FEBRUARY 2023
Interview NIC-UD Alumni: Diego Tremiterra pg.16
Contents
Page 3
Quick Take on Iberian Markets
Page 4 M&A Analysis
Page 6 The Space Economy
Page 13 ESG Investing: A change for a better world or a misused tool?
Page 16 Interview with: Diego
Tremiterra
Page 22
Business Deep Dive: LVMH
Page 26
NIC-UD Fund: Monthly Performance
Portugal ends Golden Visas. Portugal decided to put a term on the Golden Visas as a measure taken to tackle the housing crisis That Golden Visa permitted non-EU citizens to get an EU passport as long as they invested in, for instance, real estate. Portugal is not removing active visas but it only accepts renew whether the property is a permanent resident of the holder or if it is available for rent This Visa has been a controversial topic because, on one hand, it brought in foreign investments to help recover the market after the financial crisis On the other hand, it made it impossible for local residents to find affordable housing The decision still has to be approved by the parliament next month.
The potential extension of the “Iberian Exception”. Despite the war in Ukraine having started one year ago, Iberian countries are still particularly suffering from food and fuel getting more and more expensive. Rising fuel costs initiated strikes among independent transport workers and the household food budget is tightening. The “Iberian Exception”, where Portugal and Spain defended their right to set up their own prices of gas since they rely far less on Russia compared to the rest of Europe, is on request to be extended to 2023.
Iberdrola needs new renewables. The Spanish multinational updated a plan with expectations to be reached in 2025, that is to add 3.2 gigawatts of renewable energies such as wind and solar in their production capacities. Iberdrola must take action to avoid the shrinkage of its electricity generation portfolio in the long run, because unfortunately, it can suffer from unexpected natural disasters such as the drought in 2021/22 that reduced the company’s production by 7% Inflation in Spain is lower than expected.
Restructuring law putting to the test. Many restructuring plans have been implemented in Portugal and Spain to fight against the indirect effects of the pandemic, inflation, and the war in
Ukraine Among others, as the economy slows, Celsa, Spain’s largest private industrial group is directly being tested out on the new law, whose goal is to avoid high bankruptcy rates With debt worth roughly 2.8 billion euros, Celsa’s new challenge is restructuring its debt as fast as possible. The urgency is that the number of insolvent Spanish debtors, individuals and companies is constantly getting higher
Galp is about to start its 500 euros share buyback. The Portuguese multinational energy corporation is planning on executing its share buyback worth 500 million to reduce the issued share capital Galp’s shareholders gave the distribution guidelines, and they are following the Buyback program closely.
Portugal’s inflation slows down to 8.2%. The National Statistics Institute (INE) reported on Tuesday that in February, Portuguese consumer prices increased 8.2% compared to the previous year, a decrease from the 8.4% reported in January. Additionally, core inflation which disregards volatile food and energy prices, was 7 2%, a rise from the 7 0% reported in the preceding month. Prices rose 0.3% month-onmonth. After reaching a peak of 10.1% in October due to the spike in energy and food prices after Russia's invasion of Ukraine, inflation has slowed down.
Iberian Electricity Market sees the highest prices in over two months. On February 21st, the Iberian electricity market (Mibel) experienced its highest price day in over two months. The average contracted production price in Portugal and Spain rose to 151.43 euros per MWh, according to data from the Omie platform. The observed increase in price is due to a higher usage of gas-powered power plants, which is a direct result of the reduced availability of wind energy in the Iberian Peninsula.
As we enter the early stages of 2023, M&A activity is expected to remain relatively subdued, aligning with the conditions experienced in the latter half of 2022. However, experts predict that the pace of M&A activity will increase as we move into the second half of 2023 and beyond.
The second half of 2022 saw a significant slowdown in deal activity due to various factors, including macroeconomic uncertainty, volatile capital markets, rapidly rising interest rates, and the impact of inflation. As a result, many corporations focused on internal operations instead of acquiring other companies Potential sellers faced declining valuations and were hesitant to transact at prices that were down significantly from earlier in 2022 Furthermore, large, transformational transactions faced increased regulatory scrutiny, and the rapidly rising interest rate environment essentially shut down leveraged finance markets. This reduced financial sponsor activity as banks and other lenders dealt with a large backlog of transactions needing financing
Despite the challenges faced in 2022, this year's M&A market presents a highly appealing prospect due to a decline in business valuations over the past year. This has made potential acquisition targets more reasonably priced. Additionally, a robust US dollar has made foreign companies a more attractive investment, and a significant decrease in initial public offerings (IPOs) in 2022 has expanded the range of potential unicorns seeking a quicker exit
Looking ahead, there are several factors that are expected to drive M&A activity in 2023. Firstly, wellcapitalized companies are likely to make acquisitions in their core businesses. Secondly, financial sponsors are holding record amounts of capital, which they will deploy in acquisitions Thirdly, uneven performance among companies is stoking shareholder activism Lastly, cross-border M&A is expected to make a comeback.
Is the negative trend in M&A going to continue in 2023 or should we expect an exciting recovery?
It is reported that the Glazer family, who are the present owners of Manchester United, have turned down takeover offers from Qatari Sheikh Jassim bin Hamad al-Thani and Sir Jim Ratcliffe, the billionaire founder of UK chemicals group Ineos because their bids were not high enough While the Glazers have received proposals from other potential buyers, including offers for minority investments, none of them has been made public. To improve the club's balance sheet, which has suffered due to the COVID-19 pandemic, the family could raise capital from minority investors Currently, the Glazers hold about 70% of the equity and control the company through shares with additional voting rights There is no pressure on them to sell, and a decision is expected to be made by the summer
The fact that Sheikh Jassim and Sir Jim Ratcliffe made their bids public has earned them a rebuke from the club's advisers, Raine Group However, unlike the sale of Chelsea, the Glazers do not have a specific need to sell and therefore have more time to evaluate their options.
This deal is expected to exceed the $4,6 Billion paid for the Denver Broncos National Football League franchise, which is currently the record amount paid for a sports team. Both investors have very different ambitions when it comes to address the perceived shortcomings of the Glazer’s tenure. Sheikh Jassim emphasized plans to bolster the club's balance sheet and infrastructure, while Sir Ratcliffe's opening pitch focused on rebuilding ties with the fan base and halting the trend of foreign ownership in English football
Toshiba, the 147-year-old technological conglomerate, has received a $15 billion buyout offer from a consortium led by Japan Industrial Partners (JIP), a Japanese private equity firm. If approved by the board and activist shareholders, this would become Japan's largest take-private deal
JIP has collaborated with other Japanese firms, including Orix, Chubu Electric, and Rohm, and has secured bank commitments for loans totalling ¥1 4tn While Toshiba has not commented on the proposal's specifics, it has pledged to evaluate it in the best interests of its shareholders and stakeholders Following a financial crisis in 2015 and an accounting scandal, Toshiba sought bids last spring and granted preferred bidder status to JIP in October, after which negotiations have been protracted due to difficulties in securing financing from Japanese banks This deal will be a significant achievement for JIP, which has no prior experience in buying an entire company of Toshiba's size. Furthermore, the buyout offer is below the market value. This may derive from the resignation of Toshiba’s chief operating officer and worse-than-expected third-quarter results. Toshiba's stock has fallen by 25% since its June high, and some of its businesses are worth more than the company's overall market value With its earnings falling and loss-making units, Toshiba may have to settle for a lower price if it fails to attract enough buyers. The company's poor performance may increase the likelihood of a deal.
Humanity has a cognitive curiosity for the unknown, which has always sparked a strong interest in space and the sheer vastness of it all Imagination is fuel here, leading to Hollywood depictions of interstellar travel alongside literature set in distant galaxies. Though these are entertaining, they had always seemed unattainable for the mere mortal, implying we had to be limited to imagining ourselves living these experiences. But the tide is shifting, and those childhood dreams may soon become a reality.
