Weekend reading links

1. Agriculture terms of trade facing Indian farmers

Such export controls and anti-market policies inflict a large “implicit tax” on farmers, despite significant budgetary support through fertiliser and other subsidies, including loan waivers. In this context, it is useful to look at the OECD’s producer support estimates (PSEs) that it generates for more than 50 major countries in the world. They adopt a common methodological framework to estimate the impact of various agricultural policies, mainly budgetary support and market price support. The comparative results may shock some policymakers in India. For the triennium ending 2023, OECD countries supported their agriculture to the tune of about 14 per cent of gross farm receipts (PSE 13.8 per cent). Interestingly, China also supports its agriculture to the tune of 14 per cent (PSE 14 per cent), while India’s PSE is negative (-) 15.5 per cent. That happens due to the negative market price support that results from export controls, dumping in the domestic market to push prices down, putting stocking limits on private trade, banning futures markets, and so on.

2. India's banking sector in 2024 

The gross non-performing assets (NPAs) of the banking system, which stood at 3.2 per cent in September 2023, dropped further to 2.8 per cent in March 2024. After provisioning, the net NPAs dropped from 0.8 per cent to 0.6 per cent during this period. The capital adequacy ratio, meanwhile, remained unchanged at 16.8 per cent. Meanwhile, the gross NPAs of the non-banking financial companies (NBFCs) dropped from 4.6 per cent to 4 per cent, and return on assets rose from 2.9 per cent to 3.3 per cent. There was a marginal drop in their capital adequacy ratio, from 27.6 per cent to 26.6 per cent.

3. Lego facts of the day

Over the past 20 years the company’s revenue has grown ten-fold, reaching DKr66bn ($9.7bn) in 2023. A decade ago it became the world’s largest toymaker by revenue. Today its sales are greater than those of its two biggest rivals—Mattel, creator of Barbie, and Hasbro, maker of Nerf guns—combined. In 2023 it opened 147 shops around the world, taking its total to 1,031, and built factories in America and Vietnam. Sales in the first half of 2024 were up by 13%, year on year, even as the global toy market shrank. In 2004 the company was loss-making; in 2023 its net profit was DKr13bn, implying an enviable margin of nearly 20%... A foundation owns a quarter of the firm; the Kristiansen family owns the rest.

4. PE investors who flocked into China faces their reckoning.

Among the 10 largest global private equity groups with operations in China, there is no record of any having listed a Chinese company this year or fully sold their stake through an M&A deal, figures from Dealogic show. It is the first year for at least a decade where this has been the case, though the pace of exits has been slow since Beijing introduced restrictions on Chinese companies’ ability to list in 2021. Buyout groups rely on being able to sell or list companies, typically within three to five years of buying them, in order to generate returns for the pension funds, insurance companies and others whose money they manage. The difficulties in doing so have in effect left those investors’ funds locked away, with future returns uncertain... Many private equity groups expanded their presence in the world’s second-biggest economy as it grew rapidly over the past two decades. Global pension funds and others ploughed capital into the country, hoping to gain exposure to its economic boom. The 10 firms invested $137bn over the past decade, but total exits amount to just $38bn, Dealogic data shows. New investment by those groups has collapsed to just $5bn since the start of 2022...

The data covers Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent International and Apollo, the 10 largest buyout groups by funds raised for private equity over the past decade... Foreign buyout groups used to rely on taking Chinese companies public in the US or other countries in order to exit their investments after a few years. But Beijing has introduced new restrictions on offshore listings since cracking down on the ride-hailing app DiDi, in the wake of its New York IPO in 2021. Listings have slowed significantly since. In total this year, there have been just $7bn of domestic IPOs in China as of late November, compared with $46bn last year, which was already the lowest total since 2019.

China's troubles come even as India emerged as the top market for IPO listing in the world in 2024 by numbers and the second highest (after the US) by value.

The NSE of India has emerged as the number one venue for primary listings by value, ahead of Nasdaq and HK SE. 

