The changing geopolitics of energy

America’s domination of oil and gas will not cow China

Being an importer of fossil fuels and an exporter of renewable technology is not so bad

“The united states of america is now the number-one energy superpower anywhere in the world,” President Donald Trump told oilmen in Midland, Texas this summer, from a stage decorated with gleaming black barrels. The sheer volume of hydrocarbons that such American oilmen have released from the shale beneath Midland and previously unforthcoming geology elsewhere gives substance to his boast (see chart 1). Over the past decade America’s oil output has more than doubled and its gas production increased by over 50%. America is now the world’s top producer of both fuels.

Had they heard Mr Trump say that “We will never again be reliant on hostile foreign suppliers,” presidents from Franklin Roosevelt on might have nodded in envious approval. After the second world war America’s unmatched ability to consume oil outstripped its unmatched ability to produce it. Ensuring supplies from elsewhere became an overriding priority. 

The oil shock of the 1970s had a profound effect both on the economy and on geopolitics, driving much of America’s subsequent involvement in the Middle East. The surge in domestic supply in the 2010s both boosted the economy and opened up new geopolitical opportunities. America can apply sanctions to petrostates such as Iran, Venezuela and Russia with relative impunity.

But what it might mean to be an energy superpower is changing, thanks to three linked global shifts. First, fears about fossil-fuel scarcity have given way to an acknowledgment of their abundance. 

Not least because of what has been achieved in America, the energy industry now knows that it will be lack of demand, not lack of supply, which will cause production of oil, coal and, later, gas to dwindle. 

In its latest “World Energy Outlook”, published on September 14th, bp, an oil company which has recently said it plans to go carbon neutral, argues that demand for oil may already have peaked, and could go into steep decline (see chart 2 ).

This is because of the second shift: an acknowledgment by most countries that, for the sake of the climate, reliance on fossil fuels needs to come to an end. And that leads to the third shift: electrification. 

Fossil fuels provide heat that is mostly used to move things, be they vehicles or electric generators. Solar panels and wind turbines provide energy as electricity straight off. 

Maximising their emissions-free benefits means processes and devices that now rely on combustion must in future use currents and batteries instead. The bp analysis argues that in a world going all out for decarbonisation the share of energy used in the form of electricity would rise from about a fifth in 2018 to just over half in 2050.

Falling demand for fossil fuels will tilt the balance of power away from producers and towards consumers—though there will doubtless be reversals now and then along the way. 

And in a world which needs to generate much more fossil-free electricity, mass production of the means whereby to do so will become crucial, as will government backing and know-how in deployment. 

Being a mighty pumper of oil will do a lot less for America under such conditions than once it might have done. But China, the world’s biggest fossil-fuel importer as well as its leading exponent of renewable energy at gigawatt scales, will have the wind, as it were, at its back.

The covid-19 pandemic has provided a dramatic preview of a world in which demand for oil falls instead of rising. When the globe stopped spinning in March, its thirst for oil suddenly subsided. Petrostates dependent on pricey oil for their spending now face gaping deficits. Investors have fallen out of love with oil companies. 

For all Mr Trump’s grateful boosterism, the value of America’s shale sector has fallen by more than 50% since January. ExxonMobil, an oil company included in the Dow Jones Industrial Average since 1928, has been kicked off it. With a market capitalisation of $155bn it is worth considerably less than Nike, a shoemaker with a swoosh.

In the face of this turmoil China’s demand for oil imports, already the largest in the world, continues to grow—providing some welcome stability. The country’s independent refiners—the “teapots”—have become large enough that they help set oil’s price floor. “They are essentially the vacuum cleaner of the crude market,” says Per Magnus Nysveen of Rystad Energy, a consultancy. 

Michal Meidan, who leads China energy studies at Oxford University, points out that the trading arms of state-owned oil giants sinopec and China National Petroleum Corporation are now two of the three largest traders of crude cargoes priced on the Platts Dubai futures contract, which means they influence the price of crude bound for Asia. Low prices also allow China to build up its strategic reserves.

Big finds off the coasts of Brazil and Guyana and the development of Australia’s liquefied natural gas (lng) capacity, along with America’s shale boom, add to China’s opportunities; a buyers’ market is a good place to be the biggest buyer, notes Kevin Tu of Columbia and Beijing Normal Universities. 

There are plenty of bullish oilmen who think that, bp to the contrary, peak demand has yet to be reached. But even they recognise that the supply of oil below ground outstrips the thirst above it, and that competition for customers is likely to heat up.

In some instances competition for Chinese demand may be straightforward. When it embarked on a price war with Russia this spring, Saudi Arabia slashed prices on shipments bound for China. The country’s biggest refiners are mulling a plan for a buying consortium to strengthen their negotiating power with the Organisation of the Petroleum Exporting Countries. 

China will probably also flex its financial muscle as petrostates buckle under debt. It has issued oil-backed loans to crude-rich countries such as Angola and Brazil for more than a decade.

China’s position as a buyer also allows it to undercut America’s attempts to squeeze oil exporters. Chinese buyers long continued to import Iranian and Venezuelan crude. Its energy alliance with Russia is particularly important.

