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The 2019 stock market reversal: how it happened

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 Few people would have disagreed at the beginning of the year that the nine-year-long bull market was reaching its end phase. That didn’t diminish the shock when it actually happened. Here is Breakingviews’ imagined account of how the good times came to an end in 2019.


Day 1 – The market opens on an unremarkable Monday. A mid-sized maker of car fan belts files for Chapter 11, blaming European tariffs levied in response to U.S. trade barriers. Three hours later, Facebook announces a data breach, which it attributes to alt-right Generation Z whiz-kids with possible links to Russia. Investors, jittery over the impact of trade war and tech-sector weakness, start to sell. The S&P 500 Index slumps 4 percent, financial and internet stocks bearing the brunt.

Day 2 – Tech stocks fall further and faster. That afternoon, President Donald Trump takes to Twitter to call Federal Reserve Chairman Jerome Powell an “ENEMY OF THE PEOPLE” for his reluctance to cut rates. Later at an event, Powell emphasizes that the Fed is not on a pre-set course, but stocks only slide further. Trump muses on replacing the Fed chief with wrestling promoter Vince McMahon. Despite confusion over whether such a thing is possible, the S&P slides 4 percent.

Day 3 – Two ratings agencies say they are downgrading a basket of BBB-rated bonds to junk status, expressing concern that a slowing economy will push up defaults. Spreads on high-yield bonds widen dramatically. Market-makers stop trading some exchange-traded funds exposed to corporate debt, and collateralized loan obligations, which buy and repackage junk-rated loans, start offloading assets. The S&P slips 3 percent.

Day 4 – Trump announces the formation of “Team America,” a group of U.S. plutocrats who pledge to invest their personal wealth in the U.S. stock market, including the chief executive of one of Wall Street’s biggest lenders and Treasury Secretary Steven Mnuchin. Within hours, Tesla chief Elon Musk, who had been named as one of the group, tweets that he is looking forward to taking America private “at 420.” Stocks dive a further 5 percent.

Day 5 – Warren Buffett, whose name did not appear on the Team America line-up, tells a CNBC interviewer that he sees no buying opportunities at current levels, and is minded to use his $100 billion cash pile buying back shares instead. Retail investors take fright. Stocks slump 3 percent. Facebook’s valuation has now fallen from $390 billion at the start of the year to just $200 billion.

Day 6 – Over the weekend, Chinese President Xi Jinping expresses concern that, as the holder of $1.2 trillion of U.S. debt, China’s feelings have been hurt by U.S. volatility. Starbucks branches immediately attract protests in second-tier Chinese cities, and rumors proliferate that the People’s Bank of China is preparing to sell Treasuries. Yields on 10-year debt hit 4 percent. The S&P has now fallen 20 percent in a week.

Day 7 – Talks over the acquisition of a large media company fall apart. The buyer blames uncertain markets, but reports emerge that the company’s bankers got cold feet, and withdrew a letter they had provided declaring themselves “highly confident” of arranging financing. Shares in dozens of putative takeover targets fall as much as 30 percent. Trump tells Fox News that Securities and Exchange Commission Chairman Jay Clayton could be doing more to help.

Day 8 – An open letter from Wall Street bank chief executives appears in the financial press, arguing that post-crisis banking reforms have made the meltdown worse. They argue that proprietary trading, which could have enabled banks to buy up stocks on their own account, would have stemmed losses, and call for a reconsideration of Basel 3 and Dodd-Frank Act rules. Financial stocks rise, but the S&P still ends the day down 2 percent.

Day 9 – Mnuchin announces he is standing down from the Treasury, but pledges his full support for the president. Trump says he will pick a replacement quickly, and declines to shut down reports that he is considering rapper Kanye West for the role. Stories emerge that the original selloff may have been triggered by hedge funds who had set up algorithms to trade automatically based on Trump’s tweets. Markets are flat.

Fed expected to hike interest rates, defying Trump

Day 10 – Facebook says Buffett is investing $10 billion as a vote of confidence, taking voting shares and generously priced warrants. The slide in stocks has stopped, as abruptly as it began. The market closes up slightly but has lost almost a quarter in two weeks. Congress begins to discuss curbs on algorithm-based trading. After markets close, the White House announces its new pick for the Treasury: first daughter Ivanka Trump. -Reuters

-John Foley and Neil Unmack


Investment

Not So Fast: Can Elon Musk Really Open Tesla’s China Gigafactory This Year?

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Elon Musk rarely shies away from setting bold targets for Tesla, despite a mixed record for achieving them when promised. So it was in character when he announced the electric-car company’s first Chinese Gigafactory could be operational in about 11 months.

