1. One of the less discussed but genuine successes of India's Insolvency and Bankruptcy Code (IBC) is the resolution of stressed power generation assets.
“Stressed assets” — coal generators that were unable to pay their debts to lenders — became a $23 billion drag on the financial sector, but the list of plants has been whittled from 34 in 2018 to four after alternative utilities, led by state-owned NTPC Ltd., stepped in as buyers of last resort and creditors took haircuts on their investments.
This about the comparative economics between coal and solar
In 2017, a new solar or wind generator was still marginally more costly than a new coal plant. Nowadays, it’s drastically cheaper. The average Indian solar generator in 2024 needs about $30.76 per megawatt hour to break even and wind is at $39.91/MWh, according to BloombergNEF, compared to $50.53/MWh for new coal and an average tariff at NTPC, the largest coal generator, of about $59/MWh in the 2023 fiscal year.
The article writes about the return of private investments into coal plants and the slowdown in the growth of renewable investments.
In this context, it's instructive that the major coal power investors are also the ones with the biggest renewables generation ambitions. This presents conflicting incentives.
2. Taylor Swift's East Asia tour is confined to just two places - Singapore and Japan - leading to Swifties from across the region being forced to travel to these countries. This has in turn boosted economic activity in these countries. This about Singapore.
In contrast, during the next leg of her tour in Europe, Swift is traipsing across major and minor cities throughout the continent, hitting four European cities in May, and another six in June, including smaller U.K. cities such as Liverpool and Cardiff. Many of the more than 300,000 tickets sold in Singapore have gone to overseas fans who will fly in, and hotels and restaurants haven’t been shy. The city’s iconic five-star hotel, the Marina Bay Sands, is offering “The Wildest Dreams Package," which comes with a three-night stay, four VIP tickets and a round-trip limousine ride from the airport. The cost: nearly $40,000. More than 90% of guests buying the exclusive packages are coming from abroad, according to the hotel. Travel booking website Agoda said that searches for accommodation in Singapore spiked 160 times over usual levels after ticket sales began last summer... Nomura Bank estimates that the combined effect of six Coldplay concerts in January and six Taylor Swift concerts in March could contribute $300 million to Singapore’s tourism revenues in the first quarter. Bookings for tours and Singapore attractions have surged, according to travel booker Trip.com. “With the trade recovery yet to take off fully, Singapore is busy making ‘concert economics’ its new growth driver," said HSBC in a note.
3. The taxation structure on ICE, hybrid, and electric cars.
4. Some facts about capex in India from a Livemint long read. One point has been the declining private sector capex and the much lower public sector capex compared to the pre-reform era.
The entire reform period has seen a secular decline in public sector capex to around 6-8% of GDP, from levels of well above 10-11% of GDP in the 1980s. As an aside, what is also alarming is the steep decline in private sector capex since the global financial crisis of 2008. Importantly, the private sector never really recovered from that crisis and its after-effects.
Within public sector capex too, the share of public sector units has declined, with budgetary capex replacing PSU capex in recent years.
Add in PSE capital spends to the mix (from their own resources), as compiled by budget documents, and overall central government capex rises to over ₹14.5 trillion. But seen in the context of overall GDP, the sharp bump in absolute terms looks less impressive—even in the context of the last decade or so. Combined central government capex (main government plus PSEs) is budgeted at around 4.4% of GDP for 2024-25—that’s still lower than the level 10 years ago.
This about highways and railway spending.
In 2021-22, it budgeted a spend of ₹1.22 trillion on such projects, of which, over half was to be funded by itself (largely through borrowing). Since 2022-23, however, all of NHAI’s funding was done directly through the government budget. It was not allowed to borrow any funds directly from the market, the aim being to keep the body’s borrowing on a tight leash. For 2024-25, as much as 15% of the main central government capex, or ₹1.68 trillion, is allocated toward funding NHAI... As of 2019-20, the central government budget contributed less than half of railways capex for the year ( ₹1.46 trillion). This ratio started to creep up. As of 2024-25, almost all the capex for the railways ( ₹2.52 trillion) will come directly from the central government budget, with just ₹10,000 crore earmarked to be raised by the railways directly from the bond market or its internal resources. In this sense, at least a significant part of the increase in capex is a shifting of funds—bringing them ‘on-budget’—rather than extra spending.
