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Tag: Investment

  • Raining Catfights And Dogs On The Trump Victory Trade

    Raining Catfights And Dogs On The Trump Victory Trade

    You could smell the global fear on Monday. By Friday, that fear mostly wafted around Donald Trump’s Mar-a-Lago compound. Forty five years ago Colonel Kilgore in Apocalypse Now first memorably stated, “I love the smell of napalm in the morning. It smells like victory”.  Arguably, the Republican party scribes will recount in time how the smell of ketchup-spattered walls in Florida this week marked the beginning of the end for a once-likely victory for Donald Trump. Tuesday’s Presidential debate watched by an audience of 67 million people was a disaster for Trump, and hailed as a triumph for “dumb as a rock” Kamala Harris. As eminent Bush Republican strategist, Karl Rove, cheekily asked, “What does that make Trump?”. A loser, but possibly there’s a bigger loser out there. It is interesting to note that Colonel Kilgore and Francis Ford Coppola’s Vietnam epic is today viewed as possibly the most powerful  “anti-lie” rather than “anti-war” movie of all time. Fast forward to today, and here are a few big lies under pressure in the real world, real money arena of financial markets….

    On the debate night, Trump flounced into the post-debate spin room declaring victory and quoting nonsensical Twitter and Fox viewer polls. However, as we always say… opinion is cheap, but investment decisions risk real money. So, it was striking to see the following morning that Trump’s publicly listed vehicle for his Truth Social platform, $DJT,  puked 16% of its value and now trades 80% lower than 6 short months ago. It should also be noted that the climate denial Don’s awful performance prompted heavy buying of clean/green energy stocks too; First Solar was up 14%, Enphase Energy up 5% and Sunrun up 10%…in one day. Let’s just say traders had a very different take on Trump’s bloviating spin-room review.

    We should also review some of the markets we highlighted in our article back in March “How To Trade A Trump Win”. In brief, we stated that there were three key ‘canaries’ which tracked the major Trump policies:

    Tariffs: Trump wants a 10% across -the-board tariff on all imported goods. Tariffs on imports are agreed by all credible economists as inflationary costs borne by the consumer. But…current inflation expectations in the market tracked by bonds, loans and money markets suggest those tariffs ain’t happening. Moreover, the current inflation rate of 2.5% is at a 3-year low. In fact, if one were to step out of the partisan bubble of US politics, one would know that the US is the global superstar in the post-Covid inflation battle.

    Oil: The Donald likes to tell voters he’s the fossil fuel industry’s best friend while promising consumers he will cut energy bills by 50%. This is almost as ridiculous as promising to protect cats, dogs and geese in Springfield Ohio, and becoming quite embarrassing for the Trump team on both fronts. Even Homer Simpson could tell you US oil and gas production is at all time highs of 14m barrels per day (vs Saudi Arabia 8m!). Meanwhile, oil costs measured by benchmark Brent Crude prices are back to the same levels seen before Russia’s full invasion of Ukraine in February 2022. Go figure!

    Ukraine: Finally, on the subject of foreign policy, and Ukraine in particular, the chances of a Trump victory also look flaky. We flagged the extreme risk of placating Russia – with ceasefire negotiations forced by Trump’s ending of Ukraine military support – and the threat this capitulation posed to eastern European countries like Poland. Well, check out Poland’s stock market; in the last 12 months it has roared upwards by 40% compared to the giddy S&P 500 ‘only’ rising 26%. Smell that Trump capitulation fear? No, me neither.

    The financial markets are struggling to believe Trump, and his chances of victory. With less than 60 days left before voting, expect an increasingly panicked Trump campaign team. The meltdown of Trump immigration/racist-in-chief, Stephen Miller, when being caught out on a Venezuela crime statistic lie is one for the ages. And, for pure popcorn moments, keep an eye on the social media spats between rabid Trump surrogate, Laura Loomer, and the more restrained Marjorie Taylor Greene(no really!) and Senator Lindsay Graham. You just couldn’t make it up. Well, Donald could.

  • Are You Following The Wrong Monster AI Moves?

    Are You Following The Wrong Monster AI Moves?

    There are now “Nvidia watch” parties. Yip. Stay up on a Wednesday night, grab some popcorn and watch the release of Nvidia’s quarterly results. There’s a whiff of Nokia about this single company focus. Then again, the commentariat are beginning to say in all seriousness that Nvidia’s results are more important to global financial markets than the Federal Reserve’s Open Market Committee (FOMC) and its guidance on the direction of interest rates. Bonkers. Anyway, Nvidia’s results this week were a bit of a yawn. Stunning growth, earnings beat, $50 billion buy backs and raised forward guidance. Still not enough for the party people, as the AI chip monster promptly lost $150 billion of market value in the after-hours trading session. Interestingly, data from the last 50 trading days has confirmed Nvidia as the most traded stock in the world with an average value transfer of $40 billion each day(!). That’s more than previous kings of the tape, Apple and Tesla, daily trading combined. So, AI certainly is focusing trading minds but we could be missing more significant business events. Like real monster moves. Try these for size….

    Coding Carnage:  During a leaked “fireside chat,” the head of Amazon Web Services (AWS), Matt Garman, suggested that in as little as two years, human developers may need to learn different skills to make way for artificial intelligence coders. “If you go forward 24 months from now, or some amount of time — I can’t exactly predict where it is — it’s possible that most developers are not coding,” he exclaimed in audio leaked to Business Insider.

