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Corona Capital

28 January 2021 By Breakingviews columnists

Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.



– Transparency International

– Government Pension Fund Global

Skinny domestic product. U.S. GDP expanded at a puny 4% annual pace in the fourth quarter, by the government’s early estimate on Thursday. That’s nothing compared with a 33% annualized rate in the third quarter, but at least the economy is growing. Overall America’s economic output in 2020 was down 3.5% from the year before. That’s the biggest contraction since 1946, although, to be fair, the figure 75 years ago was a seismic minus 11.6%.

The biggest hit has been to the services sector – think everything from airlines to bars – while housing and manufacturing have propped up the economy. The net effect has been bad for jobs, though, and a recovery that is losing steam because of continuing Covid-19 infections is a worry that was also noted by Federal Reserve Chair Jay Powell in a press conference on Wednesday.

With poverty increasing and nonfarm employment declining last month for the first time since last April, according to the Bureau of Labor Statistics, there’s increased pressure on lawmakers in Congress to deliver some version of President Joe Biden’s $1.9 trillion spending plan. That requires the plight of real people to prevail over politics. (By Richard Beales)

Bunged up. One symptom of the coronavirus crisis is a global corruption pandemic, according to a report released on Thursday by Transparency International. The watchdog identified a link between perceived corruption within a country and underinvestment in healthcare, which persisted even after accounting for levels of economic development. The organisation also called out weak oversight of coronavirus response programmes in rich countries like the United States, and the British government’s habit of handing out huge procurement contracts with weak controls.

Underlining TI’s point, its annual Corruption Perceptions Index saw the U.S. achieve its worst score since 2012, and successful virus-fighter New Zealand top the charts. Governments wanting to do better could make it mandatory for state departments to conduct corruption risk analyses, even in health emergencies, and hand greater power to audit bodies. But politicians and civil servants are understandably more focused on fighting Covid-19 right now. The danger is that, once the crisis is over, public anger about corruption takes a back seat, risking a repeat in the next emergency. (By Liam Proud)

The Nordic Way. Norway’s controversial bet on hedgies is paying off nicely. On Thursday the country’s $1.26 trillion Government Pension Fund Global – led by former hedge fund supremo Nicolai Tangen – announced a 10.9% return for 2020, as bets on U.S. technology stocks paid off. That compares with a roughly 9% increase in Norwegian crown terms for the FTSE Global All Cap Index, according to Refinitiv data. Zooming tech giants such as Apple, Amazon.com and Microsoft saw equities, which represent nearly three-quarters of the fund’s assets, buoy overall gains as credit and unlisted real estate returned 7.5% and made a small decline, respectively.

Such outperformance should further vindicate the choice of Tangen – founder of London-based AKO Capital – following opposition to his appointment last year. The fact that it represents a marked acceleration from a 14.6% drop suffered in the first quarter may also indicate happier news for Singapore’s competitor, $230 billion sovereign fund Temasek, which posted a 2% fall in the year ending last March, just as the pandemic began to bite. (By Christopher Thompson)

Pumplona. The Paloma cocktail, comprising grapefruit juice and tequila, is lifting Diageo’s spirits. The $92 billion drinks giant said on Thursday that sales of tequila jumped 80% in North America in the six months to December, helping to drive year-on-year organic sales in the region up 12%. That eased the hangover from closed bars and restaurants. Diageo is not the only beneficiary of the home-cocktail vogue: tonic maker Fevertree’s U.S. sales were up 23% last year.

Tequila brands like Don Julio and Casamigos also liven up Diageo’s valuation gap over its closest rival Pernod Ricard, which reports results on Feb. 11. The French group has an enterprise value of just under 19 times expected EBITDA for the year to June 2021, while Diageo is valued at almost 21 times, according to Refinitiv data. Assuming there’s no supply shortage – agave plants used to make tequila take seven years to grow – Diageo’s cocktail buzz should carry it through the pandemic. (By Dasha Afanasieva)

Pandemic winner. Prada is returning to its former glory. Sales at the $16 billion fashion group will double to 5 billion euros in four to five years, boss Patrizio Bertelli said in an interview published on Thursday. Investors are already pricing in an acceleration. Shares in the Italian maker of the $2,500 Galleria bag have gained 68% in the past 12 months, making it the best-performing stock among top European bling companies. Over the same period LVMH is up 23%, while Moncler rose 18%.

That suggests that Prada’s turnaround strategy is working. Even before Covid-19, the group stopped offering discounts and cut ties with most department stores to improve its profitability. Its directly controlled retail shops now account for over 90% of total sales. By 2023, EBITDA should represent 33% of forecast sales of 4 billion euros, Refinitiv data shows. That’s still behind Moncler’s projected 39% EBITDA margin. Even so, the gap is narrowing. (By Lisa Jucca)

Sweetened revenge. Chalk one up for pushy investors. A Carlyle-backed group doubled its original offer for Japan Asia Group, a green energy and technology company, to 48 billion yen ($463 million) after activist Yoshiaki Murakami smelled something fishy and lobbed in his own unsolicited bid. The 1,200 yen a share proposal is now quadruple the company’s undisturbed price in September.

Murakami blasted the original structure, accusing JAG’s board of handing Chairman Tetsuo Yamashita 10 billion yen of assets as part of the deal for just 60 million yen. Under the revised terms, Carlyle pays a little more to buy bigger stakes in two of the company’s divisions, but at the same valuation. That should help it avoid looking like a pushover in future confrontations with hedge funds. Yamashita, though, kicks in a heftier sum, which suggests it might be that much harder for Japanese companies to get away with cosy management buyouts. (By Jennifer Hughes)


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