To understand how the space sector is structured today, we have to start at the beginning. In the 20th century, as technological development in space technology was through the roof, two key forces pitted against each other to be the first to achieve certain landmarks in human development. Which key forces were these? You guessed it, the United States and its good old friend Soviet Union. This tension came to be known as the Space Race.
In 1957, the Soviet Union launched its Sputnik 1 satellite, the first satellite in space, which was soon followed by Sputnik 2 before the United States could even draft a response When this response did come, through the US’ Vanguard 1A, the launch was a failure due to an immediate floundering of the main engine. Nevertheless, the US was able to launch its first satellite into space, the Explorer 1, one year later. The satellite space race ensued for many years But a key step in the marathon was undoubtedly the Moon landing, carried out by the US side in July 16, 1969, through the Apollo 11 mission US and Soviet forces fought to be the first to send a man to the moon, and the US’ victory signified a clear (large) step above Soviet Union technology.
But this is not an article about the space race With the success of the Moon landing in 1969, civilization begun to wonder whether humans could indeed, one day, live in space This curiosity
Miguel Amaral
has been fuelled recently, with successful launches of humans in space by more, let’s say, independent enterprises. Virgin Galactic launched Richard Branson into space, and is looking to offer commercial space flights to the mere mortal (as long as you can afford the ticket, that is). Similarly, Blue Origin launched Jeff Bezos and a handful of other crew members into space and is looking to be the first to offer commercial solutions. Another, yet different, space race is on. However, many think that the Space Economy is merely linked to commercial flights into space. This could not be further from the truth.
With the launch of the Sputnik 1 satellite by the Soviet Union in 1957, a little known agency by the name of the National Advisory Committee for Aeronautics was turned into the National Aeronautics and Space Administration (NASA) to fight off Soviet Union advances. What followed was a deep US government spending on human spaceflight through the Apollo program in the 1960s, which highlighted a centralized model of the US space sector with NASA at its centre NASA, therefore, was buoyed by governmental initiatives, and NASA engineers at the time thought the centralized model should remain for the future of space exploration as it ensured higher coordination amongst initiatives, higher economies of scale and less deviation from objectives. In addition, the participation by the US government in the space sector addressed a common market failure in public goods: if left to the market, these goods tend to be underprovided. One such example is national security, and it is easy to draw out parallels
However, the tide has shifted. Whereas NASA took up more than 4 5% of the total US Federal budget at the peak of the Apollo missions during the 1960s decade, it now takes a mere 0 5% after a gradual but persistent decline over the years, as showcased in Figure 1
The reason for such a shift away from a centralized approach comes down to a myriad of reasons From a more economic point of view, centralized approaches to innovation carry some ingrained issues such as weak incentives for the efficient allocation of resources, poor aggregation of dispersed information and resistance to innovation due to reduced competition. But these were not all. Even though NASA received funding from the US government, amounts and priorities were subject to frequent and dramatic revision by policymakers, deeming it impossible to budget for the achievement of core objectives The cherry on top of the cake came with the President’s Commission on Implementation of US Space Exploration Policy in 2004, which defined that “NASA’s role must be limited to only those areas where there is an irrefutable demonstration that only the government can perform the proposed activity”.
In the centralized model, private firms working with NASA were insured against the enormous risks of investments in space through cost-plus contracts, but their participation in gains were limited. In the new decentralized approach, private firms share the enormous risks and potential returns of investments in space. Even though returns are far into the future, this has not stopped inventive private businesses from tapping into a potentially highly lucrative new sector in the economy. These businesses form what is now called the New Space.
The decentralized set of space companies that emerged after the end of the NASA shuttle program in 2011, a program drafted with the aim of developing Space Transportation Systems and that faced higher costs than expected, thereby becoming a failure by NASA standards, are known as New Space. New Space companies can be compartmentalized into 5 big groups, each distinct in their value proposition.
Nonetheless, NASA still plays and will continue to play an important role in the future of the Space Economy. Even though we have now moved to a more decentralized structure, NASA still provides insight to businesses engaging in space activities The key here is that NASA provides insight rather than oversight, that is, it aids in the development and data measurement/collection, but does not have control over the initiatives undertaken by firms. With this, firms now retain ownership of the Intellectual Property (IP), whereas under previous contracts the government was the default holder of IP rights knowing that work was done at its command.
A new dawn in space age is now under full steam However, risk is present in every step of the way
Firstly, the most commonly known sector refers to the Satellite data access and analytics sector. As expected, these include companies that launch satellites into space in an effort to grab important data that can then be used for a myriad of objectives. Satellites provide information on weather, wildfires, smoke, volcanos and about each environmental occurrence you can think of. Moreover, they offer a means of communication between devices on Earth and outside it. Such information has deep potential, as it allows the creation of predictive weather models and the usage of the Internet by many households in the world This sector is tightly linked with sector number 2, the Remote Sensing sector, which includes companies that provide images of Earth for observation and analytics Due to the closeness in technology between these 2 sectors, they are often observed as a single Satellites sector. Big names operate here, such as Maxar with over 5000 employees and Planet with 500 employees The latter is developing Earth imaging and video technology, whereas the former specializes in robotics for satellites This sector is seen as a highly attractive one for the near term, knowing that the
technology is already widely available and returns are not so far out in the future Taking a closer look, Morgan Stanley predicts that the most significant short- and medium-term opportunities in Space may come from satellite broadband Internet access, thereby estimating that satellite broadband will represent 50% of the projected growth of the global space economy by 2040 (even predicting a share of 70% in their most bullish scenario) This estimate makes sense taking into account that launching satellites which offer broadband internet service will help drive down the cost of data, all at the same time as demand for that same data explodes (Source: Morgan Stanley Research).
However, as a classic traffic jam for the Ponte 25 de Abril on a hot Friday afternoon, the surrounding Earth space is now getting too crowded, and the problem is growing exponentially Questions are starting to be raised on whether there is a limit to the number of satellite. If a cap is imposed, the aforementioned companies are likely to suffer as they cannot further scale their operations
from exciting. Something which already forms part of our daily lives is predicted to drive 50% of the total growth in space up until 2040? Even though I personally find it thrilling as I think of possible avenues the sector can diversify into, I understand your position So let’s take a more speculative approach and move into the exciting Space Access sector. Pretty straightforward; this sector encapsulates companies that aim to ensure that access beyond our planet is a feasible regular activity, where some even promote space tourism. This sector includes widely known businesses, such as Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin, alongside less known ones, such as XCOR Aerospace and Astrobotic. Whereas Blue Origin and Richard Branson’s Virgin Galactic promote space tourism, it is key to highlight what exactly that means. Whereas one might be tempted to think that this refers to 5-star luxury hotels in space, that is not quite the case. As evidenced by the test flights showcased by the aforementioned extraordinary entrepreneurs, their companies plan on offering brief journeys to space to the common human. Here, an important concept is LEO: Low Earth Orbit These offerings ensure crewed LEO transportation, at a starting slim cost of $450k per ticket, but have not yet showcased the ability to go beyond it However, some companies have succeeded in this task, thereby contributing to Orbital Space Tourism where passengers are flown to the International Space Station as an example Only two have been able to ensure this experience: Space Adventures and SpaceX. Nevertheless, the golden rule of Space Access is precisely in the word: it only means access For those 2001:Space Odyssey childhood dreams, customers will not be able to satisfy them from this sector. They must move elsewhere
You may be thinking that this is a kilometre away
With space access guaranteed, what is there left to do? That’s right: living in space The next sector I would like to highlight represents exactly this: the Habitats and space stations sector. This nomenclature is pretty straightforward: we are speaking of space living quarters where it is intended a temporary or permanent settlement or green habitat that contrasts with a simple waystation An example of this, which has formed part of our history for quite some time now, is the International Space Station (ISS) where astronauts ensure that the ISS’ commercial, diplomatic and educational purposes are fulfilled At the heart of this sector, we can find companies that provide various services, from ensuring payload delivery to the ISS, such as Nanoracks, to building inflatable space habitats, like Bigelow Aerospace. If your mind got stuck with imagining what exactly “inflatable space habitats” are, you are not alone since it confused me too As a high level dive on Bigelow Aerospace, the company majorly provides inflatable extensions to the ISS that can supply astronauts with more comfortable living quarters, with the goal of offering commercial timeframes in these habitats for consumers. When looking closely at these commercial offerings, Bigelow offers a 60 day trip to the B330, their small space station that can freely roam around LEO, for an unbeatable price of $51.25m. But don’t worry, transport and consumables are included
In all honesty, none of the abovementioned sectors strikes me as truly revolutionary Do not get me wrong, I find them to be quite extraordinary, especially taking into consideration the amount of development opportunities that may materialize in each and every one of these sectors in the future. But my strong interest in Venture Capital always propels me to look for disruptive technologies that may become the next big thing. This sector, the Beyond low Earth Orbit (LEO) sector, fits precisely into this criteria both for its unpredictability and sheer potential Let me explain why This sector encapsulates all that you can think of when you envision a future for humans in space: Human lunar expeditions, Asteroid mining, Mars colonization You name it For these 3, only human lunar expeditions have been showcased as a viable possibility with 6 successful expeditions having already been realized, the first of which came upon the Space Race I started this article with. For the latter two, and many more, there is still no factual evidence they are possible. However, their potential is enormous.
