Archives - June, 2019



29 Jun 19

They say there is no such thing as bad publicity. Ireland might beg to differ, having been at the centre of a US Senate hearing on Apple’s tax practices at a time when the EU is working hard to crack down on tax evasion.
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On May 21, the Senate Permanent Subcommittee for Investigations dug into Apple’s tax activities in gory detail. Their findings show that Ireland has been at the centre of Apple’s success in tax avoidance.

The subcommittee found that the company used subsidiaries in Ireland to funnel about $US74 billion in income away from the US. The subsidiaries involved were incorporated in Ireland but not tax resident anywhere.

The structure allowed Apple to pay an effective tax rate of 2 per cent or less since 2003, well below Ireland’s corporate tax rate of 12.5 per cent. Perhaps the most damning part for Ireland came in the explanation of the low rate in the subcommittee’s report: “Apple told the subcommittee that, for many years, Ireland has provided Apple affiliates with a special tax rate through negotiations with the Irish government.”

This is serious. It would be awkward, to say the least, to have the government cutting deals with multinationals while also, as the holder of the EU presidency, presiding over a push for greater transparency in corporate tax dealings. Irish Prime Minister Enda Kenny immediately rebutted Apple’s version of events. Is there another explanation for why Apple pays such a low tax rate?

Seamus Coffey offers one on the Irish Economy blog: Apple benefited from a loophole in the way Ireland defines taxable income. The country’s 12.5 per cent tax rate applies to income after subtracting expenses such as royalty payments for intellectual property licences. In Apple’s case, these payments are huge, significantly reducing taxable income.

The royalties are paid to another Apple subsidiary in a different tax jurisdiction. This is sometimes referred to as a “Dutch sandwich”, because the payments are typically funnelled through the Netherlands on their way to Bermuda, where there is no corporate tax.

Whether Ireland really is a tax haven, the perception could be just as damaging as the reality. The countries calling the shots in the EU (namely, Germany) aren’t favourably disposed to countries that lure away their tax revenue. Just ask Cyprus, which received little sympathy for its banking troubles. Ireland will almost certainly succeed in exiting its bailout program in the next year, but it may need assistance from its eurozone partners in the future.

Ireland should use the Apple drama as an opportunity to consider whether the benefits of an attractive tax regime are worth the costs. Many multinationals have set up in Ireland for access to the European market. The low corporate tax is clearly a draw, but so is the skilled, English-speaking talent pool. Multinationals have helped to keep Ireland’s exports buoyant throughout the crisis, with pharmaceuticals, chemicals and business services performing well over the past few years. As of last year, multinationals employed about 150,000 people in Ireland.

Some analysts question how much Ireland benefits from the multinationals. Most of their profits flow to shareholders outside the country. Without them, Ireland would have struggled to achieve the export-led growth it posted last year. In the longer term, a sustainable growth model must involve Ireland weaning itself from exports and fostering domestic demand.

Perhaps the Apple embarrassment will awaken it to that reality.

Bloomberg

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29 Jun 19

Analysts are again questioning whether Australian banks are overvalued, after the financial sector led last week’s sharemarket sell-off.
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The big four banks have been trading near their historic valuation highs, with Commonwealth Bank’s price-to-earnings ratio recently lifting to about 15.5 times its annual earnings.

Before last week’s falls, CBA’s share price had risen more than 50 per cent in 12 months. The share price closed at $68.19 on Monday, 38 per cent higher than last May.

CIMB analysts John Buonaccorsi and Ashley Dalziell said local banks were about 20 per cent overvalued on most fundamental ratios.

“Using the Gordon growth model, current market pricing implies the Australian bank sector can achieve a constant 7 per cent terminal growth rate, or alternatively a 27 per cent [return on tangible equity], both of which are unlikely to be achieved,” the analysts said.

Platypus Asset Management’s chief investment officer, Don Williams, said CBA’s highest p/e ratio was in 1999 at about 17 times earnings. “We would argue that 14 or 15 times is at the high end of its valuation range and the low end is around 10,” he said

Last week, UBS analyst Jonathan Mott described CBA as the ”most expensive large bank in the world by nearly every measure”.

