(Reuters) -Citigroup on Monday downgraded U.S. stocks in anticipation of a pullback in growth stocks and a recession in the fourth quarter of the year, while betting on beaten-down counterparts in Europe with an upgrade.

The brokerage cut its rating on U.S. stocks to “neutral” from “overweight”, following a strong rally in the first half of the year. It warned that growth stocks were set for a pullback as the “euphoria” around artificial intelligence enters a more “digestive” phase.

Citigroup instead sees potential in “heavily discounted” European stocks, as the bank increased allocation to some cyclicals. These include the materials sector, which is seen benefiting from a potential uptick in China’s economic growth.

The S&P 500 has gained 14.6% so far this year, while the tech-heavy Nasdaq jumped about 31%, driven mainly by a handful of tech stocks that rode high on AI potential.

Futures tracking the S&P 500 were flat by 8:00 a.m. ET.

Citigroup also downgraded the global IT sector to “neutral”.

Strategists at the brokerage downgraded UK stocks on a lack of exposure to growth stocks and a stronger pound. Emerging market (EM) stocks, upgraded to an “overweight” rating, replaced the UK stocks in Citigroup’s asset allocation.

“EM offers a more interesting risk/reward profile, with exposure to a combination of growth and materials. It could also benefit from USD weakness, rate cuts and potential improvement in China sentiment,” the strategists said.

(Reporting by Subhadeep Chakravarty; Editing by Shilpi Majumdar)

By Scott Murdoch and Julie Zhu

HONG KONG (Reuters) – Alibaba Group and Tencent shares rose in Hong Kong on Monday as China’s $984 million fine for Ant Group was viewed as signalling the end of a regulatory crackdown on the country’s technology sector.

After the penalty on Friday, Jack Ma-founded Alibaba affiliate Ant announced an up to $6 billion share buyback that values the fintech company at a 75% discount to that touted in an abandoned initial public offering (IPO) but was considered to provide liquidity and certainty for investors.

The abrupt cancellation of Ant’s IPO in late 2020 heralded the start of a wide-ranging clampdown by Beijing on industries from technology to education, as regulators sought to contain what they saw as excesses and bad practice after years of runaway growth.

The People’s Bank of China (PBOC) on Friday said that most of the prominent problems for platform companies’ financial businesses had been rectified and regulators would shift their focus to overall regulation of the industry rather than specific companies.

“We view this announcement a key milestone for a regular, clear and visible regulatory environment for China’s internet companies,” Huatai Research analysts wrote in a note to clients.

The scrutiny of the last two years created an uncertain environment that wiped billions off China tech sector share prices, including online retail giant Alibaba, gaming company Tencent and food delivery group Meituan.

Alibaba’s Hong Kong shares have shed 71% since early November 2020 when the Ant IPO was scrapped and the regulatory crackdown began.

Alibaba’s Hong Kong-listed shares closed 3.2% up on Monday, beating a 0.6% rise for the benchmark Hang Seng index. Tencent closed 0.7% up.

In the US premarket trading, Alibaba’s New York stock was down 0.1%.

Beijing’s move to finalise penalties and outstanding issues with Ant and other tech names comes as China’s economy “is challenged by a weak recovery” and is meant to assuage investor concerns as well as meeting commitments to support private sector growth, Daniel Tu, founder of Active Creation Capital, said.

Besides Ant, the Chinese authorities also fined Tencent’s online payment platform Tenpay nearly 3 billion yuan ($414.88 million) over areas such as customer data management.

ANT GROUP’S SHRUNKEN VALUATION

Alibaba, which spun off Ant 12 years ago and has a 33% stake, on Sunday said it was considering whether to participate in the buyback that would transfer shares to an employee incentive scheme.

Ant’s major shareholders, Hangzhou Junhan Equity Investment Partnership and Hangzhou Junao Equity Investment Partnership, which collectively hold more than 50% of its shares on behalf of the company’s executives and employees, will not participate in the buyback, it said.

Foreign investors bought into Ant in the third fund raising round in 2018.

Ant said on Saturday that it proposed to repurchase up to 7.6% of its equity interest at a price representing a valuation of about $78.5 billion.

That compared with the $315 billion valuation in 2020 for what was set to be the world’s largest IPO, had it not been derailed at the last minute by Chinese regulators.