A different strength

As energy expert Daniel Yergin points out in “The New Map” (see article) Vladimir Putin realised the significance of energy relations with China early on; but the pivot to China became more urgent after the financial crisis of 2007-09. In 2009 the China Development Bank lent two state-controlled Russian companies, Rosneft, an oil producer, and Transneft, a pipeline builder and operator, $25bn in exchange for developing new fields and building a pipeline which would supply China with 300,000 barrels of oil a day.

In 2014 Western sanctions over Crimea inspired Gazprom, another Russian energy giant, to commit to a long-haggled-over gas pipeline, the Power of Siberia, which opened last December. Tying in Chinese custom gives Russia a large market unmoved by calls for sanctions at a time when European demand is faltering. 

But as Erica Downs of Columbia University points out, “As soon as a pipeline is built, the balance of power shifts from supplier to buyer.” After the first oil pipeline was built, China refused to pay the agreed price.

All this power in the market, though, cannot mask the geopolitical downside of relying on imports. Being a large importer may give you more power than being a smaller one; but it still leaves you vulnerable. China is acutely aware that much of its oil comes through the straits of Hormuz and Malacca, which could be closed by third-party conflicts or, in extremis, the us Navy. 

In recent months China’s concern about energy security has risen as relations with America have declined, notes Ms Meidan—for all the current talk of decoupling, China has been buying lots of lng from America, as well as crude for its stockpiles. 

Communist Party documents for China’s new five-year plan emphasise the need for a more flexible, reliable energy system.

What China lacks in oil and gas supplies it makes up for with industrial policy, which it has long been using to support domestic coal production and nuclear power as well as what is now by far the world’s largest renewables sector. Chinese companies have invested in mines from the Democratic Republic of Congo (drc) to Chile and Australia, securing access to the minerals needed for solar panels, electric vehicles and the like. 

Unable to be a petrostate, it is becoming what one might call an electrostate, investing strategically all along the chain from mine to meter.

This is not in itself anything like a triumph for climate action. China has more than 1,000 gigawatts (gw) of coal-fired generating capacity. This installed base, with which it generates 49% of the world’s coal-fired electricity, makes it the world’s biggest carbon-dioxide emitter. And its coal use is set to expand in the years to come.

Its wind and solar capacity of 445gw, vast though it is by most standards, is less than half coal’s total, and those renewables typically run at a much smaller fraction of their capacity than coal plants do. But China also has 356gw of hydropower capacity, more than the next four countries combined. 

It has been building nuclear power plants faster than any other country—the average age of the 48 reactors in its fleet is less than a decade—and intends to go on doing so; nuclear, which now produces less than 5% of the country’s electricity, is set to produce more than 15% by 2050.

The evolution of China’s nuclear, wind, solar and battery sectors varies somewhat, but the basic formula remains the same: learn from foreigners and then use massive investment and authoritarian dictat to support deployment on a very large scale. Subsidies at home and abroad have helped. 

Support for renewables in Europe in the 2000s created a demand for solar panels only Chinese firms, liberally aided by the state, could meet. Chinese battery giants, led by catl, benefited from a policy that subsidised electric vehicles only if they used batteries from domestic suppliers.

Fossil-fuel free as they are, these technologies still require raw materials. Wind and solar power need a lot more of some non-ferrous metals—notably, if unsurprisingly, copper—than systems which burn fossil fuels; batteries require niche materials in ways that fuel tanks do not. 

Generally, the world has plenty of these necessary commodities—but less capacity to get them to market than rapid decarbonisation requires. As Andy Leyland of Benchmark Minerals Intelligence, a research firm, puts it, “There’s no geological shortage. It’s a financing shortage.” 

Mines which frequently go over budget and are too often delayed, sited in countries prone to instability, are not overwhelmingly alluring to most Western investors.

Chinese companies have helped fill the gap. Some of this is through domestic investment. China produces 60% of the world’s “rare earths”, which have properties that make them useful in electric motors, among other things. They are not, generally, rare in a geological sense, but they can be in short supply. (They are also often mined in ways that do great damage to the local environment.)

For other metals China mostly has to look further afield. Tianqi, a private company, has a minority stake in sqm, Chile’s biggest miner of the lithium on which batteries depend. Tsingshan has invested in battery-grade-nickel projects in Indonesia. 

The drc’s copper and cobalt have attracted Chinese investors for over a decade, and mines owned by others often send their output to China anyway. China refines more than twice as much lithium and eight times as much cobalt as any other country, according to Bloombergnef, a research outfit (see chart 3).

Ivanhoe Mines, led by Robert Friedland, a veteran American miner, has had backing from two Chinese companies, citic and Zijin Mining, to build the world’s largest new copper mine in the drc. 

Mr Friedland argues that Chinese investors look further into the fewer-fossil-fuels future than Western ones. “What do the batteries look like? Where is the supply chain?” 

These are questions, Mr Friedland says, where the Chinese “are probably ten years ahead”.

Politicians in America, Europe and Australia have expressed concern at Chinese control of minerals critical to not just energy but defence. A company backed by Bill Gates and other billionaires plans to search for cobalt in Quebec. 

America’s Development Finance Corporation is, for the first time, taking equity stakes in mining companies. One beneficiary is TechMet, which is betting that some investors will prefer mines independent of Chinese control. 