Let me then start with Asteroid mining You might be wondering where exactly the potential lies in this segment, but I think it would help if I mentioned that Neil DeGrasse Tyson, the renowned astrophysicist who, if you don’t know him, you certainly know his face, mentioned that “The first trillionaire in the world will be the person who mines asteroids”. Why exactly does Mr. Tyson predict this? Just think of basic supply and demand dynamics: the first individual who is able to provide the market with a new mineral or material which carries otherworldly characteristics will most likely be able to charge an absurd premium for that product, even more so if it taps into a lack of supply evidenced by the Earth ecosystem As an example, the asteroid 16 Psyche has been reported to contain $700 QUINTILLION ( that’s 18 zeroes, 700 billion billions of US dollars) worth of gold, enough for every person on earth to receive roughly $93bn, a completely absurd figure. Of course, such an extraordinary jump in supply would drive prices down, but it just showcases the potential that asteroid mining carries. Two businesses that have been studying this possibility are Deep Space Industries and Planetary Resources, both of which are trying to reduce the cost of these missions while increasing their
feasibility. Despite many predicting that asteroid mining is still at least 5 years away, it for sure will be exciting to watch this new race unfold
Next up, I would like to discuss something that Matt Damon’s character Mark Watney in the movie The Martian would love to hear: Mars colonization. This subsector is pretty selfexplanatory, as it reflects the wish to extend human life to our neighbouring planet. Is this possible? Well, natural conditions are undoubtedly hostile to life: the atmosphere is unbreathable due to the lack of oxygen, its temperature on average fluctuates between -70ºC and 0ºC (“The cold never bothered me anyway”, Elsa from Frozen would say) and its soil is covered with intense ionizing radiation. Moreover, despite knowing that Mars has in-situ resources, such as underground water and ore, opportunities to generate electricity (crucial for human life) via wind, solar and nuclear power using its resources are very dim. This sure paints a grim picture Nevertheless, some plans have been drafted that aim to make human life on Mars feasible. To ensure it, first transportation of both humans and infrastructure must be ensured. This is at the helm of some of SpaceX’s operations, namely through fully reusable launch vehicles and human-rated spacecraft with the aspiration of developing fuel using Mars resources If the latter is ensured, then effectively a return to Earth by colonizers is made possible and Mars can one day become a transportation hub to elsewhere in the galaxy. But that is too far off yet. With transportation ensured, the next step is to guarantee permanent human settlements on the planet to effectively colonize it One plan which I found particularly interesting is that of the United Arab Emirates (UAE), which announced the desire to establish a settlement on Mars in 2117 (!) led by the Mohammed bin Rashid Space Centre I believe this comes to simultaneously show two things: firstly, how far off Mars colonization is; secondly, how, despite the former, the interest is worldwide, shared from the UAE to the US whilst tapping into India and China. Mars colonization will be a (multi)global event, and it will definitely be interesting to see how it shapes up
Despite the interest the Beyond LEO sector has attracted, it still carries arguably the most controversy out of all of the aforementioned sectors The success of public-private partnerships (namely through NASA) is undeniable, especially
through satellite execution and resupply of the ISS, but the case for commercialization of LEO (and beyond) is hotly debated Many believe that current private businesses are piggybacking in various ways, most importantly through benefitting from NASA technology which took decades to develop yet is seen as a given for these companies. I find these critiques to be unjustified. If society is unable to stand on the shoulders of giants, benefitting from what those before developed, then we are effectively heavily extending timelines of new projects. NASA was able to develop a lot of technology and infrastructure from scratch, but it is only right that the pioneers of commercialization are able to leverage it. As long as it is done in a legal way.
So far, I have taken a strongly qualitative approach. Let us then look at some data, and especially investment.
Over the past decade, the space sector has shown impressive growth in investment activity, growing from an annual investment of $300m in 2012 to $10bn in 2021 at an outstanding CAGR of 47.54%. Moreover, Space Capital, a NY-based VC firm, estimates that over $270bn of cumulative private equity investment has been fuelled for the Space sector, through 1791 different companies. This investment has been strongly focused on the 2 initial sectors I mentioned: the Satellite data access and analytics sector and the Remote Sensing sector, which makes sense knowing the huge demand for data and how far away beyond LEO technology still is. Moreover, small LEO launches serve as proof-of-work for more ambitious projects in the future. If launch costs are successfully reduced to a level where it becomes rapidly profitable to launch satellites, this opens the door
for the same development on more complex launches like the one Mars One is planning
whilst Earth imagining companies allowed for an analysis of the truth that was happening on the ground In fact, record revenues for Earth observation companies demonstrate how some segments showed themselves to be countercyclical Secondly, the second half of 2022 saw a triumphant return to the moon with NASA’s Artemis program, which is committing billions of dollars to build a permanent settlement on the moon We can expect geopolitics to continue to be a driver of growth going forward, as China’s lunar ambitions to place a permanent settlement on the moon by 2028 have put the country on a trajectory to overlap with the US
Nevertheless, a true test was in place during 2022 Amid rising inflation, geopolitical conflict and rapid hikes of interest rates, many feared that capital would dry up for space ventures looking to scale up. This was unfortunately the truth. With a record-beating $47 4bn invested in 2021, the Space economy saw private market investment decline by 58% in 2022 It is worth looking at these figures in context The total private market investment saw a 31 2% decline in 2022, from $5.3tn in 2021 to $3.7tn in the year after. It is clear the space sector was hit harder than most amidst the troubling past year. The age of easy money was over.
The troubling tale of 2022 opens the door for a different, yet bright 2023 With capital invested declining in this past year, many of those cash burners will not survive. This will favour ventures which have streamlined their operations, as many VCs signalled at the beginning of the year that businesses would have to make do with what had already been invested. For those that took advantage of the crazy funding environment in 2021, they left victorious For those that waited until 2022 for a funding round, they may run into some problems.
Ultimately, we can expect high volatility in the market for some years to come However, in the end, this will lead to consolidation amongst the efficient players, with competition favouring ones Quality companies with showcased market fit, positive unit economics and leadership will continue to get funded in but this highlights a more selective funding environment With a stronger talent pool to choose the next years will be an attractive time to investing in space companies.
Nonetheless, there are still positives from 2022. Firstly, the war in Ukraine showcased the growing capabilities of commercial space companies SatCom enabled Ukrainians to stay connected,
However, that may be true for the satellite sector some ways, the space access sector The has a proven business model, showcased by the exponential increase in satellites surrounding Earth and the profitable companies that have benefitted from this technology The latter, whilst still not profitable and far from it, has already shown signs of its feasibility with crewed launches The same cannot be said for those more ambitious and emerging sectors like the Beyond LEO For 11
those, the technology is unarguably in the fluid stage which highlights that the dominant design for their activity, which will leap humanity towards the galaxy, has yet to be found When it does, and it is only a matter of time until it will, we will be talking of a trillion-dollar industry that can be developed as far as the eye ( or telescope) can see. Think of it this way: humanity can be thought of as a child stuck in front of a closed candy store with no means of getting in It is only a matter of time until someone brings the key to open it, and once inside the possibilities are endless.
