This week's interesting finds

This week in charts 

Gold

Global onshoring index

Recession

Uranium

Nuclear power

Small caps 

Small caps vs. Large caps 

S&P 500 Earning yield

Private Equity’s Latest Move to Gin Up Cash: Borrowing Against Its Stock Holdings 

Cinven’s clients got some unwelcome news last year: the buyout firm’s financing tied to a lab-testing company wasn’t going well. Instead of getting a windfall, clients had to ante up more cash. 

The price drop was so bad in February 2023 that Cinven faced a margin call — an ultimatum from lenders to put up more money for collateral or risk seeing the stock seized. Cinven, with the help of clients, had to hand over 299 million euros, or about $320 million, said people familiar with the investment. 

But the risk is more than just a falling stock price. On top of the margin loans, funds have adopted more novel forms of borrowing against their holdings to free up cash for investors, adding to the proliferation of debt across private equity. 

China’s exports surged in May 

China’s exports grew faster than expected in May, official customs data showed on Friday, in a boost to policymakers eager to drive economic momentum even as trade tensions rise. 

The recovery in exports points to stronger overseas demand at a time when domestic consumption in China remains weak and has provided a further boost as officials target annual GDP growth of about 5 per cent for 2024. 

Faced with the effects of a prolonged property slowdown in the mainland, Xi Jinping’s government has focused heavily on manufacturing as part of an upgraded industrial strategy. 

Beijing’s prioritising of industry has been criticised in the US and the EU, which is next week expected to publish the results of a months-long probe into subsidies for Chinese electric vehicles. 

The European Commission’s decision will be closely watched across markets. Chinese auto exports are up 20 per cent in the year to date, according to an ING report, against a backdrop of a domestic price war between dozens of competitors. 

China’s exports soared during the Covid-19 pandemic but declined for much of 2023 as trade activity normalised. 

This week’s fun finds

Rather than try to intentionally burn our faces off, this time around we were all about the flavour. This week's entrants were Wolf’s Bite Pepper Sauce and Tijuana Tom’s Gochu Gang.

Consensus was that both had really great flavour and would both make good wing sauces. People were even smiling at the end.

Other comments:

• Would I let my children eat this?
• Smells like pumpkins. 

How Birkenstock became an improbable luxury empire 

The 250-year-old German orthopedic shoe company Birkenstock has transformed itself into a luxury behemoth with Succession-level family drama. Tim Loh explains how the shoemaker got where it is today. Watch the video to learn more.

This week's interesting finds

Our willingness to look different – Notice of EdgePoint Go West Portfolio’s closure…for a good reason! 

Rather than close a fund for underperforming, we’re redeeming investors’ money on June 19, 2024 to lock in pleasing returns for our investors from what we believed was a once-in-a-multi-decade opportunity in Canadian energy. 

Go West was launched back in November 2019 to capitalize on an underappreciated sector where we believed we could add value through our proprietary insights on each of the businesses we owned. 

We said this was a Portfolio with a finite life. If the market recognized the sector’s potential and the opportunity was no longer as attractive as when we launched Go West, we would close the Portfolio and return the funds to all investors. 

For more on Go West’s closure, you can read this letter from Portfolio Managers Frank Mullen and Geoff MacDonald. 

This week in charts 

Office loans 

Workplace occupancy 

Bank withdrawals 

Unrealized gains (losses) 

Equities 

Data centres 

ChatGPT 

Consumer spending 

U.S. stock market 

Jamie Dimon says some private credit ratings ‘shocked’ him, evoking bad memories of mortgages before the Great Recession: ‘There could be hell to pay’

The rise of private credit over the past decade has been nothing short of monumental. But JPMorgan Chase CEO Jamie Dimon warned this week that parts of the burgeoning sector have some of the same problems that the mortgage market had prior to the Great Recession of 2008, including questionable credit ratings from ratings agencies. 

Losses Pile Up in Top-Rated Bonds Backed by Commercial Real Estate Debt 

For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses. 

Buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan got less than three-quarters of their original investment back earlier this month after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era, according to Barclays Plc. All five groups of lower ranking creditors were wiped out. 

Market watchers say the fact the pain is reaching all the way up to top-ranked holders, overwhelming safeguards put in place to ensure their full repayment, is a testament to how deeply distressed pockets of the US commercial real estate market have become. 