The buyback will be one of the first opportunities for Ant investors who participated in three funding rounds from 2015 to 2018 to sell out of the company.

Ant’s largest onshore investors were the National Council for Social Security Fund, Zhifu (Shanghai) Investment Centre, Shanghai Zhongfu Equity Investment Management Center and China Life Insurance, according to the 2020 IPO prospectus.

Ant and its subsidiaries had violated laws and regulations in areas including corporate governance, financial consumer protection and anti-money laundering obligations, the PBOC said on Friday as it announced one of the largest fines to date for a Chinese internet company.

The finalised penalty could prepare for Ant to secure a financial holding company licence, lift its growth rate and eventually revive its plans for a stock market listing.

However, analysts question whether Ant will press ahead with a listing in the near future.

“According to the company, the reason for the buyback is providing liquidity to existing investors and attracting and retaining talented individuals through employee incentives,” said Oshadhi Kumarasiri, a LightStream Research analyst who publishes on Smartkarma.

“Ant could have achieved both these objectives through an IPO … This means IPO is essentially put on hold.”

($1 = 7.2310 Chinese yuan renminbi)

(Reporting by Scott Murdoch in Sydney and Julie Zhu and Donny Kwok in Hong Kong; Additional reporting by Selena Li in Hong Kong; Editing by Anne Marie Roantree, Jamie Freed, David Goodman and Barbara Lewis)

By Seunggyu Lim

SEOUL (Reuters) -South Korea’s financial services regulator has asked major commercial banks to prepare around $4 billion in financing to support a credit cooperative hit by customer withdrawals, two banking sources familiar with the matter said on Monday.

An official at the Financial Services Commission said it could not confirm the amount or other details, but it had asked the banks for cooperation in preparing liquidity through repurchase-agreement facilities to aid MG Community Credit Cooperatives (MGCCC).

“(Authorities) are closely monitoring the liquidity of MGCCC,” the official said, declining to be named due to the sensitivity of the matter. The commission had no further comment.

Depositors were lining up last week to withdraw funds from a branch of the cooperative after local media reported a rise in non-performing loans tied to real estate projects. The branch, in the city of Namyangju east of Seoul, is due to be closed soon.

South Korea’s top financial authorities pledged on Sunday to ensure liquidity at the credit cooperative, which has nearly 1,300 branches, saying in a statement that MGCCC’s capital ratio and liquidity far exceeded regulatory ratios and it had sufficient cash-equivalent assets.

Sharply rising interest rates and a cooling property market have raised concerns about the potential impact on Asia’s fourth-largest economy.

South Korea’s five major commercial banks have signed or are in the process of signing repurchase agreements with the credit union, said the sources, who declined to be identified because of the sensitivity of the issue. Repurchase facilities allow for raising cash in exchange for collateral, such as bonds.

Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank and NongHyup Bank had been asked to make financing available to MGCCC, although the actual amount extended to the credit union would depend on deposit withdrawals, the sources said.

The sources added that each of the banks was asked to prepare 1 trillion won of financing, or 5 trillion won in total ($3.84 billion), as potential support.

State-run Korea Development Bank and Industrial Bank of Korea are also setting up repurchase agreements with the credit union, Yonhap news agency reported on Monday, citing unnamed financial industry sources.

MGCCC and the banks did not immediately respond to requests for comment.

MGCCC said in a statement last week that its debt delinquency rate was manageable and it would work with the Interior Ministry to improve its financial soundness.

Sunday’s statement, from officials at the Bank of Korea and the Ministry of Finance as well as the Financial Services Commission, added that withdrawals at MGCCC had slowed and new deposits had been coming in since last Thursday.

An investor note from Citi last week played down the risks from the incident but warned of negative effects on economic growth from the indebted real estate sector.

“We don’t see systematic risks from the event,” said Kim Jin-wook, an economist for Citi in Seoul, adding that any negative effects would likely be far less than those of a missed bond payment by a theme park developer late last year.

South Korean financial authorities coordinated with financial groups to set up a liquidity programme last November when a missed bond payment by theme park developer Gangwon-Jungdo Development sparked worries about a credit crunch.