5. 2025 is expected to be an inflexion point for EVs in China, as it's estimated to overtake ICE cars in sales.

China is set to smash international forecasts and Beijing’s official targets with domestic EV sales — including pure battery and plug-in hybrids — growing about 20 per cent year on year to more than 12mn cars in 2025, according to the latest estimates supplied to the Financial Times by four investment banks and research groups. The figure would be more than double the 5.9mn sold in 2022. At the same time, sales of traditionally powered cars are expected to fall by more than 10 per cent next year to less than 11mn, reflecting a near 30 per cent plunge from 14.8mn in 2022. Meanwhile, EV sales growth has slowed in Europe and the US, reflecting the legacy car industry’s slow embrace of new technology, uncertainty over government subsidies and rising protectionism against imports from China... China's adoption of battery electric vehicles (BEVs) is projected to grow to 80% by 2035... HSBC estimated about 90 new car models had been planned for release by manufacturers in China in the fourth quarter of 2024 — about one a day — and nearly 90 per cent were EVs. 

This has important implications.

The forecasts suggest Beijing’s official target, set in 2020, for EVs to account for 50 per cent of car sales by 2035, will be achieved 10 years ahead of schedule. Norway leads the world in EV sales as a share of the market, with more than 90 per cent of new cars battery-powered... They imply that over the coming decade, factories set up in China to produce tens of millions of cars with traditional engines will have almost no domestic market to serve. They also highlight how the rapid rise of the Chinese EV industry now threatens the national manufacturing champions of Germany, Japan and the US. As China’s EV market tracked towards year-on-year growth of near 40 per cent in 2024, the market share of foreign-branded cars fell to a record low of 37 per cent — a sharp decline from 64 per cent in 2020, according to data from Automobility, a Shanghai-based consultancy. In this month alone, GM wrote down more than $5bn of its business value in China; the holding company behind Porsche warned of a writedown in its Volkswagen stake of up to €20bn; and arch rivals Nissan and Honda said they were responding to a “drastically changing business environment” with a merger.

6. The long-term performance of a UK local government pension fund that invests over half its portfolio in index funds raises more questions on the value created by the asset management industry. 

Quentin Marshall, chair of Kensington and Chelsea’s £1.9bn pension scheme, has delivered the best performance of any UK local authority fund over the past decade by parking half of its assets in a global equity index tracker. Marshall, who has chaired the fund since 2014, said individual stock or fund selection hinders rather than helps drive returns and he avoids tactical decision-making when his team meets to review its investments... “The whole asset management industry is built on the premise that they have value,” Marshall said. 

He is withering in particular about consultants who advise pension funds on investment decisions and “rely on backward looking data which is definitely shown to be completely and utterly useless as a source of prediction”. Over the past decade, the 51-year-old Conservative party councillor and banker has delivered average annual returns of 10.8 per cent for the pensions of workers at Kensington and Chelsea’s council, which provides services to both the wealthiest parts of the UK and neighbourhoods with significant deprivation. The performance, driven by a heavy equity exposure, outstrips other local authorities, according to shareholder advisory group PIRC. Marshall’s fund was the only local authority to achieve double digit annual returns over the past decade. The second best was Bromley council, which trailed him with 9.3 per cent... Marshall attributes his performance in part to making few decisions. His team meets formally to review its strategic asset allocation once a year but it has been “broadly unchanged for many years”. Half of the fund follows the BlackRock MSCI world index tracker...

His rejection of fund and stock selection makes him sceptical that the UK government’s decision to pool all of the assets of England and Wales’s £391bn local government pension scheme will help boost pension returns, although he supports the government’s attempts to professionalise the investment process. Last month Labour chancellor Rachel Reeves set out plans for a series of “megafunds” to run local council pension assets, a move the government hopes will drive billions of pounds of investment into British infrastructure and fast-growing companies. The reform programme was supported by her Tory predecessor Jeremy Hunt. But Marshall does not buy their argument that the reforms will lead to better pension returns for cash-strapped councils.