“We’re looking forward to hopefully having some initial production of the Model 3 towards the end of this year and achieving volume production next year,” Musk said at the Shanghai groundbreaking January 7.

He may be disappointed.

There’s no precedent for building a large, modern auto-assembly plant and starting its production in under a year, manufacturing experts say. In fact, even Tesla’s official goal of ramping up to 3,000 Model 3 electric sedans per week at some point in 2020 won’t be easy.  

“Unless he’s mastered some approach that I’m not aware of to do everything in a more effective and efficient way, that lead time to build is going to be really challenging,” said Laurie Harbour, CEO of manufacturing consultant Harbour Results Inc. in Southfield, Michigan. “It definitely seems completely optimistic.”

Musk’s motivation to rapidly localize Tesla’s operations in China is as simple as legendary criminal Willie Sutton’s apocryphal maxim about banks: That’s where the money is. China is the world’s largest electric-vehicle market, where sales of rechargeable vehicles likely reached about 1 million units in 2018. That’s why Tesla’s capacity target for its Shanghai Gigafactory when fully ramped up is 500,000 vehicles annually.

Tesla begins delivering Model 3s to China in March, but its China sales are restrained by a 40% import duty on foreign-built autos (China last month moved to cut that to 15%). Along with the Model 3, the Shanghai plant is also to eventually produce Model Y electric crossovers that can be sold to Chinese customers with no added tariff.

But first Tesla has to build that plant.

It typically takes at least two years to get a large new auto factory ready to churn out vehicles, according to Brian Jones, COO of Lexington, Kentucky-based Gray, an engineering firm that’s built nearly 450 auto and parts plants in North America over the past five decades for companies including Toyota, Volkswagen, General Motors, Mercedes-Benz, Nissan and Volvo.

“From the first shovel in the ground to the first vehicle rolling off an assembly line, the fastest we’ve ever seen is 24 months, which is typically a project you see from one of the more mature, experienced manufacturers,” Jones says. “That schedule can go all the way up to 36 months.”

That includes building the factory structure itself, as well as infrastructure in and around the site, including utilities, roads and exit ramps in place.

Tesla secured the 210-acre site in Shanghai’s Lingang area last year for about $140 million, and Musk said the cost of the initial phase to get the facility up to 250,000 units of annual capacity would be about $2 billion. (Analysts estimate that getting the plant to Tesla’s half-million-unit capacity goal may total $5 billion.) The local Shanghai government is helping expedite the project in terms of permits and supporting infrastructure, and Tesla says lessons learned from Model 3 production at its Fremont, California, plant mean it can accelerate Chinese Gigafactory construction.

Still, Musk’s comments were at odds with those he made in a July statement issued by the Shanghai Municipal Government about the plant’s timetable. Once permits and other preparations were set, “it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up to produce around 500,000 vehicles per year for Chinese customers,” he said.

By October 2018, however, he’d begun describing the accelerated timetable. “We’re driving to have Model 3 production for the China market or the Greater China market active certainly next year. It will be happening next year,” he told analysts during Tesla’s third-quarter results call.  

“Things work differently in China, so the North American experience (for building a new plant) may not translate exactly there,” said Kristin Dziczek, who studies industry, labor and economics as a vice president at the Center for Automotive Research in Ann Arbor, Michigan. Local government assistance will certainly help, “but this does seem really, really aggressive,” she said.

ELON MUSK VIA TWITTER

Reproducing the design and robots used for the Model 3 assembly line in California will speed things up, according to consultant Harbour.

Tesla also has to certify new suppliers in China, which is very time-consuming. Auto-assembly plants are “such a big system, and it’s such a gamble from launch of construction to starting to build (vehicles). Everything has to fall in line as planned in order for it to execute in that kind of timing. And to do it in 11 months, every star in the universe has to align for that to happen,” Harbour said.

Gray hasn’t built any of Tesla’s facilities nor has it built plants in China, but it is exploring consulting opportunities there, Jones said.

So could one of the top auto plant builders in the U.S. get a “greenfield” production site ready in under 12 months?

“We love a challenge, but that would be a stretch,” Jones said.

A Tesla logo is seen at the groundbreaking ceremony of Tesla Shanghai Gigafactory on January 7, 2019 in Shanghai, China.
A Tesla logo is seen at the groundbreaking ceremony of Tesla Shanghai Gigafactory on January 7, 2019 in Shanghai, China. VCG VIA GETTY IMAGES

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Economy

World Will Improve Where It Matters Most In 2019

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The world economy is set to enjoy a very good year. In that, it will be much like 2018 and 2017 and most probably like 2020 and 2021. Economic growth will be fairly strong in most of the countries where such expansion does the most good. While rich countries worry about objectively tiny setbacks, poor people are overall gaining more of the dignity that comes with adequate material comfort.