($1 = 1,302.7800 won)

(Reporting by Seunggyu Lim; Additional Reporting by Jihoon Lee and Joyce Lee; editing by Edmund Klamann and Jason Neely)

By Byron Kaye and Lewis Jackson

SYDNEY (Reuters) – The cost of serving up a sandwich with a cup of coffee has hit the roof across Australia’s vaunted cafes, squeezing profits and forcing a wave of closures for those that managed to survive the COVID slump.

The A$10 billion ($6.6 billion) Australian cafe industry, the world’s biggest outside Europe per capita, is shaping as an early, visible casualty of a perfect storm of rising utility bills, produce costs, wages and rents plus a slowdown in discretionary spending brought on by interest rate hikes, say economists and people in the industry.

A Reuters analysis of popular cafe orders found the cost to commercially produce a steak sandwich, including all overheads from electricity to cuts of beef, rose by one-sixth in the past two years, while discretionary spending flatlined, effectively wiping out the 10% profit margin typical of the industry.

The cost to make a flat white, one of the most popular Australian coffee orders, jumped by nearly one-fifth.

The result is smaller profits, a shrinking pool of regular customers and business owners heading for the exit.

“The cost of living started to bite, especially on people who used to come in for a daily meal,” said Jack Hanna, a former World Latte Champion who closed Goodsline Cafe in downtown Sydney last month, two years after opening to rave reviews and spending roughly A$1.5 million on the fitout.

“People are just not willing to spend money on discretionary items when the supermarket also costs quite a lot. We had to increase our prices and pay staff a living wage,” Hanna added.

Damian Krigstein, a nearby cafe owner who helped Hanna pack up Goodsline, said his business, Bar Zini, plans to convert to takeaway to cut costs.

“When you look around Sydney and you look at so many businesses for lease, institutions from when you were a child just completely gone now, people losing their livelihoods – it’s scary times,” said Krigstein.

Before COVID-19, hospitality venues were about one-third of Australian small businesses advertised for sale. Now there are more businesses up for sale, and the percentage of hospitality venues is closer to half, with asking prices being discounted by up to 50% of historic market values, say selling agents.

“Many of these hospitality vendors are simply exhausted after surviving COVID,” said Peter Meredith, a broker at SBS Business Brokers. “They are relieved to get out of leases.”

About one-sixth of cafes advertised for sale now close down before finding a buyer.

“People are starting to panic with increased electricity, wages, rent,” said Guy Cooper, a director at Link Business Sales Australasia, which has more than 400 hospitality businesses for sale nationwide.

Australian Securities and Investments Commission data showed business insolvencies in May at the highest monthly rate in eight years as COVID-related government protections expire.

So far, the insolvencies have been dominated by construction firms, but hospitality is expected to overtake it in the next year, says CreditorWatch, a credit reporting agency.

CreditorWatch CEO Patrick Coghlan said while a business-to-business organisation can raise prices 10% or 20%, that’s not possible in hospitality.

“You can’t charge A$30 for a bacon and egg roll. There’s no real respite.”

COST PRESSURES

Driving inflation, energy prices have jumped as much as 30% after the Ukraine war disrupted coal and gas markets, while wholesale produce costs have surged after years of extreme weather events.

With unemployment near the lowest on record, wages are rising, too, including for hospitality staff.

In addition, the pandemic increased cafes’ reliance on third-party delivery platforms which take a cut of revenue.

To combat inflation, Australia’s central bank has raised interest rates by 400 basis points in 14 months, the fastest tightening in a generation. It paused in July but warned it may resume hiking if inflation, still running at 7%, fails to slow.

As rising utility bills and a collapse of consumer spending make it impossible to make rent, David Cox, a cafe owner from Sydney’s suburbs, said he is selling, with expectations he will lose at least 60% of the A$170,000 he spent buying and refurbishing the business two years ago.

“The mortgage rates have done a lot of damage,” said Cox, 59, who recently laid off his three casual staff when daily takings dipped from A$1,000 last year to A$200. Cox’s monthly energy bill is about to jump from A$3,000 to A$3,800, nearly all his revenue.

“Some of my regulars I used to have will still come and get coffee and say, ‘We had to bring lunch. We just brought it in from home,'” he said.

($1 = 1.5103 Australian dollars)

(Reporting by Byron Kaye and Lewis Jackson in Sydney; Editing by Praveen Menon and Sonali Paul)