“It’s a very significant strategic issue for the United States and the West,” says Admiral Mike Mullen, a former chairman of America’s Joint Chiefs of Staff and now the head of TechMet’s advisory board. 

“I almost liken it to Huawei. We wake up and they’re in control of the world.”

Here comes everyone

China now produces more than 70% of the world’s solar modules. It is home to nearly half its manufacturing capacity for wind turbines. It dominates the supply chain for lithium-ion batteries, according to Bloombergnef, controlling 77% of cell capacity and 60% of component manufacturing. 

With its industries at such a scale, and support costs ballooning, subsidies for them have been cut. Last year China eased restrictions on foreign battery-makers, too

The rest of the world has benefited—the costs of solar panels and batteries have dropped by more than 85% in the past decade. “We will invest continuously in research to make sure we retain our leadership—in research and in mass production,” says Li Zhenguo, president of longi, a giant producer of solar modules. 

China is keen to set technical standards across a range of industries, hoping to shape the playing field for further innovation. For clean-energy technologies in particular, says Mr Tu, it has an edge.

Though it has successful and influential innovators such as Tesla, in this part of the energy world Mr Trump’s superpower looks like an also-ran. His rival in this November’s election, Joe Biden, promises to get back in the race. Developed countries elsewhere are further along. 

Panasonic in Japan and lg Chem in South Korea are both making innovations in battery technology. Europe’s generous support has provided a big market for the world’s top wind turbine manufacturers, Siemens Gamesa, which has its headquarters in Spain, and Vestas of Denmark.

And Europe’s green ambitions are growing. In her state-of-the-eu address on September 16th, Ursula van der Leyen said that the European Commission, of which she is president, will be pressing for carbon emissions 55% below those of 1990 by 2030. 

This means European utilities are expected to provide both a large increase in capacity and a near-zero-emissions future. To do so they will have to buy yet more hardware from China. 

But Europe’s aggressive strategy gives them an opportunity to take the lead in developing the systems which put that kit to work, both at home and abroad, as well as in technologies China has yet to master.

Visit a wind farm in America’s heartland and you may well find an office of Electricité de France (edf) nestled among the corn. Enel, a utility which has its headquarters in Italy, is the single largest investor in wind and solar projects in developing countries, according to Bloomberg nef, with France’s Engie and Spain’s Iberdrola not far behind. Orsted, a Danish firm, is the world’s top developer of offshore wind.

China’s national champions have invested ambitiously in power projects abroad, too. Of the roughly $575bn invested or promised under China’s Belt and Road Initiative as of 2019, nearly half has gone to energy projects, according to the World Bank. But most of this has been on coal plants, nuclear reactors and dams. 

And nations wary of China’s influence and motives treat its advances with suspicion. 

Efforts by State Grid, the world’s biggest utility, to buy stakes in European electricity companies have been rebuffed. 

In Britain, state-owned China General Nuclear Power Group (cgn) has minority stakes in two nuclear plants being built by edf, but a plant to be built by cgn itself is years away from approval which may not come at all.

Nevertheless Chinese companies are starting to invest more in wind and solar power abroad. China Three Gorges, a big power company, said in August that it would buy half a gigawatt of Spanish solar capacity from X-Elio, a developer based in Madrid. Last year cgn bought more than 1gw of wind and solar farms in Brazil.

To maximise its electrostate power China needs to combine its renewable, and possibly nuclear, manufacturing muscle with deals that let its companies supply electricity in a large number of countries. 

The International Renewable Energy Agency has suggested that such “infrastructure diplomacy” might prove as important to Chinese power in the 21st century as the protection of sea lanes was to American power in the 20th. 

If it uses it deftly, the energy transition could bring it advantages beyond any achievable with rigs, derricks and pipelines.

Cash Is History. How to Profit From the Digital-Payment Future.

By Daren Fonda

Sometime back in March, the Federal Reserve began quarantining cash bills arriving from Asia. The move was meant to protect Americans from the coronavirus, but it wasn’t entirely necessary. Cash usage was already at an all-time low. 

Covid-19 has just hastened the decline, with Americans at first stuck at home and now still wary of the close proximity required for the physical exchange of bills. 

The volume of ATM cash withdrawals tumbled at least 12% in the second quarter, according to Wall Street research firm MoffettNathanson.

Digital payments have ably filled in, and those cash withdrawals are unlikely to return. In fact, the rise of digital payments is one of the few Covid-19 trends all but guaranteed to last long after a vaccine. And that creates significant opportunities for a host of tech-focused payment companies.

“Because of Covid, consumers don’t want to touch anything, and it’s creating a virtuous cycle for us,” says Mastercard president and incoming CEO Michael Miebach.

It’s not just that the physical economy is getting nudged online. Consumer and business behavior is shifting, perhaps permanently. Millennials who loathed cash before the pandemic are now even more likely to “Venmo” one another cash for last night’s pizza and beer. 

Millions of seniors, stuck at home, are going cashless for the first time. Retail stores and restaurants are developing online sales channels, while governments worldwide are shifting to cards for disbursements to consumers and businesses. 

Outside the U.S., India’s transition to a cashless society is accelerating, while Sweden is closer to becoming the world’s first cashless country. One of the hottest start-ups in Silicon Valley these days is Stripe, a payments technology company valued at $36 billion.

