Macro Research

Venture investing in Germany

Posted on by S Klamp

Deutsche Bank recently commented on the new venture grants available in Germany. No doubt, Germany is way behind the s-curve when it comes to venture investing. But what do you expect from an economy and society that is known for its conservative approach to…everything?

To be clear, we are in favour of venture investing as a means of creating new companies that have the potential to be big, one day. We agree with the authors of the Deutsche Bank report that it is not necessarily a question of How Many but rather a question of Quality. Having said that we advocate that there also needs to be a critical mass of start-ups in general before the How Many questions makes a difference. An market equilibrium overall needs to be established that can also absorb failures without stigmatising failing teams.

The US venture market has dealt with that under a ‘contingent contract’ basis. That is, teams get together to work on an idea and only if they manage to attract investment they will fully form. If not the team members move on. It is not unusual to see different teams iterating on a number of ideas, de facto having failed with a prior idea, to see a new company and team emerging.

The US model allows for energetic entrepreneurs to test the market without being held absolutely accountable for ideas that failed to attract funding at that time in history. It often does not mean that the idea was not valid (agreed, sometimes that is the case!), but it may be that the idea was too early for the market and other variables had to come into focus first before an idea has enough substance and a network that enables a faster adaption rate (Think of creating Apps before the iPhone even existed).

It is that clustering of capabilities on the one hand and the network effect (+ structure/regulation) of the local market on the other that allows for ideas and people to come together. Regrettably the latter too often walk away too early and do not give it enough time and chances to see the fruition of their own ideas. But who can truly afford waiting? It is that ‘idle’ time that appears to bug investors. It appears that the question that is forming in investors/society’s mind is “What, you still have not secured funding?” therefore you must be a failure. Regrettably that is utter nonsense. In fact, Germany would do good to overcome that attitude to venture investing as the venture market is required to create exactly that, the next big thing. The benefits of only company making it and the impact it has on people in that region or country is difficult to price in terms of future market capitalization. But surely we can agree that the position momentum may inspire other aspiring entrepreneurs to try too?

We suggest that Venture Investing is the only way to capture the potential upside when good ideas take off. Not every company can be the next Google or Youtube. Even smaller start-ups value as part of the value chain may make a difference later on when other things may fall into their place.

China growth outlook – is anyone concerned?

Posted on by S Klamp

The Federal Reserve Bank of San Francisco published a recent review (‘Is China Due for a Slowdown‘) of the Chinese economy and whether  we can finally expect a slowdown. The summary reads “While average income in China appears to be headed towards levels that have been associated with growth slowdowns in other countries, high income inequality between wealthier coastal provinces and the less-developed interior suggest that deceleration may not be severe”. So is this good or bad news? As to the consumer story, we look to the US and Asia’s regional consumers in a little more detail below.

Further we read the Goldman Sachs A-Share piece with great interest. In its recent update, Goldman Sachs suggests the following companies, among others, as a Buy-Rating:

– Baosteel – Steel company
– Beijing Capital – Real Estate Developer: Residential, Office, and Commercial in Beijing
– Better Life – Supermarkets
– BlueFocus – Public Relations
– Fiberhome – Telecommunications
– Hualu-Hengsheng – Chemical manufacturer
– Industrial Bank – Industrial Bank, Top 10 in the country
– Jiangsu Yuyue – Medical Equipment
– Jizhong Energy – Coal products
– Ping An (A) – Insurance
– SAIC – Automotive
– Yantai Wanhua – MDI manufacturer, largest in the region

Other stocks that offer a potential upside (on current share price) are Lushang Properties, Jiangsu Zhongnan Construction, China Merchants Bank (A), Shenzhen World Union Properties and Zhejiang Yankong Group.

While this list is interesting and gives a broad range of exposure to various sectors, it masks the wider implications that currently drive the regional and global economy. Access to the these companies is restricted to many investors. Therefore other proxies may serve as an indication of what is truly happening in the region. Below, we take a look at the state of the domestic Chinese banking sector, the regional and global consumer sentiment as gauge for current consumption trends.

Deloitte commented in a report on China’s Banking Industry in its 2012 outlook. The conclusion of the report starts by stating:

“The banking industry of China faces challenges on many fronts – to asset quality, non-performing loan levels and liquidity, to name a few. Emerging risk is perhaps the greatest challenge. With the expected
slowdown in domestic economic growth and weak external demand, new risks in the industry are growing. Industry risk is being controlled, in part, through greater regulatory scrutiny, monetary policy easing, and
local debt approval. The reform of rural financial institutions continues to move forward, further supporting growth in “Agriculture, Farmers and Villages”.”

We couldn’t agree more. The transition from an inward looking banking sector towards an industry that strives to be part of the globalization effort will take time but the forces are at work. Not only is the sector catching up fast, it will certainly lead in a number of segments not before long. The easing of the RMB exchange rate ‘gridlock’ is likely to enable a more balanced approach by its domestic banks in line with investor expectations both domestically and internationally. The domestic banking sector certainly must get its act together to avoid any of the fallacies of earlier decades. Nonetheless, while the housing sector is overheated for some and therefore poses a significant risk, the individual consumer is still striving and aspiring to developed market levels.

To balance our (global) view, we explored KPMG’s US Retail Industry Outlook Survey (2012) to look for evidence that spending on the domestic, eg consumer level, are intact and demonstrate signs of robustness despite the gloom in the global economy. After all, someone has to spend their income for (consumer) goods and thus make the trade to go round; if not the Americans who else we ask. The authors of the report conclude “…retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the US economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014/2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels.” This makes an OK reading and does not worry us too much as we would expect some level of re-balancing at the individual consumer level. But signs are certainly pointing sideways if not upwards over a medium term view.

PwC - 2012_Retail_Consumer_Products_Asia_Chart16

PwC: 2012 Asia Retail and Consumer Products, Chart 16

The Asian regional consumer behaviour is certainly becoming an ever more important factor as far as the decoupling from the developed world versus developing world is concerned. PwC put out a report entitled 2012 Outlook for the Retail and Consumer Products Sector in Asia and hits the nail on the head. Numbers in China are always big and staggering but these do not change the fact, there are what they are. China’s spending on Food, Beverages and Tobacco will double during period 2011-2015 potentially achieving US$1.4tr in sales. It is thus interesting to note that China has only 2.5 hypermarkets per million people. France, the US, and South Korea have 25, 12.3 and 7.6/ per million respectively. The conclusion is obvious.

In a nutshell, the consumer story in Asia appears to continue to gain traction. Although some believe it is slower than analysts had forecast, it is still a momentum that is gathering pace. And if the classical S-Curve is anything to go by, Asia will soon have a major impact on corporates that serve the regional consumers.

We look at the global conglomerates that can serve the market (Unilever, Kraft, Mars, Procter & Gamble, Johnson & Johnson, L’Oreal, Walmart, Carrefour, TESCO, Metro to name but a few), have the capabilities to develop regional if not local strategies, and the capital to have staying power when things get tougher than anticipated. A clear road map is certainly required to take on these markets. Entering them all at the same time, may just a little bit too challenging for most.