Best of Lex: leading by an ill example

Dear readers,

People will ask their doctor to sign them off from work, as needed, to provide evidence that their illness is acute. Not President Donald Trump, who demands that his doctors stand in front of the TV cameras declaiming on his rapid recovery from coronavirus. He demanded his doctors gave permission for him to go back out on the campaign trail, and duly received a “well” note from them.

Indeed, Mr Trump cannot stop bragging about his recovery. He rose from his sickbed long enough to manage a drive-by for supporters near Walter Reed National Military Medical Center outside Washington DC. Since returning to the White House he has offered live interviews emphasising his miraculously rapid recovery from a disease that has levelled hundreds of thousands of Americans.

However, reports of Mr Trump struggling to breathe, and coughing through interviews, raise some doubts. When he does return to the campaign trail, Lex recommends he take a leaf from Russian president Vladimir Putin’s playbook: attend his rallies bare-chested.

Meanwhile, not all his supporters believe the threat of contagion on Pennsylvania Avenue has passed. The Republican Senate majority leader Mitch McConnell stated on Thursday that he had avoided all contact with the White House for months, not surprisingly, decrying the lax procedures there.

The sudden incidence of the disease at the White House demonstrates the importance of testing. Shares in US laboratory testing companies Quest Diagnostics and Laboratory Corporation of America trade at only a little above their pre-pandemic levels. The explanation lies with the postponement of much non-coronavirus medical treatment and the uptake of quick-turnround tests that do not involve medical labs. Investors may do better to backtest makers, such as Abbott Laboratories, than processors.

But rapid testing is not a panacea, as the infections at the White House — which uses them — show. Much of the world is struggling to keep the pandemic under control. Lex has previously argued that a slew of high-profile corporate disasters was unlikely, absent a serious second wave. Unfortunately, that serious second wave is now materialising. That is particularly bad for travel and leisure companies such as easyJet. Without fresh finance, the UK low-cost airline could run out of money next year.

Banks would also be hit hard by a prolonged second wave. The problem for British ones is not just bad debt, but also criticism of their handling of the government-sponsored loans scheme. Among the many pitfalls is the high proportion of borrowers that turn out to be fraudsters. Lex suggested several ways to limit the damage, including forgetting about any big payouts to chief executives.

Bank regulators have curbed dividends and share buybacks during the pandemic. So what can a bank do with its extra capital? This week Morgan Stanley earmarked some of it for the shareholders of money manager Eaton Vance. Lex reckoned the $7bn paid — a 40 per cent premium — was a pretty price. But the market is ready for consolidation in the fund management sector, and shares in the US bank rose.

The pandemic has accelerated the shift towards digital payments, a theme running through many of this week’s Lex notes. Ant Group, the Alibaba fintech affiliate, has ambitions to expand in markets such as the US where digital payment use is growing. More US retail stores — from Neiman Marcus to Walgreens — are taking Alipay, Alibaba’s online payments service. But the Trump administration is reportedly exploring national security-related restrictions on the digital payment platforms. That goes some way to explain the relatively low multiple expected to be achieved in Ant’s Hong Kong and Shanghai initial public offering.

Access to Alibaba’s payments services is one benefit for Dufry, the Switzerland-based duty-free operator, which has announced a tie-in with the world’s largest ecommerce platform. The deal should work well for both sides, Lex reckoned.

An all-share merger between Nexi and Sia to create a €15bn Italian payments group should work too. The pandemic is helping shift Italy away from cash transactions. An enlarged and stronger Nexi offers investors an opportunity to profit from that trend.

Nordic countries lead Europe in digital payments. That helps hold down their banks’ cost-to-income ratios. An exception is Denmark’s Danske Bank, which has had to spend on improving its anti-money-laundering compliance processes. Returns for investors have been poor. Lex thought Danske was reminiscent of the original trolls of Scandinavian folklore, floundering from mishap to mishap, destroying human prosperity.

No one can sneer at the Danish businesses that lead the world’s wind power industry, though. Wind farm operator Orsted and turbine maker Vestas Wind are likely to benefit from Boris Johnson’s newfound enthusiasm for wind power. The UK prime minister’s change of heart is justified. The fall in the costs of offshore wind has been dramatic. The UK goal of getting to 40 gigawatts of offshore capacity by 2030, more than enough to meet average domestic electricity consumption, is achievable.

Lastly, retail wine sales have risen during the pandemic. A bottle of good wine can lift the spirits. It can provide asset investors in a world of ultra-low interest rates with a compelling haven asset. The performance of the Liv-ex Fine Wine 100 index, which charts the price movements of 100 leading fine wines on the secondary market, has been impressive. It is not a tipple for the impatient, however. Like the finest Bordeaux or Burgundy, the richer rewards go to those who let their wine investments age.

Lex hopes readers can enjoy a glass or two this coming weekend.

Alan Livsey
Lex research editor