None of these trends have been lost on Wall Street. Digital payment stocks like PayPal Holdings (ticker: PYPL) and Square (SQ) have been some of the best performers in 2020, pushing their valuations to extremes. 

The elevated prices could pressure the stocks in the near term, keeping further gains muted. But for long-term investors, there’s still time to jump in.

“The stocks may breathe a bit from here, but we’re still likely underestimating the amount of e-commerce and digital banking shifts that will happen,” says Lisa Ellis, who covers payments for MoffettNathanson.

“Big Tech will continue to poke at payments. They all have the ability to write the code and do the algorithms. If you’re a small or midsize bank, you have no chance. ”

— Dave Ellison, a manager of the Hennessy Large Cap Financial fund

Cash represented 26% of all U.S. consumer payments in 2019, according to the Federal Reserve’s latest Diary of Consumer Payment Choice. That’s down from 31% in 2016.

The Fed updated the study this May, noting that consumers were holding on to more cash as a result of the pandemic, but few of them were spending it. Some two-thirds of respondents said that they had made no in-person payments from March 10 through early May, meaning cash isn’t changing hands.

As cash’s share of payments continues to fall, PayPal looks unstoppable. The stock, at a recent $176, fetches a steep 39 times 2021 earnings. 

But growth estimates are rising, and analysts keep hiking their price targets. Positive earnings revisions are more likely than negative ones, says Ellis, who expects the stock to gain 25% over the next year to $220 a share. 

Square is also capitalizing on digital payment trends, but its valuation poses an even higher hurdle. Following a 133% gain this year, the stock trades at 121 times estimated 2021 earnings.

The giant card networks, Visa (V) and Mastercard (MA), may have more upside over the next few months; their stocks are up less than 15% this year, well below their average annual gains of 25% to 30%. 

The card networks are seeing lower transaction volume due to the pandemic. Earnings estimates have fallen, pushing up near-term multiples. But the card networks are getting a boost from the decline of cash, and, as the connective tissue of the payments system, their networks are gaining in value. 

Both Visa and Mastercard are also expanding into high-growth areas such as peer-to-peer, or P2P; business-to-business, or B2B; business-to-consumer, or B2C; and cross-border remittances.

“Higher consumer demand is resulting in more merchants offering electronic payments, and with more transactions, there’s more demand for data analytics and cybersecurity,” says Mastercard’s Miebach.

Meanwhile, there are behind-the-scenes payment processors that get less attention but remain just as vital to the future of payments. Fidelity National Information Services (FIS) and Global Payments (GPN) both made major acquisitions last year: Fidelity National bought Worldpay, and Global Payments merged with Total System Services—adding scale, global reach, and diversified product lines. Both firms now handle payment processing for card issuers while also connecting traditional and online retailers to card networks and banks, a business known as merchant acquiring.

Both Fidelity National and Global Payments trade around 27 times 2020 earnings—far below multiples for pure-play e-commerce stocks like PayPal or Square, and at least a 33% discount to Visa and Mastercard.

Dave Ellison, a manager of the Hennessy Large Cap Financial fund, has shifted his portfolio away from traditional financial-services stocks into the payments and financial-technology, or fintech, space.

“These companies are positioned to continue to grow and take share in an industry where the alternatives are becoming less attractive,” he says.

Ellison, a longtime investor in bank stocks, says that he has soured on financial-services models that rely on deposits and lending. “I like the companies that are moving money around, rather than buying and selling money,” Ellison says. “Big Tech will continue to poke at payments. They all have the ability to write the code and do the algorithms. If you’re a small or midsize bank, you have no chance.”

While fintech valuations are rich, the multiples reflect the scarcity value of high-growth businesses in a low-growth climate. “ has been expensive for 23 years, and it has worked out,” Ellison says.

Another growth driver: the “silver tech” generation of older Americans going cashless for the first time, as Covid-19 changes habits. PayPal says that this demographic is now its fastest-growing user base—with considerably larger transaction sizes and purchasing power than those of younger generations. 

“There has been a massive adoption of e-commerce and mobile payments, and it has come with tremendous growth of new users,” says Deutsche Bank analyst Bryan Keane, who has a Buy rating on PayPal and a $234 target.

Barron’s recommended Mastercard, Visa, and PayPal in a May 2019 cover story. All three have outperformed the S&P 500 index.

The trends we identified have only accelerated. With more people working from home, more purchases are being made online. Where physical transactions are happening, they increasingly rely on contactless methods, including credit and debit cards with wireless chips built in.

The convenience of those methods is one more incentive for consumers to drop cash. 

The shift to contactless cards increases the number of transactions per card by 20% to 30%, according to a J.P. Morgan report. 

Meanwhile, grocery stores, restaurants, and other businesses trying to retain customers amid social distancing are taking orders online and offering curbside pickup, where cash simply doesn’t work. 

E-commerce sales from businesses to consumers should grow 10% over the next year, the bank says. There is plenty of room for growth, since U.S. online shopping is still only 8.9% of total retail sales (versus 23% in China).

Indeed, one of the hottest e-commerce stocks this year is Shopify (SHOP), a platform for small businesses to create online storefronts, track sales, and provide fulfillment services. 

