy for the people to have to swallow this exceptionally bitter pill. But staying in the Euro has had its perks already, but of course recency bias is always a problem. People always base their expectations on the recent past, either positive or negative. Nobody argued that Cypriot government employees were amongst the best paid in the Eurozone. I never heard that.
The reason why it took so long to deal with this problem is that in truth there were far bigger fish to fry. Italy and Spain and even Greece were more important last year. Much more important. And so whilst the minnow was eating and supersizing itself, the sick bigger fish had to be fixed. And for the record I don't think that this sets any precedent. And the reason is because this is how Cyprus positioned themselves. You can't have everything though. You can't be a tax haven, part of the Euro, and not comply. No time like the present to push harder for a central European banking authority to make sure that is closed quickly.
Markets this morning globally are cheering this news, so I guess whilst the implications are for less trust in the direction of Europe inc, i.e. Brussels and less trust of local politicians and banking institutions, the medicine was awful either way. Local equity markets here are responding with a cheer, markets across Asia responded favourably too. The Euro after having made a good fist of it has levelled out again. But stocks in Europe at the beginning of trade are responding with a two thirds of a percent gain.
In case you missed it, perhaps you took the day off like I did on Friday, Bidvest have done something cheeky and potentially opportunistic. The official announcement came Friday, joint cautionary announcement: "Bidvest Shareholders are advised that Bidvest has today submitted a firm intention letter ("the Letter") to the Board of Directors of Adcock Ingram Holdings Limited ("Adcock Ingram") in terms of which Bidvest proposes to acquire 60% of the issued share capital of Adcock Ingram from its shareholders." Wow. Why I say cheeky is that the timing seems good, from the part of Bidvest. Adcock has struggled for the better part of five years since having been unbundled from Tiger Brands.
Adcock's bottom line has only managed to grow below inflation for the last five years. Top line growth has been muted too, growing at less than 9 percent per annum for the last half a decade. The stock has woefully underperformed their peer Aspen. In part due to the brilliance of Aspen, but also one got the sense that post the Tiger unbundling and the associated accompanying fines that they kind of "lost their way". Plus with their business being less internationally focused like Aspen, and with South African business dragging with AVR tenders not going their (Adcock's) way.
I am guessing that Bidvest are seeing sunnier days ahead for the Adcock business and by being the majority shareholder, they could give the business much needed impetus. I wonder what the PIC, as the biggest shareholder thinks, they own 14.4 percent. And then Blue Falcon Trading 69 at 10.34 percent. That entity is nearly two thirds owned by Kagiso and just over one quarter owned by a community trust, Kurisani. I am not too sure of their intentions. You might still have a lot of "soft" old Tiger Brands shareholders, who might be more than happy to go along for the cash option. I suspect the PIC might not be too happy, but I am sure that the fellows at Bidvest have done their homework. The cheque for 60 percent of Adcock at current levels is around 6.5 billion Rands, roughly 8.3 percent of the Bidvest market cap. I suspect that this might just be their biggest deal ever, without having done too much homework in this regard.
Byron's beats the streets On Thursday evening after the market closed in the US Nike released third quarter results which sent the stock up 11%. If you need reminding the Nike share price hit a speed bump a long with the Chinese economy last year. Sales had slowed in that region and inventory was oversupplied. The shares slowly started creeping back as things proved to be not as bad as everyone initially thought and has now surpassed all time highs again. I can safely say we stuck to our guns and added to the stock whenever the opportunity arose and will carry on doing so. Let's look at the numbers.
Revenues from continuing operations increased 9%, 10% if you exclude currency changes. Diluted headline earnings per share were up 20% to 0.73c. EPS comfortably beat revenue growth because of margin expansion (increased 30 basis points to 44.2%), a lower tax rate and the share buyback. Future orders are up 7%. Earnings for the full year are expected to come in at $2.64 for 2013 and $3 for 2014. Trading at $59.53 the share trades at just under 20 times 2014 earnings. That may seem expensive but the company is expected to achieve double digit growth for the next 4 years at least.
Here is what CEO Mark Parker had to say about the quarter. "Our team delivered strong results in Q3. We did it with a relentless flow of innovation into our key categories. Given the diversity of our portfolio, we're able to capture big opportunities that drive sustainable, profitable growth. At the same time we continue to invest in new ways to enhance athletic performance, build strong consumer communities, and improve how we design and manufacture our products. That's how we increase our potential and drive shareholder value."
As I mentioned above, we really like the long term story here. Sales growth in mainland China is still slow as they pump the promotions and discounts so as get rid of the excess inventory there. But that region will come right. Growing GDP at 7.5% which is already off a high base means billions of Renminbi being created for disposable income. If you earn more you consume more, especially calories. This means you need to burn those calories away. Exercise and a healthy lifestyle come hand in hand with a better standard of living.
Nike has put themselves at the forefront of innovation and brand awareness amongst sports apparel. They are the ultimate aspirational brand in this division and it seems like their marketing division will not let this slide even though they have had some unfortunate athlete mishaps. As the world grows GDP Nike will benefit at a much faster rate. We continue to add to Nike as one of our core Vestact holdings in New York.
Crow's nest. We are flat now, after some initial exuberance. Another short week in store, four days on and then another four days off. Ironically in Cyprus it is Independence day when they celebrated their autonomy from Greece. The very country that led them to this mess right now that their banks are in, buying Greek bonds at the time for Cypriot banks seemed like a good idea, they would have been better off parking them in German Bunds. But that is history. There is not enough clarity yet, and that might weigh in the coming days to the long weekend. Let us not forget the importance of the BRIC's summit, even if it seems all talky and not too much resolution. A new club takes time to gain traction, but nice to be a part of it, even if I don't agree with the entry, we don't have the clout, but most importantly, the population.
Sasha Naryshkine and Byron Lotter
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