Trade wars, technology and Asian income
FundCalibre Managing Director Darius McDermott interviews well-known Asian income manager Jason...
“We’re basically watching a high stakes poker game.” These were the words of James Yardley, one of FundCalibre’s senior research analysts earlier this week. He was, of course, referring to the Brexit negotiations and political shenanigans in Westminster.
James believes that Theresa May’s strategy had a major flaw: whilst she talked about ‘no deal’ being better than a bad deal, nobody, least of all the EU, really believed her. “She had been ready to bluff at the start of the negotiations, but not at the end.” he continued. “And, as any poker player knows, for a bluff to work the other side has to believe you – and you have to be willing to follow through on the bluff right until the end of the hand.”
Indeed, the game of poker can be applied very nicely to almost every aspect of the Brexit negotiations. May’s strategy was also slow, predictable and passive: all generally bad traits in any game of poker. Whilst she won plaudits for her dogged determination, her refusal to alter her strategy made it easy for her opponents on both the leave and remain sides of the argument to defeat her. In reality she never even came close to getting her withdrawal deal successfully through parliament.
Now May has gone and been replaced by Boris Johnson, who has brought in Dominic Cummings – the controversial architect of the ‘Vote Leave’ campaign – as his chief adviser. “Cummings is a student of game theory and he is a fan of John Boyd, the USAF fighter pilot and military strategist whom he has written about in his blog.” James told me. “Boyd’s great emphasis was on speed, flexibility, decentralisation and fast decision making. Cummings is also a student of Sun Tzu and he has written about pulling opponents off balance, disorientating them and making them seem like an unreasonable aggressor.”
We are now seeing the change in strategy in practice. Firstly the government has done everything it can to make people believe it will leave with a ‘no deal’ if a deal with the EU cannot be struck. In this aspect the government seems to have succeeded: everybody on all sides – including the press and the EU – now believe the government is prepared to leave on 31 October without a deal.
The bluff is now believable and arguably has already had some success: both Chancellor Angela Merkel and French President Emmanuel Macron have given a bit of ground to find a solution. Whether this is genuine or not is too early to tell – we should not forget other leaders are playing their own game and Merkel and Macron may just be distancing themselves from any blame over a potential ‘no deal’. The expectation is still that, however scary the bluff from the UK may seem, the EU will still call it.
The second element of the government’s strategy is to be aggressive, unpredictable and disorientating. The total opposite of what we saw under May. Firstly, to the surprise of many, the government has prorogued parliament. This means parliament cannot sit, and the number of days available for MPs to stop a ‘no deal’ Brexit is reduced. This was an aggressive move which, whilst technically was within the rules (although this is being challenged in the courts), was almost unprecedented. It has succeeded in knocking the government’s opponents off balance and causing a strong reaction.
The second aggressive act was to remove the whip and effectively sack rebel Tory MPs who handed control of the order paper to parliament. This move was disorientating. As Ken Clarke said on Newsnight, he feared the government had got exactly what it wanted, with a new election around the corner. Johnson can now replace these rebels with people who support his own position – thereby greatly strengthening his hand in a future government. As any poker player knows, folding a weak hand and waiting for a better one is a critical part of the game.
The Johnson government has now suffered repeated losses in parliament – first on Brexit and now on its attempt to hold a general election. On the face of it it hasn’t started well. Was this all part of Johnson and Cummings strategy from the beginning or have things already gone badly wrong?
Nobody really knows, and that in itself is dangerous and confusing for their opponents. Now Jeremy Corbyn, the leader of the opposition, has been forced into the awkward position of opposing an election he has spent years calling for.
It has also been suggested that the government has not fought the legislation designed to prevent ‘no deal’ as hard as it might have, either in the commons or the lords. This begs the question: what is the Johnson government’s strategy and what could it have up its sleeve next?
Of course the danger of an aggressive strategy in poker is that when it goes wrong it can go very badly wrong. In their negotiations with the EU, Johnson and Cummings might remember that bluffing on every street and getting called is very expensive, and you can also look extremely foolish when you’re forced to reveal your terrible hand.
It’s also worth remembering that in gambling, it’s usually the house that wins, not the punter. So on a lighter note, here are a few Elite Rated funds who are backing the bookies in one way or another.
GVC Holdings is a gambling and online gambling business, which owns numerous brands, including Ladbrokes. The firm is also a constituent of the FTSE 250 (the 250 largest listed companies in the UK) and a holding in both Merian UK Alpha and Marlborough Special Situations fund*.
Richard Buxton, manager of Merian UK Alpha, told us yesterday: “Whilst this year’s profits will be held back by the change to fixed odds betting terminals stakes to a maximum £2, the story is not about this year. There are the benefits of the Ladbrokes Coral acquisition to come through this year and next, but the real interest is their joint venture in the US with MGM, as the US opens up online gaming state by state. If this works as we anticipate, there will be material upgrades to profits expectations and the shares – still suffering from management share sales in March, despite re-purchases last month – are far too cheap.”
Eustace Santa Barbara, co-manager of Marlborough Special Situations, added a note of caution yesterday: “GVC is a small holding in our fund. We believe operationally it is the superior online gambling operator and its recent acquisition of Ladbrokes Coral has given it a more diversified portfolio. Earnings could also be boosted by an exciting opportunity in the US: a Supreme Court judgement has given every state the power to legalise sports betting if it wants to, and GVC now has the right to operate in three of those states. However, there are risks: for example, global regulation and taxation of gambling generally, and it remains to be seen how quickly different US states agree to sports betting, plus there will be lots of competition.”
888 holdings which owns several popular gambling brands and websites including sports, casino, poker and bingo brands, was a new addition to Man GLG UK Income fund earlier this year.
The firm, which launched in 1997, had revenues of $540m in 2018 and now employs 1,350 people. It is now a 1%** holding in the fund, managed by Henry Dixon, who said recently: “One of the new purchases for us this year has been 888 Group the online gamer. It’s about 13 times earnings, cash equates to almost 20% of the market capitalisation, and the yield is slightly over 6%.”
Sands China Ltd is the leading developer, owner and operator of multi-use integrated resorts and casinos in Macao. Macao is the largest gaming market in the world (as measured by casino gaming revenue) and is the only location in China offering legalised casino gaming. The company is the largest stock in Jason Pidcock’s Jupiter Asian Income fund (6.2%***).
“The growth of outbound tourism from China is a major structural trend.” Jason told us. “Increased freedom to travel and higher disposable income means that overseas holidays are far more accessible to Chinese citizens than they once were. One of the clear beneficiaries as a preferred leisure destination in the region is Macau, which offers a range of entertainment options, but is primarily known for its casinos and luxury hotels. I believe the shift toward consumer spend on experiences, rather than material goods, is one of the biggest tailwinds driving Asian equities today.”
*Source: Fund management companies, 5 Sept 2019
**Source: fund factsheet, 31 July 2019
***Source: FE Analytics factsheet, 31 July 2019