Shopify, which charges monthly fees, is riding the e-commerce surge, having doubled revenue in its most recent quarter to $714 million. 

However, at 394 times next year’s estimated earnings, the stock’s multiple is unforgiving, and its $105 billion market cap makes it larger than e-commerce firms eBay (EBAY), Etsy (ETSY), and Wayfair (W) combined.

Investors can use payments stocks to play the same trends underlying Shopify’s success. And Covid-19 has actually created a buying opportunity, relative to the rest of tech, at least.

Even as the scales tilt to e-commerce, weakness in consumer spending at physical locations is pressuring transaction volumes on card networks. Both Visa and Mastercard are expected to report revenue declines this year, their first annual declines as public companies.

Payment processors are also under pressure because of weakness in bricks-and-mortar retail. While payments volume is taking a breather this year, it should reaccelerate in 2021. And the addressable market is enormous: Digital payments worldwide totaled $15.7 trillion in 2019 out of $33.2 trillion in total consumer sales.

In the U.S., digital payments accounted for 68% of all retail purchases, rising steadily for years. Tack on business transactions, peer-to-peer exchanges, and other types of payments, and the market grows further.

Gary Norcross, CEO of Fidelity National, says that a structural shift to electronic payments has been nudged ahead a few years by the pandemic. “We’ve seen a significant decline in the use of cash,” he says.

The Digital Pure Play

PayPal is the clearest winner in the digital shift. The company added a record 21.3 million accounts in the second quarter, up 137% over the prior year, and ended the quarter with 346 million active accounts. 

“The world has accelerated from physical to digital across multiple industries,” CEO Daniel Schulman said recently. “Merchants are embracing a digital-first strategy, and these...are durable and meaningful tailwinds.”

PayPal, a pioneering online payment service that grew up with the rise of eBay, has expanded into cross-border money transfers with Xoom; it has taken a leading role in peer-to-peer with Venmo, exceeding 60 million accounts; and it’s signing up more online merchants via its Checkout button, which has a 79% share of the top 500 online retailers. Amazon Pay is No. 2 at 14%.

Wall Street expects PayPal’s earnings and revenue to both rise 20% this year, with sales hitting $21.3 billion. Analysts expect similar growth in 2021. The stock is up 68% in the past 12 months to a recent $181.

“The sustainability of their extraordinary growth is the key controversy on the stock,” says Ellis at MoffettNathanson. But PayPal remains one of her top picks, partly because PayPal continues to develop new revenue streams. One such area is Hyperwallet, PayPal’s instant-cash platform used by companies like Uber, DoorDash, and Etsy to pay independent contractors or vendors.

Bank of America analyst Jason Kupferberg recently reiterated his Buy rating on PayPal shares, noting that elevated e-commerce trends are persisting, and that the company is capitalizing on the shift to digital payments.

Operating margins are rising, he says, and he remains bullish, given PayPal’s “significant scarcity value and accelerated structural benefits related to the pandemic.” 

His $235 price target implies a multiple of 38 times estimated 2022 adjusted earnings.

The Card Networks

Visa and Mastercard are broader plays on the global economy, so their businesses haven’t seen a boost from Covid-19. Visa reported a 70% decline in cross-border travel-related revenue in August, compared with last year, but says it’s now seeing “encouraging signs” where borders have reopened. Analysts expect revenue to fall 5% at Visa and 7% at Mastercard this year.

The slowdowns should be temporary, though. A recovery in the global economy and travel should lift card transaction volumes next year. Ellis estimates that payment transaction volume will grow 14% in 2021, well above its average 10% growth rate from 2012 to 2019.

Visa is also capturing new payment flows in areas like P2P, and expanding services to banks, such as analytics and advanced security. The company should benefit from its acquisition of Plaid, a financial network that links customer bank accounts to apps like Venmo and Robinhood, for stock trading. Ellis is particularly upbeat on Visa Direct, which powers peer-to-peer apps like Square’s Cash App and cross-border money transfers.

Ellis says that Visa Direct is “extraordinarily disruptive” because it’s replacing checks, cash, and wires.

“For most of our history, money flowed one way—from the consumer to merchant,” Visa Vice Chairman and Chief Financial Officer Vasant Prabhu told Barron’s. 

“Now, we can do merchants paying you, disbursements from businesses or governments to consumers, cross-border remittances, and medical and insurance payments. We’ve seen some extraordinary growth in those areas with Visa Direct, and we think this is a significant opportunity for a very long time.”

Ellis values Visa’s stock—which recently traded at $205—at $250, or 37 times forward earnings, a modest premium to the current multiple of 35. That price/earnings ratio looks steep compared with the broader market, but it’s in line with Visa’s historical premium, supported by the company’s steady profit growth, averaging 19% a year, with operating margins around 70%.

Mastercard should benefit from similar dynamics, along with a strong push into business transactions and other payment flows.

CEO-elect Miebach says Mastercard’s cross-border e-commerce revenue has held steady. Europe is leading the way in a travel-and-entertainment recovery, and he sees modest improvements as travel recovers globally.

“People will want to make up for lost time to see customers and family,” Miebach says. 