This report, developed from the discussion between the UN and CEOs of 55 of the world’s leading financial institutions, revolutionizes the financial industry In it, it is argued that ESG practices are not only morally and ethically correct, but also lead to better risk-adjusted returns
Portfolio managers could now invest in ESG securities without “betraying” their fiduciary interest of maximizing returns
Fast forward 15 years and the total amount invested in ESG assets globally reached a new record of more than $35 Trillion, according to Bloomberg
Most people would say this is a change for the better, of a more sustainable and altruistic market, and a tool to combat climate change, aligning investment with societal and environmental change, making Wall Street help Main Street.
However, ESG Investing is not this rosy ESG investing faces some structural issues and needs a
First of all, this type of theme investing faces the problem of connecting investment with impact After all, one of the main consequences of ESG should be a more sustainable world However, no concrete evidence exists that ESG investing leads to better practices In fact, according to the research paper “Do ESG Funds make StakeholderFriendly Investments?”, ESG mutual funds hold stocks with worse practices compared to non-ESG funds, shown by their worse track records for compliance with labour and environmental laws Instead, securities with higher ESG ratings have higher ratings because they emphasise and consider ESG metrics more, even though objective measures like compliance and lawsuits show they perform worse A question of marketing and not action On the other hand, since ESG disclosure is not mandatory, but instead voluntary, some companies embellish their practices by carefully choosing the KPIs they report or by putting the
The ESG Industry has increased tremendously with more AUM in this type of assets now than ever before. But is this extra investment having the desired impact of this initiative?José Vieira Figure 1:Historical vs projected global ESG ETF (Source: Bloomberg)
business or supply chain. These problems of information come from the lack of standardization across ESG ratings, companies only report what they want, and if they have the means necessary for it.
Apart from this, it is possible for an upgrade in ESG ratings to happen not due to a business improvement but due to hiding bad practices under the rug. Some ways to do this are outsourcing unsustainable practices to the supply chain3 or selling unsuitable segments. For example, a company’s ESG rating will increase in case it disposes of an oil rig it owns But what if this disposable is through selling to another player? Then, although the company improved, the societal change is nil since this other company will keep extracting oil Furthermore, since ESG disclosure is not mandatory, but instead voluntary, some companies embellish their practices by carefully choosing the KPIs they report or by putting the spotlight on the more sustainable section of their business or supply chain. However, these types of practices don’t solve the underlying issue but just lead to the company masquerading itself as more sustainable than it actually is, with no impact on society. Amazon is well-known for doing this, limiting as much as possible the products and services included in their carbon footprint report Another similar issue is the subjectivity of ESG in general. After all, sustainability is in the eye of the beholder For example, should an ESG fund invest in an oil, tobacco, or gambling company if it has some of the best practices in the industry or refrain from these since they are members of unethical of
industries? Some ESG analysts will argue in favour investing in it, and some argue against it This leads to peculiar situations For example, Tesla was recently excluded from the S&P500 ESG index Elon Musk responded by tweeting “ESG is a scam”, since Exxon Mobil, an oil and gas company, is present in the index. Another example is Amazon. According to Sustainalytics, one of the leading ESG rating firms, Amazon has an environmental risk score of 5 6 out of 100, a very positive Environment sign However, the company’s carbon emissions increased by 15% in 2019, 19% in 2020 and 18% in 2021 Analysts defend this rating due to Amazon’s pledge to be carbon neutral by 2040 One analyst may put more weight on the present carbon emissions while the other may value pledges and commitments more The same input may lead to different outputs. This is evidenced by the difference in ESG ratings. MSCI, for example, gives Amazon an average rating in the environment section
Another major issue of ESG is fees. ESG funds have higher fees than standard funds. According to FactSet and published by Wallstreet Journal, ESG funds had a 0 2% fee vs 0 14% in standard funds at the end of 2020. Higher fees lead to an incentive to greenwash in order to take advantage of the higher payout This also leads to an incentive to market ESG in a good light, fuelling the increased demand for related products. Some of these studies of ESG effectiveness are done by firms that sell these types of products, creating a conflict of interest. This conflict of interests between the Research and Sales departments is a major problem of ESG.
The problems described paint a bleak picture of ESG However, once again, I disagree I believe ESG can be a useful financial tool However, change needs to occur in order to bring more standardization. The most straightforward way to do this is with more regulation One of the major solutions to the problems referred to would be standardized and mandatory ESG-related data disclosures, for individual companies; and for funds that invest in ESG, mandatory disclosure of strategies and methods of action to increase sustainability in holdings. This is actually what the European Union is doing Among the major initiatives implemented is the Climate Benchmark Regulation, focused on more transparency related
to rating methodology; the Sustainable Finance Disclosure Regulation, focused on more transparency related to ESG data provided by individual firms and how funds are measuring and considering ESG risks; and the Taxonomy Regulation, outlining what can be considered a sustainable investment or not. Couple this with a more cynical investment market, putting more emphasis on the here and now than the far future, and the further development of this asset class and a better future with more standardization in both data and rating methodology seems likely. In any case, at the end of the day, the City Hall needs to be a major force for a change instead of just watching Wall Street.
NIC Co-Head (Class of 2016)
/in/diego-de-bragançatremiterra
Diego Tremiterra is a highly accomplished professional with a diverse background in finance, business strategy, and media.
He graduated from Nova SBE with a degree in Business Administration and Management, and in 2016 he served as Co-President of the Nova Investment Club-UD With a growing desire for Finance After, he interned at Goldman Sachs which led him to accept the offer of the GS Equity Sales team
After that, he worked at Real Vision where he oversaw Real Vision's strategic business growth. He is currently a Junior Portfolio Manager at Noster Capital LLP, a macrofocused fund manager aligned with the principles of value investing.
Diego is the Co-Founder of Lykeion, a Newsletter platform that explores the intersection of business, money, and geopolitics to provide readers with a better financial media knowledge.
Q: I noticed that you didn’t engage in a master’s program. Can you tell us why and if you missed it at any point in your career? Do you think it is a good strategy to enter the work market right after graduating as you did?
A: I think it depends on what you want to do. One of the most important things for students to understand is that there is not only one right path As you grow up, especially when you are at the end of the undergraduate degree, there is a lot of pressure from some people telling you what to do and I think each one of us is very different with different interests that also change and it is important to understand the best of your capabilities and things that interest you the most so then you can try to find out the career that revolves around.
At the same, I understand that it is hard to be a student because you are in a stage you hear about certain kinds of jobs, and you want to follow these jobs because of the reputation, money or the amount of doors they open which is filly fair since you got start somewhere In my case, for the industry of finance, the vast majority of people can be easily recruited out of
an undergraduate degree I never felt that in any sort of way that I needed a master’s degree. In my opinion, it is better for you to have some real work experience and then potentially go back and do a master's or an MBA The practical world experience, especially for finance, is super important.
Last, most Investment Banks easily recruit out of undergraduate degrees and starting young is a strong value proposition they have when compared to your competition.
When you are applying to a spring internship in the first year of university, you don’t have many things to show up; your grades at university and the average university won’t be that important so they are going to look at your interest, the languages you speak, the sports you do and experiences So, the more you wait for those applications the more you are going to have raw numbers and some markers to show and people to compete
Q: While at Nova you were CoHead of NIC-UD, how important do you believe this was for your future success? And is there any story you would like to share regarding that time?
