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Daily Intelligence Briefing –
FEATURED TOPIC: WHISKEY & OTHER SPIRITS ARE IN A SUPERCYCLE
President Trump has long complained of unfair trade practices by China and the need to narrow America’s $327 billion deficit with the country. The message seems to be getting through. China has decided to cut import tariffs on 187 consumer goods effective . The types of products on the list include dairy, pharmaceuticals, clothing, and spirits. The move is designed to accelerate China’s shift towards a consumption-driven economy, while also signaling to the U.S. and the rest of the world that Beijing is opening up the economy to the global market.
This is welcome news for whiskey producers, as the import tax on whiskey will be halved from 10% to 5%. China is already an important market for the spirits industry, and given the country’s heft, even a small policy change can have a significant impact these companies bottom line.
The global whiskey market was worth USD $5.56 billion in 2016 and is projected to reach $7.13 billion by 2021, growing at a CAGR of 5.1%. The driver of this growth is a global economic recovery that has put more disposable income in the hands of consumers, rapid urbanization and an expanding middle class in emerging market countries, and the rising popularity of craft spirits.
The fastest growing markets are in Asia, where whiskey accounts for 40% of Diageo’s total alcohol sales, compared to 25% of sales globally. India consumes 48% of the world’s whiskey, while in China, direct exports of the Scotch variety jumped 45% to £27m in the first six months of 2017.
Another source of this momentum is new technologies that are being deployed in the production process. Whiskey is an alcoholic beverage made from grains—barley, maize, wheat, rye, etc.—which are malted and fermented. The fermentation results in a liquid that is then distilled, sometimes twice or even thrice. The distilled whisky is then stored in wooden barrels for maturation; this aging often extends over many years. However, one new disruptor in the space, Cleveland Whiskey, can fully age whiskey in a 24-hour period using “flexible maturation and finishing technology.”
China’s decision to slash import duties is happening at a time when a new generation of whiskey drinkers is emerging among the millennial cohort who increasingly seek status through sensory consumption experiences rather than material products. More than 100 whisky bars opened last year throughout China in key cities including Shanghai and Beijing. Following the tariff cuts, whiskey will become more affordable to local consumers which could create another lift in demand.
Spirits are in a 30-40 year “supercycle” according to Spirited Funds CEO, David Bolton, who notes that whiskey and bourbon are experiencing particularly strong growth. Consumers “are spending more on the products, and the industry is investing hundreds of millions of dollars to increase storage and production.” No doubt, these trends have helped the performance of the Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY) which is up 23% YTD, beating the S&P500’s 15% YTD return. The fund invests in publicly traded companies involved in producing and selling whiskey, bourbon and other spirits. The ETF holdings include some of the biggest names in alcohol, including Diageo (DEO), Rémy Cointreau (REMY) and Pernod Ricard (PDRDY) whose brands include Jameson and Beefeater.
HERE in the meantime are some articles about this change in China’s trade policy (These stories are summarized in the SERVICES Section)
- F&B – China import cuts will boost multinationals
- F&B – Craft Spirits Market Analysis
- F&B – Irish whiskey set to benefit from China’s move on import taxes
CHART: Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY)
OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:
- Bonds – Bond Traders Start to See Crack in Fed’s Resolve About Inflation
- Cryptocurrencies – This Gold and Silver Fund Is Now Investing in Bitcoin
- Portfolios – It’s Not the Leverage, It’s the Illiquidity That Will Hurt
- Stocks – Just Eat set to join blue chip index after share price jump
- Economics and Trade:
- OBOR – Who Gains the Most from the New Silk Road
- Retail – Thanksgiving e-commerce sales hit a record $2.87B, up 18.3% year-on-year
- Mobile – China’s tech giants reach global elite with gamers, shoppers
- EVs – South Korea to Boost Metals Stockpiles in Anticipation of EV Boom
- Ethanol – EPA decision on renewable fuels good news for ethanol industry
- Energy & Environment:
- Power – 5 Distributed Energy Trends in Emerging Markets
- CHART: Bitcoin Guns For $10,000 as Cryptocurrency Mania Intensifies
JOE MAC’S MARKET VIEWPOINT
- Joe Mac’s Market Viewpoint: A Review of MRP’s Latest Change-Driven Investment Themes
- Joe Mac’s Market Viewpoint: The Gathering Storm
- Joe Mac’s Market Viewpoint: The Trump Trade & STATUS QUO BIAS
- Joe Mac’s Market Viewpoint: Why India Now
- Joe Mac’s Market Viewpoint: Contrarian Crude Call
CURRENT MRP THEMES
TIPS (L) / Long-Dated UST (S)
Industrials & Materials (L)
U.S. Financials & Regional Banks (L)
Emerging Markets (L)
Oil & U.S. Energy (L)
U.S. Homebuilders & Construction (L)
Electric Utilities (L)
U.S. Healthcare Providers & Pharma (S)
Gold & Gold Miners (L)
Robotics & Automation (L)
Video Gaming (L)
Lithium (L), Palladium (L)
Value over Growth (L)
About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.