    Consulting Charge: The big global consultancy firms are on the AI charge, and I don’t mean their fees. CB Insights has flagged some very big numbers as the Big 4 accountancy outfits ramp up AI investment:

     

    • Deloitte — announced $1.4B upskilling program (December 2022) and $2B for development of industry-specific applications of tech including AI (April 2024)
    • EY — invested $1.4B in AI, launching EY.ai enablement platform (September 2023)
    • KPMG — spending $2B on AI & cloud services in partnership with Microsoft over 5 years (July 2023)
    • PwC — investing $1B in genAI in its US operations over 3 years (April 2023)

     

    Then check out what another professional services giant is saying. Less than one year after announcing it would invest $3B in AI tech, publicly traded Accenture reported $600M in gen AI bookings in Q2 FY 24 and $900M in Q3 FY 24. On the company’s Q2 earnings call, CEO Julie Sweet said, “Our sales in generative AI…are the fastest we’ve ever seen.”

    Productivity Proof: There’s lots of commentariat guff about AI lacking enough use cases. Ahem. Let’s see what European payments player, Klarna, is doing. Quite well actually. Having cut staff from 5,000 to 3,800, staff productivity has exploded upwards by 78%. The company has so much faith in the AI tasks performed in marketing and customer service that management is talking about cutting staff by a further 50%. One can only imagine what other European fintechs like Stripe and Revolut are going to do. But two things are certain. These nimble fintechs can’t do nothing as the cost advantage is existentially massive with AI. Oh, and that’s fintechs. So, what are the lumbering ‘digital transition’ legacy banks going to do? Do, or dAI me thinks.

    Of course, AI chip expectations attached to Nvidia have a good chance of ultimately disappointing as with all cyclical manufacturing companies in history. However, the twaddle about “lack of use cases” now needs to come with serious business health warnings. Note that Klarna also told the market that 90% of its staff are using generative AI tools… daily.  Also, when talking to a medtech consultant with IBM in Dubai this week, she stated that EVERY pitch or business project now contains an AI piece.

    Just today I’m reading about plans in the UK to move to a 4-day week and you know AI will be in the discussion. It’s also in HSBC’s latest report on the UK venture capital scene. A stunning more than one in every 5 dollars raised ($4.4 billion forecast for 2024) is going to the not so niche sector of AI. Not technology, not life sciences…. just AI. Now think about ChatGPT’s parent, OpenAI, potentially receiving multi-billion dollar investments from Apple and Nvidia at a $100 billion + valuation, and then see CB Insights report M&A activity in the AI sector delivering a record 119 deals in Q2 this year.

    The business message seems very clear. Don’t watch. Move, and fast.

  • Watch Out For Joyful Asset Shocks

    Watch Out For Joyful Asset Shocks

    Wow, what just happened! In the last 33 days we saw an incumbent US President forced out of his re-election campaign, financial markets take a battering, Japan’s Nikkei dropping 20% in just two days’ trading,  the Republican National Convention celebrate polls predicting the second-coming of their Cheesus, and a likely funds-deprived military capitulation of Ukraine to Agent Orange’s mate in the Kremlin. It was all rather scary and in the financial markets the ‘fear gauge’ measured by an options derivative, the VIX index, rocketed from its long-run median level of $17.6 to $60 on the 5th August. In fact, that was the largest single-day increase in the ‘fear index’ in history. Then, over the next 7 days it fell right back to its average $17 level. Incredible. But, not even the VIX could have foretold the emergence of the ‘joyful warrior’ Kamala Harris as the pollsters’ best current bet for the White House in the November election, nor the invasion of Russian territory for the first time since 1941 by Ukrainian soldiers (in German tanks!!). These are amazing geopolitical turnarounds but not necessarily the type of shocks to move financial markets. However, we’d like you to think about a few developments which really could shock….in a good way.

     

    Productivity: The scary headlines would suggest recent ‘revisions’ of US jobs data revealed a less healthy US employment picture. The revisions showed that the statisticians over-counted the number of jobs created in the year to March 2024 by 818,000. However, before we go all wobbly-kneed about job creation moving at a pace of  ‘only’ 175,000 new jobs per month (vs previous estimate of 245,000) we need to consider that US GDP growth numbers have not changed. This means that labour productivity which has stalled for decades is picking up serious speed. Hmmm. Anyone tempted to ask ChatGPT what’s going on? Well, our AI boom might be beginning to pay dividends but in a more subtle way. Probably the best read of the week is a guest contribution by Brian Albrecht, Chief Economist at the International Centre for Law & Economics, on Noah Smith’s always excellent blog. Two snippets really hit home with me. First, the subtle impact of AI:

     

    To be clear, the progress isn’t about chatbots. Instead, it’s about small improvements across every sector of the economy. It’s the human resources manager using AI to sift through resumes more efficiently, the logistics planner optimizing delivery routes in real-time, or the data analyst automating report generation. These minor advances, multiplied across millions of workers and thousands of businesses, are what will ultimately drive significant productivity gains.

     

    Second, massive change in productivity could be already under way but is hidden by upfront costs like training, reorganizing workflows and designing new processes:

     

    The computer revolution offers a helpful parallel. In 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere but in the productivity statistics.” This “productivity paradox” persisted for years. It’s almost comical now to think of 1987—when the original Macintosh was brand new, and C++ was just gaining traction—as an era when “the computer age was everywhere.” Even then, the transformative potential of computers was clear to many observers. Despite the invention of the personal computer in the 1970s, we didn’t see significant productivity gains until the late 1990s. Why? It took time for businesses to figure out how to use computers effectively, redesign workflows, and develop complementary innovations.

     

    My own sense of things is that we are obsessing over generative AI (chat bots) and missing the integration of AI applications which have been around far longer than ChatGPT or Gemini; think machine learning, automation, robotics, virtual assistants etc. Of course, with far more powerful digital assistance available this has a potentially huge impact on the formation of new companies.

