CPPIB looking for bargains amid market selloff, Machin says

The head of the Canada Pension Plan Investment Board sounded optimistic Friday about opportunities that may arise out of the recent return of volatility to markets.

“I think there was a lot of euphoria coming into the new year, so I think some of that’s blowing off here,” said Mark Machin, president and chief executive officer of the CPPIB, in an interview with the Financial Post. “Hopefully, there’s opportunity thrown up by some of this volatility. Certainly, our public market teams are looking at better entry positions into stocks that wouldn’t otherwise be there because there’s volatility.”

The CPPIB reported Friday net assets of $337.1 billion for its fiscal third quarter ended Dec. 31 2017, up from $328.2 billion for the previous quarter. Canada’s largest pension fund said its net return was 4 per cent for the quarter, 12.1 per cent on a five-year annualized basis, and 7.4 per cent on a 10-year basis.

For the nine months to date in its fiscal year, CPPIB reported that the fund had increased by $20.3 billion, delivering a net return of 6.7 per cent. 

CPPIB, which manages investments for the Canadian Pension Plan, chalked up some of the gains to the scorching pace of international stock markets last year (as of the end of the quarter, 30.5 per cent of its assets were foreign public equity, totalling $102.7 billion). That pace finally slackened this past week, helping trigger the first correction in the Dow Jones industrial average in two years.

The recent downturn also marked the first time that the market has entered correction territory since Machin was appointed to lead the fund in 2016.

Machin said the “fundamental reason” driving the volatility has been the longstanding anticipation of rising interest rates. He also said the shake-up did not change anything about the CPPIB’s approach, which includes long-term infrastructure and real estate investments.

“This type of short-term volatility doesn’t affect us at all,” he added. “It’s part of what we’re set up to be protected against, because we broadly diversify the portfolio across different geographies, across different strategies, across different asset classes.”

However, as something to watch, Machin highlighted the CPPIB’s recent creation of a group focused on power and renewable energy. CPPIB came to terms with a Brazilian energy company during the quarter on forming a new joint venture that purchased two working wind farms in the northeastern part of the South American country. The fund made an initial investment of $272 million in equity as part of the transaction.

CPPIB also sold an 18-per-cent ownership stake in a European heat and water sub-metering during the quarter for net proceeds of approximately $1 billion. Following the quarter, CPPIB announced it would pay US$144 million for a 6.3 per cent ownership stake in an Indian renewable energy developer.

The quarter also preceded some of CPPIB’s more recent transactions, such as a US$20-billion deal involving Thomson Reuters’ financial and risk business. A consortium led by U.S.-based private equity firm Blackstone, and including CPPIB, aims to own 55 per cent of the financial data business through a new company. 

The CPPIB also announced several coming changes to its C-suite this week, with senior managing director and chief operations officer Nick Zelenczuk, as well as senior managing director Graeme Eadie, to retire at the end of May and March, respectively. Eric Wetlaufer, senior managing director and global head of public market investments at the fund, is also departing the CPPIB effective May 31.

Machin said the moves were part of “planned renewals.” 

“We’re going through processes to make sure we have strong successors in place, and doing that sort of transparently,” he said.

Financial Post

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How Artemis hit bullseye by betting on stock market collapse

Texas hedge fund plucks millions out of chaos from investments designed to benefit from turmoil and volatility

Stock markets gyrated wildly this week, and a lot of people lost a lot of money. But Chris Cole, a 38-year-old hedge fund manager from Texas, wasn’t one of them. He made millions from his fund’s bet on a financial apocalypse.

From his office overlooking the Colorado river in Austin, Texas, Cole runs Artemis Capital, a hedge fund that, since 2012, has been betting on a repeat of the 1987 Black Monday stock market crash.

Related: By betting on calm, did investors worsen the stock market fall? | Nils Pratley

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‘Clearly foolish’: Donald Trump’s habit of taking credit for a bull market just got super risky

The Trump administration is “concerned” about Monday’s plunge in U.S. stock markets but believes that indicators including unemployment and consumer confidence show a strong economy, a White House official said.

