Loading...
Loading...
Menu

Rational Exuberance - The Equitile Blog

2nd July 2020

Posted by: Andrew McNally

All Pent-Up

It doesn’t look like the permitted re-opening of retail stores in the UK has marked a rush back to the shops. One might have expected people to be cautious in the first week or so but even in week two the footfall in England and Northern Ireland was still down 53.1% on the same week the year before (Springboard). It’s hard to say how quickly confidence builds from here, especially in light of an impending sharp rise in unemployment once the government’s furlough scheme comes to an end. One thing is clear though - there’s no shortage of cash right now.

The Bank of England published data last week showing the sharp increase in retail bank deposits.  There’s a startling build up of saving as those with an income spent more than 100 days, with the exception of Amazon and grocery stores, with no where to spend.

Wherever you look, there’s been a significant improvement in consumers’ balance sheet in aggregate. In fact, taking both consumer and companies together, saving has been significantly higher than borrowing for some weeks.

It can’t go on forever of course, Keynes’ so-called Paradox of Thrift can soon take hold. For now though, those left with an income have plenty of financial capacity to fulfil their pent-up demand.

Read more

2nd December 2019

Posted by: Carsten Wilhelmsen

Breakfast at Tiffany's

A visit to Tiffany’s would, to most of us, prove an expensive affair but the breakfast Antonio Belloni, Group Managing Director at LVMH, had with Tiffany’s CEO early in October will be the most lucrative one he’ll have this year. The European luxury conglomerate will overtake Switzerland’s Richemont as the leading player in high-end jewellery after it completes a EUR 14.6 billion takeover of Tiffany in 2020 – building on its position as global leader when it comes to fashion & leather goods, fine spirits and luxury boutique hotels.

The deal becomes most interesting, however, when one looks at the funding of it.

LVMH will acquire Tiffany by issuing corporate bonds at ultra-low rates. With their current 2024 bond yielding minus 12bps, the opportunity for the company to lock in long-term funding costs of close to zero is clear. Even bonds issued by LVMH with a 10 or 15 year maturities will yield next to nothing. Despite the low yield, they won’t struggle to find demand however - the company issued a EUR 300 million tranche with a negative yield in March this year and the deal was six times oversubscribed.

Even if longer-term funding costs were, say, 50bps - realistic in a world where USD 10 trillion of debt has negative yields and the combined entity will still only have net debt/EBITDA of 1.6x – LVMH will pay EUR 73 million annually to bondholders in return for Tiffany’s annual estimated operational cash flow of EUR 500-600 million.

In effect, the bondholders who are paying for Tiffany are bound to lose money, in real terms, while the shareholders of LVMH will extract a net annual cashflow EUR 430-530 million. And that’s before the growth - there are already material plans to expand in China and Japan, markets where LVMH has proven success (Tiffany has remained largely an American brand).

LVMH’s customers, of course, are the sort of people who own shares in LVMH. As central banks keep interest rates close to zero, assets like Tiffany can be bought at virtually no cost to the acquirer’s shareholders who, in turn, have more to spend on expensive handbags and jewellery. 

It’s a textbook case of how wealth polarization works in practice in the current monetary environment. As an investor, in this case at least, it’s a chance to be on the right side of it.

 

Read more
Categories
Twitter Feed
 
  • In these precedented times #investing #stockmarket #history

    29 days ago

  • RT @Equitile: Monetary expansion, along with redistributive economic policy and economic nationalism, presents an inflationary threat. But…

    43 days ago

  • RT @Equitile: The Covid19 economic lockdown is helping dramatically accelerate another phase of the industrial revolution. #investment #Cov…

    43 days ago

  • RT @Equitile: The UK economy needs to pick up much more quickly if many smaller enterprises are to survive. #ukeconomy #investing

    43 days ago

  • RT @Equitile: UK consumers have built up significant savings during lock-down #UK #economy #investment

    43 days ago

  • RT @Equitile: "...the fund’s holdings fit nicely with a slightly overused bit of advice from Canadian hockey legend Wayne Gretzky, whom Mr…

    43 days ago

Register

Here at Equitile we take your privacy seriously and will only use your personal information to send you monthly fund reports, news and marketing updates regarding Equitile and its funds. If you would like to receive monthly fund reports, news and marketing updates by email please fill out the form below:

Should you no longer wish to hear from us you can let us know at any time and asked to be removed from our database. You can find the details of how we process, store and protect your personal data at http://equitile.com/uploads/equitile-privacy-policy-may-2018.pdf

Register

Thank you for subscribing.