Consider extreme poverty. The World Bank draws the line between the wretched of the earth and everyone else at daily consumption of goods and services worth $1.90. The Our World in Data website at Oxford University estimates that 72 percent of the world’s population lived below that line in 1950. The World Bank’s preliminary estimate for 2018 is 8.6 percent, down from 10 percent in 2015.

Fewer very poor people means more are enjoying better lives. The proportion of the global population without access to electricity is declining by about 0.3 percentage points a year. The number of children not enrolled in school is shrinking by about 5 million annually. Almost every indicator of basic prosperity shows the same trend.

The good news is pretty much global. Even Africa, long the lagging continent, is starting to catch up. The proportion of African children that die before they turn five has declined from 21 percent in 1975 to 8 percent in 2015, the most recent year for which data is available. Better health comes from – and with – greater wealth. Real per person income in sub-Saharan Africa has increased by 40 percent in the last decade.

Not all the news is good. Due to war and civil conflict, primarily in Africa, the proportion of the world’s population that is undernourished has risen by 0.2 percentage points in the last two years. Still, at 11.9 percent, it is 2.2 percentage points lower than a decade ago.

The prediction of more global gains in 2019 is pretty solid. There are also good reasons to believe that 2029 will be fine. Economic growth in very poor countries is becoming a virtuous circle. More education and better health creates better workers, who support stronger institutions, which make larger and more effective investments, which produce the money needed to pay for even better schooling and health.

That pattern has held in country after country for at least two decades. Bad governments do slow progress, but it takes war or total state failure, as in Venezuela, to reverse the progress.

The almost unstoppable global retreat of misery and ignorance is arguably the best news ever in economic history. For political history, however, the trends are far less clear. The old belief that greater wealth would naturally bring more open societies looks flawed. The populace of many countries, both richer and poorer, seem pretty happy with autocratic and extreme nationalist governments.

China is the prime example. The oppressive and fairly corrupt Communist Party has presided over rapid and widespread increases in prosperity. Its cross-border ambitions, both civil and military, have expanded as well.

That is worrying for many reasons. One of them is that war is probably the only force destructive enough to stop the upward march of global economic good news. The great question, for both 2019 and 2029, is whether progress will threaten prosperity by leading to the use of the world’s ever-larger supply of ever more deadly arms. -Reuters

-Edward Hadas

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Economy

Deals, Dollars and Developments On The African Continent

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The first-ever Africa Investment Forum was a resounding success with some fascinating math: 49 projects worth $38.7 billion over three days, all for the continent.


On a breezy Wednesday morning in November in Johannesburg, there is a feverish bustle at the Sandton Convention Centre, one of South Africa’s most prestigious destinations for conferences. Known for regularly hosting world-class exhibitions and events, today, it is playing host to one of the most important events of the year.

The second floor of the convention center is pulsating with action and excitement as hundreds of businessmen and power women in sharp suits and African attire greet each other. At each corner of the grand room are huge posters with quotes that say, “People don’t eat potential! It’s time to turn potential into real deals,” and,

We believe that the growth of Africa’s economy represents opportunities for its neighbors

The word on everyone’s lips is transactions. The inaugural edition of the Africa Investment Forum (AIF), organized by the African Development Bank (AfDB), is officially opened by South African President Cyril Ramaphosa.

The bigwigs of corporate Africa and political power brokers are all here, including Africa’s richest man, Aliko Dangote, along with Nigerian Vice President Yemi Osinbajo, Ghanaian President Nana Akufo-Addo and Ethiopia’s first female president Sahle-Work Zewde.

The AfDB describes the forum as a collaborative platform for the economic and social development of the continent. The goal is to bring together project sponsors, borrowers, lenders and public and private sector investments to unlock billions of dollars that will accelerate investment.
The rationale is simple. Six of the 10 fastest-growing economies are in Africa, yet Africa has a mammoth infrastructure funding gap of $130-$170 billion a year.

The man called ‘Mr. Development’ in the October 2018 issue of FORBES AFRICA, AfDB President Akinwumi Adesina, believes there needs to be a convergence of stakeholders from all over Africa to broker deals that finally unlock the potential of Africa.

As with any conference with a multitude of minds, opinions are divided for this one too. On the one hand are those who quietly wonder whether this is going to be yet another three days of rhetoric and ambiguous targets that bear no fruit? Then you have those believers who are convinced that Africa is ripe for an integrated marketplace that can actually deliver real growth.

For these people, the AIF offers new hope. They believe that the continent’s largest and smallest economies are ready to come together and take charge of their own destiny.