A: I was co-head of NIC-UD for a year and the important thing about being
co-head is that you become responsible for the direction of the club and for setting up the structures of meetings or thematic you want to debate. More important than that is to be in a group of smart people smarter than me It was thanks to NIC-UD that I started applying to internships young and started a career in finance It allowed me to make mistakes throughout my career and try to understand what I wanted to do, and that is why you should try and have experiences as soon as possible
Q: You have a fabulous career, what would you do differently if you had to start over - is there anything that could put us ahead of others in the job market?
A: I don’t think I have a fabulous career, what I think is that I am very happy with the approach to my career so far in the sense I that believe that many people are prisoners of their former selves and are afraid of taking risks So, if you take a look at my career, I jumped from markets, then I worked 2 5 years in startups and now I am working in hedge funds and running a side project in a newsletter I was never afraid of moving around, despite the fact of leaving Goldman to work in a startup in Portugal I think it is a thing that everyone needs to think
about when starting a career and it is the idea of not feeling a lot of pressure of changing course or area
Q: Having done internship programs in Haitong and Goldman Sachs, can you tell us how was the process to get into these companies?
A: Basically, what I did in the past 3 months before the internship was meeting the entire industry, trying to understand the world of IB and the different kinds of IB in which I was interested or not Once or twice a week I would go to the website of all the big banks to see what kind of advance they were doing
I remember that there was an open day for Sales and Trading in London in which students could apply and, if accepted, they could go to the Goldman Sachs office to see how the entire division works. I applied and, one day before the event, I received an email from Goldman saying I was selected for the event. In the office, I got a little exposure to how the industry really was and I also met some people from HR and I feel that when I sent the CV they already had an idea of who I was.
During the spring internship programs, I sent and had interviews with all the big banks such as JP Morgan, Goldman, and Morgan Stanley The big difference between Goldman and the rest was that the interview was much more focused on markets while the others were more personal questions. Eventually, Goldman made me the offer and I did the two weeks internship during ester It is supper intensive, and you basically take some chairs and move around the trading floor asking people to explain what they were doing. At the end of the internship, they ask you to give the name of a couple of people that should give feedback. The first stock I introduced was CTT and the funny thing about CTT was that everyone went there and introduced companies
that everyone knew I chose CTT because it was the one advantage of pitching a company that no one knew and because it was probably closer to where I lived. So, I went there and introduced CTT From then on, and this was in the third or fourth week, I was referred to as the postal service provider from Portugal There were always these icebreakers with pretty much everybody And from there, you slip in and eventually make a network The key message is that all internships, from my perspective, are networking That's the most important thing. There are two ways to be successful at networking: either you're smart and you come up with very good ideas, or you're very smart in the way you interact with people Hopefully, both But I think that's the core of any internship
Q: Do you have any tips for a person studying in Portugal who wants to work in London offices as you did?
A: The first thing you need to do is reach out to the thousands of Portuguese people working in finance in London It's super easy to access them through LinkedIn, where you can find Portuguese people working at JP Morgan, Morgan Stanley, Goldman, and other institutions. Every year, the bar for entry is set higher, and you need to have a better understanding of the industry and what you want to do and why To be honest, for me, it’s
super tough to answer this question because I don't know what I would have done if I had not gone into the Spring internship. This was one of the main catalysts that helped me to enter this industry. I started very early on and then I was already in the door of these great banks, so my focus was always performing, never thinking about how to convince people to read my CV or to interview me or whatever it was. It was always very much focused on the performance side So, you got to send a million CVs to a million different positions I know that it's just painful But you have got to do it. But I think that the one that is going to be much more efficient is for you to try and reach out to as many people as you can that are working already within the institutions because those are the people that can make referrals for you And those are the people that are going to give you inside information in terms of how the bank works and what they value and all of that. Because the big problem is for them to call you for an interview That's the big thing Once you get an interview, then it's naturally a little bit upon you to be able to perform or not But I feel that the tough part is for them to screen your CV and understand your potential Once you get the interview, it's your responsibility
Q: Regarding your position at
Goldman Sachs, can you explain how is a regular working day, the pace of work and the work balance?
A: So, the offices of Goldman Sachs are very large For instance, the trading floor, which I'm not sure you've seen if you've been to London, is very spacious. It's like a floor desk with 400 people and desks next to each other When I worked there, Goldman Sachs had two floors, I would always be the first one to arrive early in the morning since my team started early, and I was the youngest member of the team. I would arrive at the office around 5:15-5:30 in the morning, and my boss, the MD, would come in at 6 AM, which was early for most people He would be the second person to arrive, and he would always say "Good afternoon, Diego," to add some pressure to the fact that he had already been working for 17 hours or something close to it After arriving at the office, I would spend the time from 5:30 to 7 AM preparing the skeleton for emails that we needed to send out after the morning meeting During this time, I would also try to read as much as possible about any topic that interested me This was probably the only quiet time I had during the day, so I could read what I wanted to read Then at 7 AM, we would have the morning meeting, where my team would discuss our goals for the day My role was equity sales, which mainly focused on being the intermediary between the research of the bank and clients. My work involved trying to sell the viewpoints of the bank, but at the same time, I would also explain to clients why Goldman Sachs recommended certain stocks, such as Apple. As an intermediary, I provided a lot of context to clients about what Goldman Sachs believed. Sometimes it was also possible to share your Viewpoints on the company When you start as a research analyst, you usually don't challenge the senior analyst who has been following a company like Apple for 20 years. But as you gain more confidence and experience, you can share your
thoughts and perspectives In the morning, at 7:00 am, my team and the research team gather, and the research analyst presents the research report for the day, which could be an upgrade or downgrade of a company's rating, new insights on the dollar, or anything else. Once we receive that information, we go back to our desks at 7:30 am. Depending on my tenure, I would spend most of the morning sending out daily emails to different clients on behalf of the senior salesperson in the team
So basically, the senior partners would give you a mandate for you to do everything on the email and to send the email out in their name. As you start getting clients, then maybe you pick up the phone and then you call the clients, you explain a couple of different things and all that And then, in the afternoon, you would mostly be focused on executing tasks. So, what happens during the day is that you have certain kinds of tasks that you need to do throughout the day and that's probably like 30% of your time and then 70% of your time is done daily And then they're asking for help to execute specific tasks. So, the analyst work is mostly execution, it's not glamorous and you don't have a lot of time. You learn a lot about the market, its technical side and direction of assets and how to think about value in the company of all that. But most of all, you learn how to work
You learn how to prioritize requests, organize yourself, how to be superefficient, and recover from your mistakes because you're going to make them You also learn to be fundamentally responsible for the tasks assigned to you Anyone who tells you that the first year of being an analyst is all about understanding how to value a company is lying The first one or two years are mostly about executing tasks that nobody else wants to do But that’s part of the job, and it helps you learn how to work before you can move on to analyzing assets and forming opinions I would have to send a few more emails or prepare for clients in the US (United States) time
zone, and I also had a period when I did morning calls for the US team. So, when I was in London when the US team woke up, we would have a morning call with them, and they would ask me what happened in the market in Europe before the US opened And then I would kind of give them a rundown of what companies have been doing, why we have seen certain kinds of movements and all that. And this might seem simple, but at the time it was not that easy simply because you're a kid, you're a couple of months in and you're doing a morning call for DMD in New York that has been working at Goldman for many years And so obviously at the beginning you get nervous but it's a super cool experience.
Q: You worked in the Equity Sales division at Goldman, when did you know that was this area you wanted to pursue? Can you describe the specific tasks you were assigned in this area and explain some concepts such as “long-only”?
A: I chose equity sales because I'm more interested in companies than markets in general. When working in equity sales, the focus is on understanding companies and why they should be bought or sold, which for me is way more interesting than a conversation about where inflation is heading. So, when you work in equity sales, your focus is to understand companies and try to understand why this company should be a buy or a sell This involves tangible knowledge that can be useful for building businesses in the future or even transitioning into consulting. In comparison, options trading is highly technical and may not be as applicable in other fields In my sales job, I covered all sectors and worked with hedge funds and longonly accounts in the UK (United Kingdom), including big institutions like Fidelity, Balyasny, and Millennium These accounts had different strategies, with Fidelity focused on the fundamental direction of a certain kind of business and Millennium PMs trading around earnings I chose equity
sales because I have always been interested in the fundamentals of companies, and it offered more prospects compared to trading, which is more focused on execution and flows. Q: How did the chance to work for Noster Capital appear? Did a headhunter contact you or were you looking to work in a Hedge Fund?