     

    New Business Formation: The US Census Bureau shows that 5.5 million businesses were started in 2023. This is the highest total ever and is a 57% increase on the numbers prior to Covid in 2019. Recent data from Ryan Decker and John Haltiwanger at the US Federal Reserve showed a surge in new business formation, particularly in hi-tech industries. But, there’s a pick-up in business formation in sectors like construction and building services too. These trends point to fresh ideas, innovation and pressure on incumbents to keep pace. It also points to higher productivity ahead. Our reference to ‘old economy’ activities like construction is deliberate because there is another forgotten sector beginning to stir.

     

    Critical Materials: This week the price of a gold bar reached $1 million for the first time ever. I’m no gold bug and I really don’t want to get into a philosophical debate about stores of wealth and inflation protection. But, I do know one thing. Gold tends to lead when the mining sector is due a recovery. Mining has been in the naughty corner for almost 15 years but I’m beginning to wonder whether sovereign anxiety over the supply of critical materials will lead to not just regulatory action (see the EU Critical Raw Materials Act) but actual sovereign/state investment in mining assets? If AI is now considered by nearly all experts as a sovereign-level risk race then the sector critical to industrial supply chains and decarbonising the planet could be about to receive its own positive sovereign attention.

     

    Electric Vehicles: Finally, on the theme of global decarbonisation, we could be on the cusp of a serious acceleration in electric vehicle (EV) adoption. Consider the following three developments:

     

    *For the first time ever in July, more than half of all vehicles sold in China were electric.

     

    *BMW pulled ahead of Tesla as the lead EV brand in Europe last month for the first time. Note to Elon Musk, Silicon Valley “broligarchs” and a few tech heads closer to home; funding a felon can be brand destructive.

     

    *Electric vehicles are now cheaper than combustion models in China.

     

    So, the competitive landscape is broadening out with Chinese and European players catching up with Tesla. This also means production of EVs is ramping up as market penetration of the total auto market approaches 20%. This production volume surge also has cost implications. According to Wright’s Law, used by MIT and proven in the wind and solar markets, when production of an item doubles the cost of producing that item falls by 20%. Critical to the EV revolution is the cost of lithium-ion batteries, and the cost of those batteries has fallen by 90% since 2010. Indeed, as the headline above suggested, China has reached a critical market penetration inflection point. Given the cost of batteries in China have fallen by 51% in just the last year, one can understand why EVs are racing past combustion models. Get ready for the virtuous circle of more production, lower costs and accelerated consumer adoption globally.

     

    All four developments above are capable of delivering significant positive shocks to the global economy and could be perfectly timed for a joyful new US President. Whoodathunk!

     

  • Themes Checklist For The Beach

    Themes Checklist For The Beach

    The weather forecast isn’t great.  I’d usually suggest some couch thinking time but that phrasing has now become a politically-charged innuendo in the US which tops off possibly the most bizarre presidential campaign month ever. Don’t ask about couches or dolphins, or JD Vance. And, he thought having no children was the problem…..! Anyway, given the amount of delusion in the air, I’m going to suggest a beach plan. That might be the wrong plan, but thematically we might be on the right track in the world of finance. So, for those enjoying some time off, one can review and reflect on the following:

     

    Old economy: Our suggestion “Investors Need The Old Economy Too” in May started subtle, then went full hammer. This move hasn’t just been a tech shift from software to more traditional hardware manufacturing. Say hello to the ‘great rotation’. The old economy stocks roared in July. The top performing sectors in the US were industrials, financials, utilities, basic materials and real estate. As an illustration of the scale of rotation, note technology stocks actually had a negative month (-2%) while US regional banks and housebuilders rocketed 19% and 17% respectively.

     

    Smaller companies: We have written “Betting On Small Can Really Win” but boy oh boy did it rock in July. Smaller companies tracked by the Russell 2000 index whipped the performance of the large company S&P 500 by 10 percentage points. That’s the largest monthly divergence between size cohorts ever recorded in history.

     

    Climate and cleantech: Another theme close to our hearts. VC Breakthrough Energy Ventures backed by Bill Gates has just raised the largest climate fund of the year with a funding round of $839m. In Europe, the momentum is good too. Private equity deal values in European cleantech are now on track for their best year ever(Source: Pitchbook).

     

    Fintech: Stripe and Revolut valuations in recent private share sale activity have jumped by 40-50% and London remains a fintech investment hotbed. Latest British Business Bank data tells an interesting City story –  the UK fintech sector is attracting 11% of global VC investment (and 48% of all investment in Europe), a share only exceeded by the US.

     

    UK Comeback: In March we wrote “Time For A UK Recovery” and waited for credibility and competence to return to Westminster. The scorecard at the moment looks pretty good: UK equities are seeing the strongest inflows of foreign institutional investment for years (Source: BOA), and on the currency front, the GBP (formerly known as the “Great British Peso”) has been the strongest major currency performer in the year so far (Source: Bloomberg).

     

    Digital infrastructure: We wrote “Get Ready For The Cloud Wars” back in November and this has morphed into a global foot race to acquire, invest, service and build the infrastructure of our digital/AI future. From data centres to state-of-the-art chip manufacturing plants the investment giants are moving fast to get involved. While Microsoft opens a data centre every three days, it feels like the likes of Blackrock, Apollo and Blackstone are competing for digital infrastructure headlines every few days too. In fact, Blackstone estimate digital infrastructure spend by top tech companies will exceed $1 trillion over the next 5 years.

