This story is not getting much attention in the US, but we thought it too big to ignore. S&P Global, one of the world’s leading credit raters, just announced that a “debt iceberg with titanic credit risks”. S&P says that China has seen a massive rise in borrowing by its local governments, much of it hidden from view, and the the excessive borrowing poses grave risks. The ratings agency says there is between $4.3 tn to $5.8 tn of off-balance sheet debt held by local governments following “rampant” borrowing. The debt is hidden is what are called “Local government financing vehicles” (LGFVs), which were entities used to raise debt before local governments were allowed to issue bonds in capital markets.
FINSUM: This is a pretty scary story that only the FT seems to be covering. It makes one wonder if LGFVs will be the acronym at the center of the next crisis.
One of the challenges that all advisors are dealing with at the moment is how to handle rising rates and their affect on portfolios. There are good options out there for handling the challenge, like rate hedge ETFs, but within the efforts to defend against losses, there have a been a few hard-to-predict moves. One big surprise has been the performance of utilities stocks. Utilities generally lose when rates rise as their yields look relatively less attractive. However, utilities are outperforming the market, with a flat performance this month through Monday, and a 6% gain in the last three months. Explaining the gains, one fund manager says “'In a market like this, in a dramatic sell-off, the rotational effects will be higher than the interest rate effect”.
FINSUM: We sort of understand the safe haven status, but how does a rate-sensitive sector become a safe haven from rate-driven losses? Nonetheless, utilities stocks are doing well.
In what would likely come as the biggest IPO in recent memory, Uber says it is planning for a potential IPO in 2019. Parties close to Uber say that its bankers delivered valuation proposals for an IPO in the range of $120 bn. That is an eye-opening figure because it is almost double the company’s valuation from its most recent funding round 2 months ago. There are no guarantees the company will go public next year, but its CEO has said it is aiming for a public debut in the second half of 2019.
FINSUM: We do not think that valuation is out of the question given how much investor anticipation there might be for this IPO. The IPO market has been red-hot, so nothing seems out of reach.
BlackRock just reported earnings and the results are not what many expected. Total inflows for the quarter were just $10.6 bn, the lowest since 2016. Interestingly, one of the biggest areas of losses was in passive strategies held by institutional managers, where BlackRock saw $30 bn of withdrawals. The poor results sent BlackRock’s stock to its lowest point since May 2017. BlackRock’s CEO Larry Fink blamed the uncertainty about rates and peak earnings as reasons for the outflows.
FINSUM: What is interesting here is that BlackRock is probably in the best position to keep devouring assets, but even it is having trouble.
Retail stocks have come back in a big way since their slump in 2017. The whole sector seems to be having a revival in investors’ minds, but challenges remain. Rising costs pressures, tariff complications, and a looming backlog of inventory all look bleak. Consumer spending this Christmas may also be subdued. With valuations high again, there are still some great undervalued names, according to Barron’s. For instance, take a look at Nike, Tiffany, and Amazon.
FINSUM: We hardly think Amazon is a retail stock with room to run. That said, Nike and Tiffany are much more interesting as value picks.