“We believe travel will be a huge driver for us, but it will take some time.” He adds that Mastercard will stay acquisitive in areas like open banking, real-time payments, and cybersecurity. 

None of these businesses are as profitable as processing card transactions, but “the idea is not only to acquire a capability but also to drive scale and global reach,” he says.

UBS analyst Eric Wasserstrom likes the stock for those drivers, along with Mastercard’s potential to expand margins. The company invested heavily for years in services, diluting margins. But as these businesses scale up, that margin pressure should diminish, he says. 

It won’t happen overnight, but Mastercard’s 59% operating margins are well below Visa’s. “Mastercard in the near term will grow more quickly with improving margins,” he says.

He has a price target of $367, or 8% above the stock’s recent close.

The Payment Processors

If there’s a bargain bin in the industry, it’s the payment-processing stocks. Fidelity National, known as FIS, and Global Payments are in a revenue slump due to the retail slowdown, especially among small businesses and restaurants.

Before the pandemic, investors were counting on the stocks getting a lift from merger synergies, a valuation and margin boost from paying down debt, and ongoing acquisitions. The cost synergies appear intact, but the growth story has been put on hold, says Ellis.

“We’re in a healthier place than we could have imagined. ”

— Global Payments CEO Jeffrey Sloan

But FIS and Global Payments remain a key technology backbone for banks and merchants, generating steady processing revenue, and the merchant-acquiring business should pick up with an eventual revival of retail.

FIS should regain momentum with its Worldpay deal. The $48 billion acquisition vaulted FIS, traditionally a bank-processing company, into merchant-acquiring and e-commerce and gave it a larger international presence. Worldpay processes 40 billion transactions annually in 120 currencies. Payments for Disney +, the new streaming service, now go through FIS. CEO Norcross says the company won the Disney business in part because of Worldpay’s global platform and e-commerce capabilities.

“When you’re launching in multiple regions of the world, complexity plays into how you simplify the experience for the customer,” he says. “This is where FIS differentiates itself.”

FIS is seeing a pullback in transaction volumes among small bricks-and-mortar retailers. But Norcross says that April was the “low-water mark” and that there are bright spots, including grocery, fast-food, and pharmaceutical spending. “As we come out of the pandemic, we’ll see transaction volumes recover to pre-Covid levels and increase well beyond that,” he says.

FIS is also generating growth with banking services; it’s shifting to a cloud-based platform to help small and midsize banks compete against larger rivals and digital upstarts.

“They’re signing up banks in the middle of the Covid crisis, which is impressive,” says Canaccord Genuity analyst Joseph Vafi, who has a Buy rating on the stock.

FIS is expected to lift revenue 8% next year to $13.7 billion, according to consensus estimates. Cost savings from the Worldpay merger should help boost earnings before interest, taxes, depreciation, and amortization, or Ebitda, 17%, to $6.2 billion. Vafi sees the stock hitting $178, up from a recent $149.

Global Payments had its own big merger last year, buying Total System Services for $25 billion. The deal adds scale and makes Global Payments an end-to-end processor for merchants and banks. The firm now counts 1,300 financial firms as clients, up from about 500 premerger. 

The company recently partnered with Amazon Web Services to distribute and sell payment services on a cloud-based platform. “We and Amazon are tied at the hip,” says Global Payments CEO Jeffrey Sloan. “We think the partnership triples the size of our addressable market.”

Global’s U.S. merchant acquiring revenue fell 14% in the second quarter as small businesses closed and sales dried up with the pandemic. But Global Payments isn’t as exposed to hard-hit areas like travel and entertainment as the card networks, limiting its declines somewhat.

About 60% of Global Payment’s revenue is fueled by corporate technology spending that has held up well, compared with consumer transactions.

“We’re in a healthier place than we could have imagined,” Sloan says. “We’re seeing a continual recovery, and we haven’t seen any impact from hot spots in the U.S. or markets globally that are open.”

Evercore ISI analyst David Togut calls the stock a top pick and recently raised his price target to $253, 40% above the stock’s recent close of $181. Citigroup analyst Ashwin Shirvaikar isn’t as bullish, maintaining a $207 target, but he calls the stock attractive at 22 times estimated 2021 earnings. Revenue growth could beat forecasts, particularly if a new stimulus package comes through for small merchants.

Ultimately, though, it all comes back to cold hard cash. “Will it return post-Covid?” asks FIS CEO Norcross. “If the answer is no, it will be a significant tailwind for the entire industry.”

The Higher Wages of Growth 

Before the pandemic, income growth soared and poverty fell to the lowest rate since 1959. 

By The Editorial Board

In case you missed it, and most of the media did, the Census Bureau reported Tuesday that the median household income in 2019 grew a whopping 6.8%—the largest annual increase on record. While this year’s government-ordered lockdowns will erase these gains in the short term at least, it’s still worth highlighting how lower-income workers and minorities benefited from faster growth and a tighter labor market before the pandemic.

Real median U.S. household income last year rose by $4,379 to $68,709. In dollar amounts, this is nearly 50% more than during the eight years of Barack Obama’s Presidency. The wealthy last year benefited from a roaring stock market, as they did during most of the Obama years.

