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Episode 40

Will dollar bulls see red?  

Published on: August 6, 2020 • Duration: 14 minutes

This week we discuss what is next for Dollar bulls after the currency has endured its biggest monthly percentage drop in a decade? In The chatter, Louisa talks to Alex Gunz, Manager of the Heptagon Future Trends Equity Fund, about the Rubicon Thesis. This week’s whisper looks at a recent unicorn company, Infobip.

  • With the dollar enduring its biggest monthly percentage drop in a decade. Dollar bulls need to weigh up what's next. That is this week's Big Conversation. 

    Hi, everybody, I'm Louisa Bojesen, and welcome to The Big Conversation. After the biggest monthly percentage drop in the greenback in a decade, things are particularly interesting for dollar bulls at the moment, with the dollar down by around 10 percent since its March highs, it would be easy to think that what goes down must come up and vice versa. But given this more than four percent drop in the dollar index for July, how fast could a reversal trade happen? Well, we started the week and a new month with a bit of a rally, only for that rally to fizzle out. From a technical perspective, there was a massive increase in dollar shorts in the month of July to levels not seen since the height of the financial crisis almost a decade ago, so there would also have been some typical short covering taking place at the end of the month. But if you look at a dollar index chart for the last three months alone, you'll see that the biggest part of a broader drop happened more specifically in the second half of July. Expectations of further Fed easing have supported dollar selling also, and as markets have recovered elsewhere in part, safe haven trades in the dollar have come off, too. We've also had uncertainty given a big jump in U.S. Covid-19 cases, weaker economic readings, and there's more awareness of political risk given both China, U.S. tensions and November's U.S. presidential election. I mentioned the U.S. economic readings. What's the data telling us though? While we had signs of a recovery in May and June, the data recently points to more caution ahead. U.S. construction spending fell to a one year low in June, surprising many as economists had forecast an increase. Although we now all know what a shutdown means and everyone was expecting a blow out drop, the historic thirty two point nine percent fall in second quarter U.S. GDP was still a shock. As a reminder, first quarter U.S. GDP showed a five percent drop. So we've gone from a five percent drop to a 33 percent drop. US consumer spending at the end of last week led to some optimism, but while May's personal spending saw a revised print of eight and a half percent and June saw a jump of five point six percent, spending is still way below pre Corona readings. And inflation, well despite initial pandemic speculation, it's hard found. The vast majority of retailers, they've been forced to slash prices to encourage sales after demand crumbled. While some economists, they still warn of inflation or even hyperinflation, many think that for the time being, the risk of inflation is very, very low. The US inflation rate fell by one point nine percent over the second quarter, having risen early in the year. The Fed's favorite inflation gauge, the PCE index, rose by zero point four percent in June, but that was mainly because of a rebound seen in gasoline prices, and the core inflation rate, so minus food and energy, is at its lowest level since the financial crisis. What will the U.S. July non-farm payroll data reveal? Will it be weaker than the four point eight million jobs added to the U.S. economy in June? That figure is published on this Friday. So prepare for a market reaction and that perhaps especially in the dollar. While we saw sturdy job gains in May and June, well layoffs, they're now increasing once more. The service industry has again been shrinking activities because of new Corona cases. Incidentally, some of the usual seasonal factors aren't happening at the moment either, with a number of manufacturers staying open for the summer instead of closing after being forced to shut early in the year. And if you look at U.S. consumer confidence, well it dropped to a much weaker than expected ninety two point six in July. That was a big drop from June, and way down from a 20 year high in February. We went from 133 back then to 93 in July, pretty much so a massive drop. And the key here is that short term consumer confidence is especially hit. Investors are right to be nervous about the U.S. economic outlook, especially as emergency unemployment benefits worth around 75 billion dollars per month and other measures, expired this past Friday. Well, we say unemployment benefits, but really it's a lifeline to thousands and thousands of people. Congress has been looking at a new bill that outlines more financial relief, but it's uncertain when a deal could be reached, and what the result could be. The impact of open money taps or stimulus is of course, a ballooning U.S. fiscal deficit, and Fitch Ratings has responded to this by downgrading the US's triple-A rating to negative (it had been at stable). While it's much easier to criticize government solutions than it is to come up with solutions oneself, EU leaders opposite the U.S. are now being lauded for their cross-border co-operation in last month's 750 billion euro economic rescue plan, which includes debt sharing. Incidently, this has also meant an upgrade to the EU rating outlook from Standard and Poor's to a positive from a stable. Now, while many wouldn't trade on rating outlooks, it underscores the U.S. EU divide once again, also seen, for an example, in that strong euro / weak dollar trade. At the same time, seeing the amount of euro longs versus the dollar also makes you ask for how long the euro momentum trade will remain intact? The equivalent to that prickly dollar in fixed income would be the yield on the US 10 year, around a half a percent, adjusted for inflation expectations, and it looks even more prickly down at a record low below minus one percent. Now, as for the dollar's direction and assuming the obvious importance of, for example, the Fed, the general market and political stability, so much now hinges on continued aid from the government. In tandem with fighting Covid-19 and treating the sick, if there aren't enough rehabilitation and support measures, an economic recovery is only going to be so much harder. And then it won't just be the dollar running out of steam and having to start over again and again. 

    Though I mentioned long term investing, if we accept that Covid-19 is hear for the time being and that it could ebb and flow for who knows how long, then bigger picture thematic investing for the long term becomes even more interesting. These are the themes that will continue to grow and develop regardless of the Coronavirus or maybe even helped along by it. These are the huge themes that you need to be aware of that will change life as we know it over the next years and decades. Alex Gunz is the manager of the Heptagon Future Trends Equity Fund at Heptagon Capital. He researches and looks at ways to invest in bigger changes happening in areas like technology, demographics, alternative energy, health food and more. Inspired by history books, he's been galvanized by what he calls the Rubicon Thesis. Take a listen. 

