Bull & Bear
December 2016
Issue No.1
EBS.Invest
Bull & Bear Official Newsletter of EBS.Invest
EBS.Invest 2016-17 Dear Readers, We would like to present to you the first issue of the new EBS.Invest Newsletter. Over the last year a lot has happened in the ressort that we would like to share with you. First of all, there was a big change in our internal structure. EBS Invest is now divided into two legal entities. EBS.Invest e.V. is responsible for managing the overall success of EBS Invest as a whole. But we also introduced the EBS.Invest Capital UG, which is managing a new fund that we established with the help of TU Invest.This is a big step towards our goal to make financial education as close to reality as possible. This means that the new analysts of EBS.Invest Capital UG who all are first year bachelor students have real responsibility and the possibility to learn about financial concepts and ideas in a real environment. They will invest real money into real stocks. About 50 first-year Bachelor students who applied to become analysts are guided by Directors and Managing Directors who are Master students. The analysts are divided into three investments groups: Equities, Fixed Income and Commodities. Since the start of September, EBS.Invest members attended a series of lectures at Goethe-University Frankfurt to obtain the “BVHBörsenführerschein” ( Introduction to Stock Exchange). These lectures teach basic and some advanced knowledge about the stock markets and financial system. In the end, participants take an exam, which if passed successfully, leads to a certificate. We want to offer these courses at EBS next year onwards.
Content EBS.Invest 201617...P.1 Letter from the Editors...P.2 Tesla & SolarCity... P.3 Uniper and Innogy... P. 5 The Trump Effect... P.7 Future of Frankfurt... P.9 The Great Indian Currency Reform... P.11
We want to highlight some of the most important financial and political news from around the world. And last but not least we want to update you about news from the work of EBS.Invest. Enjoy reading.
1
December 2016
Issue No.1
EBS.Invest
Introduction
Letter from the Editors Dear Reader, EBS.Invest has evolved immensely over the last year. We want to show this in written form with our new newsletter Bull & Bear. As you might have already guessed our name is a reference to the stock markets. Bull markets are markets where prices are expected to rise. Bear markets on the other hand are markets which expect falling prices. Also our name references the two bronze statues in front of the Frankfurt stock exchange. Personally we hope this newsletter is more of a Bull market to you. We are always open for feedback and ideas. We also value your ideas and analyses. If you have written something that you think could be published in the next issue of Bull & Bear, do not hesitate to send us an email: research@ebsinvest.com And now, without further ado, enjoy this first issue of Bull & Bear.
Photograph by Hongbo Zhu
L to R: Leo Avemarie (Editor), Jakob Kozak (Editor-in-Chief), Abhilash Indresha G (Editor-in-Chief), Esteban Fernandez (Editor, not in picture)
2
December 2016
Bull and Bear
Issue No.1
EBS.Invest
Business International
Finally, under one solar roof The electric carmaker TESLA is merging with SolarCity to provide the ultimate solar power driven future. After dropping the domain teslamotors.com in favour of just tesla.com the company is broadening its product line-up. What is the plan and how it is working so far?
What you see is the solar roof by Tesla unlike anything else now. (Source: TESLA)
On November 17th shareholders of TESLA have voted in favour of the 2.6 billion acquisition of SolarCity by TESLA. This move is a big piece of the puzzle that TESLA founder and CEO Elon Musk (45) tries to put together. In order to transform TESLA from a solely automotive company to a solar energy company that delivers energy solutions for the future, the implementation of SolarCity seems like a clever move. SolarCity, currently headquartered in San Mateo, California, produces and installs solar panels. The first product that was unveiled by TESLA in dawn of the merger was a solar roof, which blends in and looks like a normal roof. Aside from that TESLA had already introduced the PowerWall, a storage system for energy. This means TESLA now provides a solution to generate and store a household’s power. Just recently TESLA had opened its so called “Gigafactory”, a very big battery factory in the Nevada Desert, which makes the company more independent from other battery makers and will help them to achieve their goal to produce 500.000 cars in 2018. 3
December 2016
Issue No.1
EBS.Invest
Business International
Elon Musk had shared his plans for the future in 2006 in a blogpost called “Secret Masterplan” which he ended with the words “Don’t tell anyone”. Part of the plan back then was to eventually build an affordable electric vehicle. With the Model 3, which is supposed to be on the road by 2017, TESLA has just produced this kind of affordable car, prices are said to start at around 30.000 US-Dollars. In July of this year Musk released a new plan for the future, which combines multiple aspects. First he wants to provide solar roofs with integrated storage. Also he wants to expand the vehicle product range, focusing on trucks and busses. Then he wants TESLA to bring the autopilot to perfection, which in its form today has been cause for controversies, because drivers who had the autopilot in their TESLA enabled died in car crashes.