But lower and middle-income folks were also finally sharing more in the country’s growing wealth. Notably, median household incomes increased more among Hispanics (7.1%), blacks (7.9%), Asians (10.6%) and foreign-born workers (8.5%) versus whites (5.7%) and native-born Americans (6.2%). One reason is more Americans with lower education levels were working.

Last year the number of Americans with employment earnings increased by 2.2 million, including 1.2 million more who were employed full-time, year-round. Median earnings increased by an astounding 7.8% for women compared to 2.5% for men. What was that about closing the gender earnings gap?

After the 2008-2009 recession, increases in government transfers reduced the incentive for unemployed Americans to work. These included 99 weeks of unemployment benefits, which didn’t lapse until 2013 and then many Americans out of work went on Social Security disability.

Between the third quarter of 2009—the recession officially ended in June—and the third quarter of 2015, labor participation among 25- to 54-year-olds declined to 80.7% from 82.7%. Accelerating wage growth in recent years, particularly in blue-collar industries, has drawn more workers off the sidelines, and the prime-age labor participation rate climbed back to 82.9% during the first quarter of 2020.

The result: Poverty fell 1.3 percentage points last year to 10.5%, the lowest level since 1959, and declined more for blacks (2 percentage points), Hispanics (1.8), Asians (2.8), single mothers (2.6), people with a disability (3.2), and no high-school diploma (2.2). The black (18.8%) and Hispanic (15.7%) poverty rates were the lowest in history.UBSCRIBE

As family household incomes increased, the child poverty rate also declined to 14.4% from 16.2% in 2018 and 18% in 2016. The decline in childhood poverty last year was nearly twice as much as during the entire Obama Presidency. The most pro-family policies are those that increase jobs and wages.

Income inequality last year also declined by most measures as the bottom quintile’s share of income grew 2.4%. But incomes grew across the distribution with many lower earners rising into the middle class, some of whom joined the ranks of the affluent.

The share of households making less than $15,000 in inflation-adjusted dollars declined to 9.1% last year from 10.4% in 2016 and 11.2% in 2010. At the same time, the share with income between $75,000 and $200,000 increased to 36.1% from 34.4% in 2016 and 32.8% in 2010 while the percentage earning more than $200,000 ticked up to 10.3% from 8% in 2016 and 5.9% in 2010.

In other words, all Americans were gaining economic ground. But lower and middle-class Americans enjoyed the largest gains relative to the Obama Presidency. Incomes naturally fell during the 2008-2009 recession, but they were slow to recover. Worker earnings declined and poverty rose through 2012 despite the increase in government transfer payments.

Income transfers are supposed to temporarily offset earnings during downturns, but for many Americans they became substitutes for jobs after the last two recessions. Not until 2015, when government tightened up on disability payments, did household incomes begin to rise markedly as more prime-working age Americans returned to the workforce.


These income gains weren’t magical. Policy changes mattered. The Obama Administration’s obsession with income redistribution and regulation retarded business investment and economic growth. This in turn led to slower income growth for most Americans.

Business investment and hiring increased amid the Trump Administration’s deregulation and the GOP’s 2017 tax reform that unleashed animal spirits. New business applications increased twice as much during the first two years of the Trump Presidency versus the last two Obama years, other Census data show.

Employers competed for workers by increasing wages and digging deeper into applicant pools by hiring folks with disabilities, less education and even criminal records. Rising economic growth lifted all classes. The record of his first three years are why voters still give President Trump an edge over Joe Biden on the economy.

The pandemic will eventually end, and the labor market is recovering faster than expected. The question for Americans on Nov. 3 is what kind of economy they want to have on the other side. The Trump policy mix lifted wages for all and reduced inequality. The Obama-Biden policy mix that put income redistribution first led to slower growth and more inequality.

Belgium’s Brexit Blues

The U.K. isn’t the only country with potential secession issues.

By: Caroline D. Rose


As the December 2020 deadline for a negotiated trade deal approaches and the European Union and the United Kingdom fail to get on the same page, a hard Brexit looks more and more likely. In a no-deal scenario, British-EU trade would default to World Trade Organization rules that would damage both economies by raising tariffs, delaying international deliveries and so on. 

The EU is expected to fare better than the U.K. Forecasts show that British gross domestic product will drop by about 5 percent over 10 years, while the EU’s GDP will fall by a little less than 1 percent.

Yet, some EU members will be worse off than others, none more so than the EU’s host country, Belgium. With some 8 percent of its GDP relying on trade with the U.K., Belgium is uniquely exposed to Brexit’s economic shockwaves. 

Naturally, there will be domestic political consequences to the coming economic pain. The hit to exports will unevenly affect Belgian regions, hitting the country’s northern commercial hub, Flanders, the hardest, aggravating a political rivalry shaded by separatist sentiment that has plagued Belgium for its entire modern history.


Belgium’s Dutch-speaking Flemish and its French-speaking Walloons have been at loggerheads for centuries, dating back to the country’s role as a buffer zone between the Napoleonic and Dutch empires. It was not until 1830, when Belgium was a part of the Kingdom of the Netherlands, that anti-Dutch sentiment led to revolution, marking the nation’s independence and creating an internal divide – punctuated by cultural, linguistic and religious differences – that endures today.