    Alex, you've written about something called the Rubicon Thesis. Explain what is it? 

    Sure. The Rubicon Thesis is something which is sort of so exciting, it applies to multiple areas, and we're really using this historic idea of when Julius Caesar took his armies across the Rubicon, went on to conquer the Roman Empire. And very simply, what the metaphor means is that once you start doing something, there is no turning back. And based on the behavior changes that I think we've all undergone during this very strange period of the last few months, the habits we have developed now we believe are going to be very, very difficult to undo in the future. Put very simply, it is this idea that we are becoming or have become digital by default. 

    So what are some of the kind of the main ways that you think investing is going to transform? 

    Sure. I mean, I also think about it from the perspective of being at home and how we're behaving. So we it's abundantly obvious that people are making more and more online purchases, and even if you think about a company as big as Amazon, despite the fact that Amazon has been going for 20 plus years, it's done 280 billion dollars of revenues last year. The growth they reported last Thursday was 40 percent year on year growth. That's that fastest growth they've done in nine years. So it's pretty obvious that we're shopping online more. But to my mind, what's really exciting is actually thinking about the infrastructure that underpins that. I'll just give you two really quick examples. Number one is payment. Think about how or for any any of your your viewers of this, when was the last time anyone went to a cash machine and withdrew cash? There was a great study that actually came out from Visa overnight saying that 80 percent, 78 percent of consumers said, look, we are going to not go back to cash in a post pandemic world. That's a great example of Rubicon crossing, if you will. Another really good example is think about all of this online stuff. There's a great statistic from a company called Pro Lotus. Pro Lotus is the biggest owner of industrial warehouses globally. For every one percentage point shift that you have in retail sales from physical to online, you need about 46 million more square feet of warehouse space. That's pretty amazing. So think about it like this. You've got higher inventory terms, you've got a much longer tail, that's always been the Amazon idea that you can buy anything, you have a much greater range in a warehouse than you'd ever have in a physical store. And then practically, when you're getting goods to a Tesco or John Lewis or whatever it might be, they go on a pallet. In an online world, everything is packetized and you need more space for that as well. 

    And this carries through into into other sectors, I'm assuming, as well. It's not just technical or it's tech in under, for example, energy? 

    I would say that that's totally the case because I think, you know, again, think about this idea of no turning back that we've seen with with energy. You know, all of us, whether we're in London or New York or anywhere else, really appreciate how much cleaner the air feels. You know, there are fewer planes out and about in the sky, and I'll just give you a great statistic. Apology's it's another you more UK specific one, but it's incredibly relevant. I think there's applicability in most other geographies. The U.K. has now not burnt coal for three months, which is quite amazing, really. 10 years ago, to give you a statistic, 40 percent of the UK's energy actually came from coal. So what's basically happened is there's been the substitution effect away from fossil fuels to renewable fuels. That's pretty impressive. Year to date, renewables has generated a bigger share for those of your listeners who aren't familiar with this, the biggest offshore wind turbine in the world is actually in the UK. 120 kilometers off the North Sea. It's the size of Malta. I mean, that's just crazy. It's turbines that off of the turbines. Each one is the size of the London Eye. So you're actually going to this shift. And I think it's very hard, again, to go back, if you will, to the other side of the Rubicon, where in 2018 globally, two thirds of two thirds of the world's energy was provided by fossil fuels. By 2050 if you believe Bloomberg new energy finance, two thirds of that energy will come from renewable. 

    So as Alex implied via his Rubicon Thesis, there's no going back and not either from investment themes that will transform society, how we live and how we see the future. 

    It's always interesting when companies go unicorn and I want to tell you about a recent one Infobip was founded 14 years ago in 2006 as a software startup, more particularly as a Croatian cloud communications firm, is headquartered in London and in Croatia, in Zagreb and Vodnjan, and it operates in 190 countries. What makes it interesting is that it allows companies to communicate with customers through a bunch of channels like text, like WhatsApp, Viber, Facebook Messenger, by providing technology and omni channel marketing. And that's a fancy way of saying is seamless experience for the customer, who's, for example, sitting at home shopping. Now, private equity group one equity partners has just injected an investment of two hundred million dollars into Infobip. This show of confidence means that the company now is valued at over a billion dollars, which means that it's not only a unicorn company, but it's also the first Croatian unicorn company. Its Infobip's first outside funding round. And according to Reuters, exclusive sources Infobip will be able to expand more in the US. The company is profitable and it generated revenue of around six hundred million euros last year, which was a 38 percent jump year on year, according again to the Reuters sources. They also already have a lot of big name customers like Uber, Costco, Burger King, Unilever, Raiffeisen Bank, the Austrian bank, Sherbank in Russia. Tech EU states, quote, "The company boasts 600 plus direct to carrier connections, which enables it to connect its business to a potential seven billion people and things." The company caught my attention as Covid-19 is forcing this acceleration in tech usage, and as we've been talking about once new habits or new technologies introduced to a company, chances are we won't go back along those lines. According to the same reports, Infobip precisely saw a 20 percent spike in SMS volumes during April, so during lockdown, compared to February with businesses shifting to reach customers through virtual communications. The Reuters sources seem to think that Infobip now will be focusing on more U.S. expansion, possibly through acquisitions and then an IPO in the U.S. also could be on the cards in the future. So beep, beep or Infobip, Infobip. Watch this space. 

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