Bull and bear: Royal Mail: priced to sell, are you buying? - The Share Centre Blog

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Michael Baxter

Bull and bear: Royal Mail: priced to sell, are you buying?

Written by: Michael Baxter on October 8th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Royal Mail: priced to sell, are you buying? Oh those Chinese youngsters: think they are too good for good old fashioned work, do they?  Two more implications: re-shoring and Indonesia. Human capital index shows underlying forces Is Australian economy set to see best economic performance in three years?


Royal Mail: priced to sell, are you buying?

The consensus seems to be that it’s a short-term bargain, but not so sure about the long term.

What seems to be pretty clear, based on market reaction, is that the UK government has priced Royal Mail shares to ensure the IPO is fully subscribed– and in fact it looks as though demand will exceed supply many times over.

Bear the following in mind: the government wants the flotation to be a success, not only because the money it will bring in will help to reduce debt, but because the lesson of the Thatcher years is that privatisations that make money for a large chunk of the public are a good way to garner votes.

The more shares that are sold to small private investors as opposed to institutional investors – assuming that the shares rise in value – the better it is for the government. It is better because voters tend to tick the box relating to the political party that made them money. It is important because if the government can turn much of the public into ‘capitalist’ shareholders in the Royal Mail, then the unions who oppose the flotation will have less support for their cause.

So there you have it: it is in the UK government’s interest to price shares so that they are likely to yield investors a short term profit, and in its interest to ensure that in the event that the share offering is oversubscribed – which it is– as many investors as possible are private, or retail investors. You know, ordinary folks such as you and me.

You have until later today to register your interest. Click here

Bull might say “what are you waiting for”?

Bear might ask: “What is it that the Royal Mail does again?” Oh yes that’s right it offers the rather quaint custom of letting people send messages by sticking an adhesive image of the Queen on a small paper container called an envelope and placing it in a much bigger container called a letter box. Some may say: “But haven’t you heard of email?” Of course the Royal Mail is not just about letters any more, it is more about parcels, and complementing internet shopping. But then again, most music bought these days is electronic and is shipped directly over the ether. More books are going electronic, and we are entering a period when movies are set to be mainly downloaded rather than sold on DVD. ebay is tying up with Argos so that you can collect products bought over its network from a local Argos rather than wait for the postman/woman, and beyond that is 3D printing, when we can have products made for us while we wait.

So sure, the Royal Mail may be priced to make short term investors a quick profit, but in the longer term it looks a good deal less rosy.

More Bull:          On the other hand, who knows, a privately owned Royal Mail may find it can compete with the likes of DHL or Fedex across the world, and therein lies its long term opportunity.

Oh those Chinese youngsters: think they are too good for good old fashioned work, do they?

The above headline was meant to be facetious. When you were a kid did your elders and so-called betters talk about the youth of today, and how irresponsible they were? Well as we get older, most of us join the other side, and bemoan the youth. But one assumes this generational divide is nothing compared to what is emerging in China.

The only children are growing up and joining China’s labour force. Not for the spoilt brats  the soul invigorating work of the sweatshop; oh no, they want to enjoy these namby pamby western work practises. You know, working in an office in the services sector, in jobs that pay a decent wage, too. How very greedy of them. What’s wrong with hard work, it never killed anyone – except of course in the sweat shops of Asia hard work has killed lots of people.

Now the boss of Foxconn, the company that owns rather a lot of factories, including factories churning out iPhones, has said it is all changing.

Terry Gou is the founder of Foxconn – China’s biggest private employer (the company employs over 1 million people) – so he is quite important. He was quoted in the ‘FT’ today as saying: “The young generation don’t want to work in factories, they want to work in services or the internet or another more easy and relaxed job.” He added: “Many workers are moving to the services sector and, in the manufacturing sector, total demand [for workers] is now more than supply.” See: Young Chinese shunning factory jobs, says Foxconn founder 

This is an important development. It has been said before that later this decade China will pass what’s called the Lewis Turning Point, when it will run out of workers to migrate from the country to the towns. This development may prove to be one of the key moments of the first two decades of this century. Its implication for global inflation, interest rates, and imbalances will be quite profound. The words of Mr Gou are surely an early signpost to this moment.

Two more implications: re-shoring and Indonesia

Terry Gou also made two further observations that are actually very interesting. Firstly he talked about how Foxconn wants to sell more of the products it makes to the Chinese local market. This is the flipside of the re-shoring story. As companies look to move manufacturing closer to their home markets, Chinese manufacturers need to hope that a new market for their produce emerges in China itself. If nothing else, take the words uttered by Mr Gou as more evidence that re-shoring is for real.

Maybe from an investor’s point of view another observation made by Mr Gou is even more important. He talked about Foxconn opening factories in Indonesia, where labour costs are around 50 per cent cheaper than in China. He told the ‘FT’: “We promise not just to come to leverage cheap labour…we want to transplant technology to [Indonesia].”

Indonesia, as indeed do most of the countries of South East Asia, has problems at the moment. But for Indonesia with a large current account deficit and inflation worries these challenges are especially serious. As the Fed tapers, which thanks to chaos on Capitol Hill appears to have been delayed, many fear a run on Indonesia’s currency, triggering some kind of balance of payments crisis. But as the next item below illustrates, (see: Human capital index shows underlying forces) Indonesia has strong fundamentals. When the IMF recently forecast it was going to be one of the fastest growing countries in the world over the next few years it was not guessing.

The IMF is due to release its latest projections for global growth today, and it will be interesting to see what it now makes of Indonesia.

During the early stages of an era when the Fed tightens monetary policy, Indonesia will surely be a victim. But the longer term prognosis is very good. It is like the opposite of the Royal Mail, short term bad; long term excellent.

Human capital index shows underlying forces

Human capital matters. And the World Economic Forum has recently released its latest report on this very important underlying driver of growth. It looked at four key categories: education, health, work force and employment, and infrastructure. The country that comes top is Switzerland, followed by Finland, Singapore, the Netherlands, Sweden, Germany, Norway, the UK and Denmark. Just to state an obvious but important point, Germany is the only country in the world with a population greater than or equal to that of the UK, which is higher up the table.

The US is in 16th spot.

In the East, behind Japan and Australia, in third place is Malaysia (22nd overall), one place above the Korean Republic. Chile tops the list in Latin America (36th); Panama is in second. Recently the IMF projected that Chile and Panama were set to be among the fastest growing economies in the region.

Thailand is 44th, Poland 49th and Russia 51st.

Indonesia is 53rd, ahead of Mexico and Turkey. Indonesia stands out as an example of country whose position in the league of human capital is much higher than its position in the league of highest wages or economic development.

Is Australian economy set to see best economic performance in three years?

Is it good timing or is it more than a coincidence? Australia has a new government, and a new survey indicates things are  looking up. Or maybe confidence has risen because it has a new government.

The latest survey tracking business confidence in Australia has risen to a three year high.

But Down Under there are problems galore; among them the fact that it doesn’t know how to play cricket any more. But it has also become reliant on China’s demand for commodities.

So in some respects, the observations of Terry Gou from Foxconn (see above, Oh those Chinese youngsters, think they are too good for good old fashioned work, do they? ) are as significant for Australia as they are for China.

Australia is another example of a country that needs re-balancing. Still at least it sits at number 19 on the World Economic Forum’s league of human capital – ahead of France, but below New Zealand. Do you think there will be similar pecking order in the rugby?


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Australian economy, Chinese wages, Human capital index, Indonesia economy, Investing in Indonesia, Lewis Turning Point, re-shoring China, Royal Mail flotation

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