Using measures such as pre-provision profit, which looks at a bank’s core earnings, and tangible book value, which calculates the net asset value of a company excluding intangible assets and goodwill, the big four Australian banks were at the top of the world’s most expensive banks list, followed by the Canadian and Scandinavian banks.

Mr Williams said banks remained relatively attractive compared with other investments if investors were focusing only on yield.

”One of the reasons [banks] are trading expensive versus their own histories is because they still deliver a very high, safe, and for most of them, growing yield. As long as interest rates remain low and globally as well, the hunt for yield hasn’t disappeared … it’s just having a correction.”

But analysts said a falling dollar and expectations of an end to quantitative easing in the US led foreign investors to sell their shares in local banks last week.

“The proportion of that fall [in the banks] reflects not so much fear and loathing from a domestic investor perspective, but reflects offshore investors saying they are out of the bank holding they were in and out of Australian dollars,” Patersons Securities strategist Tony Farnham said.

This story Administrator ready to work first appeared on Nanjing Night Net.


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29 Jun 19

The market fell for a fifth straight day as concerns about Chinese growth and volatility on the Japanese sharemarket took their toll.
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Stocks fell more than 1 per cent in the morning, but the market clawed back half its losses thanks to a strong performance from telecommunications companies.

The benchmark S&P/ASX 200 Index lost 23.6 points, or 0.5 per cent, to 4959.9, while the broader All Ordinaries shed 25.7 points, or 0.5 per cent, to 4938.6.

Materials slumped 1.5 per cent as miners BHP Billiton and Rio Tinto shed 1 per cent and 2.6 per cent respectively after Shanghai copper slipped and became mired near last week’s lows.

A senior FX strategist at Royal Bank of Scotland, Greg Gibbs, said the recent disappointing growth in China could be the ”new norm”, and we should expect to see growth closer to 7 per cent.

”My impression is that clients’ confidence in the Chinese economy has wavered and they are expecting this to be a relatively weak year in China,” Mr Gibbs said.

Retailers finished weaker, with the consumer discretionary sector losing 1.1 per cent.

David Jones lost 0.8 per cent after it reported a 3.4 per cent fall in its third-quarter sales. Myer dipped 1.2 per cent while electronic goods and entertainment retailer JB Hi-Fi slipped 0.1 per cent.

Financials dragged on the market, slipping 0.2 per cent, as investors sold banks after a recent stellar performance across the sector on the back of strong earnings reports and high dividend yields.

Commonwealth Bank fell 0.8 per cent, while Westpac dipped 0.3 per cent. ANZ bucked the trend, rising 0.6 per cent after saying it would outsource 70 call-centre positions to New Zealand to improve profit.

Biotechnology firm CSL lost 0.9 per cent, while Woolworths dropped 1.1 per cent to trade at three-month lows, and Wesfarmers slipped 0.3 per cent to six-week lows.

Telcos bucked the trend, rising 0.7 per cent.

The market has now closed lower for the fifth-straight session, with the S&P/ASX 200 plumbing a five-week low.

In Asian markets broadly, Japanese volatility dominated proceedings again with the Nikkei dropping a further 3.2 per cent.

Australia’s dollar, meanwhile, provided a reprieve for traders, steadying around US96¢.

With Agencies

This story Administrator ready to work first appeared on Nanjing Night Net.


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29 Jun 19

Just as well Paul Zahra is a retailer instead of a banker – otherwise the Australian Competition and Consumer Commission might be wondering if he was attempting a little price signalling while announcing disappointing sales figures.
Nanjing Night Net

David Jones’ Zahra isn’t the first shopkeeper to let the market know what he thinks about that nasty habit of discounting. Even while announcing a ”Super Saturday” sale, Myer’s Bernie Brookes seemed to be warning Target not to pull the trigger on a discount war. Brookes also came out as a fan of a weaker dollar, claiming there would be more pluses than minuses for Myer.