According to the World Bank, year-on-year economic growth in sub-Saharan Africa is slashed by two percentage points due to a lack of infrastructure. Analysts believe around $100 billion must be invested each year to eliminate the deficit and give African infrastructure a shot at competing with other developing regions.

Traditionally, the World Bank, the AfDB and African governments have sought to address the infrastructure gap by investing in larger infrastructure projects valued at more than $1 billion.

This means smaller-scale projects, in the $100 million to $200 million range, which are also necessary for the development goals of the continent, are neglected.

History shows that trade has the potential to transform nations.

Adesina believes this. 

“The AIF is probably the most important game-changing initiative for accelerated economic development in Africa. It is a unique platform for investment, finance, transparent transactions and a genuine African marketplace for closing deals to accelerate the economic development of Africa. The fact is that no individual benefactor, no matter how rich, or government or sovereign wealth fund, or even a multilateral development bank, for that matter, can provide the resources to meet Africa’s critical economic development needs,” he says in his opening address at the conference.

According to Adesina, the solution is clear. Africa can and Africa must collectively work towards financing its development, requiring broad partnerships with the private sector and an appreciation of the realities of global investment partners.

“This will be an African investment marketplace where the AfDB and its partners will screen and enhance bankable projects and attract co-investors and facilitate transactions to close Africa’s investment gaps. This platform will reduce intermediation costs and improve the quality of documentation and information and increase active and productive engagements between African governments and the private sector,” he says.

It is that type of collaboration that brings Shamima Mallam-Hassam, Country Executive of Alter Domus, all the way from Mauritius to Johannesburg.

“We are a leading fund and corporate services provider, headquartered in Luxemburg, with an office in Mauritius. The purpose of being at the Africa Investment Forum is to meet with people that have projects in Africa, that we can help in their structuring, and use Mauritius as a platform for their investment into Africa. So this is a very high-level forum, where a lot of insights have been shared about where Africa is going and how there can be more collaborations to make projects happen,” she says.

Ethiopia’s first female president Sahle- Zewde networking with delegates at the Africa Investment Forum. Picture: Gypseenia Lion

Can developing nations thrive in a global economy without an international, collective mind-set? International organizations like the United Nations Conference on Trade and Development (UNCTAD) believe that for sustainable development to exist, more developed African economies need to break down barriers between them and less developed economies. To begin with, the continent needs to address rising unemployment.

“We need to create 400 million jobs for 400 million Africans, who are already born, between now and 2030. These massive numbers need massive responses,” says Ibrahim Mayaki, CEO of the New Partnership for Africa’s Development (NEPAD) during a panel conversation at AIF.
A total of 49 deals were made at the AIF, which were valued at $38.7 billion, according to the final numbers released. These deals represent a renaissance for the African continent. But the concern for some is whether the returns from these deals will remain on the continent.

“The ownership of industrial assets must be African companies. A lot of developers make the mistake of allowing foreign ownership, which alters the trajectory of your destiny,” says Basil El-Baz, chairman and CEO of Egypt’s Carbon Holdings.

The all-important issue of women’s empowerment in corporate Africa is also discussed. A panel in ‘Investing in women for accelerated growth’ reveals women entrepreneurs experience a significant funding gap of $42 billion annually, but are more likely to repay loans compared to male borrowers. David Makhura, the premier of the Gauteng province where the conference is held, attests: “African women need to be supported. They are the ones that sell to provide for their children and families.”

The panel comprises prominent and successful women, including Ibukun Awosika, president of First Bank of Nigeria Limited, Hayat Sindi, senior advisor to the president of the Islamic Development Bank, and Daphne Mashile-Nkosi, chairperson of Kalagadi Manganese.

We need to make women a critical component of our financial system


Ibukun Awosika

Underpinning the market place is ‘The AIF Platform’, that connects 200,000 American businesses and users from 100 countries, many of whom are potential investors and trade partners for Africa.

The AIF Platform is announced in partnership with the Inter Development Bank (IDB) who launched a similar platform, Connect America, in 2014.
“We have over 400 million smartphones in Africa. Within a few years, this number will exceed a billion. But none of these are made in Africa. We are the consumers but we’re not the value creators,” says Ashish Thakkar, founder of Mara Group, before the closing plenary.

The AIF Platform was created to address exactly this. By connecting African-based companies like Mara to global trade partners, there can be economies of scale.

If there is one thing to take away from the conference, it is this: there is a fight to back Africa as an investable destination so that capital can land in the continent and unlock its potential. As Adesina puts it: “This is Africa’s time to change the rhetoric. We need to make Africa independent; we can no longer build Africa relying on aid. The only way to achieve this is a complete rise in intra-Africa trade.”

Africa’s richest man, Aliko Dangote attended the inaugural Africa Investment Forum. Picture: Gypseenia Lion

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