5. FT has a long read on the spectacular but suspicious rise of Temu, the Chinese e-commerce platform that retails cheap clothes, toys, footwear, kitchen items etc. It has undergone the fastest retail expansion in history spreading from China to 49 countries after less than two years in operation. Temu's parent company, PDD Holdings, owns Pinduoduo, the sister App which dominates the Chinese market. PDD is a retail e-commerce giant and is known for its aggressive marketing and discounting.
When it still published such numbers, PDD reported more than 870mn active users in the country supplied by over 13mn merchants who, it claimed, together generated a third of all parcel traffic in the country, tens of billions of packages a year. After just nine years in business, PDD is now bearing down on the world’s biggest ecommerce group Alibaba, both in terms of retail scale and stock market capitalisation. Worth $162bn, it regularly trades places with the older retail giant as the most valuable Chinese company listed on a US stock exchange.
The article points to the surprisingly limited asset base, low cash flow, low manpower etc., despite the firm's market impact and compared to competitors.
Why do balance sheet metrics move at a different pace to revenues? How does a $200bn company own less than $150mn worth of hard assets?... It operates like eBay and Amazon’s third party marketplace, connecting buyers with sellers to take a cut of each transaction and charging merchants to advertise on its platform. In its most recent quarter those revenues almost doubled versus the previous year, to $9.4bn, prompting Alibaba founder Jack Ma to exhort his former company to “change and reform” in response. PDD reported $2.5bn of cash flow, even as it appears to throw very large sums at the expansion of Temu. It has achieved this with a headcount that upends all assumptions about ecommerce logistics: it started last year with 12,992 employees, an order of magnitude less than Alibaba and a small fraction of Amazon’s 1.5mn staff. PDD’s physical footprint is also minuscule, a striking contrast with Amazon, JD.com and Alibaba, where control of logistics was long seen as a competitive advantage; a way to ensure speed, capacity and satisfactory service. Where Alibaba spends $5bn a year on property and equipment, including the upkeep of 1,100 warehouses, PDD owns just $146mn of hard assets — mainly office equipment and IT hardware and software...
It doesn’t report the size, location or number of the warehouses it rents. Those logistics, like PDD’s servers and customer service call centres, are mostly outsourced, ephemeral and unenumerated. The opacity extends inside the business. Staff use pseudonyms and know little about other teams. The structure is flat, with a small group of decision makers directing the “grassroots”, young people chosen for their poverty or debt obligations which motivate them to work long hours... Over 2020 and 2021, PDD reported selling $2bn worth of merchandise without disclosing any stocks of inventory on its balance sheet, or the costs of those goods sold, two standard retail accounting items. Then it stopped selling mystery merchandise as abruptly as it started... Research and development spending that year rose only slightly to $1.5bn in total, similar in scale to eBay rather than Alibaba’s $8bn annual spend on product development... In the blow-out recent quarter, marketing services grew at roughly the same pace they have since the middle of 2021, about 40 per cent year-on-year. But over the same period, transaction fee revenues grew at more than three times the rate of marketing services. Based on the transaction fee rate PDD reported in 2021, that would suggest an improbable level of activity, making the PDD ecosystem twice the size of Alibaba and on a par with the $2.2tn annual output of the Italian economy. Instead, PDD must be charging its merchants a lot more.
This is the most stunning point, Temu's rise is not being felt by its competitors
PDD’s impact is hard to detect in their numbers. In the battle of online flea markets, Alibaba’s Taobao reported improving take rates and growing merchant numbers last month that hardly indicate obliteration by Pinduoduo. Alibaba’s executives have not addressed their upstart rival by name on any of their earnings calls. Outside China, both eBay and US discount chain Five Below said last year they hadn’t seen any impact on their business from Temu. Amazon didn’t mention it when reporting results last month... If PDD’s numbers are indeed to be believed, then a shrewd executive team directing pseudonymous underlings has created one of the most successful businesses the world has ever seen. But it is not clear how the several thousand staff who run PDD deal with the risks in administering hundreds of millions of transactions, and tens of millions of suppliers delivering tens of billions of parcels...