A: What happened there was that I left Goldman to work in a startup, a Portuguese startup of a friend of mine The idea there was to run a modelling agency and what we wanted to do, he needed help from someone that runs the operating and financial side of the business And the idea was to export the business model to different geographies, like raising money and exporting it So instead of just being like a modelling agency focused on Portugal be a modelling structure for a modelling agency that could be scalable across the world. And so, I spent five months running the operations and building the models and all that stuff And then, eventually, we were going to reach out to investors, but he wanted to change careers And so, after that, when he wanted to change careers, I was like, all right, okay, so I'm not going to stay in just a small company in Portugal So, what do I want to do when I go to work for another startup? It was a super cool experience as well. And the startup experience, I always wanted to do that because, again, I'm very interested in companies and the way companies work
I think the best way to understand how a company works is to work for a startup, especially in the early stages You learn all the different technicalities that revolve around operating a business In finance, many people tend to look at companies just as financial statements They build the financial model, put in the forecast, and make assumptions for revenue growth and
expansion in margins These numbers are important, but you need to understand the nature of the business first to drive the numbers People in finance often overlook this, which is why I wanted to work for a startup. I gained a lot of helpful experience from my two and a half years working for two different startups
The guy who runs the hedge where I worked 2 years ago was part of my network and had become a mentor to me because he also did a very, very reputable career in London and had been running his hedge funds since 2008 and for the past two years, we had spent, I don't know how long and how much time over the phone discussing investments, ideas and all that He wanted to launch a second fund. And so, he reached out to me and proposed we launch the second fund together He needed someone that helps with the analysis of investments as well So, I thought it could be a right fit, and eventually, I decided to join the project I've been doing both at the same time 90% of my time is focused on the fund, and then 10% of my time, which tends to be during early mornings or late evenings and weekends, is focused on growing Lykeion
Q: Could you tell us about a regular working day at Noster Capital, what exactly do you do and what are the main challenges you face daily? How was it different from Goldman Sachs's work policy?
A: On one side, you're working on an institution that everyone knows, there are a lot of structures and many people involved. There are also a lot of processes. While in the Hedge Fund, there is a much smaller structure, which gives me more responsibility and it's more horizontal in terms of getting to say your opinions with regards to almost everything, be that the direction of the business or an investment that we want to do. The second biggest difference that for me is one of the most important ones is the fact that Goldman did not have time to do deep dives in terms of
companies So, one of the big problems I had, and I think this is important for people to understand, is that at least I was frustrated with spending every day trying to speak with portfolio managers and analysts about a company without really knowing the company because I was just reading what the report of the research guy was saying, and I would replicate that and tell that to the client without really having put some serious thought on the back of that simply because my role forced me to try to sell two, three or four different investment ideas every day. So, it's impossible for you to have a proper understanding of what you're saying. My job now is mostly focused on identifying good investment opportunities and taking my time to do due diligence
You're constantly screening for companies, be it in your network, be it online You build your model, your own assumptions internally, debate with the team and speak with the management of the company or with the investor relations.
Eventually, we present our case to the portfolio manager of the fund, and then, it makes an assessment and then we decide if we start opening a position or not. So, my job is extremely focused now on the time for me to do property diligence when looking at a company and that, for me, was always where I wanted to be in the investment world. I did not want to be an intermediary I didn't want to be telling someone else's opinion And the good thing about the work that I do nowadays is that all of it is my own opinion based on research that I've done.
And so, you can be right or can be wrong, it's going to be both most of the time The good thing is at least that my own job, and I know what I'm saying, I'm not just saying other people's opinions
Q: I’ve read an article in Lykeion regarding the macroeconomic
environment, negative earnings per share and expected recession. Can you talk about it and tell us how the fund has approached the market given this scenario?
A: So, when you think about our fund, the structure is fundamental research and then there's the macro-overlay
Fundamental research is identifying companies, deciding what we want to invest in, our view on a company, the evolutions of margins, what multiple we should be trading, where is average going, and how the balance sheet looks like in three years' time. That's the fundamental side And then what happens is that on top of that, you have a macro-overlay
What I can tell you about my perspective of where we are in the macroeconomic cycle Usually, I like to think about where interest rates are and how big interest expense is as a part of the US budget And so, I think we've written a couple of charts and articles on the back of that You understand that you know, independently of where inflation is, there is a certain maximum level, rates cannot fundamentally stay this high for that long Independently, it's irrelevant if we're talking about six months, a year, or two years.
For the US to avoid having significantly higher interest expenses, eventually what they will need to do is, to turn interest rates lower, especially when you consider that over the next three years, almost half of the US debt is going to mature
So, the question is, are we at a big turning point in which we will see interest rates all over the world stay positive and continue to be higher over the next couple of years or not? My perspective is that that's probably not going to be the case I think eventually rates will come down. Inflation will probably come obviously, it's already been decreasing, but it will decrease even more. Central banks all over the world will be able to lower their interest rates Especially for this year, there are so many uncertainties and it's so easy to make a case of inflation being high and inflation being low. And
that's why we wrote that article about max uncertainty And I think the macro understanding and setup right now is anyone's guess
Especially for this year, there are so many uncertainties and it's so easy to make a case of inflation being high and inflation being low. And that's why we wrote that article about max uncertainty And I think the macro understanding and setup right now is anyone's guess I don't try to make a guess on the back of that. I don't try to have a strong fundamental view of where inflation is going to be at the end of the year, simply because I think it's an equation that is too complicated I'm much more focused on trying to understand the companies that I want to own independently of where the macro environment is headed. And that's why I always focus on looking at high-quality companies that are very well-operated. Obviously, the macro environment is going to affect the earnings of a company and the multiple that the investors are willing to pay for it, but across the cycle, you are happy to hold them and that's where my expertise is much more prevalent.
Q: As it is mentioned on the website, Lykeion is read by people at Google, Goldman and Harvard among others, how do you promote your newsletter and research and what are your plans for its future?
A: That's been probably the biggest challenge because I mean, both myself and Tim, who's the other co-founder, have full-time jobs, and these are not jobs that take four hours a day Usually, we've not spent too much time focusing on growth and all growth has been organic and coming from Twitter and recommendations and people sharing the content Now we have the research product that has been coming out for the past two months and the next one is going to come out this weekend. This is written by two incredibly good guys, Jacob and Roger The interesting thing we're trying to do is focus on the convergence of geopolitics and macro Obviously, geopolitics are increasingly
becoming important, the US is still the dominant force, and this year there is probably an increased dominance over the rest of the world But we're marching towards a multipolar world. What that means is that you have forces that over the last 30 and 40 years were not there because it was a unipolar world where if you understood the direction of the US, you understood the direction of pretty much the rest of the world For our generation, this is the most important aspect from a perspective of investment in finance, economics, but also lifestyle and how the world works it's important to understand that the problem with geopolitics is that fundamentally it is not investible because every analyst talks about things that are going to happen over the next 10 years
The question is, what kind of assets should I own? That's where macro comes in At Lykeion, we try to bring a little bit more urgency and pressure on specific themes that are important, and that is more timely for investors within a big geopolitical narrative.
Our last piece of research was incredible in that sense because we talked about the two reasons why we live in a world of maximum uncertainty. And if you think about it, it's because you have China reopening right now and you have the big overhang of the war.
