Another smorgasbord of interesting stories as seen elsewhere on the web today.
First up, the rise of Chinese infrastructure funds and Chinese REITs. I think this could be a huge new sector and can easily imagine a rush of money into Chinese renewable energy funds. Asian-focused fund manager Eastspring has got an interesting primer on this very new development HERE.
Here are the key takeaways:
- “The recent launch of the first onshore C-REITs is a positive move to widen the financing channel for infrastructure projects from the public to the private markets. This new asset class will widen the range of long-duration assets available to Chinese savers and supplement pension and life insurance investments.
- The development of C-REITs has been carefully considered, which we think it will lead to C-REITs becoming mainstream investment products over time, similar to REITs in other markets.
- China may approve the listing of REITs outside the infrastructure domain and into commercial properties (offices, shopping malls, logistics, residential housing). China could therefore become a USD 3 trillion REIT market, overtaking the US, currently the world’s largest REIT market and far outpacing the rest of Asia.
- The launch of the onshore infrastructure REITs can provide an avenue for Chinese domestic investors to switch from direct property ownership to investing in a REIT and possibly extend investments into sub-sectors outside of the infrastructure space.
Tech sector headlines
Sticking with the idea of listed funds, over to Mick Gilligan and his regular blog which highlights the latest managers report from Ben Rogoff at Polar Capital technology. As Mick reminds us, his essay like the annual report is full of eye-catching data such as:
- Worldwide IT spending is expected to reach $4.1trn in 2021, a yoy increase of 8.4%.
- Private equity is sitting on a record cash pile of $1.5trn.
- Mentions of inflation increased >800% y/y in Q1 earnings calls.
- Netflix reached 200m subscribers by the end of 2020.
- PayPal added more users in the second quarter of 2020 than they had in the entirety of 2016.
- Companies showing >40% revenue growth de-rating from 34x EV/Sales to ~23x in early 2021.
- During the pandemic hand gel traded at 10x so-called fair value !!
- When the US 10yr-2yr spread is +150bp level annualized SPX gains fall to 5.8% v 11.0% when 0-1.5%.
- Mastercard says $1 in $5 of global retail spending occurred online in 2020.
- Intel (-13%) had an annus horribilis in 2020 as its manufacturing process was pushed out yet again.
Which equities outperform in an inflationary environment?
Next up is another great research note from the always reliable Nicholas Rabener at FactorResearch. He’s been digging around in the historical records to find the answer to what must be the $64 trillion question: which types of equities do well in a high inflation environment. You can see the original note via this link.
Bottom line? If inflation does push close to 10% – highly unlikely in my view but not impossible – then pretty much all equities do badly !
Real Monthly US Equity Returns by Inflation Regime, 1947 to 2021
Real Monthly US Equity Returns: 10 Best Sectors amid High Inflation, 1947 to 2021
Boost the SEIS scheme if you want to boost innovation
Last but no means least, tax perks. I’ve grown more and more suspicious of tax allowances that supposedly help investment but are in fact just a bung to very wealthy investors. The one scheme where I am more enthusiastic is the EIS, though I would bring the total cap lower. By contrast, I’ve always thought that the allowances on the Seed EIS scheme were too stingy. An active seed-stage investor called SFC Capital has just released a report which reckons there’s been a decline in first-time seed-stage funding rounds into UK startups since the peak for deals in 2018. Here are the headline numbers on that decline: .
- The number of first-time seed-stage funding rounds into UK startups is down 36% from the peak in 2018
- With data showing a strong correlation between SEIS limits and average first-time seed-stage deal size and the time taken to raise, it’s likely the stricter requirements introduced to SEIS in 2018 are a major driving force of that decline
- Covid also had an impact in 2020, with Government financial support providing alternative financing options and delaying equity raises, as well as changing VCs’ behavior
Interestingly SFC have some practical suggestions about what might help improve early-stage seed funding – which is critical for an innovation economy – these include the following, all of which I think are spot on in my view and all Treasury acceptable in terms of cost:Increase the SEIS funding cap from £150k to £250k, and extend the qualifying period from two years to three years
- Remove the “sunset clause” that would see SEIS phased out from 2025
- Increase Government investment into seed-stage funds
- Reduce admin/bureaucracy to simplify SEIS for funds and encourage more to invest at seed stage