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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. The big three banks — Goldman Sachs, JPMorgan Chase and Citi — all posted strong quarterly results yesterday. Dealmaking is back and trading incomes are higher. But, as in many cases, the bad comments were easier to remember than the good ones. “We have a lot of assets out there which look like they’re entering bubble territory,” warned JPMorgan’s Jamie Dimon. Is it time to search for opportunities in other markets? More on that below. Email us: unhedged@ft.com.
Value gone global
Earlier this month, Rob touted the appeal of the much-maligned US value stock sector. In his words, “there is more to life than growth and tech”. The S&P 500 value sub-index has underperformed the S&P 500 growth category in recent years — but Rob made the case that the value of value stocks is building up.
It has been brought to our attention that value actually has been one of the best-performing areas of public equity investing — internationally, that is. Dan Rasmussen at Verdad Advisers noted over the past five years, international small-cap value has been a quiet winner:
“This year really changed the tone with many currency and equity markets internationally better than the US,” Rasmussen said. But why is it that it’s the exact opposite of US large cap (aka, mostly tech) — that has emerged as another powerhouse? According to Rasmussen, the answer may be as simple as:
. . . there just isn’t an international Google, or whatever. Your best name would have been Novo Nordisk or something, but that’s had its troubles, or ASML . . . What’s really made money is international value, and the cheaper and smaller you’ve got, the better you’ve done. Which is the exact opposite of what has worked in the US. Our narratives of value being bad are very US-centric. Value isn’t bad — it has just moved abroad.
Most of the names in the international small-cap value ETF that Rasmussen used are in the industrials and materials sectors and/or located in Europe and Japan — growth or innovation names these certainly are not. They are also much lower risk than US tech, and even US small caps. Chart courtesy of Rasmussen:
The small-cap value trade’s success abroad perhaps says more about how unusual US stock market conditions are, rather than the international value names themselves. The US megacap tech names are leading on the innovation front, and as Unhedged pointed out earlier this week, are also trading on hopes of future progress. That is the logic investors have used to justify the expensive valuations. But as Rasmussen notes:
It’s also quite rare in history that the biggest companies would be the biggest stock gainers, or that buying the most expensive companies would be a winning strategy. The success of boring old value investing internationally highlights how unique what’s been happening in the US is, and how special the largest US growth companies are.
A good reminder that elsewhere in the world, markets are still rewarding beyond just growth.
A warning for big dealmakers
This is Oliver Barnes, US deals and activism correspondent at the FT, helping out on Unhedged.
Unlike my boss, Signore Fontanella-Khan, who poured cold water on a dealmaking rebound in this column earlier this week, I happen to believe we are headed for the boom times.
But I have a note of caution for companies — emboldened by dealmaker-in-chief Donald Trump’s openness to big, beautiful deals — to think about the darn shareholders!
Excited by the window to do megadeals after Trump reined in Washington’s antitrust watchdogs, corporate America has forgotten about the need to justify their deals to the investor base — and are facing the wrath of activist hedge funds as a result.
The Financial Times on Monday revealed Jeff Smith’s Starboard Value has built a stake in Keurig Dr Pepper, after its stock plunged more than 25 per cent in the wake of the fizzy pop maker’s pricey €15.7bn deal to buy European coffee maker JDE Peet’s.
Starboard, which has been locked in private negotiations with KDP in recent weeks according to people familiar with the matter, has no path to block the deal. But it has deftly tapped into wider shareholder discontent about the acquisition, forcing the company to give it an audience.
In the aftermath of August’s deal announcement, consensus was that the biggest single beneficiary of the deal was JAB Holdings, the investment firm which forged the 2018 merger that created KDP and was JDE Peet’s biggest investor, with a 68 per cent shareholding.
Almost 50 deals worth $10bn or more globally have occurred this year, according to data from the London Stock Exchange — and KDP’s deal is by no means the only one to face activist pushback.
Elliott Management took aim at Global Payments after investors reacted badly to its $24.2bn acquisition of Worldpay in a three-way deal, which took place during the market maelstrom unleashed by Trump’s tariff announcement in April.
The result: the payments group last month agreed to add two board directors, as well as set up a committee to manage the integration of Worldpay in order to keep Elliott at bay. A further mutually agreed upon board director will be added by next year.
On the flipside, T Rowe Price, the biggest shareholder in Thoma Bravo’s $12.3bn acquisition target Dayforce is preparing to vote against that deal.
Just like with mergers and acquisitions, there was no typical summer slowdown in shareholder activism during the third quarter, with July and August more than doubling the four-year average for campaigns each month, according to a report by investment bank Barclays.
Big deals have always come with big risks. Now, companies are getting trigger happy again with dealmaking. They would be smart to pay attention to those risks or the so-called Trump bump may not be confined to dealmaking — it may apply to shareholder activism as well.
(Barnes)
One good read
The new (culinary) market bubble?
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