“Obviously we’re concerned about setbacks that happened in the stock market, but that being said, we’re looking at the long-term strong economic fundamentals,” Mercedes Schlapp, President Donald Trump’s director of strategic communications, said in an interview Tuesday on Fox News.

Treasury Secretary Steven Mnuchin said on CNBC Tuesday that markets are functioning normally and that Americans should focus on long-term investments.

Trump has repeatedly claimed credit for the stock market’s rise over his first year in office, and now he risks taking the blame if there’s a prolonged downturn. Monday’s selloff — the biggest tumble in more than six years — intensified just as the president was recounting “a tidal wave of good news” about the economy in a speech in Ohio. He didn’t mention markets, even though he often boasts about them with the refrain, “how’s your 401k doing?”

“We’re focused on the fact that there’s been the lowest unemployment that we’ve seen in a long time, and there’s confidence in our businesses,” Schlapp said.

The episode highlights the political risk Trump runs tying his presidency too closely to a bull market. Larry Harris, a professor of finance and business economics at the University of Southern California, said it was “clearly foolish” for Trump to claim credit for the rising stock market.

“If we accept that he’s taking credit for the market on the way up, logically he must accept credit for the market dropping,” Harris said.

Though the Dow and the broader S&P 500 are now down for the calendar year, U.S. stocks are up since election day, the Dow rose more than 25 per cent last year, unemployment remains low and gross domestic product has increased every quarter he’s been in office.

“Your paycheques are going way up,” Trump said. “Your taxes are going way down.”

Aboard Air Force One

The TV in Air Force One’s board room is usually turned to Fox News, but when White House staff boarded the plane after Trump’s Monday speech, the network was broadcasting a red chart illustrating the market decline. Aides turned it off.

At 4:46 p.m., Mnuchin — who returned to Washington with Trump, along with tax policy adviser Shahira Knight, Representative Jim Renacci and Senator Rob Portman, both Ohio Republicans — approached the press cabin. He waved off questions about the stock market and insisted that Fox News, which covered the market downturn throughout the flight, had remained on the TV.

It hadn’t been. Aides only turned it back on toward the end of the flight.

Trump spent part of the flight talking with Portman, Mnuchin and senior adviser Stephen Miller and was in good spirits, aides said. As the plane approached Washington, the National Security Council’s chief of staff, Keith Kellogg, fetched a bag from the galley. “At least it’s not an air sickness bag,” he joked to reporters.

Later the White House issued a statement drawing on a familiar Washington strategy for addressing market downturns. Like George W. Bush, Ronald Reagan and even Herbert Hoover in their own moments of market distress, the Trump team struck an upbeat note, trying to shift the focus to economic “fundamentals.”

“The President’s focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers,” Press Secretary Sarah Huckabee Sanders said in a statement after the plane landed. “The President’s tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people.”

Tax Overhaul

Trump told workers at the factory that the Republican tax overhaul “set off” a wave of favourable economic news. He cited a commitment Apple Inc. announced in January to invest US$350 billion in its U.S. operations and also lauded bonuses some companies have given workers since the tax overhaul was passed.

Trump has sought to highlight companies that have doled out employee bonuses and raises, citing the tax cuts as the reason, White House aides said. Four corporate chief executives, each of whom paid employees US$1,000 bonuses, were at the Ohio event: Jeff Norris of Sheffer; Greg Carmichael of Fifth Third Bancorp; Christopher Irion of e-Cycle; and Matt Schron of Jergens Inc.

The event was the president’s second day trip to promote the GOP tax overhaul he signed in December and his third visit to Ohio since taking office. He visited a bellwether voting district in western Pennsylvania last month.

First lady Melania Trump travelled with the president to Ohio to pursue a different agenda. She visited a children’s hospital in Cincinnati and participated in a briefing with physicians on opioid addiction.