     

    Wall Street veterans would say  ‘the trend is your friend’. So, we aren’t giving up on any of these themes just yet. However, we will return to two critical risk factors for many of these themes in a later article. Geopolitical risk from Taiwan to Iran to US electoral chaos looks like it is escalating rather than fading. US politics can make for electric watching (with the shock too) but the just announced prisoner swap deal between Russia and the US was significant. The allied multinational effort by the Biden White House shows the value of joined up thinking and shared values but the planet faces other bigger challenges. Arguably, our highly charged politics needs to address the fundamental challenge of climate and electricity too. For another day, but the race to decarbonise and electrify the global economy is definitely not on track…..

     

  • Five Tech And Money Moves To Watch

    Five Tech And Money Moves To Watch

    You do wonder. Regulators all over the world are in a flap about AI and cryptocurrencies, and their potential dangers in the wrong hands. Meanwhile, every summer millions go on holiday and are literally robbed. Welcome to the “Wild West” of foreign exchange. Who hasn’t puked at the ridiculous margins/commissions charged by airport exchange bureaux, retail banks and various financial intermediaries for a basic financial transaction?  One doesn’t need to be a financial guru to know that nowadays, in our ‘flash boy’ world of high-speed trading technology, the professional traders trade financial instruments like bonds, equities, commodities and currencies at ultra-low costs where commissions are struck at tiny portions of a single percent. The professional traders’ jargon monoxide might use the term ‘basis points’  for these tiny percentages but main street consumers will usually use expletives to describe commissions (plus margins or spreads) that can amount to a cost well over 10%…. or a thousand of those basis points. So, that’s the moaning over. Let’s look at the recent tech and money developments which might inspire…

    Turning first to one of the better solutions to foreign exchange (FX) pain, Revolut, it was interesting to see the company just receive regulatory approval in the UK after a three year wait. The Revolut FX service is, on average, about 25x cheaper than the majority of consumer options. A new UK licence was also nicely timed for a share sale which put a $45 billion valuation on Revolut. That looks like a 50% uplift in valuation for the British fintech and illustrates a renewed investor enthusiasm for innovative payments platforms. Check out Ireland’s Stripe where a secondary share sale from early investors(and staff) to VC giant Sequoia was done at a $70 billion valuation. That’s an encouraging 40% jump from its March 2023 valuation low. However, it’s not just Irish international financial giants attracting foreign investment capital.

    The recent Renatus Private Equity M&A H1 report on the Irish market showed activity picking up with 207 deals completed in the first half of 2024. That compares against a 30% fall in M&A deals globally (Source: PwC). For this writer, it was significant to see, in a high interest rate environment, that financial services was the second most active sector in the country after software. Indeed 21 of those 31 deals in financial services were in accountancy and insurance. Many of the acquirers were larger overseas groups looking to consolidate intermediaries rather than the wholesale providers of financial products. Maybe, there’s a bit more going on than just cost and brand consolidation?  What about a seismic cost shift?

    If you thought cryptocurrencies and blockchain were dead you’d be dead wrong. Bitcoin is flying high and supporting a digital currency ecosystem worth $1.3 trillion. Small stuff really, but think of my FX moan earlier and know that digital currencies and blockchain are ABSOLUTELY the route to cutting out the commission cowboys and intermediary ‘tolls’ which bedevil global financial services, and particularly the average consumer. Consider the following headlines:

     

    Kamala Harris’ digital dollar vision: A new era of financial inclusion?  –  American Banker

     

    “Bitcoin is a legitimate financial instrument,” Says Blackrock CEO Larry Fink – Yahoo Finance

     

    Goldman Sachs to launch 3 tokenization projects by end of year – Fortune 

     

    You didn’t think I wouldn’t mention Kamala this week, did you! So, in the interest of political balance it should be noted that it’s not just the prosecutor getting involved in digital currencies. The felon too is due to headline the 2024 Bitcoin Conference. The former fella used to call cryptocurrencies a ‘scam’ but, not unlike his disastrous recent VP pick, he’s capable of the most marvellous position reversals (and debate commitments). It’s difficult to call or even visualise the US political future but there’s a fascinating visual story developing on the AI front.

    We have written previously about a subtle technology shift in the investment world away from software and towards hardware. We all know the Nvidia chip story by now, but who knows EssilorLuxottica? Not quite the tech everyday name. And, that’s because EssilorLuxottica is not a typical technology play. It is, in fact, a luxury sunglasses designer and manufacturer – yep Oakley, Ray-Ban, D&G, LensCrafter and Vogue are all their brands. Moreover, Facebook/Meta who dived into the metaverse prematurely are now looking to buy a stake in the luxury glasses player. Of course, the potential of a worn screen/glass interface could be the next iteration of the 8 billion mobile phones on the planet. Early days yet, but AI continues to move at rapid pace. Of course, Meta’s move for hardware could be viewed as a strategically defensive move as the consumer information landscape shifts rapidly. Google had pretty robust quarterly results this week but latest breaking news could be interesting…

    The AI pioneers at OpenAI have announced the launch of their own AI-powered search engine, SearchGPT. The product is only available in beta version for 10,000 users but I’m sure Google’s executives will be watching the feedback rather closely. So, despite the summer holidays it’s fair to say there is plenty going on. And hopefully, one day, holiday makers will have an AI assistant embedded in their ‘sunnies’ to spot an airport FX robbery in real time!

     

  • The Hottest Investment This Summer

    The Hottest Investment This Summer

    Ok, I’m a bit hot and bothered. When a tee-shirt ripping Hulk Hogan is the warm-up act for possibly the next President of the United States I’m inclined to think our planet is in trouble. The Republican National Convention(RNC) in Milwaukee this week marked a new level of bizarre in US politics, but the hot air sadly can’t be confined to the GOP speaker line-up. As a record-breaking 1,400 tornadoes and scorching heat batters the US, I am resigned to the fact that decarbonisation of the global economy is way down the MAGA Republican (GOP) list of priorities. However, political mayhem can often leave investment markets unmoved, even relaxed. This seems to be the case so far, but things are fascinatingly stirring in long-forgotten parts of the market and I see one particular opportunity heating up fast. First, let’s look at some data:

    Technology: It’s not just Microsoft having a bad cyber outage day. In recent days, technology stocks experienced their worst share price falls since 2022. However, overall, stock markets continue to hit new highs. Why?