7. Good oped on the implications of the events in the Middle East over the year.

8. Junk food and children health in UK

While the price of healthy, whole foods — such as fish or staple vegetables such as carrots — has soared, unhealthy processed foods are more likely to be placed on enticing promotions and cost significantly less than fresh alternatives. Per calorie, healthy food is almost three times as expensive as unhealthy options, says the Food Foundation. The most deprived fifth of the population would need to spend half of their disposable income on food if they stuck to the government-recommended healthy diet, the charity found. This compares to just 11 per cent for the highest earners. To put together a children’s packed lunch that meets healthy eating guidelines, typically involving fresh fruit and vegetables, unsweetened yoghurt and brown bread, costs up to 45 per cent more than a lunchbox filled with chocolate, flavoured yoghurt and processed snacks marketed at children, according to the charity. The imbalance in grocery baskets between whole foods and junk foods has contributed to higher levels of obesity in lower-income groups, with poorer families becoming more reliant on less-healthy diets, data shows.

The trend has also been exacerbated by food inflation. Between 2021 and 2023, healthier foods increased in price by £1.76 per 1,000 calories compared with £0.76 for less healthy foods, according to the Food Foundation. Fruit and vegetables are the most expensive grocery category, costing an average of £11.79 per 1,000 calories, while food and drink high in fat and sugar costs £5.82... Children are constantly tempted by brightly coloured packaged food placed strategically in shops and advertised on TV and social media platforms. Young people are also influenced by what their friends are eating. Soft drinks, confectionery, snacks and desserts account for about a third of food and soft drink advertising spend, compared with just 1 per cent on fruits and vegetables, says the Food Foundation. Brand advertising, which accounts for about 40 per cent, also contributes to unhealthy eating as consumers tend to associate companies with their products, such as snacks, even if they are not directly promoted... Researchers have also found that some companies deliberately market junk food to deprived communities... According to research by Impact on Urban Health, which mapped food availability in London boroughs, unhealthy food outlets were significantly more concentrated in deprived neighbourhoods.

The same story is repeated across the world. 

9. About corporate churn rate. 

Just over 1 per cent of the 1,513 UK-listed companies in 1948 still existed 70 years later, according to an analysis by two Cambridge professors. Roughly half of US public companies traded for 10 years or fewer over the past century, says Morgan Stanley.

10. On industry concentration in banking in the US

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, the four largest US banks by deposits and assets, collectively reported about $88bn in profits in the first nine months of 2024, according to Financial Times calculations based on figures from industry tracker BankRegData. Together they account for 44 per cent of the US banking industry’s profits — the highest share for the first nine months of the year since 2015 — despite the pool taking in more than 4,000 of the country’s other banks. Including US Bank, PNC and Truist, the seven largest banks by deposits generated almost 56 per cent of all banking profits in the first nine months of the year, up from 48 per cent for the same period in 2023.

11. Finally, a snippet on structural transformation in the US, from an excellent oped by Martin Wolf.

In 1810, 81 per cent of the US labour force worked in agriculture, 3 per cent worked in manufacturing and 16 per cent worked in services. By 1950, the share of agriculture had fallen to 12 per cent, the share of manufacturing had peaked, at 24 per cent, and the share of services had reached 64 per cent. By 2020, the employment shares of these three sectors reached under 2 per cent, 8 per cent and 91 per cent, respectively. The evolution of these shares describes the employment pattern of modern economic growth.

He points to an important challenge in manufacturing

Initially, two positive forces — cheaper food and higher incomes — shift spending towards manufactures and drive up the share of manufacturing in employment. But two negative forces — the decline in prices of manufactures relative to services and the higher income elasticity of demand for the latter — do the reverse. Initially, the positive effects on manufacturing dominate, because the agricultural revolution is so huge. Yet there comes a time when agriculture is too small to provide a positive impulse to manufacturing. Then forces operating within manufacturing and the service sector dominate. Employment shares in manufacturing start to fall. In the US, these have been falling for seven decades. The idea that this process is reversible is ridiculous. Water flows downhill for a good reason.