Bloomberg.com

HBC’s new CEO Helena Foulkes has her work cut out in unforgiving retail sector

TORONTO — Between placating activist investors and developing new ways to grow a veteran business in an increasingly unforgiving sector, new Hudson’s Bay Co. chief executive Helena Foulkes has her work cut out for her.

Foulkes, a former executive with U.S. drugstore giant CVS, will fill the void left at HBC after the abrupt departure last fall of veteran retail executive Jerry Storch, who made a return to his consulting firm after close to three years at the department store retailer’s helm. According to reports, Storch’s vision for the retailer clashed with that of governor and company chairman Richard Baker, who assumed the CEO role on an interim basis after the former CEO’s departure in November.

“HBC has an amazing portfolio of retail banners, valuable real estate and an innovative approach to M&A that give it the ability to win,” Foulkes said in a statement on Monday. “The future of retail will be defined by companies that think creatively about where the consumer and the world are headed.”

She was not available for further comment.

“Helena is a transformational leader who will invigorate the business with a new perspective as we position HBC for the future,” Baker said in a statement. “Throughout her 25 year tenure in retail, she has a proven track record of making bold, strategic choices that, at their core, put the customer first and have proven enormously impactful to business success.”

At No. 12 on Fortune’s 2017 Most Powerful Women list, Foulkes, 53, was most recently executive vice president of CVS Health and president of CVS Pharmacy, in charge of overall retail strategy and operations at 9,700 retail stores, 20 distribution centers and e-commerce sites, as well as merchandising, supply chain, marketing and real estate. Prior to joining CVS in 1992, Foulkes, who has an MBA from Harvard Business School, worked at Goldman, Sachs & Co. and luxury retailer Tiffany & Co.

She was known for boosting the profile of CVS as a proponent of healthy living, spearheading the drive to take tobacco products off its shelves in 2014 and overhauling the retailer’s front-of-store business with an improved selection of beauty products and digital initiatives.

HBC, the owner of Saks Fifth Avenue and Home Outfitters, has seen its shares fall about 11 per cent this year after issuing disappointing third-quarter results in December. It faces continued pressure from shareholder Land and Buildings Investment Management to divest more of its real estate, sell its lagging European department store business or go private. The stock fell 2.6 per cent on the Toronto Stock Exchange to around $10 per share amid a broad downturn in equity markets Monday.

Last week, Land and Buildings founder Jonathan Litt reiterated some of his demands, saying HBC is “flush with cash” to go private after a US$500 million equity investment from Rhone Capital in December, part of a deal that saw HBC sell its Lord & Taylor flagship store in New York to house the head offices of shared office space company WeWork Cos.

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Aecon a ‘stepping stone’ for Beijing: Fears rise as Ottawa decides on $1.5-billion deal

OTTAWA — Critics of the pending acquisition of Aecon Group Inc. by a massive Chinese state-owned enterprise are urging the government to look past short-term interests of Canadian investors and consider the broader implications of Chinese capital inflows into sensitive assets.

Investment Canada is currently reviewing the $1.51 billion acquisition by China Communications Construction Co., which is nearly 64 per cent owned by the Chinese government and is one of the world’s largest construction firms. In December, Aecon shareholders overwhelmingly supported CCCC’s offer to buy the company for $20.37 a share, a 23 per cent increase over its market price in October.

But critics are raising the alarm over concerns of ceding control of a company that builds and refurbishes nuclear energy plants to an increasingly aggressive foreign power.

“We can’t expect individual shareholders to take a long-term view, but we should demand our government to think about the broader consequences,” said Duanjie Chen, a former researcher at the University of Alberta who studies Chinese foreign direct investment.

“Every foreign company they buy is a stepping stone for the Chinese government,” she said. 

Ottawa’s decision on the acquisition is expected in the next few weeks. It could still be subjected to a comprehensive national-security review, which would take months to complete.

