Saturday, October 17, 2020

Weekend reading links

1. Aswath Damodaran (HT: Ananth) has a scathing takedown of the idea of ESG investing. 

There is a weak link between ESG and operating performance (growth and profitability), and while some firms benefit from being good, many do not. Telling firms that being socially responsible will deliver higher growth, profits and value is false advertising. The evidence is stronger that bad firms get punished, either with higher funding costs or with a greater incidence of disasters and shocks. ESG advocates are on much stronger ground telling companies not to be bad, than telling companies to be good... Based on the evidence, it appears to me that just as likely that successful firms adopt the ESG mantle, as it is that adopting the ESG mantle makes firms successful... The ESG bandwagon may be gathering speed and getting companies and investors on board, but when all is said and done, a lot of money will have been spent, a few people (consultants, ESG experts, ESG measurers) will have benefitted, but companies will not be any more socially responsible than they were before ESG entered the business lexicon.

Staying on the issue, Dani Rodrik writes,

This calls for a different mode of regulatory governance, according to which broad economic, social, and environmental objectives are set by public authorities, but refined (and occasionally revised) in a continuous process of iterative collaboration with firms. While getting the private-public balance right is difficult, there are successful examples of such collaboration in technology promotion, food safety, and water-quality regulation. Ultimately, though, the only real solution to the conundrum is to make business itself more democratic. That means giving employees and local communities a direct say in the way firms are governed. Firms can become a reliable partner for the social good only when they speak with the voices of those whose lives they shape.

Last year, nearly 200 large US companies, grouped under a Business Roundtable declaration, pledged their commitment to stakeholder capitalism. Their balance sheet when faced with Covid 19, according to a study by Tyler Wry of Wharton,

As COVID-19 spread in March and April, did signers give less of their capital to shareholders (via dividends and stock buybacks)? No. On average, signers actually paid out 20 percent more of their capital than similar companies that did not sign the statement. Then, as the coronavirus swept the country, did they lay off fewer workers? On the contrary, in the first four weeks of the crisis, Wry found, signers were almost 20 percent more prone to announce layoffs or furloughs. Signers were less likely to donate to relief efforts, less likely to offer customer discounts, and less likely to shift production to pandemic-related goods.

Gillian Tett has a summary of the challenges associated with a common ESG accounting standard to help compare across firms. The arguments of the likes of Dani Rodrik and the results of commitment-based approaches points to the need for an active role for governments in the definition of such standards. Industry-driven approaches, especially by the likes of World Economic Forum, are always vulnerable to being greenwashing. 

2. The Covid 19 pandemic has led to massive erosion of equity capital across businesses. This leaves us with the scenario of businesses which while having promising prospects are unable to borrow more or even sustain the same level of borrowing due to depleted equity. These businesses will not be able to capitalise on the various monetary stimulus infusions by governments and central banks across developed economies. Ricardo Hausmann raises these challenges in this article.

3. Ashok Gulati is optimistic on the agriculture sector, post-reforms,

My reading is that in the next three to five years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate. Some will fail, but many will succeed. These companies will help raise productivity, similar to what has happened in the poultry sector.

While not being as pessimistic as Yogendra Yadav in this critique, such optimism (3-5 years) has little basis with field realities. 

4. Development Impact Bonds (DIBs), and that too in education, should count as among the dumbest of several naive inane ideas that inhabit the space of international development. That the World Bank is funding some is one more reason to argue why development of developing countries should be left to insiders. There are too many people from the global North, who promote such fads, for whom development is a very attractive and accountability-free career option which inflict considerable harm in developing countries.

It beggars belief how such claims (by Ronald Cohen) pass muster and find its way into an FT article,

“I wouldn’t be surprised if paying for success raises $1tn. The idea can spread much more widely and it will grow because it delivers much better results per pound spent.”

Or perhaps, it's a reflection of how disconnected and clubby vast parts of international development is. 

This, this, and this are my earlier posts which highlight the problems with pure outcomes-based approaches to solving complex development problems.

5. The Economist points to a new research by Justin Sandefur and Dev Patel which uses a statistical technique to compare the performance of students across 80 countries on a benchmark international test, Trends in Mathematics and Science Study (TIMSS). 

The research finds that children in rich countries do far better than children from similar income households in poor countries.

Unsurprisingly, in almost every country, richer kids post higher test scores. But what is less obvious is that at a given level of household per capita income in PPP dollars, kids from wealthier countries score much better than kids in poor countries. It’s not just your own socio-economic status that matters, but the wealth of the country you live in that determines your educational outcomes. In terms of test scores, it’s better to be (relatively) poor in America than (relatively) rich in Honduras. The strength of those country effects is huge. Controlling for a household income as flexibly as possible, we still find that country fixed effects explain over half of the pupil-level variation in reading scores, and about two-thirds of the variation in math scores.

6. Apple is fast becoming an also ran in the Chinese smartphone market

Sample this,

In 2017, Apple dominated the premium $600-and-up smartphone market with an 86% share, versus Huawei’s 5%, according to Canalys. But in the first half of 2020, Huawei controlled almost half the market, while Apple had fallen to 42%.

