Gravitas Spark CrowdFunding

Tag: Investment

  • Watch Out For A New Wealth Wave

    Watch Out For A New Wealth Wave

    AI superstar stock, Nvidia, has just reached a valuation of over $2.75 trillion. That exceeds the value of the entire German stock market. How about the combined value of IBM, Tesla, Facebook, AMD, Netflix and Intel? Yup, that’s what happens when a share price clocks up a 1,000% return since 2022. And yet, those “combined” companies listed all have an AI story too. In fact, I have seen data indicating that 179 of the S&P 500’s constituent companies referenced AI in their recent quarterly analyst results’ calls. So, is AI the only game in town? We think not, and then we found a striking headline…..

    Hargreaves Lansdown rejects £5 billion bid from PE consortium –  Financial Times

    What’s the big deal? It’s not even a big deal. I mean, Nvidia just increased in value by $150 billion over a few hours on NO company-specific news. Allow me to expand. Or should I say converge….?  For those readers unfamiliar with Hargreaves Lansdown, the company is an investment platform serving 1.8 million UK-based clients with a combined £150 billion of wealth assets. However, what really caught the eye and what should resonate with regular readers is the convergence of four distinct themes we have written about in recent months:

     

    *The PE in the headline stands for ‘private equity’ and we are expecting stable or falling interest rates to prompt an increase in buy-out deal activity.

     

    *The rapidly increasing weight of private (not publicly listed) assets in high-net-worth investment portfolios. Research data from Pitchbook reckons private assets could reach a total value of $20 trillion by 2028.

     

    *The UK might be in the middle of the worst election campaign by any governing party in history but investors are beginning to look past the Tory party meltdown. UK companies are cheaper than similar companies in other markets and investors see opportunity and dinghy-free sanity ahead.  

     

    *We have highlighted the potential of ‘old economy’ companies in neglected areas of the market beginning to show signs of a new life. Specifically, we flagged a huge merger deal in the mining sector, the US bank sector actually outperforming technology this year and breaking news of an agreed £3.57 billion buy-out of the Royal Mail by a Czech billionaire.

     

    So, of course, we are intrigued by potential private equity interest in a cheap UK old economy financial services company. However, it’s a bit early for thematic victory laps. It feels like there is more going on than opportunistic feasting on cheap UK assets. Indeed, our curiosity is focused on the sudden appeal of wealth management businesses. Deal activity has been building steadily with Canada’s RBC buying Brewin Dolphin, private equity house Pollen Street swooping for Mattioli Woods and US bank Raymond James acquiring Charles Stanley. Other mid-size UK wealth operations like Quilter, Brooks McDonald and St James’s Place will likely feature in additional media buy-out speculation. This might appear like a simple consolidation trend in a fragmented sector plagued by digital, regulatory, capital, pricing and demographic/behavioural challenges.  In deal jargon this could be described as ‘defensive M&A’. Or, that description could be just plain wrong. What if there’s a new opportunity in wealth management? I can think of two significant drivers right now:

     

    1. We referenced the explosion of private investment assets to $20 trillion by 2028. The good news for investment platforms is that fees on private investments are higher than publicly traded assets given they cannot be traded on a stock exchange in a nano-second.
    2. AI, and Nvidia in particular, is investing in the processing power required for these large language models (LLMs) used to train AI applications. However, there’s a basic component of AI that every business leader, regulator, customer or user will tell you is critical – robust data.

     

    Thanks to years of onerous KYC(know your client) and AML (anti-money laundering) compliance, it is reasonable to conclude that the wealth management industry must be in possession of some of the most accurate and high-value/personal data on the planet. Whisper it quietly but blockchain and digital currency(crypto) technology are also staging impressive comebacks in 2024. We often write about the compounding effect of the convergence of new technologies and I’m wondering if a faltering wealth management industry might be on the cusp of increased revenue opportunities in private assets and reduced costs through AI, blockchain, digital assets, tokenisation etc. Even those companies considered digital leaders are revving up their curiosity. Only this week in Dublin, Revolut’s chair, Martin Gilbert, and founder of Aberdeen Asset Management admitted that a move into asset management by the fintech platform was a possibility – “It’s something we talk about a lot”.