Stock price of TESLA rose by 4% between 17-18th November (Source: finanzen.net)
The TESLA CEO also emphasised the idea of car sharing. He envisions that customers can make their car available for sharing in the time that they are not using it themselves, and by doing so even make money. But despite these plans for the future, sceptics are looking as always on the endeavours of Musk and his company. TESLA does not make a profit; it is highly in debt. BMWs CEO Harald Krüger recently said he wishes TESLA all the best on their way to find a sustainable business model. This gibe should not hide the fact that established automakers are beginning to feel threatened by TESLA and starting to move towards the same electronic future.
4
December 2016
Bull and Bear
Issue No.1
EBS.Invest
Business National
Dirty vs. Clean The German electricity providers E.ON and RWE both recently bundled some of their business activities in new subsidiaries. But the new formed companies Uniper and Innogy are performing differently after their big IPO. Both companies follow a different strategy.
Coal Power Station on the left. Offshore wind power stations on the right. (Source: fotocommunity/ Vattenfall)
The nuclear phase-out still grips German electricity providers in the marrow. High costs are going to unfold to follow the enacted “Energiewende� by the German government in 2010. The goal is that by 2050, 80% of all energy consumed in Germany will be renewable. After the catastrophe in Fukushima in March 2011 Angela Merkel, the German chancellor, also decided against the use of nuclear power. This means that the electricity providers have to find alternatives to generate power and dismantle their nuclear power plants as well as to find a storage space for nuclear waste. This takes time and costs money. The four biggest electricity providers recently agreed to pay 23 billion Euros into a fund in order to achieve the above mentioned goals. In order to be ready for a nuclear power free future, the two biggest German electricity providers changed their structure over the last few years. This year was the time when they both made this clear to everyone by going public with their new subsidiaries. RWE, the second largest energy provider in the country, headquartered in Essen, Northrhine-Westfalia, founded Innogy, a company that produces renewable energy (wind, water and solar power). RWE itself is taking care of coal and gas power stations. This approach puts all its hope in the newly founded Innogy. It is the symbol of the future, while RWE as a brand stands for the past.
5
December 2016
Issue No.1
EBS.Invest
Business National
E.ON, the largest energy provider in the country, headquartered in Düsseldorf, Northrhine-Westfalia, founded Uniper and is following a different approach than its competitor. The business with renewable energy stays within the E.ON brand. Uniper is responsible for gas power and coal power stations. Some people accused Uniper of making use of leftovers. Indeed, it is a new company whose main business seems outdated and is not supported by the government in the long run. By doing so the E.ON brand itself is “green” again and stays relevant. The nuclear power plants are kept by E.ON. This might interest investors of Uniper, as it does not inherit this burden. So the two companies follow the same basic idea: Separating “old” energy and “new” energy. RWE does it by building a new company for new energy. E.ON is putting the old energy into the hands of Uniper. This way Innogy and E.ON want to be ready for the “Energiewende” and the future. It is interesting to see how both are doing on the stock market.