     

    Old Economy: Sectors neglected for months, even years, are attracting investors who are watching potential interest rate cuts and interesting valuation discounts to technology, pharma and AI-giddy companies. The top performing sectors over the past week were old-fashioned financials, industrials, energy and real estate.

     

    Smaller Companies: Only a few weeks ago we wrote an article “Betting On Small Can Really Win”. Hoo boy. The share prices of smaller companies over the past week have been on an historic tear. Stock indices which track smaller companies are flying as Trump would say “like you’ve never seen before”. The Russell 2000 is a benchmark used for smaller companies in the US and it has rocketed 12% in just the past week.

     

    UK Markets: The benchmark FTSE 100 post the Tory election rout immediately embarked on a two week winning streak. Coinciding with this political re-set, UK consumer confidence just hit a 3 year high.

     

    Venture Capital (VC): The latest data from VC research team, Pitchbook, shows that fintech and cleantech/sustainability start-ups are attracting the most investment in Europe of recent quarters.

     

    Clearly, investment capital is ‘rotating’ out of large company technology and looking for alternative opportunities. Furthermore, some structural themes are here to stay. So, we believe there are alternative opportunities to plug into the ‘monster themes’ like AI, decarbonisation, cloud wars and electrification. Where better to start than our planet and the urgent need to stem global warming? We have written many times before that this $9 trillion per year decarbonisation spend can’t happen without critical materials like rare earths and base metals. However, the mining sector essential to extract these critical materials has been starved of investment as large pools of capital shun the sector’s poor sustainability/ESG track record.

    That is changing as the big money now realises if there’s no mining, there’s no EVs, no batteries, no AI, no data centres etc These big funds are now pushing for sustainability assurance solutions which will allow them to deploy capital again and ensure the supply of critical materials can keep up with the demands of economic electrification. So, if you can excuse the mining pun, we have found a little gem of a play on mining/ESG which ticks the following boxes:

    *Market leadership: The company is a fintech with mining-valuable data built over 4 years.

    *Market fit: It is winning mining company customers – there are 4,500 publicly listed and investment capital-hungry mining companies – and generating more than $1m of annual revenues already.

    *Institutional endorsement: Critically, big investment houses are telling the mining industry this company’s independent ESG assurance process can open up investment and significantly speed up investment decisions.

    *Structural tailwinds: The macro themes of smaller companies, UK and old economy all feature in this opportunity.

    *Money talks: And.. founders and international institutions are putting in their own money to grow the company’s global footprint.

    So many boxes ticked, with macro and structural themes aligning. This has to be our hottest opportunity to fight global heat this summer, and for many summers more. But, not too many. This company will surely be bought by a global data player or consultancy in less than 5 years with a potential 10x return to private investors. Think Bloomberg, Accenture, Reuters, S&P Global etc but don’t tell them yet – we are keeping this opportunity exclusive and private.

    Links to next week’s webinar here and the company’s investment memorandum here.

     

  • Betting On Small Can Really Win

    Betting On Small Can Really Win

    Please, no political bets. The headline is absolutely not referring to the UK Prime Miniature. The 14-year Conservative Party mission to shrink public services, business investment, critical trading relationships, institutional integrity and individual standards of public behaviour is ending in electoral wipe-out. Time for new beginnings, even small ones. As I read about UK ‘global leadership’ (with China) in a potential 9,000 millionaires leaving the country before the end of this year, I’m thinking more about generational change and down-sizing shifts in wealth creation strategies. That might seem strange in a world of mega-trillion tech companies but wealth works across different types of assets and for different generations. First a couple of size observations.

    An interesting chart this week from Private Equity/VC research data house, Pitchbook, showed smaller private equity(PE) funds outperformed bigger ones over a 10-year time horizon. In the best performing quartile of funds the performance gap was a whopping 6.7%. In real money terms, the returns of small funds were one third higher than the bigger funds. Here’s the chart:

     

     

    Clearly, the challenge of earning high returns with massive pools of money runs into the problem of a smaller opportunity set. In other words, big funds can only deploy capital in bigger companies and miss out on opportunities with smaller (probably faster growing) companies. However, funds as they become bigger can also suffer from strategy “drift” as pressure to deploy capital forces funds into other sectors, geographies, vintages, styles etc. As a classic illustration of this challenge, look no further than the ARKK innovation fund managed by Cathie Wood. Back in 2021, a big winning bet on Tesla and other innovative companies by the ARKK fund attracted billions of investor dollars. However, since then, the fund has cratered in value by 59% while the funds which track the Nasdaq tech index are up 37%. Big can sometimes be painful. Of course, new strategies can help diversify risk for investors and five headlines caught my eye this week:

     

    Blackrock Muscles Into Private Assets Market For Wealth Clients – Bloomberg

    Andreessen Horowitz plans to launch a private equity fund  –  Fortune

    Carlyle and KKR beat rivals to win $10bn Discover Financial loan portfolio – Financial Times

    Private Credit Is Trouncing Private Equity So Far This Year – Wall Street Journal

    Watford FC Sells Digital Equity Tokens – Techopedia

     

    So, the giant manager of publicly listed assets is looking for private assets, the venture capital giant wants private equity, the private equity monsters are going for better returns in private credit (loans) and Elton John’s former club is looking for digital equity. Got all that? Probably not, but, if we think about Elton and the music business 20 years ago then you’re witnessing a similar generational shift in investment/wealth products. Investors, as individuals or as families, are increasingly looking to invest in private assets, not just publicly listed companies or funds. There is also an additional trend we should be watching. Private investors are now organising themselves in syndicates or family office structures and the latter segment is sitting on enormous pools of wealth. Try these for size:

     

    *Family offices currently manage circa $10 trillion of investments. Compare that to the higher profile hedge fund industry which manages $6.5 trillion.