    Expect lots more talk on investment desks in London and Dublin too. On days like today, I miss those desk chats…. and the laughs, lots of them.

    Mark “Dicey” Reilly RIP

  • Market Bulls Shopping in China?

    Market Bulls Shopping in China?

    Well, this is awkward. Perhaps the only fully bipartisan view in Washington these days is that China’s economic influence needs to be curtailed. The Biden administration has just announced further Chinese import tariffs and the push to decouple from Beijing’s giant manufacturing machine is in full swing. Thanks to the Bidenomics IRA and Chips Acts, a wave of multi-billion dollar projects in cleantech (EV batteries, renewable energy etc) and critical computing technology (AI chips, fab construction etc) have landed in the US. Arguably, Europe is on the homeshoring case too, particularly in the EV and cleantech areas. However, while the world focuses this week on the current ‘big shiny thing’ in the guise of AI – and pending results from its $2 trillion poster child Nvidia – the more significant global economic story right now is probably China.

    You might have read headlines about Chinese electric vehicles piling up at ports around the world but there’s much more going on. Chinese export surpluses are exploding as global markets are flooded with not just cars but steel, chips, solar panels, clothing, machinery and many other manufactured goods. It feels like the Beijing regime is compensating for a debt-slowed domestic economy by ramping up its manufacturing and export efforts. Check out the following data points:

     

    *Chinese steel exports in April amounted to 92 million tons, up 16%.

    *Chinese car exports reached 417,000 units in April, up 38%.

    *Chinese aluminum output hit all-time highs in recent weeks.

    *Chinese exports of key cleantech items – batteries, EV cars, solar panels – hit $150 billion in 2023 by growing 20%.  

     

    In fact, despite decoupling attempts in the US and official ‘dumping’ complaints from the EU, China’s current account surplus is at all-time highs powered by exports worth more than $3.5 trillion. One might presume the impact of flooding markets with cheap goods would be deflationary but that ignores the sheer scale of domestic Chinese consumption. It also ignores the reality right now in financial markets. I would highlight three markets in particular:

     

    1. Commodities markets: Copper, iron and zinc prices have jumped by 10% in the past 30 days. Copper has actually clocked up a 30% gain in 2024 alone.
    2. Chinese stocks: Despite US tariffs, banking debt issues and a moribund domestic economy the benchmark stock market, the Shanghai Composite Index, is up 7.6% this year after 3 years of negative returns. In Hong Kong, the news is even better with a 15% gain after 4 painful years of losses.
    3. German stocks: You’d think they’d learn but, fresh from a painful Russian energy dependency experience, Germany’s industrial base is perceived as heavily exposed to China’s economic activity.  That strategic risk is for another day’s discussion but, for now, investors are buying German shares and driving the DAX benchmark to all-time highs.  Arguably, a China ramp up of activity is helping investor sentiment towards German stocks.

     

    There’s a part of me wondering has China become too big and therefore nobody else can compete with the scale and unit costs of their manufacturing base? It’s probably too early to jump to conclusions and the domestic property debt unwind has a long way to go as Japan financial historians will attest. However, there is clearly a Beijing long-term strategy in play now. I would highly recommend the recent article from Noah Smith as to potential current Politburo thinking but these three thoughts stood out for me:

     

    *China wants to dominate and be the ‘world’s manufacturer’.

    *China is balancing overproduction and a weak consumer with a compensatory export ramp up.

    *China is preparing its manufacturing base for flexibility and the capacity to switch to war production mode.

     

    The final strategic explainer is more than slightly concerning. So, let’s not over-hype the significance of Nvidia’s results this week. The AI revolution and Nvidia, as barometer of that manic race to technological superiority, is almost irrelevant if China is putting itself on a war footing. On a more upbeat note, the upturn in Chinese economic activity could be the beginning of a significant global economic recovery and a rotation away from technology into ‘old economy’ assets. Regular readers will recognise that thought from previous writings here. Of course, that broadening out of investor confidence will help bulls, portfolios and pensions in the near term but not even the best generative AI model can really tell us what China wants to do in the long run. And remember, the Russian bear experience is that we should probably believe what we are seeing.