That argument seems to come down to making international online shopping a little less attractive, but a weaker Australian dollar equally makes prices on imported stuff at Myer – the vast majority of it – a little less attractive, too. Or maybe a softer currency could become an excuse for prices at the troubled discretionary department stores stabilising and inching higher.

That’s what Zahra is rather desperately hoping, even while saying he expects everyone else to be slicing prices on excess winter clothing.

So we have David Jones signalling Myer, which is signalling Target, which is busy signalling distress as the new CEO works out what the chain should be after his two predecessors let it wander in the face of the resurgence by Australia’s biggest department stores: Kmart and Big W.

And that’s why, for all the publicity they garner, David Jones and Myer aren’t nearly as important as their coverage might indicate. Far from representing the mindset of the Australian consumer and the overall health of Australian retailing, the two mid-tier department stores represent themselves as they struggle to update their 19th-century business models.

They are the middle-order players in the department store space, which itself is the smallest of the Australian Bureau of Statistics’ six retail categories. Myer’s 0.4 per cent lift in April-quarter like-for-like sales last week was greeted as good news, holding out the possibility of recording its first full financial year of sales gains since 2007. Yes, 0.4 per cent – a shop assistant’s sneeze. And never mind Monday’s announcement that DJs’ like-for-like sales went backwards by 3.4 per cent.

Meanwhile, both David Jones and Myer try to make the most of their online sales picking up – doubling, says DJs, up 200 per cent, says Myer – but those percentages are from a very low base and they remain unprofitable.

I glimpsed a ”unique browsers” graph for the 2012 calendar year that showed David Jones pretty much flat throughout, Myer picking up a little and The Iconic soaring far above them. The Iconic is an Australian e-tailer – not one of those nasty foreigners avoiding GST – and works on convenience, not price.

But The Iconic doesn’t make a profit either while it’s busy buying customers. With private equity backers and founded by a couple of Boston Consulting alumni, the business plan could well be to build the brand and then offload it to either one of the two obvious local candidates struggling in cyberspace or one of the foreign retailers that relish our market – companies who think Australian consumers are just fine and far from being on strike.

This story Administrator ready to work first appeared on Nanjing Night Net.


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29 Jun 19

The governor of Japan’s central bank has shrugged off concerns that the recent spike in bond prices could damage the country’s fledgling recovery.
Nanjing Night Net

Haruhiko Kuroda, the Bank of Japan head, said analysis by the central bank last month showed that the country could withstand an increase in market interest rates of as much as 3 per cent, as long as there were accompanying improvements in the economy.

Japan’s sharemarket crashed 7 per cent last Thursday following weak economic data in China, speculation that the US was close to winding up its money-printing program and on fears that falling Japanese government bond prices would undermine the government’s economic strategy and punch a hole in bank balance sheets.

Sharemarkets across the world also took fright, with the Australian market down 2 per cent on the day.

But Mr Kuroda said that Bank of Japan estimates in April showed that a 1 to 3 percentage point rise in interest rates would not cause problems for Japan’s financial system, as long as it was accompanied by economic improvements, since a recovery would lead to increased lending and help to improve banks’ earnings.

“Japan’s financial system as a whole seems to possess sufficient resilience against such shocks as a rise in interest rates and deterioration in economic conditions,” Mr Kuroda said.

Mr Kuroda and Japan’s Prime Minister, Shinzo Abe, have launched a vast stimulus program, promising in April to inject $US1.4 trillion into the economy in less than two years through quantitative easing, to jolt the Japanese economy out of a 15-year deflationary malaise and lift inflation to 2 per cent.

The policy triggered a huge sharemarket rally. But a surge in bond yields, which means bond prices have fallen, has threatened to make government borrowing expensive.

Domestic banks could be forced to take losses on their large holdings of Japanese government debt.

Mr Kuroda said that the Bank of Japan was watching for any signs of overheating in asset prices and would take “appropriate action” if financial imbalances emerge, suggesting it might unwind its ultra-loose policy.

The Nikkei slid another 2.5 per cent on Monday but remains up 36 per cent for the year.

This story Administrator ready to work first appeared on Nanjing Night Net.


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