This week’s fun finds 

This week, Catherine and Kevin celebrated their two year work anniversary and treated the team to authentic Cuban food. Congratulations and well done. Definitely happy to have you as part of the EdgePoint family. 

The Cube Rule of Food Identification 

The question was asked: are hot dogs sandwiches? New York said yes.

This week's interesting finds

Embracing change at our 16th annual Cymbria Day 

On May 15th, Cymbria held its 16th annual Cymbria Investor Day at Koerner Hall. This year the Investment Team talked about how correctly identifying the benefits of change inside a business is what gives us the ability to buy future growth at a value price. 

Click here to watch the video. 

This week in charts 

Data centres 

Interest rates 

Debt forecasts 

Global website traffic 

Silver 

Lithium 

Multifamily deliveries / construction

Office space vacancy 

Japan’s 10-year yield tops 1% for first time in 11 years 

In recent weeks, investors have increased their bets that the Bank of Japan will lift interest rates further and begin to reduce its purchases of government debt after it ended eight years of negative rates in March. 

Benchmark 10-year borrowing costs in Asia’s largest advanced economy rose as high as 1.005 per cent on Wednesday, a level not seen since May 2013. 

The central bank in March abandoned its policy of using purchases to cap 10-year borrowing costs, but has continued to buy government debt to avoid causing shocks to financial markets. Governor Kazuo Ueda has previously said the central bank had no immediate plans to change the size of its bond purchases. 

Private Credit Has Too Much Cash and Not Enough Places to Put It 

Private credit’s historic rise is creating a problem that most asset managers would love to have: too much cash in their coffers. 

Dry powder, or the amount of money committed to private credit funds that has yet to be deployed, is at a record. That’s in part because demand for their capital from buyout firms remains tepid. What’s more, bank leveraged finance desks are increasingly seeking to poach back business. The result has been what some have called a ‘race to the bottom’ among private credit managers. 

To win deals, managers in the $1.7 trillion industry are offering cheaper pricing and giving up key investor protections. They’re also keeping larger slices of financings for themselves, and even swooping in at the last minute to snatch business from the leveraged loan market. 

In recent weeks direct lenders have offered some of the most aggressive financing terms ever seen in the market. 

This week’s fun finds 

Hot Sauce Review - Liquid Stoopid 

Omaha, Nebraska is home to Berkshire Hathaway, but it's also where Tim purchased a bottle of Liquid Stoopid for the EdgePoint Review Crew. He told us that he requested the hottest sauce that was still flavourful and came back with this brain-melting bottle. 

Here are some of our thoughts… 

• Smells like: Fruit 
• Tastes like: Pepper and chemicals 
• “It gave me the hiccups” and “My face is numb!”

This week's interesting finds

This week in charts

Retail investors

AI

U.S. vehicle sales

Global GDP

Gold production

Oil

U.S. credit spreads

Consumer price index

US sharply raises tariffs on Chinese EVs and semiconductor imports

President Joe Biden is sharply raising tariffs on Chinese imports, ranging from electric vehicles to solar cells, in a pre-election effort to protect US jobs.

The White House said $18bn of Chinese goods would be hit by the rises, which were “carefully targeted at strategic sectors” and designed to buy time for US companies to catch up with Chinese rivals in green technology.

In one of the biggest moves, the US will quadruple the tariff on Chinese EVs to 100 percent this year.

Only 2 per cent of US imports of EVs come from China, according to the CSIS, a think-tank. But the higher tariffs are designed to make it even harder for the Asian country to gain a real foothold.

A ‘Digital Twin’ of Your Heart Lets Doctors Test Treatments Before Surgery

Patients diagnosed with heart disease, cancer and other ailments face myriad decisions: Which drug will be most effective? Will the side effects outweigh the benefits? Will surgery be enough? 

Determining the best path forward may be far easier in years to come. Instead of trying a therapy and hoping it works, researchers are creating so-called digital twins to predict how a patient will respond before ever starting treatment.

In a Baltimore lab, Natalia Trayanova and her team at Johns Hopkins University are creating computational models of hearts. Each one mirrors the heart of a real patient with a potentially fatal arrhythmia, an irregular heartbeat that is often a result of scarring from heart attacks or other conditions.

The replicas, or “digital twins,” appear as personalized 3-D hearts on computers, with areas of scarring shown in white. The team can use them to model how and where to make new tiny scars through a procedure called ablation to fix the arrhythmia.

Digital twins for all?