     

     

  • Warning: 3 Zones Of Interest

    Warning: 3 Zones Of Interest

    Nobody likes to be admonished. So, it’s an interesting commercial call to deliberately call out one’s customers. Even more daring to use the Holocaust as your messaging context. There are no adequate words (almost literally in many scenes) for Jonathan Glazer’s brilliant but upsetting Oscar-winning film, The Zone of Interest. The luxury dream life of Auschwitz commandant Rudolf Höss, his wife Hedwig and five children in a house right next door to the walls of the Nazi death camp is almost two films. One is seen, the other heard. The effect is extremely unsettling – you see nothing, but hear and know really evil events are happening.  However, director Glazer is using this notorious historical setting to deliver a present day admonishment. Like Hedwig Höss and her household, we hear things but choose not to ‘see’ bad things. However, you’ll be relieved to read I don’t plan a similar scolding…..but have some cautionary thoughts.

    It has been an interesting week for the planet’s hottest investment topic, Artificial Intelligence or AI. For main street consumers we are on the cusp of not just hearing about AI, but actually ‘seeing’ it in action. First, Google showed off the latest use cases for its AI model, Gemini, in search, education, video, workflow etc. All hugely impressive, and the intention is for Gemini to be embedded in Android powered phones soon. Not to be outdone, reports are flying around that Apple will do something similar with its iPhone and OpenAI’s ChatGPT model. As the tech-heavy Nasdaq index hits all-time-highs, it’s clear AI is going to move rapidly from being a corporate cloud story (Nvidia, Microsoft etc) to being a main street consumer revolution on our phones. However, the cloud and the powering of AI models is still entirely relevant to this move. Arguably, AI infrastructure is today’s gold rush version of  ‘spades and shovels’ which, for investors, means data centres are critical to deploying AI. You’ve probably already heard that. But, do you ‘see’ the reality…?

    My favourite trivia question of the week has been how many data centres will Microsoft open in 2024. Every answer I have received has been wrong, mainly in the low double digits. The reality, per a recent Financial Times article, is that Microsoft is opening a data centre “every three days”. Mind-blowing. These are $300-400 million facilities, not Starbucks cafes or KFC restaurants. And, that’s just one company. Here’s another – Echelon Data Centres. I had the pleasure of briefly meeting its owner, Niall Molloy, at the excellent Renatus Real Deal 2024 conference this week where Molloy was interviewed as winner of the “Deal of the Year” award. I was stunned to learn Echelon only started in the data centre construction business in 2017. Just 7 years later private equity giant, Starwood Capital,  has invested $850 million in Echelon and the business is currently valued at north of $2 billion. A super story of bold vision and world-class execution, but Molloy had a cautionary word about the pressures on global electricity grids as data centre campuses begin to match the power consumption of capital cities. The AI and data centre revolution is coinciding with an even bigger global shift – decarbonisation of our economies. The solution is more electricity power, and the challenge is the expansion of under-invested electricity grids. However, where there is risk there is opportunity.

    Ireland has been mentioned as one of the most challenged national electricity grids and many readers will have ‘heard’ the negatives of data centre power consumption. However, all data centres now have to create/install their own power supply and most likely the source will be renewable energy. That means huge investment capital is required because it is no longer just a construction project, but also includes incremental builds of electricity generation and water supplies. Hence, we should ‘see’ this week’s reports of Intel’s plans to expand its Fab34 semiconductor chip factory in Leixlip as a ‘wow’ moment. The plans are not new but the financing is ground-breaking. Intel was originally looking to spend $2 billion. Now, the number is $11 billion and global private equity player, Apollo Global, is being tapped as the solo partner on the project. The entry of global private equity into AI infrastructure funding should signal opportunity and expert eyes ‘seeing’ a way forward despite grid challenges. So, my second cautionary word after ‘seeing’ a consumer AI shift is that there are risks but also huge opportunities away from the actual technology. In other words, investing in power, storage, construction, critical minerals/materials, water, skills training/resourcing and other professional support services could generate top class returns.