     

    *There are currently 15,000 family offices operating and actively investing globally.

     

    *Now, for the banger. In the next 20 years there will be a seismic transfer of wealth from “Baby Boomers” to the next generation. Current estimates of this generational wealth transfer exceed $80 trillion.

     

    So, this investor base of family offices will have new principals and new ‘purpose’. Apart from asset growth , tax structuring, succession planning and philanthropy, it is increasingly likely these investors will be ‘values driven’, and possibly less interested in the buy-and-sell 5-year cycles of private equity and venture capital funds. In this writer’s view, a massive pool of patient purposeful capital is poised to disrupt the traditional way companies are funded. And, for smaller companies and smaller investors this should be considered a win without any need for Gambling Commission scrutiny…..

  • A Few Pictures Of Promise

    A Few Pictures Of Promise

    So, despite all the scary headlines and genuine bad-actor or bad-bot risks, artificial intelligence (AI) now officially rules the financial world. Nvidia, the AI chip superstar, is now worth a staggering $3.327 trillion and has overtaken Apple and Microsoft as the most valuable company on the planet. Or to put it in simple futuristic terms, investors are expecting greater returns from this company over time than from any other company operating today. To quantify the sheer scale and speed of the change in expectation from investors, let me paint a slightly different picture. Just over 3 years ago in March 2021 the market value of Nvidia was just $330 billion. So, in just over 3 years financial markets have changed their view of Nvidia’s future by $3 trillion. Wowzers. Now, in the spirit of changing views, allow me to present a few more pictures which promise better things than current headlines might suggest.

    The perception and headlines written post the recent European elections would suggest Green/climate candidates suffered setbacks and populist near-term promises won the day. Indeed, closer to home, Green Party leader, Eamonn Ryan, has decided to step down. A rushed analysis might suggest voters have decided that climate crisis policies have stunted growth and opportunity. However, the following chart from the Financial Times using World Bank data suggests reducing carbon emissions can be achieved, or can be ‘decoupled’, while countries’ growth trajectories diverge in a positive way:

     

     

    Another area perceived to be struggling with our ambition to decarbonise the global economy is electricity. In our last article we certainly identified a significant need, and worrying potential shortage, for critical metals like copper to assist the electrification of economic activity. However, a more encouraging perspective might emerge from an unusual source. China gets bad press on coal, pollution and environmental damage but its electricity story is a global leader. The excellent writer, Noah Smith, has pointed out that China is miles ahead of every other country and could arguably be described as the world’s “first major electrostate”.  The next chart or picture doesn’t lie and is based on data from sustainability research group, RMI:

     

     

    Perhaps, China is a good example of how countries or regions can gain a laggard reputation but can then become a leader. For example, Europe’s productivity growth has lagged the US for almost 2 decades. Incredibly, the GDPs of the US and EU were roughly the same size back in 2008. Today, the US economy is 44% larger than that of the EU. The productivity story in this Financial Times graphic is pretty stark and uses LSE Group data:

     

     

     

    Clearly, the digital revolution has been a big factor in that productivity divergence. However, it’s more nuanced than just digital adoption. Bluntly, US capital backed its entrepreneurs and its flagship digital leader companies in a big way, and in frustrating contrast to a more risk-averse European business and investment culture. It’s not just a finance thing. The US became the coding and software capital of the world. Software developer talent was paid extremely well, were encouraged to create more products and became the rock stars of the US economy. So, would you be surprised to know that the US now employs fewer software developers than it did in 2018? This chart from ADP Research might surprise….

     

     

    Then I read an interesting piece from the excellent Angular Ventures VC newsletter this morning and started to think some more. The newsletter cited a recent post written by Chris Paik at Pace Capital which has raised eyebrows in the tech world. The title alone was provocative.. “ The End of Software”. He reckons AI and large-language-models (LLMs) are driving the cost of software downwards like content creation in the early 2000s. He concluded with the punchy view, “Majoring in computer science today will be like majoring in journalism in the late 90’s.” Ouch. Angular Ventures’ David Peterson can see some merit in Paik’s view on the direction of software travel and paints the picture succinctly:

     

    “It’s uncontroversial at this point to say that LLMs are surprisingly good at writing code. Is the code as elegant or performant as the code written by an experienced software developer? No. Could you ask an LLM to write a custom piece of enterprise-grade software? Also, no. But even today LLMs are good enough to empower non-technical people to write small snippets of code – tiny, trivial, seemingly insignificant lines – to solve problems which they previously thought impossible to solve by themselves. And that is more meaningful than it seems, because it has the potential to shift the clearing price of software itself.”

     

    My own thinking is still evolving but I do believe Europe and its productivity stagnation might now be an opportunity. That might seem a little bold but the AI talent race is looking good for Europe. In turn, innovative applications of AI in the European economy could close the software and productivity gap with the US. A recent report from VC Atomico on “The State of Tech” states that Europe has more AI talent than the US. Here’s the encouraging picture:

     

     

    Again, the headlines might suggest the US is leading in the AI race but the talent story will be a critical driver of future growth rates. So, lots to think about and, whether it’s electricity, carbon emissions, AI or productivity, readers should be keenly aware of the dangers of chasing rear-view mirror headlines. The data and charts can paint an opportunistic picture not seen by the headline writers. As a final thought, and an illustration of change, the Nvidia $3.3 trillion valuation mark prompted me to look at other historic charts and ‘beginnings’. So, here goes….. Nvidia’s current market value is roughly the same ($3.5 trillion) as China’s entire GDP as recently as 2007. China’s economy today is worth $18 trillion.