- China, Industrial Profits (YTD), YoY, OCT: 23.3% from prior 22.8%
- Hong Kong, Exports, YoY, OCT: 6.7% from prior 9.4%
- Hong Kong, Imports, YoY, OCT: 7.9% from prior 9.7%
- Honk Kong, Balance of Trade, OCT: HK$ 44.0B from prior HK$ -44.7B
- Israel, Industrial Production, YoY, SEP: -5.5% from prior -1%
- Taiwan, Consumer Confidence, NOV: 86.16 from prior 83.34
Bonds – Bond Traders Start to See Crack in Fed’s Resolve About Inflation
Fed Chair Janet Yellen and her successor, Jerome Powell, lead a busy lineup of central bankers speaking this week. The Fed’s preferred gauge of price growth will also be released this week, with a survey of economists indicating it’s likely to slow to a 1.5 percent year-on-year pace. Since the Fed’s Nov. 1 decision, the yield curve from two to 10 years has flattened by 15 basis points and is now close to the lowest level in a decade. Traders will monitor all of these speakers with one question in mind: after a year in which the Fed has largely stuck to its script, will inflation drive policy makers to improvise? B
Cryptocurrencies – This Gold and Silver Fund Is Now Investing in Bitcoin
The Old Mutual Gold and Silver Fund, which handles a portfolio of precious metals equities – firms engaged in exploration, development and production – worth about $220 million, is now investing in bitcoin. About 20% of the firm’s holdings are held as physical metals. The fund now has a mandate to channel as much as 5% of their investments into digital currencies. The earnings generated from the appreciation of its digital assets will be re-invested into gold and silver equities. CCN
Portfolios – It’s Not the Leverage, It’s the Illiquidity That Will Hurt
Too much short-term debt backing long-term assets fueled the last credit bubble a decade ago. This time round, investors are hunting for yield in hard-to-trade, often private assets. As a Goldman Sachs economist put it recently: “illiquidity is the new leverage.”
The natural buyers of illiquid assets are in many ways insurers and pension funds. The share of European insurers’ equity holdings that are unlisted, for instance, has grown to 34% at the end of 2016 from 28% in 2011. U.S. insurers’ holdings of private bonds grew to 22.5% at the end of 2016 from less than 21% of all assets in 2013.
Individual insurers echo the trend and anecdotal evidence suggests pension funds are making similar moves. Investment banks are exploiting the trend, by creating and selling long-term illiquid products. The more that everyone pursues the same strategy, the more dangerous it will become. WSJ
Stocks – Just Eat set to join blue chip index after share price jump
Just Eat, an online takeaway firm, is expected to be promoted to the FTSE 100 just three years after its stock market debut. Its elevation would make it the first such firm to join the blue chip index. Companies at risk of demotion include: Babcock (one of the UK’s oldest engineering firms), Merlin (which also owns Madame Tussauds and the London Eye), and hospital group Mediclinic International. Changes to the FTSE 100 and 250 will take effect in mid-December. BBC
OBOR – Who Gains the Most from the New Silk Road
Leaders of Russia, Turkey and Iran will hold a summitto discuss Syria. A stable Syria is crucial to all parties involved in Eurasia integration. China has made it clear that a pacified Syria will eventually become a hub of the New Silk Roads, known as the Belt and Road Initiative (BRI) – building on the previous business bonanza of legions of small traders commuting between Yiwu and the Levant. The new transportation corridor is configured as an important Eurasian hub linking not only the Caucasus with Central Asia but also, in the Big Picture, the EU with Western China.
This has been met with ecstatic reception across Turkey and spells out Ankara’s pivoting to the East as well as a new step in the extremely complex strategic interdependence between Ankara and Moscow. From New Delhi’s point of view, this is the ultimate win-win. India needs all the gas it can get, fast. You don’t need a weatherman to see which way the wind blows across Eurasia; integration, all the way. OP
Retail – Thanksgiving e-commerce sales hit a record $2.87B, up 18.3% year-on-year
Adobe says that Thanksgiving online sales hit a record $2.87 billion, up 18.3% YoY. Given that these early days of holiday sales are considered a bellwether for the rest of the season — a crucial part of the year for e-commerce companies — it’s a strong sign of a tipping point in online spending. Between November 1 and November 22, overall spending has been up 17.9% compared to 2016, with all 22 days seeing over $1 billion in online spend – a mark of consumer confidence.
Smartphones accounted for 46% of all e-commerce traffic, up 15% from a year ago; Desktop-internet users accounted for 44% of traffic, down 11% year-on-year; Tablets accounted for only 10% of traffic, 5.7% less than in 2016. As for actual spending, smartphones represented 30.3% of all sales, desktop sales were at 57.2%, while tablets were at 12.5%.
Adobe determines its figures by tracking 80% of online transactions at 100 of the largest retailers on the web in the U.S. Adobe overall forecasts that sales online will reach $107.4 billion this season, up 13.8%. TC
F&B – China import cuts will boost multinationals
China’s new plan to slash import taxes on a wide range of consumer goods promises to boost the prospects of multinationals in the Chinese market. Tariffs for 187 product categories will drop from an average 17.3pc to 7.7pc after the cut takes effect on.
