Raphael Stevens

THE 177-PAGE coalition agreement between Germany’s Social Democrats, Free Democrats (FDP) and the Greens contains grand plans to combat climate change and covid-19, and to speed up digitisation. Tucked away on page 73 is a more modest promise, to fund a small part of its public-pension scheme by investing in stocks. Reactions in Germany ranged from the apprehensive to the enraged. “Is our pension safe in stock?” fretted one news outlet. Another asked: “Are politicians gambling away our pension?”As retirees live longer, Germany’s pension system, which was established in 1889 by Otto von Bismarck, is buckling. Workers and bosses together pay a “pension tax” of about 18% of a worker’s gross wage. This is meant to fund the roughly €300bn ($340bn, or about 9% of GDP) paid out in pensions each year. But shortfalls have meant that the government has had to subsidise the scheme, to the tune of €100bn last year. The problem is only set to get worse as more baby-boomers retire.In order to help fix the problem, the liberal FDP has long supported a plan to reshape the pension scheme along Swedish lines. Sweden’s system consists of a standard pension, to which taxpayers contribute 16% of their gross income, and a supplemental “premium” pension, through which 2.5% of each taxpayer’s income is placed into a stock fund of their choosing. Should the taxpayer decide against active investment, the money is deposited instead in a state fund, which since 2003 has made an annual return of 9.9%.The plan outlined in Germany’s coalition deal is far more modest. The government will funnel €10bn from its annual budget into a publicly managed pension fund, which will be invested in the stockmarket, and which may generate attractive returns. The principal itself accounts for only about ten days of pension payments, says Martin Werding of the Ruhr University Bochum, who conducted a feasibility study of the FDP’s proposal ahead of the election. But the party hopes it may only be a first step towards a “stock-and-bond covered pension system”.The reaction to the government’s plan tells you much about Germans’ attitudes to capital markets. Studies indicate that they are “market-shy” and tend to overestimate the risks from investing. Only around a quarter of households own stocks. By contrast, more than half of all American households do so, much of it in the form of 401(k) retirement plans. This could in part reflect differences between the two countries’ tax systems. Germany imposes a higher tax rate—of 25%—on long-term capital gains, for instance.Then there are Germany’s scars from the dotcom era. In 1996 Deutsche Telekom listed on the stockmarket. Germans headed to the market in droves; about 650,000 of the buyers of the newly issued stock were first-time punters. The share price soared seven-fold before crashing spectacularly in the early 2000s. The effects still linger. Those who held Deutsche Telekom shares or who might remember the crash are less likely to hold stocks even today, as are their children, suggests research published last year by the German Institute for Economic Research (DIW), a think-tank in Berlin. Even by 2020 the number of Germans investing in the stockmarket was still a shade below its 2001 level.The FDP hopes that the planned changes to the pension scheme might increase Germans’ familiarity with stock investing. “The Swedes really aren’t known as turbo-capitalistic stock gamblers,” jokes Johannes Vogel, the party’s expert on pension politics. The coalition government also aims to make it easier for people to save for retirement outside their state pension. The tax-free personal allowance on capital gains will rise from €800 to €1,000 a year in 2023, and the coalition hopes to launch an inquiry into the creation of a Swedish-style public-investment fund.These changes alone might do little to put the pension system on a sustainable footing and make pensioners better off. That, says Marcel Fratzscher of the DIW, would require a change to the state retirement age, as well as labour-market reforms. Nonetheless, he reckons, the plans provide a “glimmer of hope” that the government realises, at least, that the system needs reform. ■This article appeared in the Finance & economics section of the print edition under the headline “Aversion therapy” More