China reopening is hard to understand because you need to think about what kind of China are we going to have after reopening is it going to be a China pre-2018 or China post-2018? Because that will be a significant difference if they are going to be focused on services or on goods. If the focus is on goods, then obviously that's a bull case for commodities. So, the implications are quite different
I think it's time to be cautious and humble. I think that if you see the amount of cash that is on the side of the market right now, it just keeps on growing And that's simply because you have positive real rates of return and at the same time, because the level of uncertainty is so high
So, we all need to see how these two variables develop for us to understand where we're going And that's why a product like geopolitics and macro makes sense right now because it gives you the long-term perspective of the war and where China is going. But at the same time, he has that macro side to think, and gives advice on a couple of things that you could be doing with your money right now
Q: Finally, do you have any last message or advice for young people just starting their professional career and are interested in the area of Finance and the markets?
A: I'll circle back probably to the message that I was trying to send at the beginning, which is you need to get a foot in the door I would say do not be afraid of jumping around because I think the most important thing at the beginning of everyone's career is for you guys to understand what you like and you will only understand what you're going to like when you're going to try and do it And then do not stay in places simply because they're paying you a lot of money or because you like the brand because that's fundamentally in the long term is not
going to make you happy Most of the Money probably comes on the back of having equity in a business If you're just selling your time, it's significantly harder to build a significant amount of wealth You need to try and understand what are the things around the world that interest you because the worst thing that you want to have is a midlife crisis when you're 40 years old and you have a wife and then you have three kids and all that stuff, and suddenly you don't like what you're doing and you want to change But then you cannot do that because you have significantly more responsibilities. I would suggest trying and making as many mistakes as possible early on And then do not be afraid of moving around because there are many different opportunities as long as you're willing to go after that,
despite maybe your mother or different generations telling you, don't do that, don't do that Be conservative, be conservative. But again, that's a personal perspective on the issue Everyone needs to tailor that to their own lives and their likings.
conglomerate inserted in the Luxury Goods goods to cosmetic products, including such as Vuitton merged with champagne producer cognac producer Hennessy, forming group The current CEO of LVMH is Bernard Arnault and the company employs 150,000 employees worldwide, having its headquarters located in Paris, France The company is listed on the Euronext Paris exchange, using the ticker MC PA
In 1984, Bernard Arnault bought Agache-WillotBoussac, a bankrupt holding company that owned two newspapers, livestock, and Dior. Bernard Arnault was not a founder of LVMH, it was the product of a merger between Moet-Hennessy and Louis Vuitton In 1987, the merger occurred, and internal conflicts over control began, resulting in Arnault buying an accumulated 37 5% of LVMH stock, becoming the largest shareholder. As of 2022, Arnault amassed around 48.18% of LVMH shares and 63.9% of voting rights. His ownership of LVMH is constituted by Christian Dior (Arnault owns 97.5% of the company, which owns 41.4% of LVMH) and the Arnault Family Holding company (which directly owns 6 72% of LVMH)
Bernard Arnault began buying various known brands such as Givenchy Fendi, Donna Karan, Marc Jacobs, Sephora, DFS, Bulgari, and TAG Heuer LVMH’s acquisitions continued, now owning 75 brands across five different industries.
LVMH has increased revenue year after year This success is witnessed by its share price, which has increased almost 3-fold since the pandemic, from 311$ on the 15th of March 2020 to reach a high of 829$ on the 3rd of February 2023
LVMH is a conglomerate in the Luxury Goods industry, with rivals including Kering, Hermes, and Richemont During the pandemic, the industry as a whole experienced a decrease in revenues as physical locations had to close, and potential customers often purchased luxury goods and items in person Given the nature of the industry, many major players struggled to keep cash flowing during these times.
However, despite LVMH being a major player in the luxury goods industry, with over 5600 stores worldwide, the conglomerate also operates brands in other industries. Hence, the conglomerate was better prepared than its rivals
Nevertheless, as the pandemic began to fade, and as governments lifted restrictions, stores began to reopen, revenues began to increase, achieving numbers greater than pre-pandemic Especially LVMH, seeing 53,670 million euros in 2019, versus 79,184 million euros in 2022 This performance increase is partially due to a larger enthusiasm for luxury goods since the pandemic’s end The industry as a whole, and especially LVMH began seeing a greater demand for its products Reasons behind this wave of enthusiasm include bigger savings during the pandemic, allowing more consumers to become customers. Moreover, since the beginning of the pandemic, various companies in the industry began giving more attention to their environmental footprint, many of them increasing their spending for ESG purposes and making the luxury goods industry into a circular economy This in turn shifted the image of the industry, from being known to not follow animal rights to one that is joining others to a greener and fairer future Finally, one final reason is the increased presence of luxury goods in the digital universe. Luxury companies began using the metaverse and the known Web3 to market their products, making them more exclusive than ever allowing them to increase their customer base.
Consequently, the number of customers in the industry began to increase after the pandemic, thus many companies including LVMH began seeing better results quarter after quarter The industry seems to be on track to increase year after year as these goods become more exclusive as their supply relative to demand gets smaller.
Over the past decade, the luxury industry has benefitted from a growing global economy, and a higher number of wealthy individuals and consumers trading up
China has been the biggest contributor to growth in the luxury market with the rise of the middle class, a higher disposable income and consumers typically more interested in luxury items as a status symbol than their western counterparts.
The industry is expected to grow from $349.1 billion as of 2022 to $419 billion in 2027 However, many factors can impact these results
While luxury has fared recessions better than other industries, in order to maintain a high level of growth the state of the high-end consumer is crucial Negative wealth effects from lower asset prices might discourage consumers from buying luxury products
E-commerce should continue increasing its importance over the coming decade; however, many companies remain wary of diluting brand image by selling online, with major brands like Chanel only selling fashion product lines in physical stores.
Goods, Perfumes and Cosmetics, Watches and Jewelry and Selective Retailing and Other Activities
Its Fashion and Leather Goods segment is the biggest contributor to revenues providing 49% of total revenues, followed by selective retailing, which holds Sephora, with 18%
Its companies include Louis Vuitton, Christian Dior, Fendi, Givenchy, Moet & Chandon, Hennessey, and Celine among many others.
The company has grown exponentially since CEO Bernard Arnault took the helm, mainly through acquisitions Arnault looks for companies that are both timeless and modern, have a well-recognized name and a brand value that usually takes decades for companies to acquire and would be highly expensive to obtain in a short period of time even with a lot of capital. To these companies great craftsmanship and innovative design are added, allowing them to stay modern and appealing to consumers Although Arnault has taken a Wall Street-like M&A approach he focuses on buying star companies and holding them, an approach not
unlike Buffett’s at Berkshire Hathaway, who he cites as his biggest business inspiration.
The company is deeply involved in every step of its supply chain, particularly at Louis Vuitton, as Arnault says "If you control your factories, you control your quality; if you control your distribution, you control your image." As most luxury companies LVMH chooses to keep a limited supply at stores and rarely responds to demand increases with supply increases; business decisions consider possible dilution of brand perception over the long run, leading to seemingly peculiar strategies to different industries
LVMH’s main competitors are Kering, founded by Arnault’s nemesis François Pinault, Richemont, Hermès, Estee Lauder and privately held Chanel
Over the past ten years LVMH and Hermès have significantly outperformed their competitors while Richemont underperformed the market.
LVMH trades at an EV/EBIT multiple of 19 7x, below the mean for the group. Hermès is the most expensive on an EV/EBIT basis at a 35.4x multiple. Both these companies have the highest net profit margins in their comps set while Richemont has the lowest, barely breaking even. On the other hand, Richemont had the highest over year growth at over 30%, followed by Hermès Hermès exquisite business quality is seen in its financials; however, it will become difficult for the company to reinvest in its business as they saturate organic growth opportunities In the last year Hermès returned almost a third of operating cash flow to shareholders and significantly increased its cash position
In the fiscal year of 2022, LVMH presented a revenue of 79,184 million euros and a COGS value of 24,988 million euros, thus presenting a gross margin of 68.4%. Compared to past performance, this result is slightly larger than the figures seen in 2021 and 2020, 68 3% and 64 5% respectively Revenue in 2022 was up 23% when compared to 2021 As stated in LVMH’s 2022 Financial Reports: “Revenue was boosted by the Group’s main
invoicing currencies strengthening on average against the euro, in particular the US dollar, which appreciated by 11%, and the Chinese renminbi, by 7%.”