7. Emmanuel Saez and Gabriel Zucman have a detailed rebuttal of a few papers critiquing their US inequality findings. The summary, nothing much changes at all - inequality in the US is shockingly high and rising, and prevailing policies are contributing to it. 

8. Some disturbing news about the infrastructure pipeline, as reflected in the newly inaugurated India Investment Grid portal. This Livemint article points to less than a fifth of the 1000 largest projects, which form 80% of the value of the National Investment Pipeline, to be "even remotely close to being tendered".

This article points to the growing pile of delayed projects and increasing delays. 

9. Unintended consequences of tax law changes,

The dividend distribution tax, which had to be paid by the company, has been abolished. All companies now have to pay a tax on “income distributed” by the medium of buybacks, whereas only unlisted companies were liable to pay the “buyback tax” earlier. From 2020-21, the shareholder also has to pay income tax on dividends received. On the other hand, the shareholder, who accepts a buyback offer, is no longer liable to pay capital gains tax on the associated profits. Consequent to these changes, buybacks have become a more attractive way for promoters to reward themselves and other large shareholders, compared to paying dividends. The impact is already apparent. The tally so far this financial year stands at over Rs 28,000 crore, including the recent buybacks announced by TCS and Wipro. This exceeds the buyback quantum for 2019-20, by a massive 42 per cent, with almost six months still to go in the current fiscal.

Interesting point about dividends, 

A company may deliver far higher returns by ploughing profits back into generating growth. This will be reflected in rising share-prices. Amazon (listed in 1997) has never paid dividends; Microsoft issued its first-ever dividend in 2003, some 22 years after listing; and Apple did not pay dividends between 1995 and 2012.

10. Edward Luce has a very good long read on America in the backdrop of the elections. He foresees a slow-burn constitutional crisis arising from among other things, changing constitution of the Supreme Court and demographics. The starting point of deep polarisation makes it very plausible. 

11. Nice article about Fast Retailing which promotes Uniqlo brand and Tadashi Yanai in NAR. This three-way race at the top of apparel market is interesting and Uniqlo is fast catching up with the big two.

The article talks about what perhaps differentiates Uniqlo,

Since its beginnings, Fast Retailing's strength has always been to nail reasonable pricing for basic items, said Takahiro Kazahaya, a retail analyst at Credit Suisse Securities. Yanai has "set a clear mission for the company to provide cheaper and more functional clothing for everyone of all ages, and has been doing what it needs to achieve that." The secret of Uniqlo's pricing power is partly due to the large volumes of orders it places with the textile industry. That allows it to work with textile makers more closely, to mass-produce exclusive materials for low prices. "Most apparel makers just tell us to do things at low cost," a Japanese textile company told Nikkei. "But Yanai-san asks us what we need in order to do things he wants us to do." Other partnerships include one with knitting machine maker Shima Seiki Mfg. for a seamless "3D Knit" collection, and it has successfully raised design quality by releasing regular collections with top designers including Christophe Lemaire and Ines de la Fressange... Uniqlo casts a wide net, targeting customers of all ages and lifestyles, which means the "long-term potential market is bigger for Uniqlo [than Zara]," said Takahiro Saito, CEO of fashion retail consulting firm Demand Works and author of the book "Uniqlo vs. Zara."

Btw, interesting question to ponder - who's the Tadashi Yanai equivalent in India? An intriguing thing about Indian manufacturing is this. Despite the very large and captive domestic market, why have we not seen large domestic brands emerge in clothing, footwear, kitchenware, electronic appliances, office stationary, sporting goods etc, capable of out-competing foreign brands on quality and price in the domestic market, and with some becoming reasonably large enough to start expanding outside? 

12. Is Taiwan Straits the hottest geo-political landmass in the world today?

But former top U.S. officials have painted a worst-case scenario in which China takes advantage of chaos following a contested U.S. election to invade the island. Glaser said China's next provocative move might be to fly an aircraft directly over the island. Taiwan would have the right to down the plane as a defensive measure, potentially sparking a larger conflict. But ignoring the act would allow Beijing to continue aggressions with greater impunity.

From the Chinese perspective, even with it getting stronger and more globally influential, the window for a forcible takeover of Taiwan may be closing. So the compulsion to think as act now or never could be high.

13. One of the casualties of the 2000s bubble was value investing. There is a reprise happening now, as investors chase growth stocks. In simple terms, the markets have stayed high longer than value investors can stay invested. Sample the latest to bite the dust - AJO Partners.

14. Indonesia follows India with radical labour market reforms.

15. Bloomberg article on how Dharavi kept out Covid 19.

16. Real estate is the largest destination for PE investments in India. Sample this about Blackstone, which is apparently considering purchasing Prestige Estates Projects' commercial properties for $2 bn,

Blackstone is the largest owner of commercial real estate in India with a total investment of around $7.8 billion as of March 2020. It has built its portfolio over more than a decade, buying up more properties as India’s economy slowed in recent years. Two real estate investment trusts backed by Blackstone have also been listed on India’s public markets. Prestige Estate is one of the largest developers in southern India. It has about 45 ongoing projects spanning 52 million square feet, with another 57 million square feet under construction.

17. Finally, Scott Galloway thinks AirBnB's IPO next year could make its stock the Tesla of 2020. 

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