KAZAKHSTAN IS OFTEN called the Saudi Arabia of uranium. In fact its market share, at more than 40% of the world’s nuclear fuel, is not far off the share in the oil market of the Organisation of the Petroleum Exporting Countries and Russia combined. So when unrest, followed by harsh repression, shook the country early this month, buyers of the metal shuddered. Spot uranium prices jumped by 8% on January 5th alone, to $45 per pound, according to UxC, a data provider. With protests now quashed, the market has settled. Nevertheless, the commodity, which is often dubbed “yellowcake”, seems set for a turbulent decade.The immediate impact of the Kazakh turmoil may be limited. Although the protests happened far away from uranium-producing regions, a small drop in global output is nevertheless likely. To extract uranium, Kazakhstan uses a method that involves pumping acid into the ground to dissolve the ore, recovering the solution and then using chemicals to separate out the metal. Disruptions to the shipping of compounds and equipment, because of stranded trains or communication problems, may have slowed operations.Any shortfall may not matter much for now. Big buyers of uranium, such as China and France, which are heavy users of nuclear fuel, have several years’ worth of inventories. The most exposed utilities could borrow from foreign peers in case of immediate shortages, reckons Toktar Turbay of CRU, a consultancy. Most of them buy nuclear fuel using long-term contracts that largely insulate them from short-term jumps in the spot price. All of this creates a buffer against a squeeze.Still, the events in Kazakhstan, which for decades was the world’s most stable uranium supplier, may eventually jolt buyers into guarding against the risk of relying too much on a single source. A day may come when the Kazakh government falls or state assets come under attack (Kazatomprom, the country’s sole uranium producer, is 75% owned by a sovereign fund). Some consumers are therefore looking to diversify their sources of supply. As Kazakhstan is the lowest-cost producer by far, that will mean paying a premium.A rise in overall demand could lift prices further. From Belarus to Bangladesh, many emerging markets are going nuclear to help them decarbonise. China is planning 150 new reactors in the next 15 years. Even in the West, which has long been ambivalent towards nuclear energy, attitudes could change. The European Commission plans to class nuclear as green in its “taxonomy” for investors, which could direct funds towards new projects. NuScale, the first firm seeking to commercialise small, modular reactors to be approved by American regulators, is preparing to go public (via a merger with a special-purpose acquisition company).Beyond the near term, supply may not be able to rise quickly enough to satisfy greater appetite for the metal, supporting prices further. New mines are planned in Africa and the Americas, but they require a price of at least $50-60 per pound of uranium to be profitable. If a rise in demand of 2% a year between now and 2030—a conservative estimate—is to be satisfied, then all of those projects will need to be up and running, says Tim Bergin of Calderwood Capital, a hedge fund. That may not be realistic. One such mine, in Canada, is under a lake; another involves freezing the ground up to 400 metres below the surface. The price of fissile fuel may become increasingly flammable. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Atom and abroad” More

WANG BIN has gained the undesirable distinction of becoming China’s first “tiger” of the year. The term refers to a senior official ensnared in a corruption probe (as opposed to a “fly”, a lower-level cadre). Mr Wang, the chairman and Communist Party secretary of China Life, one of the world’s largest insurers, is a big catch. On January 8th the Central Commission for Discipline Inspection, China’s corruption watchdog, announced that he was under investigation for serious violations of law and party discipline—bywords for corruption. (China Life said in a statement that it firmly supported the probe.)Conviction rates for high-profile, publicly announced investigations such as this are 100%. One of the biggest tigers of finance so far, Hu Huaibang, the former head of China Development Bank, is imprisoned for life. Another, Lai Xiaomin, the former chairman of a state asset manager, was put to death.The probe into Mr Wang is only part of China’s long crackdown on insurers. Much of that attention has been warranted. Not long ago the fastest-growing segment of the industry, which holds about 25trn yuan ($3.9trn) in assets, was high-risk, high-return investment products, rather than conventional policies such as life and health insurance. Premiums on short-term policies were often used by companies to buy property and trophy assets overseas, leading to dangerous mismatches between assets and liabilities.A whirlwind crackdown starting in 2017 at the direction of Xi Jinping, China’s president, put a stop to many of the excesses. The chairman of the industry watchdog was thrown in prison, and the regulatory body was taken over by its banking counterpart. The chairman of Anbang Insurance, which had gone on a foreign-acquisition spree lasting several years, was arrested and his company was bailed out and nationalised, in order to prevent spillovers to the rest of the financial system.Regulators have become more stringent over time. Many high-margin investment products have been banned. And investments made by the companies are closely monitored. As soon as new products prove popular and profitable, regulators often step in to make sure they become less so.That is starting to make the job of providing insurance harder to do. Products that cover accidents, for example, were until recently a booming corner of the industry. This came to a halt when new rules required insurers either to raise their loss ratios (claims as a share of premiums earned) or lower their premiums. Vehicle and health insurance have also faced more red tape and have seen a rapid decline in premiums, too. Insurers now find it increasingly difficult to plan for the long term because “the rules of the game change almost every year,” says Sam Radwan of Enhance International, a consultancy.There have been knock-on effects. Chinese insurers rely heavily on vast armies of agents to sell products. By 2018 China Life had amassed more than 2m agents, about the same number as active personnel in the military. Cheap labour and ever-fatter premiums made the industry incredibly profitable. In 2019 the profits of Ping An, the world’s largest insurer by market value, surged by about 40% in a single year.Since then, however, agents have become hard to hire and retain. Tighter rules and shrinking premiums have made the job less lucrative for salespeople, who rely on commissions. The pandemic has discouraged in-person meetings and has made it harder to make sales. At the same time, as premiums have become compressed, big insurers have sought to sell higher-value products to wealthier people. This requires skilled agents with a knack for working with rich clients—something few companies have in great numbers, says Li Jian at Huatai Securities, a broker.The impact has been devastating. China Life has shed more than 1m agents since the start of 2018, with nearly half the exodus taking place in 2020. About 700,000 agents left Ping An between 2019 and September 2021. Overall, about 30% of salespeople have departed from the industry over the past three years.All this has turned a booming industry into a backwater. China Life’s value of new business, a gauge of profitability, fell by 19.6% in the first nine months of 2021, compared with the same period in 2020. Net profits were about 55% lower in the third quarter of 2021 than they were a year earlier. Ping An has reported similarly gloomy results. The investigation into Mr Wang has industry executives asking who might be next. But that is probably not the only thing keeping them up at night. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Taming tigers” More