Clinicians envision a tomorrow where nearly everyone could have a digital twin created by artificial intelligence, using information from medical exams, wearable data devices and medical records. AI could search through data of others with comparable issues and run simulations while providing continuous monitoring of a patient’s health.

Like a crash-test dummy, a digital twin could be used to test drugs and conduct trials without harming the actual patient. A digital twin of a heart could allow surgeons to visualize the procedure and the patient’s specific vessels before an operation. The technology could be used to design highly accurate prosthetics or determine the most effective rehabilitation exercises. Digital twins of a patient’s uterus and cervix could help predict pregnancy outcomes. 

While the concept has been used for decades in other industries such as mechanical engineering, digital twins are still relatively new in healthcare because modeling a human organ or body—at times to the cellular level—is so complex. Collecting personal data with wearable devices and sensors also requires addressing concerns about how to preserve privacy. Machine learning, or artificial intelligence, is still evolving and can at times produce biased results. 

Tackling tough questions

But the potential has generated enthusiasm from doctors and researchers who describe a not-too-distant future where digital twins could answer difficult medical questions. What side effects will a specific patient get from cholesterol-lowering drugs? How likely is a patient to get asthma or diabetes, and if so, how soon? How might a woman’s specific pregnancy progress?

Researchers are already working on these ideas and, in some cases, putting them into novel use. 

This week’s fun find

Passage of water

In collaboration with artist Yiyun Kang and NASA, learn about freshwater availability and engage with possible solutions to avoid a water crisis.

This week's interesting finds

This week in charts 

Spreads

Interest payments

Gold

Fixed income

Used vehicles

Battery manufacturing

Cyber attacks

Maturities

Real returns

Lost in space

Downtown Toronto’s largest office landlords are plagued by a growing problem: too many empty floors.

But all buildings are not equal, and a new analysis pulls back the curtain on what’s going on behind the shimmering glass of all those skyscrapers that define the city’s skyline, revealing a deeply divided office market.

While some towers are chock-full of tenants, one-third of the biggest office buildings in the core of Canada’s most important financial district are at least one-fifth empty, with some grappling with even larger voids of up to 50 per cent.

The characteristics of the fullest buildings provide insight into how landlords are navigating the new world of remote work at a time of high interest rates and a stalling economy.

It all raises questions about what might happen to valuations in Toronto’s office market if so much floor space remains left unfilled and what the effects on surrounding businesses will be. With some of Canada’s largest pension funds prominent landlords in the Toronto market, the implications go far beyond the power corner of King Street and Bay Street. 

“Prior to the pandemic, downtown Toronto was a landlord’s market with very low vacancy and availability and since the pandemic it’s moved towards much more of a tenant’s market,” said Carl Gomez, chief economist and head of market analytics at CoStar, a Washington-based commercial real estate information provider that has operated in Canada since 2014.

Today, Toronto is one of the few Canadian cities where office vacancies are still on the rise. The percentage of space available to lease in the financial district was 17 per cent as of late April, according to CoStar, higher than the city as well as the rest of the country. 

One thing is clear: It’s a tenant’s market. 

No longer can landlords profit simply from owning an office tower in Canada’s financial capital. Nor is easy access to the city’s underground path and public transportation enough to attract tenants. Owners have put in fancy showers, some have Dyson hairdryers, while others are providing activities such as trivia in the afternoon to entice tenants to love their office life once more. 

As the CoStar data show, the impact of the pandemic on Toronto’s office towers has not been even, with some towers seeing availability rates rise sharply while others have fared much better. 

The most common explanation is that tenants are abandoning lower-class buildings to move into higher-rated towers with more amenities such as green spaces and cutting-edge ventilation systems, ditching Class C for Class A towers. 

Retailers near emptier buildings in the financial district aren’t so fortunate. 

The return of foot traffic to downtown appears stalled. The share of employees in Toronto’s financial core has been stuck at about 60 per cent of prepandemic occupancy since early February, according to consulting group Strategic Regional Research Alliance. The peak day is Wednesday at 70 per cent and the lowest is Friday at 37 per cent. 

Businesses have marvelled at how easy it is to find space in coveted buildings. Accounting and business advisory firm MNP LLP said it got a prime location at a 30-per-cent discount to prepandemic days. CIRO, the investment watchdog, said it had a number of properties to choose from. 

A flood of new office space has come onto the market in recent years. Since the start of the pandemic, 11 downtown office towers have opened including the 49-storey CIBC Square and the 47-storey TD Terrace. 

