Breakingviews - Corona Capital: Cognac and candy, EU banks, India



LONDON/HONG KONG (Reuters Breakingviews) - Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


- Cognac and chocolate

- Bad debts

- India and the United States

BARGAIN BARS. Cognac lost out to chocolate during lockdown. Remy Cointreau on Tuesday reported sales of 150 million euros in the quarter to the end of June, a year-on-year decline of 33%. However, the $8 billion spirits maker’s performance was better than expected by analysts, who had pencilled in a 43% drop. Contrast that with Lindt & Spruengli. The $20 billion Swiss chocolate maker said it expects organic sales to fall just 5%-7% this year.

Remy and Lindt’s share price performances don’t reflect the relative resilience of what they sell, though. The distiller’s share price is 27% higher this year, while the chocolatier’s stock is trading below its pre-pandemic levels. Remy’s exposure to China, which is expected to recover faster, explains much of the difference. Still, with punters only slowly returning to bars and duty-free outlets, sales of spirits will languish behind chocolate for some time. (By Dasha Afanasieva)

LAST RESORT LENDERS. Careworn European bank shareholders need to adjust their expectations downwards – again. Lenders face a hit of at least 400 billion euros in credit losses over the next two years which, combined with falling revenue, will squeeze already mediocre profitability, according to a report by Oliver Wyman. If a second lockdown occurs then bad debts could rise to 830 billion euros, or one-tenth of outstanding loans.

Regulators can take some comfort. In a less severe scenario nearly three-quarters of banks would maintain common equity Tier 1 capital ratios above a healthy 12% threshold. Shareholders will suffer more. Europe’s largest lenders trade at an average of 0.7 times projected 2020 tangible book value, according to Refinitiv data, implying they need to earn a 7% return on tangible equity. But the consultants reckon average returns will only touch 5% by 2022. Investors should brace for another pummelling. (By Christopher Thompson)

JUST SAY YES. The United States and India are haggling over a package that would open India’s market to U.S. dairy, almonds and apples, in exchange for preferential treatment for Indian generic drugs, sources told Reuters. It’s a good time for Prime Minister Narendra Modi to approach President Donald Trump, whose trade pact with China looks unstable, so he’s in the hunt for another win. The president has also been taking anti-malarial quinine to fend off Covid-19, and India is a big manufacturer – although it relies on China for raw materials.

New Delhi could use a warmer relationship with the White House, which withdrew from trade negotiations last year complaining about lack of reciprocity. A surprise digital tax on foreign transactions was resented by Alphabet-owned Google and Now, with Chinese troops menacing at the border, India is hardening its stance towards Beijing in the economic field. A mild rebalancing towards Washington seems likely. (By Pete Sweeney)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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