A FEW YEARS ago a stranger sidled up to me at a conference. I had been introduced as an equity salesman with over 30 years of experience. “Success or failure?” he asked impishly. I laughed. When I started in stockbroking, anyone older than 50 carried an air of defeat. If they hadn’t made enough money to retire early, they were seen as losers. Well, I’m still here and I’m not the only one. There is a lot more grey hair on the sales desks these days.That is not the only change. Trading revenue is slimmer, because of regulation and new technology. The way sell-side analysts and salespeople are paid has changed. But the biggest difference is in the kinds of conversation I have and who I have them with. Twenty years ago, I hardly spoke to the fast-money crowd. Now most of my day is taken up with them. Share prices are set at the margin. And the marginal buyer and seller is a hedge-fund manager.Hedge funds are behind much of the recent market drama. The minutes of the Federal Reserve’s rate-setting meeting last week were a trigger. The immediate prospect of tighter monetary policy spurred hedge funds to sell expensive “growth” shares, notably those of technology companies, the profits of which are expected to last long into the future. Those distant earnings must now be discounted at a higher rate. So tech shares fell. At the same time, a lot of the funds bought cheap “value” stocks.I specialise in a sector that is seeing selling pressure. But most of my hedge-fund clients trade at a more granular level. They want to bet on the most resilient stocks on my patch and against those that will falter. What matters to such “long-short” traders is that their longs do better than their shorts. Their investment horizon is days and weeks, not months and years. There are lots of these hedge funds trading lots of stocks. That is why beneath the surface, the stockmarket is so noisy.Clients want to talk to me. I know my industry well. I have a good team of analysts behind me that is in regular contact with companies. And I talk to a lot of other investors. Everyone has the same hard data—the stock price, the financial statements, the consensus forecasts for earnings and the firm’s “guidance” around those numbers. But the hedge funds are trying to anticipate short-term shifts. They come to me for soft data.I get asked all sorts of questions. How confident does the finance director of firm X seem about making the numbers? How steely are the investors in the stock—are they committed holders or would they dump it on bad news? Is anyone thinking of buying burnt-out stock Y? Would firm X be open to acquiring firm Y or is it still digesting its latest purchase? No one asks about valuation anymore. When I hear a hedge-fund manager say a stock is cheap or dear, alarm bells ring. He is usually trying to “reverse-broke” me, ie, influence the market by swaying me.The buy-side used to reward us with fat commissions. Now the biggest brokers allow clients to use their systems to trade directly on the stock exchange at very low cost. Regulators insist that the buy-side pays directly for our advice. These clients agree to pay a fixed sum every year. My performance is measured by “interactions”: the phone calls I make, the meetings I arrange and the requests I respond to. The hedge funds are especially hungry for information. So they pay well.The buy-side was once a gentler place. Before passive investing put pressure on fees and performance, a dolt could make money in fund management. If you got the dolt drunk regularly, he would allocate you some commission. I still talk to clients whose investment horizon is five years and not five days. But the conversations are more serious. Boozy lunches have been regulated away. No one has the time for them anyway. The sell-side trader is a marker of cultural change. The old-school version was a red-faced bruiser called Fat Matt or Cardiac Kev. The new model is a triathlete.Improved health might explain why there are more near-sexagenarians like me around. It’s mainly a cohort effect, though. The City grew quickly in the 1990s. Anyone who read “Liar’s Poker” figured they’d get rich in sales. But the broking of listed stocks has since lost its mystique. Finance graduates now opt for jobs in private equity—or at hedge funds. My generation has stuck around. Success or failure? I’ve survived several rounds of cuts. I have a job that I enjoy. I am still pretty well-paid. I think that counts as success, don’t you?For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Sexagenarians and the City” More