    Clearly, private equity giants have spotted an investment opportunity. And, don’t forget Blackstone’s recent $1 billion purchase of a majority stake in Dublin-headquartered data centre engineering firm, Winthrop Technologies. Still, there’s one final cautionary tale; under-investment caused by political inertia or regulatory uncertainty. Exhibit A on political misrule is probably the UK. However, Brexit might be the go-to lament you ‘hear’ but the reality is a long-standing issue we wrote about in March:

     

    The Institute for Public Policy Research estimates the under-investment in business at $500 billion less than what other comparable OECD countries have invested since 2005. Public sector investment (infrastructure) was a further $200 billon below the G7 average. All in, this chronic lack of investment places the UK 27th out of 30 OECD countries.

     

    As regular readers will know, we have been quite positive about UK investment opportunities in recent months but this warmer view has been based on a contrarian prompt. Investors have been fleeing UK investments for years and Panmure Gordon published some startling figures in a research report from their Economics team this week. I would highlight three in particular:

     

    • UK public companies trade on a like-for-like basis (taking into account sector and growth characteristics) at a 17% valuation to comparable companies trading in the rest of the world (RoW).
    • The gap in valuation between the biggest UK companies (FTSE 100) who are globally engaged and the more domestically-focused smaller UK companies (FTSE 250) is at its widest in 20 years.
    • Funds focused on UK investing strategies have reported outflows for 82 of the last 97 months (Source: IA)

     

    Please ‘see’ this as the damage inflicted by chronic under-investment for almost 20 years. So, given our planet faces an existential threat without decarbonisation, the critical need for investment in global electricity grids is not exclusively an AI or data centre issue. Data centres are just a ‘wall’ blocking the bigger picture view . Without joined-up policy thinking, we risk ‘hearing’ about data centres but missing a planetary extinction event moving into irreversible territory. Don’t zone out on this one.

     

  • Investors Need The Old Economy Too

    Investors Need The Old Economy Too

    Investors need to be aware of investment cycles as well as economic cycles. The investment stars of today can be the performance dogs of tomorrow. Just don’t tell South Dakota Governor, Kristi Noem, who has spectacularly blown up her vice-presidential ambitions in recent days. Kristi got her MAGA guns, God and babies messaging confused and thought it was a good idea to publish a book featuring a tale about her shooting a misbehaving puppy, Cricket. Not sure there’s even an emoji to cover that. Nor do investors really need to be told that shooting puppies is not a great vote winner. However, investors do need to know that star stocks can fade and badly performing ‘dogs’ do make comebacks.

    Financial market stars are often the ‘next shiny thing’ and the Covid-19 pandemic introduced lots of new companies which suddenly entered our daily lives and kept the global economy going. Consider online payments and Shopify. Its share price collapsed by 20% (and $20 billion!) in one evening this week and joined other pandemic superstars like Peloton, Zoom, RingCentral etc. in a combined $1.5 trillion loss of market value since the end of 2020 (Source: Financial Times). Meanwhile, the old economy which was kept alive by these companies is finally shaking off its ‘dog’ status as the tech-obsessed investment markets realise we need the old stuff too. In fact, three recent developments have caught our eye and signal potential opportunity.

    First, we need to dig. Not literally, but the most basic activity underpinning economic activity since the Stone Age is probably the extraction of basic materials. So, when a potentially massive deal in the mining sector is reported we should pay attention. The $39 billion approach by BHP Billiton for De Beers owner, Anglo American, shines a light on a sector which has been largely shunned by investors on ESG, geopolitics, talent retention and energy cost worries. A pick up in M&A activity suggests a floor for executive expectations and potential upside opportunity for investors. Indeed, in our recent Private Portfolio Thoughts newsletter we wrote:

     

    “….the entire out-of-favour global mining sector is now worth approximately the same as just one technology company, Google ($2.2 trillion). However, when we see research showing China controlling almost 80% of the value chain in electric vehicle (EV) battery production we’d expect a few mining and mining technology ‘diamonds’ to be completely undervalued as the world races to EV adoption and net zero targets.”