Stock price of Innogy dropped since its first offering by 11%. (Source: finanzen.net)
Innogy did not perform well on the stock market in the first two months after the IPO. Investors did not seem to be convinced. But still, for RWE the IPO was a success, because it flushed 3 billion Euros into the coffers of RWE and 2 billion Euros into Innogy. RWE still holds a 75% stake in Innogy. Uniper on the other hand rose by 14% since its debut three months ago. Uniper is interesting for investors, because it promises relatively high dividends. But of course sceptics point out, that there is no growth potential for the company, as it only manages existing power stations and mainly invests in their continued existence. Stock price of Uniper increased since its first offering by 14%. (Source: finanzen.net)
6
December 2016
Bull and Bear
Issue No.1
EBS.Invest
Politics International
The Trump Effect With the change in the guard at the White House from the Democrats to the Republicans and the statements that have been voiced during the campaign trail by Donald Trump, the results raise questions about the impact of his presidency on the global economy and the markets.
Donald Trump meets Barrack Obama on November 10th in the White House. (Source: Wikimedia/ CC)
As the world waited and watched for months the US presidential election campaign, Donald Trump won the race to become the President-elect and will be inaugurated as the forty-fifth president of the United States in January 2017. The consequences of a Trump presidency will be numerous and far reaching. The new Trump administration might even reverse globalisation, destabilise the financial system and threaten faith in the US dollar. One of the observations that was noticed during the campaign season and before the declaration of the results was that many of the market pundits predicted that Trump pulling off an upset win would create a panic reaction in the markets: fall of equities and other risky assets and a shift towards bonds and other safe-haven assets. However, on the contrary, the S&P 500, the Dow Jones Industrial Average, the NASDAQ composite and Russell 2000 – the four most widely cited indices of US stocks hit all-time highs recently at the closing of the Thanksgiving weekend. 7
December 2016
Issue No.1
EBS.Invest
Politics International
With regards to the Fed’s monetary policy for late this year and 2017, there is no reason to believe the election results will have a major impact on the Fed’s outlook. The Fed is much less sensitive to financial markets than it is seen to be. As it stands now, the Fed is on course to increase rates at its December meeting, with more increases likely in 2017. Unless there is a major US stock markets post-election. (Source: Thomas Reuters) market disruption or a change in the underlying economic fundamentals, there seems to be no reason currently to believe that the Fed will change its course. During the campaign, Mr. Trump’s promises focused on higher economic growth and corporate profits. He believes in lower taxes on businesses, less regulation and a major boost of infrastructure spending. While how those beliefs will translate into policy decisions and impact the economy is anybody’s guess, it would definitely be a boon for the bottom line of major companies, as evident from the surge in the stock market.
10-year Treasury yield (%). (Source: FT.com)
As far as the financial industry is concerned, Trump seems likely to roll back the financial regulations, including the Dodd-Frank legislation brought in as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall Act, which would separate traditional banking from investment banking. While the long term impact of the policies of the Trump administration remain to be seen, the markets seem to be ahead of themselves in seeking to identify the positive effects of his tenure in a tightening economy. The next four years will set the stage to see if Mr. Trump’s business ‘acumen’ will translate to real policy decisions and whether they will give a boost to the US economy or sink it into a crisis again.
8
December 2016
Bull and Bear
Issue No.1
EBS.Invest
Business International
Future of Frankfurt After Great Britain voted to leave the European Union on June 23rd, one city is particular interested in its consequences: Frankfurt. It hopes to gain new popularity in the banking industry
Frankfurt is the leading choice among those seeking to relocate. (Source: StreetWiseJournal)
In a landmark referendum carried out in June 2016, around fifty-two percent of British citizens voted to leave the European Union. The move raised an uncertainty among the citizens, the firms and markets in Europe and across the world. While the future of London which is the centre of the British economy is still plagued in uncertainty, the actual exit from the European Union will take up to two years giving enough time to frame the rules and regulations required for the future. Under the circumstances, the effects of this move on the European economy, Germany and the viability of Frankfurt as a financial hub on the continent will be varying. Given the uncertain role of London, major banks and financial firms have already publicly declared their intentions to move the jobs from London to other hubs like Frankfurt after the Brexit. In such a scenario, even a minor move two percent of the jobs from London could raise the number of jobs in Frankfurt by eleven percent or perhaps even higher. It seems to be that it is not only the financial firms who are potentially looking to relocate, but also a host of other FinTech and consulting firms are also considering shifting their business from London towards other hubs in Europe. Even though the exit of Britain was shocking surprise for many insiders in the industry, the financial sector in Germany and Frankfurt as a financial centre have much to gain from this move. 9
December 2016
Issue No.1
EBS.Invest
Business International
The potential impacts stemming from this move on the economy are being seen as mostly neutral to positive.