The forthcoming decision comes amid growing allegations of China increasingly peddling influence  abroad. In recent years, Australia, Canada, the U.K., New Zealand and others have raised red flags over varying degrees of Chinese interference in political, academic and publishing circles. Australia, which has seen the most acute signs of bribery and intellectual suasion by Chinese firms among developed nations, is now crafting new laws to better defend against “unprecedented and increasingly sophisticated” efforts by the Chinese to sway public opinion.

Chinese SOEs often lay the groundwork for the country’s political ambitions, said Derek Scissors, a resident scholar the Washington-based American Enterprise Institute. And while individual Chinese companies might not pose a risk in their day-to-day operations, he says, they can always be enlisted to do work on behalf of the state.

CCCC International Holding Ltd. of China has made a $1.5-billion bid to buy Calgary-based Aecon Group Inc.

“Any Chinese company is hostage to the wishes of the party at any given time,” Scissors said.

According to CCCC’s 2016 annual report, the company considers ‘response to national strategy’ as its most material social responsibility after ‘engineering quality’. The company did not respond to a request for comment.

Such concerns prompted the U.S. to sharpen its definition of what should be considered “strategic infrastructure” in foreign investments, and U.S. Congress is currently working to reform its Committee on Foreign Investment in the United States (CFIUS).

“You have to treat every Chinese company as a potential threat in this fashion—not that it is a threat, but as a potential threat—and then you have to decide what that specific threat is,” Scissors said.

A group of domestic construction companies including Ledcor Group, PCL Constructors Inc. and P.W. Graham & Sons Construction have been lobbying the government to reject the deal, arguing it could make the domestic market less competitive. They also argue that Aecon has contracts at potentially sensitive assets, such as telecommunications infrastructure, nuclear facilities and the Site C dam in B.C.

Others, meanwhile, argue that Aecon’s contracts typically consist of routine work, like burying fibre optic cables or refurbishing turbine generators at nuclear facilities, and therefore wouldn’t give CCCC intellectual property access.

“I think they poorly understand what Aecon actually does,” said Frederic Bastien, an analyst at Raymond James based in Vancouver. “It’s starting to get a bit far-fetched.”

Minister of Innovation, Science and Economic Development Navdeep Bains said in Question Period Wednesday the acquisition would “go through a robust and rigorous process” before a decision is made.

CCCC’s Aecon deal is part of a larger international expansion in the developed world, following on the heels of the Chinese firm’s 2010 acquisition of U.S. firm Friede & Goldman and the 2015 purchase of Australian construction company John Holland.

“Acquiring Aecon is a major move of CCCC in its international strategy,” the company said in a statement, adding that it would “achieve a substantial breakthrough in its full entry into North America.”

The deal adds scope to an already massive construction company. CCCC is expected to be one of China’s greatest beneficiaries of the One Belt, One Road initiative, which aims to create a sprawling network of rail, road and see ties between Europe, Africa and Asia.

In the corporate mandate statement on its website, written in Chinese, CCCC says it is “determined to become a world-renowned” engineering contractor, urban complex developer and operator, specialty real estate agent, integrated infrastructure investor, and manufacturer and merchant of marine and port machinery.

According to DBS Group, CCCC snapped up US$116 billion in new construction contracts in 2016 alone, over half of which are overseas developments. The company has projects scattered across Africa, Southeast Asia, Central Asia and the Middle East, and consist mainly of railway, road, bridge and port developments.

CCCC is one of the state-owned companies driving Chinese foreign direct investment between 2005 and 2017 which is now nearing the US$1.8 trillion, according to data compiled by the AEI. Canada has been a favoured recipient of Chinese capital, receiving US$49 billion over the period, along with the U.K. (US$73 billion), Russia (US$53 billion) and Australia (US$103 billion).

The share of public rather than private capital invested by China overseas also jumped in 2017 to 66 per cent of total investments, down from 54 per cent in 2016, according to AEI data, indicating the country’s renewed efforts to invest overseas through its state-owned enterprises. China has also pulled back spending through many of its private companies after a slew of international investments went sour.