BOSTON IS NOT the most popular of winter travel destinations. But many economists were nonetheless disappointed by the news that their profession’s grand annual meetings, scheduled to take place in the city in early January, would again be virtual. Greater experience with remote-conferencing technologies meant that events unfolded more smoothly than they did a year ago. That seemed appropriate for a conference dominated by speculation about how covid-19 might permanently alter the economy.Many sessions were devoted to sketching out the probable features of the post-pandemic world. New habits are sticking—and economists have gathered the data to prove it. Take remote work. Jose Maria Barrero of the Instituto Tecnológico Autónomo de México presented results from research with Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago. Since May 2020 the economists have conducted a monthly survey that, among other things, asks Americans about their plans to work remotely. A year ago, the results suggested that remote work would account for 20% of full-time hours after the pandemic.Over the past year, however, remote work has gained favour. Based on the survey results from December, the researchers reckon that 28% of hours might ultimately be worked from home. Employees who were once undecided now say they might sometimes work from home, said Mr Barrero. And respondents who had always said they would toil remotely now plan to spend more time doing so. In all, about 15% of full-time workers are expected to be fully remote in future, and just under a third to work in a “hybrid” fashion—a dramatic change from before the pandemic, when just 5% of people laboured at home.Remote work will persist because the experience of it has been better than expected, and because workers and firms have invested time and money (together estimated by Mr Barrero to be worth about 0.7% of America’s GDP) in improving it further. But new arrangements will also be driven by employees’ preferences. Though many workers look forward to returning to the office, a sizeable chunk—about 15%—say they would definitely or probably leave employers who do not offer remote options. This has created an opportunity for young firms to attract talent by hiring remotely, said Adam Ozimek of Upwork, a freelance-work platform.As the opportunities to toil remotely have grown, people have become happier to move away from big, expensive cities. Mr Ozimek noted that research published early in the pandemic suggested that the most significant geographical impact of new working arrangements would be on the distribution of population within cities. Reductions in commuting time as a result of hybrid arrangements would produce a “doughnut effect” as people left city centres for distant suburbs. But analysis of more recent data suggests that moves between cities are increasingly significant. Places with high housing costs and a large share of workers in jobs that can be done remotely have experienced slower growth in house prices and rents than other areas. Whereas data from 2020 sent an ambiguous message about migration trends, figures for 2021 show clear outflows from high-cost places, like California.Some parts of the world may face uncomfortable adjustments as a result, rather as deindustrialisation placed severe strains on parts of America and Europe in the 1970s and 1980s. Research presented at the conference by Conor Walsh of Columbia University noted that the economic burden of the pandemic fell hardest on less-skilled service workers in dense and expensive cities, who previously catered to the needs of skilled workers. A permanent exodus of white-collar professionals could leave some less-skilled workers trapped in places with declining job prospects.A more remote future could yield some offsetting benefits, though. Studies of pockets of the economy suggest that pandemic-related shifts hold the potential for productivity gains. Emma Harrington of Princeton University discussed research showing that the productivity of workers at call-centres rose by 7.6% when work went remote, without a detectable decline in customer satisfaction. Dan Zeltzer of Tel Aviv University presented analysis of the shift to telemedicine in Israel, which showed that the utilisation of resources tended to rise and costs to decline, with little sign of more missed diagnoses or other negative health outcomes.Virtually unrecognisableWhether such gains will translate into a stronger macroeconomy is less clear. Janice Eberly of Northwestern University credited remote work with reducing the decline in GDP in early 2020 by nearly half relative to what it might otherwise have been. Yet although remote work might boost companies’ profits by lowering the costs of office space, and improve welfare by reducing commuting, she doubted that it was a fundamental enough shift to lead to enduring productivity gains. That chimed with other, more general fears about the post-pandemic economy. Catherine Mann of the Bank of England worried that business investment might prove insufficient, held back by uncertainty about growth prospects and uncompetitive markets. Though investment was strong in 2021, recent surveys show diminished appetite for capital spending, she noted, compared with share buybacks and mergers.Larry Summers of Harvard University observed that, although central banks may struggle to control inflation in the short term, long-run growth is likely still to be restrained by the same headwinds, such as demographic change, that blew before covid-19. The upshot of the conference often seemed to be that although economies have done better during the pandemic than many people dared hope, they are likely to disappoint in its aftermath. But as participants from around the globe zoomed seamlessly from session to session, without having to visit an airport or queue up for coffee, one had to wonder whether such conclusions were not a touch too pessimistic. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Remote prospects” More