Germany leads in banking among competitors. (Source: FT.com)
The location of ECB in Frankfurt which reiterates its dominance as a major force in global finance is one of the reasons why Frankfurt is positioned well to benefit from Brexit. Apart from setting the monetary policy for the entire euro zone, the European Central Bank is also the top banking regulator for the EU. This gives the city a natural advantage over most other places seeking to replace London’s supremacy as a financial hub. Other factors that make Frankfurt a top choice among the other contenders for are: Quality of Life - Frankfurt ranks 7th globally in the annual Mercer quality of living survey of international cities. Cost of living – The consumer prices in London on average are some 10% higher than in Frankfurt. Adding rent, the premium is almost 45%. Availability of office space - More than 10% of office space in Frankfurt is unoccupied. And it’s relatively cheap with rents about a quarter of those in London. A survey conducted by the Boston Consulting Group examined financial centres which could be viable alternatives to a post-Brexit London. The results of the online survey, conducted in June 2016 before the UK’s EU referendum, showed the Frankfurt am Main leading the ranks. According to the results of the study, around twenty percent of London’s financial services jobs could shift to other global financial centres. Uncertainty still prevails for most in London’s financial centre, but one thing is certain: Frankfurt is ready and well positioned to welcome those in need of a new home. 10
December 2016
Bull and Bear
Issue No.1
EBS.Invest
Politics International
The Great Indian Currency Reform In the first week of November, the Indian Prime Minister in a surprise move announced that 86 percent of the currency in circulation in the country would be removed from the economy within 50 days. Which begs the question: Why?
500 and 1000 Rupee notes cease to be legal tender. (Source: Wikimedia/ CC)
The demonetization move was seen as a crackdown on corruption and black money while also acting as a driver to get millions of Indians on the country’s economic grid. The Indian Ministry of Finance claimed that 500 and 1,000 rupee notes were being used to fund terrorism, finance illegal drug sales, fuel the black market and are the method of choice for those seeking and paying bribes. Petty corruption is rampant in India, and a massive campaign against it was one of the campaign promises Mr. Modi rode on during the election wave 2 years ago. This move is comparable to the ECB’s decommissioning of the 500 Euro note in May this year in an effort to crack down on its perceived nefarious uses. The current state of India’s economy and its society in general is different than the EU’s, and this step seeks to address deeper underlying issues within the economy.
11
December 2016
Issue No.1
EBS.Invest
Politics International
Impact of the Move The Indian economy is fuelled by the cash-centric market, accounting for roughly 45% of GDP. Up until now, cash made up for upwards of 95% of all monetary transactions in a country where only about sixty percent of its people have bank accounts. This purge on 500 and 1,000 rupee notes may successfully push more Indians to get bank accounts, use digital methods to make purchases, and to engage in commercial exchanges that can be more easily tracked and taxed, thus ushering in more transparency. Impact on Markets The Indian equity markets have been on a downward trend since the government demonetized the 500 rupee and 1,000 rupee currency notes. The two benchmark equity indices—the Nifty 50 and the S&P BSE Sensex—fell on each trading day except two since the demonetization. Factoring into account the rise in the US dollar, the dollar equivalents of the Sensex and the Nifty fell more than eight percent each.
Movement of Indian Indices post-demonetization. (Source: The Indian Express)
Once the short-term impact of demonetization is over, Indian equities will likely rebound sharply. A rate cut from the Reserve Bank of India that seems to be in the offing would be beneficial and easy monetary conditions are generally favourable for equities. Consumption-driven sectors and stocks will continue to bear the brunt in the short term. Meanwhile, it has also been projected that this demonetization movement will be a boon for Indian banks, with increased deposits and more people getting into the banking system, as the cash economy retracts throughout the country. All in all, the move by Indian government seems have been the single biggest leap since liberalization in 1991, moving the country towards a cashless and digital future. 12
Bull & Bear