     

    The mining sector, despite its sustainability (ESG) challenges, is a critical part of our decarbonised future. As an illustration, the race to electrify the global economy requires more copper in the next 25 years than has been produced in the sector’s entire history.  But a shortage of investment threatens that electric transition. For investors, capital shortage (vs ‘hot’ capital stampedes) means probable opportunity and…..on the capital front, there might be better news too.

    The critical cog in the global financial system is the banking sector. Of course, banking had its almost-perennial risk shock last year with the failure of Silicon Valley Bank(SVB) but, arguably, the lack of systemic knock-on impact should be taken as a positive. Furthermore, the stabilisation of interest rates (even if not falling) without major economic casualties to date is also encouraging. So, like the mining sector, we’d be looking for major deal activity from ‘insider’ executives to confirm there was potential sector upside ahead. Step forward Spanish banking.

    Bilbao-based BBVA has just launched a hostile $13 billion bid for its domestic competitor, Sabadell. Not just a bid, but a riskier hostile one too. Also, don’t forget recent bank deals in the UK  – Nationwide buying Virgin Money ($3.7 billion) and Barclays acquiring Tesco Bank (up to $1 billion). This feels significant and check out the performance of the financial sector in a “Magnificent 7” tech-dominated US market. Larger US financials are actually outperforming the top tech names in the Nasdaq 100 index year-to-date (+10% vs +7.6%). Also, it is interesting that the traditional barometer of the broader old economy, the Dow Jones Index, is on a 6-day winning tear. Perhaps, the dogs (but not Cricket) are back?

    Finally, the combination of the old economy Dow Jones rising, banks gaining deal confidence and shunned sectors doing M&A prompts a further thought. Public markets have been shrinking for years in terms of numbers of quoted companies listed on public exchanges. However, the role of private capital and private markets has grown in significance. Pitchbook’s latest research suggests private markets now control $14.7 trillion in assets, growing by an annualised 12.8% each year since 2012.

    Those private assets include private equity, real estate, infrastructure, venture capital and private debt/credit. The latest projections from the Pitchbook research team say these assets could stretch to $24 trillion by 2028 in a positive macro environment. This writer has also seen research showing family offices for the uber-rich now allocate 46% of their investment portfolios to private assets. So, let’s join the dots here. It seems entirely possible that ‘old economy’ companies could be purchased in private buy-out deals, backed by private capital and more confident banks. That’s a healthy development for investment markets but also provides opportunities for investors to diversify their portfolio into private assets. Now, start digging, or even mining those possibilities.

  • Risk Warning: Trust, But Verify…..

    Risk Warning: Trust, But Verify…..

    On the fifth check of my passport at Paris’s Orly airport I did wonder. Will trust die before our planet dies? Both are under severe threat and, yet, I’m hopeful. Let’s take a look at three particular examples of widely-held mistrust where recent developments might challenge the negativity. First, some history. Ronald Reagan’s signature phrase in nuclear disarmament talks with the Soviet Union was derived, ironically, from an old rhyming Russian proverb: Trust, but verify. Of course, it was tough to trust the Kremlin but technology, in the form of satellite imagery, was the critical verification tool. These days it’s technology which is not trusted but could also be the solution.

    We have previously written about global payments processing as possibly the biggest ‘network’ yet to platform and join social media and cloud computing in the multi-trillion dollar wealth creation club. However, the payments opportunity starts with technology mistrust. Bitcoin is flying high but the cryptocurrency ecosystem is still widely mistrusted by consumers, governments and regulatory authorities. Stripe famously ceased processing Bitcoin payments on its platform back in 2018. Now, it’s all change. Stripe is bringing back crypto payments, this time with a stablecoin. The USDC stablecoin to be accepted by the platform will be pegged to the US dollar ie it tracks the US dollar value. More critically, the technology which underpins the security and verification of these currency assets is blockchain. On so many levels this is a huge verification moment for digital currencies and the software blocks used to build them. Now, for some more building…..