Check out the companies making headlines before the bell:
Delta Air Lines (DAL) – Delta shares rose 2.2% in the premarket after the airline beat top and bottom-line estimates for the fourth quarter. Delta earned an adjusted 22 cents per share, 8 cents above estimates, and said it expected a strong spring and summer travel season.

Boeing (BA) – Boeing’s 737 MAX jet could resume service in China as soon as this month, according to a Bloomberg report. Boeing added 2.6% in the premarket.
Moderna (MRNA) – Moderna expects to report data by March from its Covid-19 vaccine trials involving children aged 2 to 5 years old. If the data is supportive, the company will file for approval to vaccinate that age group. Moderna fell 1.1% in premarket action.
Virgin Orbit (VORB) – Later today, Virgin is scheduled to launch its first commercial satellite since going public. Its stock added 2.1% in the premarket after falling 5.8% in Wednesday trading.
Taiwan Semiconductor (TSM) – Taiwan Semiconductor reported record quarterly profit, with the chipmaker beating analyst forecasts while also issuing an upbeat outlook amid surging demand for semiconductors. The stock rallied 3.8% in the premarket.
KB Home (KBH) – KB Home reported quarterly earnings of $1.91 per share, 14 cents above estimates, although the home builder’s revenue was slightly below analyst forecasts. KB Home also issued a positive outlook for 2022, and its stock surged 7.7% in premarket trading.

Lennar (LEN) – Lennar increased its dividend by 50%, raising its annual payout to $1.50 per share from $1.00. The home builder’s next quarterly dividend of 37.5 cents per share will be paid on February 10 to shareholders of record as of January 27. The stock added 2.4% in the premarket.
SolarEdge Technologies (SEDG), Enphase Energy (ENPH) – SolarEdge gained 2.3% in premarket trading while Enphase rallied 3.2% after both alternative energy companies were upgraded to “buy” from “neutral” at Guggenheim. The firm said the potential negatives it highlighted last year – such as high valuations and optimistic forecasts – had largely dissipated.
Sunrun (RUN) – The solar equipment company added 2.1% in the premarket after being named a top 2022 stock pick at Morgan Stanley, which said Sunrun is among companies with strong barriers to entry and little growth priced in.
Match Group (MTCH), Bumble (BMBL) – Goldman Sachs upgraded the dating service operators to “buy” from “neutral,” saying both would benefit from “structural industry tailwinds” in the years ahead. Match rose 3.2% in premarket trading and Bumble gained 3.1%.

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