The acquisitions of Canadian firms by Chinese SOEs place the Liberal government in a delicate position, as they try to forge new trade ties with China while also resisting foreign investment in sensitive assets.

“This government is very open to China,” said Maxime Bernier, the Conservative opposition critic for Innovation, Science and Economic Development. “I’m a bit concerned with the direction of the Chinese government with their state-owned enterprises.”

In March 2017 Ottawa approved the acquisition of Montreal based ITF technologies, a fibre optic cable provider, by Hong-Kong based O-Net, overturning a 2015 decision by the Harper government to block the investment.

Financial Post

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US bond market rout fears trigger Wall Street sell-off

Apple, Visa and Exxon among biggest fallers as American and European stock markets tumble from record highs

Wall Street was heading for its worst week in two years on Friday as markets in Europe also continued to tumble from record-high levels reached less than a month ago.

Investors headed for the exits amid growing fears over a bond market rout, triggered by early signs of inflation in the US as economic growth accelerates. US government bond yields, which rise as prices fall, hit the highest level since January 2014.

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Apple’s second-quarter revenue forecast misses estimates

Apple Inc.’s revenue forecast for the second quarter on Thursday was below market expectations, adding to concerns of a plateau in demand for its newer iPhones, including the anniversary edition iPhone X.

The company forecast second-quarter revenue between US$60 billion and US$62 billion, while analysts on average were expecting US$65.73 billion, according to Thomson Reuters I/B/E/S.

Shares of the world’s most valuable technology company were down 1.3 per cent in extended trading on Thursday.

In the latest fiscal first quarter, the company said it sold 77.32 million iPhone units, below analysts’ average estimates of 80.03 million, according to financial data and analytics firm FactSet.

However, average selling prices were stronger than expected – US$796 against expectations of US$756 – a fact that Chief Financial Officer Luca Maestri attributed to higher demand for its newest iPhones.

“It was really driven by the success of the iPhone X and also the iPhone 8 and iPhone 8 Plus,” Maestri told Reuters in an interview. “The new lineup has done incredibly well.”

In recent weeks, Wall Street analysts had speculated that iPhone X sales may have been slower than previously expected for the first quarter and may drop off sharply for the March quarter, lowering their estimates for the March quarter and full fiscal 2018.

The company, which will be paying US$38 billion in repatriation tax, said net income rose to US$3.89 per share in the first quarter from US$3.36 per share a year earlier.

Apple has set aside money for potential repatriation taxes for several years, so its large tax bill did not result in a major one-time charge.

The company forecast a tax rate of about 15 per cent for the second quarter.

Revenue rose about 13 per cent to $88.29 billion for the first quarter ended Dec. 31. It reported US$78.35 billion in the previous year.

Maestri also detailed the company’s plans for its cash. He said the company, which has about US$163 billion in cash net of debt on its balance sheet, plans to balance its cash and debt. He did not say whether that would come in the form of returning capital to shareholders or capital expenditures.

“Over time, we are trying to target a capital structure that is approximately net neutral. We will have approximately the same level of cash and debt on the balance sheet,” Maestri said. “We’re going to take that (cash net of debt) balance down from $163 billion to zero.”

Amazon revenue surges 38.2 per cent on holiday season boost

Amazon.com Inc reported a 38.2 per cent jump in fourth-quarter revenue on Thursday, driven by a surge in online shopping during the holiday season and strong demand for its cloud services.

Amazon, which shipped over 5 billion items worldwide through its subscription-based Prime service in 2017, said its net sales rose to US$60.45 billion in the reported quarter from US$43.74 billion a year earlier.

Net income rose to US$1.86 billion, or US$3.75 per share, in the quarter ended Dec. 31 from US$749 million, or US$1.54 per share, a year earlier.

The results include a tax benefit of about US$789 million related to the new U.S. tax law.

Revenue from Amazon Web Services, the company’s fast-growing cloud services business, surged 44.6 per cent to US$5.11 billion, beating the average estimate of US$5 billion, according Thomson Reuters I/B/E/S.