The new skyscrapers have increased the amount of office space in the core by 7.8 million square feet, or 9 per cent, according to Altus, a commercial real estate consulting firm. That occurred as demand dropped dramatically and tenants tried to get rid of their space on the sublet market. 

Over the next two years, three more office towers will open in the financial district, including CIBC Square’s second 49-storey tower. The new additions will increase office space by another 2.5 million square feet, or 2.8 per cent, according to Altus. 

As tenants move into their new offices at places like TD Terrace and CIBC Square, they are leaving their former landlords with space to fill. 

Carmakers bet on hybrids as shift to EVs slows 

Global carmakers are stepping up their investment in hybrid technologies as consumers’ growing wariness over fully electric vehicles forces the industry to rapidly shift gear, according to top executives. 

A combination of still high interest rates and concern over inadequate charging infrastructure has chilled buyers’ enthusiasm for fully electric cars, prompting a rebound in sales of hybrid vehicles that most of the industry had long regarded as nothing more than a stop-gap. 

Tapping the resurgent demand for hybrids was a priority, executives from General Motors, Nissan, Hyundai, Volkswagen and Ford told the Financial Times’ Future of the Car Summit this week.

“We have to invest heavily in the future of plug-in hybrids,” said Mark Reuss, the president of General Motors. “We have to be agile. We have a global tool chest of technical things that we can deploy fairly rapidly.” 

The view was echoed by José Muñoz, global president of Hyundai, which is now considering manufacturing hybrids at its new $7.6bn plant in Georgia given more drivers are baulking over buying fully electric vehicles. 

“If you asked me six months ago, definitely a year ago, I would have told you . . . fully electric,” said Muñoz. “A lot of things have happened between then and now. Electric is still the future. But now we are seeing a longer transition.” 

Electric car sales growth slowed in the US and Europe last year, prompting carmakers to offer discounts. Industry executives have already acknowledged that the market has lost some momentum as future sales growth increasingly depends on demand from mainstream buyers rather than early adopters. 

At the same time, there are concerns over whether governments might backtrack on previous plans to force a rapid transition away from petrol-based cars. 

Ford’s European boss Martin Sander said that the pace of the transition in Europe was “down to the consumer”, and that US group was prepared to continue selling hybrid models into the next decade. 

“We want to make sure that we are setting up our business model so that we are flexible enough” to address shifts in demand, Sander told the summit. “Our whole business and life cycle planning is much more dynamic now.” 

US rival General Motors, which had largely eliminated plug-in hybrids from its range, said in January that it would reintroduce the technology. 

Consumers’ increasing hesitation comes just as carmakers face a growing threat from Chinese manufacturers rolling out cheaper electric vehicles both in their domestic market and, increasingly, in Europe. 

To remain competitive in China, Peugeot needs to stay “agile” to avoid getting sucked into the country’s price war, said its chief executive Linda Jackson. “We’re holding on but the Chinese market is the biggest automotive market in the world so it’s very difficult for a global manufacturer not to be present,” Jackson said. 

According to Schmidt Automotive Research, Chinese brands like BYD as well as brands such as Polestar that manufacture in China accounted for almost 10 per cent of the fully electric cars registered in western Europe in March. That is up from just over 4 per cent two years ago. 

“We see an increase of competition coming from China brands and other technology worlds,” Nissan’s chief executive Makoto Uchida told the summit. 

The threat from Chinese companies has only heightened carmakers’ focus on hybrids, which typically have double-digit margins compared with often lossmaking fully electric vehicles. 

For many carmakers, the slower switch is allowing them to continue to squeeze profits from traditional engines while also providing more financial firepower to develop electric vehicle technology. 

The majority of the industry still believes that developing profitable fully electric cars is the most important long-term goal. 

Earlier this week, Toyota, the biggest champion of hybrids in recent years, said that it planned to lift spending on new technologies by more than 40 per cent after hybrid sales drove the group’s profits to a record last year. 

This week’s fun finds

Sushi Friday! 

Our partner Nic from Montreal treated the Toronto office today with Sushi Burritos. He gained extra points for originality and delivering lunch 2 minutes before noon. Well done! 

Maybe the Italians Were On To Something: Espresso Dose 

Why, if the Italian standard (one still written about in books to this day) is 14g for the double dose, would you use 4.5g more coffee for a double shot?