(click to enlarge)

Important as these differences may be, Belgium’s present-day divide is defined by economic disparity. During the 19th and early 20th centuries, Wallonia was the place to be. Although it was half the size of Flanders, Wallonia was the site of Belgium’s fast-growing coal and mining industry, bringing immense wealth to the south, while its French-speaking population gave the region a reputation of being an upper-class, bourgeoisie hub. 

This changed when coal began to die out. Businesses and financial investment fled north to Flanders, historically the commercial gateway to the English Channel and North Sea. Flanders is home to ports in Antwerp and Bruges and is thus a modern hub of international trade and Belgium’s economic engine, accounting for roughly 60 percent of the country’s GDP. 

The north is also home to the majority of Belgium’s industrial production, hosting a number of factories and production centers for the petrochemical, textile and technology industries. Flanders flourished as Wallonia fell behind, giving way to notable disparities in employment, education, exports and imports, and contributions to national GDP.

The regions’ political attitudes clearly reflect these economic disparities. The south, for example, has increasingly called for higher taxes on the north to correct the imbalance. Much of the north regards the south as burdensome, giving way to demands to cut off the south or reduce the federal government’s influence on taxation. 

This has breathed life into many far-right political blocs such as the Vlaamse Volksbeweging, Voorpost, Nationalistische Studentenvereniging and the New Flemish Alliance, and into right-wing movements like the Schild & Vrienden, which have called for greater independence from the federal government, secession from Belgium and even reunification with the Netherlands.

Support for Flemish Separatism
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Intense Debate

The 2008 economic crisis and the COVID-19 pandemic have only made things worse. In May 2019, political divisions were so bad that they created a 15-month stalemate on the creation of a government that was temporarily solved only when parties elected a caretaker prime minister, Sophie Wilmes, to manage the coronavirus outbreak. 

The pandemic sparked an intense debate between northern and southern Belgians. In hopes of keeping industries and businesses open, Flanders wanted modest lockdown measures, while the south favored stricter measures and heftier bailouts, a debate that sowed more seeds of resentment and delayed the government response. Current estimates suggest that lockdown measures will result in a 9 percent loss in GDP this year alone.

Brexit’s economic hit will only exacerbate the divide. On Jan. 1, 2021, Belgium will be one of EU members worst affected by the U.K.’s withdrawal from the European single market – with the majority of the economic damage in the already-aggravated Flemish north. Overall, Belgium’s national bank predicted that Brexit would cost Belgium roughly 1 percent of its GDP, with the worst-case scenario forecasting a 2.5 percent loss of purchasing power and nearly 28,000 jobs lost.

The damage, of course, will be felt most acutely at first in Flanders, whose commercial advantages made it more uniquely vulnerable to a hard Brexit. The region accounts for more than 80 percent of Belgian exports to the U.K. and receives 87 percent of imports from the U.K. The largest sector in Flanders to be hit will be the country’s petrochemical hub, the world’s second-largest and Europe’s largest cluster, which comprises 20 percent of Belgium’s total exports to the U.K. As far as exports go, Brussels and the French-speaking Wallonia are less exposed, home as they are to less-important wood, glass and medical exports.

The Belgian government understood as much and so tried to shield itself from the inevitable shock of the U.K.’s departure from the single market. The country reduced its exports – of minerals, pharmaceutical products and road transport materials – to the U.K. by 12 percent by the second quarter of 2019 (compared to the previous year), while offsetting U.K. trade with increased trade among other EU members. Moreover, the government began a campaign to attract U.K.-based investors to open subsidiaries in Belgium to mitigate the damage to its services sector.

Belgium's Trade Ties to the United Kingdom
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Importantly, most of these changes disproportionately helped the south, where mineral production is concentrated, and Brussels, an emerging financial and services hub. The measures ultimately did very little to insulate Flanders from the shock of Brexit.

Secession in the Cards?

Brexit will certainly reinforce rising nationalist sentiment in Flanders, but it doesn’t necessarily mean the north will secede anytime soon. 

While talks of secession have increased, competing conservative parties in Flanders have created political deadlock, and the majority of Flemish citizens are not fully on board with the idea of secession. 

Polls conducted at the end of last year revealed that just 40 percent of Flemish Belgians support secession, down 6 percent from polls taken in 2007. Many Flemish citizens understand that breaking with Belgium could be economically harmful, much as it is in the U.K., since it would lose the benefits of Brussels’ financial centers and the south’s agricultural imports. 

The costs of establishing a new state – standing up armed forces, funding new institutions, etc. – would be daunting. This is likely why Flemish parties have begun to try to hollow out Belgium’s federal system, further devolving responsibilities to provincial governments on issues such as transportation, health care, taxation and governance.

On Jan. 1, 2021, the four-year Brexit saga will be put to bed one way or another, and the U.K will depart the European single market. When that finally happens, the EU will be able to champion the example of a hard U.K. withdrawal as a cautionary tale to euroskeptic movements. 

The negative impact on EU export hubs and the effects of increased political gridlock, as is the case in Belgium, too, will be a useful message against nationalist movements that call for withdrawal from the EU, such as the “Italexit” movement pushed among Italian far-right parties, as well as separatist movements in places like Catalonia. The EU’s position is strengthened by the fact that divorce from Brussels – for both the Flemish and euroskeptic countries – is just too costly a venture.