Trump Meeting Kim Jong-Un, Labor’s $59b Cash Refund Plan, Spotify’s Unorthodox IPO

Kent Kwan

Get the full scoop on what Trump’s meeting with Kim Jong-Un, Labor’s $59b cash refund plan, and Spotify’s unconventional IPO means for you and your investments.

1. Trump to meet “little rocket man”

The leaders of the United States and North Korea will put their beef aside to formally meet in a couple of months.

It should be a very interesting meeting given Trump’s penchant for calling Kim Jong-Un a “little rocket man” in one of many Twitter blasts.

What does this mean if you’re invested in the share market?

The North Korean situation is a significant geopolitical risk. If North Korea is really on a path to abandoning its nuclear weapons, that’s very good news for share markets and the world.

North Korea will inevitably want something sizeable in return for giving up its nukes. This is a situation where Trump can rise to the occasion and show off his self-proclaimed deal-making skills; he’s referred to deals as his “art form”.

For now, we believe the share market is just relieved Trump has stopped taunting the leader of North Korea via social media.

We believe any positive news that arises from the US-North Korea meeting could lead to a short-term bounce in the broader share market, with the risk of nuclear war being significantly decreased.

On the flip side, Trump fired his well-regarded Secretary of State a few days after announcing his intention to meet with North Korea. The markets haven’t responded kindly to the news.

Trump’s increasingly impulsive decision making does worry us somewhat.

2. Labor’s bid to slash cash refunds

Opposition leader Bill Shorten revealed plans to help balance the Australian budget by removing cash refunds to shareholders. Over the next decade, the Labor party suggests this will raise $59 billion in revenue.

What does this mean if you’re invested in the Australian share market?

Under current regulations, some investors in Australian shares can claim a cash refund on top of their dividend payments.

It typically occurs if an investor has a low marginal tax rate, and the dividends they receive have imputation credits attached since the company that provided the dividend has already paid some tax.

Retirees and Aussies with self-managed super funds are the ones who will likely bear the brunt of Labor’s proposed changes, provided they win the next election.

It may lead them to move part of their investment portfolio away from dividend-rich Australian shares. This could have negative consequences for the entire Australian share market.

Although the Labor's policy may negatively impact the Australian share market in the short term, we believe there’s a silver lining.

For far too long, many Australian-listed companies have been disadvantaged as a result of shareholder demand for regular and large dividends with imputation credits.

Every dollar of dividends paid to shareholders is one less dollar being reinvested back into growing the business.

We believe this has cost listed companies the opportunity to focus on long-term growth, compared to countries like the US where growth takes precedence over dividends.

Perhaps Labor’s policy might start turning Australian-listed companies into innovative, growth-focused businesses again.

3. Spotify skips the usual IPO process and goes direct

Spotify has filed paperwork for a direct public offering; an unusual and risky process to quickly list its shares as it races with Apple Music to become the leader in a rapidly proliferating music streaming industry.

Interestingly, Spotify is offering its shares directly to investors, bypassing the typical Wall Street process where banks are hired to find buyers for the shares.

What does this mean for the broader music streaming market?

Spotify operates in a very competitive environment. Apple Music is consistently acquiring subscribers, and both Google and Amazon are challenging the dominant forces with their own music streaming apps.

Spotify is yet to prove a music service can be a viable business to investors. Losses have been growing each of the past three years, reaching 1.2 billion euros in 2017 – largely due to the royalties it pays to music publishers.

While Spotify has offered discounts and family plans to lure new subscribers, the streaming service is making less money from every new subscriber than previously. It’s a big problem to solve in such a competitive environment.

As part of AtlasTrend’s investment due diligence process, we aim to invest in companies with a perceived competitive advantage, operating in structurally sound industries where competition is low and market leaders are rewarded with high earnings growth and operating margins.

When applying this process to Spotify, it does not appear to meet these requirements.

For more insights and market news, visit our blog.


About this contributor

Kent Kwan

Kent Kwan

Co-Founder, AtlasTrend

Kent Kwan is a co-founder of AtlasTrend. He was formerly a Chief Investment Officer of an ASX listed company and prior to that was an international equities fund manager with JPMorgan.

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