Investors searching for further detail were unlikely to find it at the most recent earnings call, when Chen took a total of six questions from three analysts and made pronouncements that resembled state political sloganeering. “We are dedicated to generating value through innovations, which forms the foundation of our high-quality development,” he said, echoing a key tenet of his country’s latest five-year plan. They would also draw a blank attempting to direct questions to a chief financial officer. PDD doesn’t have one. Instead it is on its fourth “vice-president of finance” since the 2018 initial public offering, if a period when founder Huang added the job to his duties is counted. It seems that while profits are good, investors are willing to tolerate such opacity. On Wall Street, 53 out of 56 analysts recommend their clients buy, and not one suggests they sell... Unlike other large US-listed Chinese companies, PDD — which is nominally headquartered in Dublin — hasn’t courted the investors who might know it best with a secondary Hong Kong listing. The structure for foreign ownership of Chinese assets remains untested, with “heightened operational and legal risks”, according to the head of the Securities and Exchange Commission. Holders of PDD stock own shares in a Cayman Islands company that has unpublished contractual agreements said to entitle it to the profits of the Chinese operating companies.
On the face of it, it's hard not to come away with the feeling that we might be witnessing the biggest Ponzi scheme of the digital age!
6. The pushback against low-cost and short-haul flights in Europe on environmental grounds throws up several difficult public policy challenges. From an FT long read.
Last week Spain followed France in unveiling a limited ban on short-haul flights. The Netherlands, Denmark and France have pushed ahead with plans for higher taxes on flying, while the Dutch government previously tried to impose a hard cap to lower the number of flights at Schiphol... But policymakers also need to acknowledge the public popularity of cheap flying and confront the lack of viable alternatives... Aviation supports close to 5mn jobs in the EU and contributes €300bn, or 2.1 per cent, to European GDP, according to European Commission figures. But it is also responsible for around 4 per cent of EU carbon emissions. It is one of the fastest-growing sources of pollution and faces a huge technological challenge to decarbonise... European airlines and airports laid out a detailed plan in 2021 to reach net zero by 2050. Most of that will be achieved through a switch to so-called sustainable aviation fuels or SAFs, which are made from feedstocks other than fossil fuels and, from production to combustion, emit less carbon.
There's the challenge of tightening regulations and forcing the internalisation of negative externalities to create a level playing field for alternative transport options like high-speed rail.
Airlines in Europe say they are already subject to the toughest environmental rules in the world courtesy of a carbon tax imposed on intra-European flights and a requirement that 6 per cent of fuel on every flight is sustainable by 2030... The industry says the rising cost of the EU’s emissions regime will drive ticket prices higher and deter some people from flying. Pricing travellers out contributes around 15 per cent of the net carbon emissions reduction within the industry’s net zero road map. But it is not enough for environmental groups, which want the clampdown on cheap flights to go much further. T&E has called for higher carbon prices, a tax on aviation fuel and for value added tax to be added on airline tickets. Currently, airlines pay no duty on their fuel while tickets are exempt from VAT and airports and aircraft makers often receive state subsidy, T&E says. That gives flying a cost advantage; a Greenpeace study comparing ticket prices on more than 100 routes between major European cities last summer found that trains were on average twice as expensive as flights. Paul Morozzo, a transport campaigner at Greenpeace, says flying “only looks like a bargain because airlines are not forced to pay for the devastating cost of their pollution”. “The failure of governments to properly tax the aviation sector for the fuel it uses and the pollution it causes has created an uneven playing field.”
But even with the regulations and higher prices, and its several advantages, rail transport faces daunting challenges to emerging as a competitive alternative. Connectivity infrastructure need large investments.
