Larry Summers: US economy may hit an 'air pocket' in coming months
CNN.com - Top Stories / 2023-03-06 17:5616
The US economy may still be running fast and strong, but its risk of suddenly falling into a recession still looms large, despite the Federal Reserve's efforts, former Treasury Secretary Larry Summers warned Monday.

Summers told CNN's Poppy Harlow in an interview that he expects the Fed will have to raise its benchmark interest rate higher than expected and that central bank's "push and push" to combat inflation will soon trigger a downturn.

"The process of bringing down inflation will bring on a recession at some stage, as it almost always has in the past," Summers said.

And for the US economy, it could likely mean a "Wile E. Coyote moment," Summers said, referencing the cartoon canine's relentless — yet futile — pursuit of the speedy Roadrunner off a cliff and into mid-air.

Gravity eventually could win out.

"The economy could hit an air pocket in a few months," he said.


For the past year, the Fed has enacted a series of interest rate hikes aimed at chilling demand and cooling down historically high inflation. In recent months, as the pace of price increases has moderated, the central bank has eased off the gas pedal.

In February, the Fed's policymaking committee approved a quarter-point interest rate hike — its smallest increase in several months.

But in the weeks following that meeting, there was a barrage of surprisingly strong economic data, showing blockbuster job gains, hearty consumer spending and unyielding inflation.

"I don't think there's any question that we do not yet have inflation on a secure glide path anywhere near down to the 2% [Fed target] level," Summers said. "And until the Fed can be confident of that, it's going to have to be tightening rather than easing."

Some Fed members agree.

Federal Reserve Chairman Jerome Powell has cautioned that bringing down inflation will take a "significant period of time," while other Fed leaders have indicated they're open to larger interest rate hikes.

As of Monday, markets are expecting the Fed to make another quarter-point raise: The CME FedWatch Tool is showing a 69.4% probability of such a hike; however, the perceived chances of a half-point increase (at 30.6%) have grown considerably during the past few weeks. One month ago, the probability for a half-point increase was 3.3%, according to the CME FedWatch Tool.

Summers said his best guess would be for the fed funds rate to grow from its current range (4.5% to 4.75%) to 5.5%, but noted he "wouldn't be amazed" if it were to hit 6%, given the uncertainties in the economy.

"Hope for the best but plan for the worst, I think is the right advice," Summers said.

Enviado do meu Galaxy

SAP/Qualtrics: valuation is a victim of market history in the making
Financial Times: Markets / 2023-03-06 19:37



Wheeling and dealing is a lot more fun than takeover integration. That seems to be the lesson from SAP's rollercoaster ride with Qualtrics.

The German software titan first acquired the Utah software start-up in late 2018 for $8bn in cash. On Monday, Qualtrics disclosed that private equity firm Silver Lake had made a $12bn bid in partnership with Canada's largest pension fund.

This would appear more impressive if SAP had not floated a stake in Qualtrics in early 2021 at a $15bn group valuation. Amid the frenzy in growth stocks, Qualtrics at one point boasted a market capitalisation of nearly $30bn.

SAP justified its ownership of Qualtrics with the idea that its massive sales team would sell Qualtrics products to its big established client base. Qualtrics makes software that helps customers create surveys and analyse the resulting data.

Qualtrics grew quickly enough. In 2018, the company recorded $400mn in annual revenue. By 2022, that figure had hit $1.5bn. SAP's efforts to become more cloud-based and lift the valuations of both businesses further have, however, fallen short.

The evolution of Qualtrics' valuation shows how markets have changed their minds about high-growth, low-profit companies. SAP's initial $8bn acquisition valued Qualtrics at roughly 20 times trailing annual revenue. The 2021 IPO was roughly at that same highly elevated price.

Silver Lake is looking to pay well under 10 times trailing annual revenue. As for profits, Qualtrics forecasts an operating margin for 2023 of just 10 per cent. That is on an adjusted basis which suppresses a massive stock-based compensation expense.

SAP is in a position to sell Qualtrics for a higher price than it paid. Securities filings show that SAP also wrung out a $2bn dividend from the start-up.

Still, supplementary cash flows aside, big companies undertake blockbuster M&A to make big strategic leaps. If SAP merely sells after a few years for less than double Qualtrics' purchase price, it should chalk the deal up to experience.

Lex recommends the FT's Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

Enviado do meu Galaxy

Chinese companies choose Switzerland over US and UK to raise money overseas
Financial Times: Markets / 2023-03-06 21:2921


Chinese companies are flocking to Switzerland to raise capital after being discouraged from listing in the US by geopolitical tensions and in Britain by tougher audit standards.

Nine Chinese companies floated in Zurich last year, raising $3.2bn in the European country, according to SIX, the operator of the Swiss stock market. That far outstrips the $470mn they raised in New York, data from Dealogic stated.

Their shift of focus to Switzerland comes in response to months of tensions between Beijing and Washington over standards for Chinese companies on American markets. The US sought greater access to listed companies' financial audits but China resisted, citing a desire to protect state secrets.

Zurich has particularly benefited from the unease as it has less demanding requirements over the transparency of company audits.

Dozens more Chinese companies are looking to use a link set up last year that connects the Shanghai and Shenzhen stock markets with the main market in Zurich, according to bankers and exchange executives.

The "stock connect" scheme, modelled on a similar one with London, allows companies that are listed in one venue to raise capital on the other. Just five other companies floated on the Swiss market in 2022.

"Switzerland is very much at risk of becoming a Chinese market," said one senior executive at a rival exchange, adding that if all the Chinese companies which have announced plans to list go ahead, "then it will be more capital than was raised across all of European IPO volumes last year. You want lots of activity, but you do end up with a lot of risk if the enormous amount of your security comes from one jurisdiction."

So far this year the only listing in Switzerland has been Chinese — Zhejiang HangKe Technology Incorporated Co, which manufactures lithium battery equipment and raised $172mn.

Rather than undertake a full listing, companies using Stock Connect issue global depositary receipts, which represent shares in overseas companies while the issuer holds the underlying shares in its home market.

Valeria Ceccarelli, head of primary markets at SIX, said the surge in Chinese listings "confirms the attractiveness of SIX and the Swiss financial centre as an international hub for companies to raise capital".

For Chinese companies, overseas listings help make it easier to bypass tough domestic capital controls. Companies were raising money to fund their international growth and increase their visibility in Europe, Ceccarelli added.

Recommended

Some Chinese companies are also eyeing Britain, using the London Stock Exchange's Stock Connect programme which has existed since 2019 and led to five issuers raising about $6.5bn.

Two businesses have announced plans to list their shares in the UK so far this year — chemical company Yongtai and manufacturing group Lingyi iTech.

But exchange executives say that a decision by the UK auditor regulator, the Financial Reporting Council, to not deem Chinese audit standards as equivalent to international standards has pushed more companies to Switzerland, which accepts Chinese accounts for depositary receipts.

"Swiss authorities . . . do not waive any audit requirements, but treat Chinese companies the same as other foreign companies under the Swiss Audit Oversight Act," Ceccarelli said.

"At the end, the company decides where to list," she said, adding that the exchange is aware of 20 more Chinese companies that plan to list in Europe through GDRs.

Enviado do meu Galaxy