    The 2022 CHIPS and Science Act was a Biden administration attempt to reinvigorate the US manufacturing base by attracting huge factory construction projects. Scepticism was rife, given the Trump toddler promised ‘infrastructure week’ every week but never delivered. Well, let’s verify. First, the US government has paid out more than half its ear-marked $39 billion of incentives to companies planning to invest in manufacturing facilities. The corporate follow-through has been extraordinary – microchip manufacturers and their suppliers have announced $327 billion of investments over the next 10 years. Micron alone is planning a $100 billion project in Syracuse, NY. That’s a nationwide 15x leap in construction spend on these type of facilities and will capture 20% of the global chip manufacturing market by 2030. Currently, that number is zero. But what about our planet and other targets with Zero (Net)?

    Let’s face it, the push back on global sustainability and ESG targets is worrying. We often write that money talks and the following headlines paint a picture of worrying reversal:

     

    Flows to European ESG exchange traded funds halve in first quarter –  Financial Times

     

    US Fund Managers With ESG Mandates Have Worst-Ever Outflows – Bloomberg

     

    Clearly, this is not good news. However, we should be careful not to equate fund flows with commitment to climate change targets. For example, the banking sector in recent decades could be described as the ultimate counterparty requiring ‘trust, but verify’ checks on their behaviours and risk management. So, with the global financial crisis barely 15 years in the rear-view mirror, how did genuine ESG investors feel about this week’s staggering headline?

     

    Western banks in Russia paid $800m in taxes to Kremlin last year –  Financial Times

     

    Yep, that was the tax bit. The profits according to the FT were over $3 billion. Trust, but verify indeed……ESG investors can rightly ask how are those “S” and “G” policies going in these shame-free and profit-full banks? Answers on a post card to Kyiv please.  Before we all blow a complete gasket, let’s finish with some more wind but a bit more climate positivity. And, no, it’s not a Trump legal challenge. But it could ultimately rhyme by starting badly, and then ending with a positive reality check.

    First, the severity of the storms and tornados sweeping through the Midwest heartland of the US this week are truly frightening. However, there’s a bigger financial storm brewing further south. An excellent article in The Lever this week highlighted the plight of Louisiana homeowners struggling to insure their houses while 12 insurance companies have failed, and 12 others have left the state. Almost one in five Louisiana residents lost their homeowner insurance last year. The crisis is climate caused. Global insurance giant, Swiss Re, in a recent report stated that natural disasters now cost the United States $97 billion a year.

    In Florida, the climate denial Governor, Ron De Santis, might be kissing the Trump ring again but home insurance rates jumped 42% last year and coverage from big players, AAA and Farmers Insurance, has been pulled from the market before hurricane season. Unsurprisingly, Florida for-sale housing inventory has jumped 57% in 12 months. Leaders in denial-mode face a wave of voters, mortgage banks, pension funds and Wall Street analysts giving them the ultimate verification check on climate crisis. The critical shift is that investment capital has checked, and is already fleeing.

    Trust me, that seismic capital flight will force leadership change and action. Verification…..pending.

  • Another Heroic Age Begins…..

    Another Heroic Age Begins…..

    I’m nervous. My trip to the Park Hotel Kenmare this week isn’t quite in the league of those heroic voyages chronicled in ancient Greek mythology, but the dress code request on the invite pumped the pulse rate for a moment. Just a moment. The invitation to recreate the year of the hotel’s opening in 1897 in a gathering of mostly creative types (after momentary panic) seemed like an opportune way to ditch my far-from-hip personal wardrobe and embrace Victorian disguise. Party on, but still I’m nervous. I have this nagging feeling that the years 1897 and 2024 might have more in common than we’d like to imagine. Indeed, Mark Twain would say the years and risks are rhyming.

    The Thirty Days War of 1897 between Greece and the Ottoman Empire (Turkey) was hardly a century, or even decade, defining event whereas the current war in Ukraine is generationally significant for Europe. Furthermore, the first border-to-border direct attack by Iran on Israel in the past week could, left to escalate unchecked, threaten the planet with warfare of global dimensions. Neither of the current conflicts will necessarily snowball into multi-country warfare, but 1897 starkly demonstrated how military alliances fracturing under pressure in local skirmishes can lead to tragic global outcomes.