Cost is not the only issue preventing more rail travel. A much bigger problem is that the network simply does not provide the connectivity that travellers demand. A Eurobarometer survey published in 2020 found that while the main obstacle to greener forms of travel was cost, 40 per cent of respondents also cited speed. Even allowing time for travelling to and passing through airports, flights are almost always quicker than trains at present... Part of its efforts are to put more concerted focus — and investment — into the so-called TEN-T network — a trans-European spider web of roads and rail lines intended to link the continent’s major hubs. It forms the backbone of the EU’s land transport policy. The commission’s overarching but non-binding target is to double high speed rail traffic by 2030 and triple it by 2050, ensuring that passenger trains running on the TEN-T network travel at a minimum speed of 160km/h. The Green Deal climate law, which commits the bloc to reaching net zero emissions by 2050, stipulates that greenhouse gas emissions from transport must be cut by 90 per cent. But compared to the vast expansion of airline routes in recent decades, land-based connections have been painfully slow to open up, despite Brussels’ efforts to stimulate growth... Transport also consumes the biggest share of the EU’s €723bn Recovery and Resilience Facility, while rail accounts for the majority of projects within the €25.8bn provided for transport by the EU’s Connecting Europe Facility. But new rail infrastructure is expensive, often subject to delays and takes a long time to pay back the capital absorbed in construction, making it less attractive to private finance and difficult for states to justify when public finances are stretched.
Besides railways are largely state-owned monopolies, which in turn creates its set of problems.
While aviation is a highly competitive marketplace with frequent price wars, rail remains dominated by state-run monopoly operators whose domestic priorities often trump efforts to improve international connectivity... Whatever Brussels proposes in terms of international connections often butts up against national concerns, according to Bas Eickhout, a Dutch Green MEP. “No matter what, all the national decisions always go to improving the domestic train system,” he says. “So if the Dutch need to decide: ‘am I going to improve Amsterdam-Berlin or Amsterdam-Utrecht?’ they [will] decide it’s going to be Amsterdam-Utrecht.” Because such thinking is replicated across the EU, he adds, “of course we are having difficulties in having a credible alternative for short-haul flights.”
Finally, there's the complex political economy of the energy transitions.
Politicians increasingly fear voters will punish those pushing for climate-related policies such phasing out gas boilers in favour of heat pumps or curtailing the use of combustion-engine cars. Even efforts to complete existing legislation have slowed; a revision to the energy taxation directive that would have reduced exemptions for jet fuel has stalled, for instance, and will not be agreed before the end of the commission’s mandate. Brussels is also hesitant about forcing costly decarbonisation rules on industry amid concerns for the bloc’s competitiveness... The Dutch government in November bowed to pressure from airlines, the EU and the US government — all of whom warned of a hit to competition — and paused plans to lower the number of flights at Schiphol. The future of the airport is now part of coalition negotiations following national elections.
7. Don't know how you can revive economic growth through a radical austerity programme that crushes both consumption and investment as Javier Milei is doing in Argentina.
Milei is trying to push through a radical, high-risk programme of austerity to heal Argentina’s stricken economy. A political outsider, he is facing stiff opposition from Congress, unions, social movements and protected industries. In response, he has doubled down on confrontation, insulting anyone who opposes him and refusing to negotiate. For the time being, Milei’s popularity is holding up — giving him some space to direct public disquiet towards the politicians and vested interests he blames for the country’s economic woes. But if that popular support falters, he will have little institutional backing for his controversial agenda. Some political observers are already wondering privately whether his presidency will last its full four-year term...
Milei only entered politics just over two years ago and his La Libertad Avanza party holds less than 15 per cent of seats in Argentina’s Congress. He quickly ran into trouble when he tried to pass ambitious legislation to overhaul the heavily regulated economy. The president tabled about 1,000 reforms aimed at deregulating the labour market, promoting competition and raising some taxes to balance the budget. About a third of the measures were contained in an emergency decree, which faces a wave of legal challenges on the grounds it may be unconstitutional. The remainder were in a huge “omnibus bill” intended to sweep away 40 years of regulation.