Tariffs for some types of baby formula were cut to zero, triggering losses in Chinese dairy stocks. Shares climbed, meanwhile, for European food and beverage companies such as Irish giant Glanbia, Danone and Nestle that compete with local brands in the large market for infant formula.
Taxes for a range of medicines, including various antibiotics and insulin products, were lowered to 2%from as much as 6%, potentially a big win for multinational drug companies such as Pfizer and Novartis that import many of their drugs into the country. The biggest reduction came for vermouth or similar alcohol, from 65% to 14%. Whiskey tariffs were cut to 5% from 10%.Independent
F&B – Craft Spirits Market Analysis
The global craft spirits market was valued at USD 6.13 billion in 2016 and is expected to grow at an impressive CAGR of 33.4% from 2017 to 2025 to reach USD 80.43 billion by 2025. Demand is mainly driven by consumers growing a preference for premium and authentic drinks with unique tastes. People born between 1980s and early 2000s have accounted for the largest share of consumers in the industry. A major share of the millennial population has just reached the Legal Drinking Age (LDA), while the other section comprises employed consumers with significantly higher purchasing power. The millennial population segment has fueled significant demand, owing to their preference for unconventional and experimental alcoholic beverages.
Whiskey was the most consumed variety of the craft spirits, followed by gin, vodka, and rum. The craft distillers focus on the use of different spices, fruits, herbs, and botanicals to produce innovative products. They procure raw materials from family-owned farming houses who have strong experience in producing grains and fruits. BW
F&B – Irish whiskey set to benefit from China’s move on import taxes
Foreign multinationals such as Diageo stand to benefit from China’s plan to slash import taxes as a growing base of middle-class consumers seek out goods stamped with foreign brands. Among the foreign companies poised to benefit is Procter and Gamble, which gets 8% of its sales from Greater China. P&G, the owner of brands such as Crest, Gillette and Tide, may get a lift from cuts to items including nappies, personal care products and dental products. For instance, the tariff on electric toothbrushes will fall from 30% to 10%.
Tariffs for some types of baby formula were cut to zero, triggering losses in Chinese dairy stocks. Inner Mongolia Yili retreated as much as 5.8%, while China Modern Dairy Holdings Ltd. lost as much as 2.6% in Hong Kong. The tariff cuts will help companies such as Danone and Nestle that compete with local brands in the large market for infant formula. The country’s infant formula market will increase about 15% to 123 billion yuan ($18.7 billion) by 2020, according to Goldman Sachs. Chinese parents worried about a series of food-safety scandals often favor foreign brands. Irish Times
Mobile – China’s tech giants reach global elite with gamers, shoppers
While the FAAMGs – Facebook, Apple, Google’s Alphabet, Amazon and Microsoft – thrive across the world, Chinese firms have made their fortunes by cornering China’s vast market of 750 million internet users. Tencent and Alibaba have benefited from China’s rapid smartphone adoption, with cheap phones flooding the market and bringing millions online for the first time. Today, there are more than 1 billion smartphones running in China. Both Tencent and Alibaba earn most of their revenue from mobile.
Tencent, which broke into the US$500 billion league last week, boasts nearly 1 billion monthly active users of WeChat, known for its combination of instant messaging, social media, mobile payment options, games and publishing. In smartphone games alone, the company’s revenues surged by 84% in Q3. Alibaba, meanwhile, has dominated the e-commerce market, with Chinese consumers flocking to its shopping platforms to buy everything from laundry detergent to Boeing 747s. Alibaba’s annual “Singles’ Day” sales promotion drew in a record spending of US$25 billion, up 40% from last year. SCMP
EVs – South Korea to Boost Metals Stockpiles in Anticipation of EV Boom
Inventories of non-ferrous metals may be boosted significantly in South Korea beginning next year on the expectation of fast growing demand for electric vehicles, the country’s Public Procurement Service (PPS) has revealed. The agency typically keeps total non-ferrous and rare metal stockpiles at around 250,000 tonnes, with aluminum accounting for over half of that.
Park noted that the agency was currently stockpiling non-ferrous metals equivalent to nearly 58 days of national consumption, above the 56 days it is required to hold. He said that the PPS would likely buy more zinc in 2018 as stockpiles of the base metals are lower-than-usual this year. South Korea has imported at least around 1.7 million tonnes of the top 6 most industrially important non-ferrous metals each year over the past 3 years. CT
Ethanol – EPA decision on renewable fuels good news for ethanol industry
The Environmental Protection Agency’s decision to deny attempts to change Renewable Fuel Standard rules is good news for the ethanol industry and fuel retailers who would have had to assume responsibility for blending ethanol with gasolines. Meanwhile, refiners would have had little incentive to produce the necessary fuel blends, which would make it difficult for fuel retailers to comply, he said.
However, the EPA ruling is not the final word on changes. A decision on proposed changes in the renewable volume requirements for cellulosic biofuel, biomass-based diesel, advanced biofuel and total renewable fuel renewable volume requirements is to be announced SouthernMinn, the EPA said.
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