    Just before the Greco-Turkish War broke out on the mainland in 1897, there was an intervention made by The International Squadron, a naval flotilla formed by the ‘Great Powers’ of Europe (UK, France, Italy, Russia, Austro-Hungary, Germany) to address a rebellion by native Greeks on the island of Crete against rule by the Ottoman Empire. Apart from being a precursor to war on the mainland, the Cretan intervention ultimately led to strategic disagreement followed by Germany and the Austro-Hungarian Empire withdrawing from the International Squadron. Only seventeen years later the same Balkan region erupted, and those two nations formed the Central Powers alliance with Bulgaria and the Ottoman Empire to fight the Allied Powers in World War I. So, fast forward to today and it’s not difficult to spot the strains in geopolitical alliances as they confront the following crises:

     

    Ukraine-Russia: European members of NATO bordering Russia are terrified by Ukrainian funding (frozen) being used as a partisan political chess piece in an increasingly dysfunctional US Congress. How long before Poland asks for, or sources, its own nuclear deterrent against Russian aggression….?

    Israel-Iran: Clearly, hundreds of missiles launched directly against Israel by Iran is a worrying first-time development in the traumatic history of the Middle-East. However, the co-ordinated defence of Israeli and neighbouring airspace by a coalition of US, UK, Jordanian, UAE, Saudi and Israeli forces could be considered a relatively surprising show of unity between Allied and Arab nations. Less encouraging is the horror of Gaza, and European countries (and the UN) looking for the US to pressure Israel’s leadership into a more humane approach.

    China-Taiwan: The potential collapse of munitions-starved Ukraine is not just terrifying eastern European nations. The perception of ‘abandonment’ of Ukraine by the US has massive European and NATO implications, but will also reverberate through Asia-Pacific island nations watching China’s moves on Taiwan. It is no surprise to see high profile visits from the leaders of Japan and the Philippines to Washington in recent weeks. However, the fate of Ukraine will be the true indicator of the strength of this trilateral alliance. And, China will be watching closely.

     

    Arguably, the timing-fuse for the potential explosion of any of the above crises is going to be a lot shorter than 1897’s seventeen year WW I burn. So, do we panic or seek inspiration? Geopolitical leadership, frankly, is lacking courage or heroes right now. However, dig deeper into the history of 1897 and that year’s other claim to historical significance was its status as the beginning of the last “Heroic Age” and lasted until 1922. This 25-year period saw 17 pioneering Antarctic expeditions launched from 10 different countries, but the Antarctic was not the only study subject enhanced by these expeditions.

    The methods of expedition commanders like Robert Scott, Roald Amundsen and Ernest Shackleton have been the subject of many academic studies and have provided a uniquely pure window into different leadership approaches to life or death decisions under extreme conditions while cut off from the outside world. Geopolitical anxiety aside, I am increasingly optimistic that the stars are aligning for another Heroic Age. So, who are today’s heroes and where is the 2024 unexplored equivalent of the Antarctic? More importantly, can these exploits alter the geopolitical direction of travel?  I have three pioneering hopes.

    Space Exploration: The brilliant George Mason University economist, Tyler Cowen, asserted more than 10 years ago that the US economy had been in a long productivity stall since the early 1970s. He referred to it as The Great Stagnation and this appears to have coincided with the suspension of genuine space exploration in the form of manned lunar landings since 1972. Undoubtedly, the space race of the 1960s accelerated many technological developments so I’m wondering will the renewal of manned space voyages to the moon (Artemis II) and Mars trigger global progress in remote services and activities. Consultancy group, McKinsey, have estimated the space economy will be worth $1.8 trillion by 2035. So, that’s almost like finding another Brazil with lots of new investment capital driving innovation. Think tele-health, agriculture, communications etc. Space exploration also remains a beacon of hope for collaborative endeavour – see the International Space Station (ISS) as a continuing example of cooperation between Japan , USA, Russia, Canada and the European Space Agency.