None of his major measures have passed the Congress. In response to the opposition, Milei has doubled down with confrontation, often carried out in social media platforms.
People who deal with the government say the president is now more dependent than ever on a small inner circle of true believers and his army of social media followers, to whom he devotes more than two hours a day online. His closest advisers include his sister Karina, who used to sell specially decorated cakes on Instagram and is now the presidential chief of staff, and Santiago Caputo, a 38-year-old political consultant and social media guru whose father is a cousin of Luis Caputo, the former Wall Street trader now serving as finance minister... Some question Milei’s economic results too. Eduardo Levy Yeyati, an economist and professor at Torcuato di Tella university in Buenos Aires, believes the much-vaunted fiscal surplus in January benefited from accounting tricks such as shuffling government payments around.
8. Martin Wolf points to China's extraordinary savings, at 28% of the total global savings in 2023 it's only slightly less than the combined US and EU share of 33%.
This is a good summary of the problems facing Chinese policymakers
If demand is to match potential supply in such an economy, domestic investment, plus the current account surplus, must match the desired savings. If they do not, the adjustment will work through weak economic activity — that is, a recession or even a depression. This is “secular stagnation”. With savings as high as China’s that is hard to avoid. Doing so required a huge current account surplus prior to the 2008 global financial crisis and, subsequently, China’s debt-fuelled property boom. The latter is now apparently over. So what next? A natural course would be for the investment rate to fall significantly. It is highly implausible that the economically profitable rate of investment can remain over 40 per cent of GDP in an economy whose potential rate of growth has, at the very least, halved over the past 15 years. That makes no sense. The property boom masked this reality. Now it is here. If the savings rate remains where it is and the investment rate duly falls, the “solution” will then be a rise in the current account surplus as savings flow abroad. Official data do not yet show this. But there are doubts about this. Brad Setser of the Council on Foreign Relations argues that the surplus may be double what the official data show, at 4 per cent of GDP...
A current account surplus of 4 per cent of GDP does not look large by China’s past standards. But, since 2007, when China’s current account surplus peaked at 10 per cent of GDP, its share of the world economy (at market prices, which is what matters here) has jumped from 6 to 17 per cent. So, from the point of view of the rest of the world, a Chinese surplus of 4 per cent of GDP is far bigger than one of 10 per cent in 2007. Who is going to run the offsetting deficits? Who, in particular, will run them when the concomitant rise in exports will be driven by investment in competitive manufactures, such as electric vehicles? The answer is not creditworthy high-income countries: they will view these as “beggar-my-neighbour” policies. The same will surely be true for big emerging economies, such as India. If China wants the mercantilist solution to excess savings it will have to fund smaller emerging and developing countries. It can pretend these are loans. But much of the money will be grants, after the fact. If it ends up funding renewable energy there, that could be good for the world. But, from China’s perspective, it would be a costly gift... Given China’s size, stage of development and excessive savings, an essential part of any strategy for macroeconomic stability must be a jump in private and public consumption as shares of GDP. Moreover, given the financial difficulties of local government, this will also mean a bigger role for central government spending.
The automobile sector is rapidly emerging as an important source of investments and surpluses.
But in a world fearful of Chinese intentions, these surpluses are simply unsustainable. Contrary to the media commentaries, China it seems is much more dependent on the world economy for its survival in the current form than acknowledged.
9. Cocoa prices have surged to touch historic highs
Prices of beans have surged to all-time highs, with cocoa futures in New York more than doubling from the same period last year. On Tuesday cocoa futures in London traded at a record high of £5,827 per tonne. On the same day last year, they traded at £1,968. Prices are rising in part because supply is stretched. Poor weather in Ivory Coast and Ghana, which together produce around two-thirds of the world’s cocoa beans, has affected crop yields. El Niño, the sea temperature phenomenon which occurs every three to five years, returned last year, first bringing unseasonal heavy rainfall to the region and then dry heat. The result is a global crop 11 per cent smaller than last year’s season, according to forecasts published by the International Cocoa Organization on Thursday. Analysts are warning that chocolate makers and brands will pass along higher costs to consumers... Years of vast cocoa output, especially in neighbouring Ivory Coast which produces nearly half of the global supply, have kept prices low generally. That might be good news for Western consumers, but here it has meant that cash-strapped farmers have not been able to invest in their cocoa plantations. Most have not planted new trees since the early 2000s, and can ill-afford to use fertiliser or pesticides. As trees age, they become less productive and more vulnerable to disease and adverse weather events.