    Keep looking at the big picture…

  • Mr Copper To Sing Again?

    Mr Copper To Sing Again?

    I remember the original ‘Mr. Copper’, Yasuo Hamanaka, being a pretty decent karaoke singer. That’s a story for another day but there’s a risk-aware part of me saying that copper, as in the metal, needs to be sung from those Roppongi rooftops right now. Hamanaka’s claim to trading fame was cornering 5% of the copper market when discovered by US authorities 30 years ago, culminating in jail time for Mr Copper and a top 10 all-time trading loss of almost $3 billion for the mighty Sumitomo Corporation. The scandal dominated global financial headlines for weeks back then but I feel another copper story with big numbers is building. Let’s start with a selection of recent headlines…

     

    Massive copper shortage on the horizon –  The Week 

     

    Copper demand to boom as new technology drives power consumption Trafigura says – Reuters

     

    AI to add 1 million tons to copper demand by 2030 – Data Centre Dynamics

     

    Copper is the “new oil”, and prices could soar 50%   – Fortune

     

    Copper shortage threatens EV transition – DPA Magazine

     

    I think we get the picture. Copper is not just a battery/electric vehicle (EV) story – EVs actually use four times more copper than non-electric autos. Copper is also now a data centre and AI story. However, there’s an even bigger picture. McKinsey estimate the global shift away from fossil fuels to a decarbonised economy will require annual physical infrastructure spend of $9 trillion.  Yep, that’s every year until 2050. Or, the combined market value of Microsoft, Apple and Nvidia in capital expenditure……. every single year for the next 25 years. The critical detail in this decarbonisation move is electrification. Energy supply is one aspect; nuclear, natural or renewable. The transmission and storage of that converted power via electricity is the copper-critical bit. Let’s consider a few more numbers.

    *CRU Group estimate global copper demand to surge by 9.5 million tons in the next decade.

    *S&P Global go bigger – they see global copper demand doubling from current 25 million tons per year to 50 million tons by 2035.

    *For historical context, 700 million tons of copper has been produced over the course of human history. Net-Zero targets for 2050 demands that humanity produces 2x more  than it has ever produced, or 1.4 billion tons (Source: S&P Global).

    *However, the mining industry would like to have a word. Due to chronic underinvestment, planning delays, investment capital scarcity, genuine sustainability concerns, higher interest rates and shiny AI tech excitement the global mining sector is currently projected to increase production by just….. 20%.

    *Oh, and the world hasn’t made a major new copper discovery since 2014. This lack of copper discoveries also means existing mines going deeper, incurring greater costs while the grade (metal per ton of rock) falls alarmingly.

    We have a problem. Arguably, it starts with the investment maths. Consultants, PWC, reckon AI could add $15.7 trillion to the economy by 2030. But…. these technologies and their Big Tech owners require massive amounts of electricity. Both Google and Microsoft consume more electricity than small European countries. So, how about the USA, home of the original Silicon Valley? Right now, US data centre power usage accounts for 22GW, or 4.5% of the nation’s power consumption. However, according to SemiAnalysis research, that figure is projected to reach 100GW, or nearly 20% of nationwide consumption by 2030 due to AI buildout.

    To be absolutely clear, the expansion of grid infrastructure across generation, transmission and distribution is critically dependent on copper and its performance properties. Yet, there appears to be an enormous squeeze on grid capacity coming. That’s not just cheap commentariat opinion. As always, money really talks. So, can you name the electric power company that has outperformed the rocketing AI poster-child Nvidia this year? Well, that would be Vistra Corp which has clocked up a share price gain of 157% compared to Nvidia’s ‘slow-coach’ 121%.

    So, if electric power is spotted as a potential winner by canny investors ahead of a supply squeeze, where does that leave the mining sector and copper? There have been a few clues. For example, BHP Billiton in recent months unsuccessfully tried to buy Anglo-American (and its copper mines) in a massive $50 billion deal. Interestingly, the ultimate fossil fuel kingdom, Saudi Arabia, can also see the electric future. The Saudi mining company, Manara Minerals, is in talks with Pakistan on a potential $1-2 billion purchase of a 15% stake in its Reko Diq copper and gold mines.

    These numbers are big, but, in global terms, are ridiculously small compared to the $15 trillion excitement about AI. The ultimate reality check and irony is that one company, Nvidia, is currently valued at more than $3 trillion. In stark contrast, the entire global mining sector is valued at circa $2 trillion. Clearly, there will be no credible AI roll-out without a functional electricity grid and energy storage infrastructure. How long before tech investors start to scream for more mining and copper production investment?  Probably in less time than it took for Mr Copper’s illegal trading arrangements to be discovered. Meanwhile, we plan to sing the mining story before the screaming……

  • D-Day Lesson For These Roaring ’20s?

    D-Day Lesson For These Roaring ’20s?

    The events of D-Day 80 years ago this week usually feature in the closing chapters of World War II history texts. My own current curiosity lies elsewhere, more focused on change and beginnings. Not the Reichstag fire, not Sudetenland, not Kristallnacht, not Lebensraum, not Poland. These were all events in the 1930s which historians agree shaped the outbreak of a global war. However, that decade of economic distress and social anger, whipped up by populism and propaganda, was probably inevitable. Indeed, it’s possible the seeds of war were sown much earlier. The previous decade known as the “Roaring Twenties” introduced huge economic, cultural and technology advances, but the 1929 crash and Great Depression which followed were the key catalysts for the global horror ahead. That lesson from history should not be forgotten. In fact, we should be on our guard. Welcome to the new Roaring ‘20s….