Since the pandemic, LVMH’s expenses have risen, especially marketing and selling expenses, accounting for 28,151 million euros in 2022 and 22,308 million euros in 2021. Despite the increase in marketing expenses, LVMH was able to make up for it in revenue and profits. However, LVMH was less profitable in 2022 than in 2021, accounting for 17 8% and 18 7%, respectively Therefore, when considering all expenses, marketing and selling expenses is the major contributor to the decrease in profitability for LVMH. As stated in LVMH’s 2022 Financial Reports: “This increase in marketing and selling expenses was mainly due to higher communications investments as well as the development of retail networks.”
LVMH’s non-current assets increased by 4.3% and its current assets by 15 9%, resulting in a total increase of 7 5% year after year The largest contribution to a raise in non-current assets was a rise in PP&E, which: “[…] resulted from investments [ ] as well as [ ] the acquisition of a controlling interest in the real estate company that owns the building that houses the Group’s headquarters in Paris.” Furthermore, the largest contribution to a rise in current assets was an increase in inventories and work in progress due to the raise in business activity that occurred during the fiscal year
Moreover, it seems that some of LVMH’s loans and borrowing have become short-term, which resulted in a decrease in non-current liabilities of 3 9% and an increase in current liabilities of 12 7% As stated previously, the major contributor was a decline in long-term borrowing and an increase in short-term borrowing.
In 2022, LVMH saw a decrease in net cash and cash equivalents of 717 million euros However, in 2021, LVMH saw a decline of 11,989 million euros; in 2020, LVMH saw an increase of 14,309 million euros. Note, what caused such a decrease in 2021 was the acquisition of Tiffany & Co; in 2020, the rise is because of an inflow of 17,499 million euros from debt borrowing
LVMH is a conglomerate that uses acquisitions as a form of growth, thus it usually has a significant negative net cash in investing activities, particularly in 2021 with a negative net cash of 15,156 million euros This resulted from the acquisition of Tiffany & co for 13,400 million euros. In 2022, since no sizable acquisitions took place, the net cash from/used in investing activities decreased by 62 9% to a negative net cash flow of 5,920 million euros in 2022.
In 2022, net cash from financing activities decreased by 16 3% compared with 2021, with a negative net cash of 12,685 million euros The largest payment is dividends, accounting for 53.4%, and debt payments, accounting for 30.6%. The net cash was lower than in 2021 due to larger debt payments and lower proceeds from borrowing that occurred in 2021.company must operate 2 and a half years to pay off its debt, which is not a red flag because of the steady inflow of cash coming from long term contracts signed.
Moreover, given the aggressive M&A strategy in 2021, cash flow from investment activities rose sharply from -R$196,5mn to -R$1,8bn an increase of approximately 834%. Also, cash flow from financing activities grew 171% given a debenture funding of R$1,4bn to finance acquisitions.
As of February 2023, LVMH trades at 27.7 times earnings. While it is an expensive-looking price it is actually below the company’s average P/E ratio, showing that the market has long valued the company’s strong businesses. Analysts forecast that the company will have revenues of €85,466 63 million in 2023, up roughly 8% from 2022 while gross margins are expected to increase 1.5 percentage points. Current consensus is that LVMH will earn €32.96 per share in 2023. Investors bullish on LVMH can also consider investing in Christian Dior, since it owns xx% of LVMH and its other assets appear undervalued in comparison. A sum of the parts valuation methodology is usually used to value the conglomerate, with premiums to peers often attributed to each segment
The company will continue under the leadership of the Arnault family for decades to come, a business approach more commonly seen in Europe. While current prices make the stock far from a bargain,
the incredible resilience of its brands should help investors do fine if they hold the stock for the long term
As stated previously, LVMH’s revenue is influenced by currency exchanges due to the nature of the business. Since the company operates its 75 brands on each continent, and its main currency is the euro, the business benefitted when other currencies increased their value when compared to the euro. Hence, as the euro begins to appreciate, LVMH’s revenue might suffer in the future
With the reopening of China and its economy, LVMH stands much to gain. As of 2022, 30% of revenue came from Asis (ex: Japan) versus 35% in 2021 As stated in LVMH’s financial reports, “the relative contribution of Asia (excluding Japan) to Group revenue fell by 5 points to 30% as a result of partial lockdowns enacted in 2022, especially in China ”
Source: Bloomberg
Source: Bloomberg
February was a difficult month for the markets, not following the previous month's trend. In China, there is a reopening process after three years of Zero-Covid Police implemented by Xi Jinping because of the global pandemic. Markets, especially the hard commodities markets, present high expectations for this transition since China is one of the biggest consumers of these goods and demand may largely increase with the return of production levels
Persistent inflation, fears of higher interest rates and indications of a hot labour market impacted the bond market and, for the first time since November, the US 10-year yield exceeded 4%, indicating that the Federal Reserve's warnings about higher rates for longer are finally starting to hold The 30-year bond is the only significant benchmark whose yield hasn't surpassed the 4% level this year
The 30-year Mortgage Rate closed the month at 7.03% in the US, representing an increase
compared to the 6.30% close in the month of January. Regarding inflation, in the month of February, it is expected an 8,5% inflation in the Euro Area, representing a small change compared to the 8,6% of the previous month. Food and energy goods were the components most affected by price increases
War in Ukraine completes one year and there is still no concrete sign of approaching resolution. The World Bank announced an additional $2.5bn financing to Ukraine, which now amount to more than $20bn since the beginning of the conflict in February 2022.
To date, 69% of the S&P 500 firms have already released their fourth quarter earnings reports. When compared to the 5-year average of 77% and the 10-year average of 73%, only 69% of these companies have recorded actual EPS above the mean EPS estimate.
There was a change in the portfolio during the month, as Blackline position was closed and Meta Position reduced. The worst performer was Sibanye Stillwater, with a 24,71% decrease, followed by Agnico Eagle Mines ,with a 18,5% decrease in the same period The top performer during the month was Meta, having witnessed a 17,43% increase.
The war in Ukraine, inflationary pressures and uncertainties about a tighter monetary policy marked a negative month for our portfolio
The fund share price dropped 5,41%, underperforming all the benchmarks Sibanye Stillwater and Agnico Eagle Mines performance were the major contributors to the negative result observed.
Benchmarks results were divergent in the month o February, showing negative results for S&P 500, MSI World Index and FANG + indexes while the other stated indexes had positive results in the same period
Influenced by the current environment, MSCI WI had the worst performance of all the benchmarks, decreasing 2,59% this month The PSI 20, on the other side, presented the best performance with a 2,95% increase. This positive fluctuation in the Portuguese index was mostly caused by Banco Comercial Português (BCP) stock, which value increased 17% in February.
Despite reporting 8% revenue growth YoY in 2022, Disney has announced the layoff of 7000 workers as part of cost reduction measures The CEO (Bob Iger) said that this action would be responsible for saving over $5 5bn, which generated a positive impact on share prices in the following days
As a reaction to Microsoft's strong investment in Open AI, Google announced its new partnership with Anthropic, a startup in the artificial intelligence sector, with a significant investment of $300mn for a 10% stake in the company The partnership is expected to bring a new era of innovation in the field of AI, as Anthropic's focus is on creating artificial general intelligence (AGI) that can learn and adapt to various situations and environments like humans.
Lastly, ABB, a Swiss multinational corporation specializing in robotics, power, and automation technology, reported better-than-expected earnings for the fourth quarter The company reported earnings per share (EPS) of $0.61, which was $0.22 higher than the analyst estimate of $0.39. This indicates that the company performed better than what the market expected. In addition to the strong EPS, ABB also reported revenue of $7.82B for the fourth quarter This figure was higher than the consensus estimate of $7 63B, indicating that the company exceeded revenue expectations as well