10. Finally an excellent long
FT Alphaville post on the private equity industry, specifically how its long-term returns compare with the market. The main challenge is with benchmarking PE industry returns. But now the wealth of evidence points to nothing superior about PE returns.
One of the first broadsides against private equity was Steven Kaplan and Antoinette Schoar’s Private Equity Performance: Returns, Persistence and Capital Flows. Published by the Journal of Finance in 2005 it sensationally argued that returns were roughly similar to that of public equities after adjusting for the eye-watering fees. In 2012, Kaplan and colleagues Robert Harris and Tim Jenkinson... published a new paper that estimated returns had exceeded public markets for “a long period of time” and by a healthy margin — more than 3 per cent per year on average... In 2013 Andrew Ang, Bingxu Chen, William Goetzmann and Ludovic Phalippou caused a stir by arguing that “private equity is, to a first approximation, a levered investment in small and mid-cap equities”. Then in 2020 Phalippou, a professor of financial economics at Oxford’s Saïd Business School... published an incendiary paper... calculating that the only people to do well out of it (on average) are the private equity tycoons themselves.
There are at least two factors that raise questions about the industry's future. One the industry is today a behemoth with $5 trillion in assets under management and $2.9 trillion in dry powder it's struggling to deploy. With size comes intense competition and limited opportunities in a relative sense. Two, the industry was boosted by declining and low-interest rates over the last four decades, which are now bygone.
Four decades of falling interest rates helped increase corporate earnings and swell equity market valuations. Indeed, a Federal Reserve paper published last year estimated that lower interest expenses and tax rates explain almost half of all growth in US corporate profits between 1989 and 2019. At the same time, valuations of those earnings streams have increased because of lower discount rates used to calculate their worth. Despite private equity insisting that they improve companies, Bain’s latest report on the industry estimates that “nearly all the value creation” in private equity-owned companies between 2012 and 2022 actually came from revenue growth and multiple expansion. “Margin expansion barely registers,” the consultancy noted drily... Kaplan and Schoar’s 2005 paper highlighted nearly two decades ago that there was “substantial persistence” in the performance of private equity funds... However, more recent studies indicate that the persistence of private equity fund performance is weakening, and since 2000 there is “little evidence” of it, according to a 2020 paper by Harris, Jenkinson, Kaplan and Ruediger Stucke.
The institutional LPs like pension and sovereign wealth funds with very large funds to deploy and have been deterred by the high fees charged by PE firms are now seeking to invest through their own internal teams or co-invest with the PE funds.
Co-investments (and in some cases direct investments) have become far more prevalent in recent years, as Canadian, Australian and European pension plans have followed the path first taken by a few sovereign wealth funds... While CEM Benchmarking estimates that internally managed private equity portfolios on average do slightly worse than the industry as a whole, the cost saving “far outweighs any difference in top line return”.
Finally, the article questions the low volatility of PE funds, and the so-called illiquidity premium they generate.
Because private companies don’t trade like stocks on an exchange, private equity funds only do modest quarterly valuations and firmer annual ones. These can often be more art than science. That means that there’s a lot of scope for smoothing out returns, making them look both better and gentler than those derived from stock markets. Perhaps they don’t go up as much in a rally but they often stay steady in a bear market — a welcome cushion for institutional investors, even if it is just an artifice of accounting rules. This doesn’t get talked about too loudly. A lot of investors in private equity prefer to justify their large and growing allocations with a reference to a mythical creature called the illiquidity premium, a fairy that apparently sprinkles private markets with its magical return-enhancing dust.
See also this about the fake smoothness of private markets.