    It’s not just Reddit influencer, Keith “Roaring Kitty” Gill, reportedly banking hundred million dollar profits trading ‘meme-stocks’ like GameStop in recent days. There’s more than just a sense of giddiness about. Recall the 1920’s witnessed the arrival of mass-production and mass-consumerism as automobiles, electricity, cinema, radio and aviation made technology affordable to the middle class. And, then it wasn’t. Financial collapse and the implosion of banking leverage has been a feature of global economic cycles ever since 1929. It wasn’t a once-off in 1929. The global credit crisis in 2008-2009 proved that point, and then some. The critical factors in these financial earthquakes are excessive confidence and over-estimation of demand. First let’s illustrate confidence….

     

    • The S&P 500 benchmark index for global stock markets has not experienced a daily decline of 2% or more in 325 days (Source: Reuters).
    • The market capitalisation of a media company whose key ‘product’ and biggest shareholder is a convicted felon with presidential ambitions is currently over $8 billion (Source: Truth Social – just kidding!).
    • The private credit (lending) market has grown from $250 billion in 2010 to a whopping $1.7 trillion today (Source: Prequin).
    • This week AI chip maker, Nvidia, became the second most valuable private company in the world with a $3 trillion market capitalisation (Source: Bloomberg)

     

    Regular readers will know my views fall mainly on the optimistic side of AI. However, the odd sanity-check does no harm. Nvidia is a semiconductor manufacturer. In 2023 revenues generated by the entire semiconductor manufacturing sector globally reached $526 billion. So, for context, Nvidia’s market value is now six times the entire industry’s global revenue. I know analysts will talk about future AI spend, cash rich Big Tech customers and real demand, but there’s one other aspect to this growth story which is a little bit different with historical lessons.

    Legendary tech investor, Marc Andreessen, penned his “Why software is eating the world” essay in the Wall Street Journal in 2011 and there is no doubt software has embedded itself in every phone and corporation on the planet. The lovely thing about software is that it is embedded in an activity, generates recurring (frequent and relatively small) revenues and user stickiness/dependency is high. At a basic level software is code. It’s digital, not physical. Sure enough, coding platform giants Microsoft, Google, Amazon, Meta, Baidu, Alibaba etc. have dominated the league tables of most valuable companies in the world since the Andreessen prophecy. But, there has been a subtle recent shift in the value hierarchy.

    Consider that two of the three largest capitalised companies in the world are now HARDWARE manufacturers (Nvidia and Apple). Hardware is physical and brings an entirely different business model and a myriad of challenges including supply chain risks, materials, energy, sustainability, customer credit, consumer fashion, inventory management and capex investment. We don’t have a crystal ball in forecasting ultimate demand for AI but the semiconductor industry used to be known for its vicious cyclicality. With my risk history hat on, I’d venture there’s every chance this manufacturing sector will experience mismatches between supply and demand.  Of course, the automobiles and radios of the 1920’s might not resonate with today’s AI and technology enthusiasts. However, I’d highlight three other numbers which perhaps add to the “Roaring ‘20s” feel right now:

    Sport: The breakthrough of sports like boxing and athletics on a global scale was a feature of the 1920s but fans mostly followed events by radio. Now, it’s TV (or streaming). So, when basketball’s NBA is about to treble its broadcasting deal from $25 billion to $76 billion you do wonder about excess, and the projections of Amazon, NBC and ESPN? Maybe it’s the constant circling of private equity (PE) around US sport….? Latest data from Pitchbook research shows 63 US professional sports franchises have a PE ownership connection where PE involvement is allowed (NBA, MLS, NHL and MLB). Funnily enough, basketball (NBA) leads the way with two thirds of all teams in the league connected to PE.

    Securities: The 1920s saw the banks and their celebrity brokers on Wall Street begin to sell stock and bond securities to main street for the first time. Then came the ‘shoe shine’ moment in 1929.  Fast forward to today’s celebrities of the private equity universe and a recent FT report on that exclusive world. The headline-grabbing data point(and possibly harsh) suggests that, in the period 2010-2023, private equity funds raised $820 billion more than they actually returned to investors (Source: Prequin).

    Prohibition: Alcohol and gambling was the government target in the 1920s. So, remember when Bitcoin and its cryptocurrency ecosystem was dismissed by the ‘puritanical’ zeal of high street banks, regulators and law enforcement? Today, Bitcoin is trading above $71,000 and the total value of the crypto universe is $2.8 trillion. In fact, there are now billions of dollars invested in funds owning cryptocurrencies (ETFs) which trade daily on highly regulated public exchanges. Now, that’s a morality tale with a twist.

    Of course, the reference to Prohibition conjures up images of organised crime, judicial corruption, entire city governments ‘on the take’, high profile mob trials and flagrant violations of the rule of law. Couldn’t possibly happen again, could it?  Take that question with just a pinch of orange. On a more serious note, the erosion of the US rule of law is possibly a bigger threat in our immediate future than cyclical excess. Hopefully, the remembrance of D-Day sacrifice will remind those in power of their duty to call out faux (or Fox) ‘patriotism’. And, perhaps a read of the final speech in Charlie Chaplin’s The Great Dictator would help. Ironically, Chaplin’s own patriotism was questioned during a later shameful period (with my surname!) in US Congressional history. The Little Tramp’s words seem timely once again…

    Let us fight to free the world – to do away with national barriers – to do away with greed, with hate and intolerance. Let us fight for a world of reason, a world where science and progress will lead to all men’s happiness. Soldiers! in the name of democracy, let us all unite!    –  The Great Dictator (1940)