    Artificial Intelligence (AI): We have written many times about the urgent need to defend The Truth in a digital world overwhelmed by misinformation and bad actors at a corporate and sovereign level. So, it might seem strange that Artificial Intelligence (AI) could be part of the solution. A quick glance at any media headlines would suggest AI will be in the vanguard of misinformation rather than authenticity. However, I am struck in my day-to-day investment role by the number of recent AI applications which focus on one area and also could be a very profound instrument in the discovery of truth. The latest AI focus is video. We know Gen AI tools like Chat GPT or Gemini can be used to deliver super-quick summaries of large volumes of text from market analyst research to autobiographies to business plans. But, now hours of video can be analysed and checked in minutes, even seconds. So, imagine a future screen broadcast which is actually two screens, and the second screen is not a betting or chat platform. The broadcast could be Liz Truss, Donald Trump or Vladimir Putin in full delusion mode and the second AI screen could fact check (or just show previous contradictory video footage of same speaker) and alert viewers to misinformation. My hope is that real time credibility checks could be incredibly powerful in exposing populist charlatans and assisting truth discovery.

    Healthcare: Every week we read about new therapeutic discoveries using gene editing (CRSPRS), cell therapies (CAR-T), mRNA vaccine platforms, neural implants(Neuralink) or even drug manufacturing in space using micro-gravity(Varda). Healthcare remains a challenge for all governments and the recent memory of the Covid-19 pandemic should be an inspiration for further research co-operation. Recent news headlines on WHO worries about H5N1 bird flu mutations will likely focus minds and provide a potent reminder that viruses don’t stop at disputed historical borders. Indeed, a government closer to home looks like it will lose power despite delivering best-on-planet economic performance. Why? Ireland’s government coalition didn’t do enough on the health (hospitals) and safety (homes) of its citizens. You would have thought focus groups and polling research might have picked up on that genetic human instinct……to live. Politics, eh.

    So, maybe nothing much has changed since those courageous expeditions trudged across an unforgiving continent all those years ago. As a species, we are probably still driven by the same three things: discovery of new worlds, the truth, and survival. Clearly, success in these pursuits can be shared and, in turn, bring humanity closer together. So, I’m not sure this vision of our future requires heroic optimism, but we could definitely do with some leadership. And…. I’m sure the ghost of Tom Crean would have some wise Kerry thoughts this weekend on where it can all go wrong.

    P.S. The dressing up worked out, the creative crew were fantastic company, and the hotel is wow….!

     

  • Countdown To Trend Exhaustion…?

    Countdown To Trend Exhaustion…?

    It’s day 96 of my 100-day no alcohol challenge, so who’s counting? I’m certainly not exhausted. Quite the contrary, but recently I have been prone to describe the benefits as “over-rated”. However, this proximity to completion does focus the mind on other things potentially ending in the world of business and investment. In particular, and by pure coincidence, in my day-to-day risk role I’m seeing some multi-year business trends begin to stall or enter new phases of growth. But, first let’s deal with a monetary shift.

    The consensus view on inflation and interest rates was that both were on a downward trajectory with central banks promising to cut rates if consumer prices were on track for a more manageable 2% annual growth. Europe seems to be on track, and the ECB just today indicated its rate cut cycle could begin in the summer. If anything, the Fed (FOMC) in the US was going to move before the Europeans, with money market traders heavily betting on a June cut. Ouch! This week’s US inflation report (CPI) caused some real pain for those traders as core CPI came in ‘hot’ at a year-on-year 3.8% rate of price increase. That’s way off a 2% level targeted by the Fed and means a significant reversal in monetary leadership as money markets now price an ECB cut in June, and the Fed to follow suit in September. That’s a big change in expectations.

    As always, the cost of money (rates) drives all financial asset prices and this ‘change’ in trend could have an immediate impact on currency markets. Watch the Japanese yen continuing to fall to a 34-year low versus the dollar and Tokyo’s stock market at a 34-year high. A Bank of Japan rate hike might be needed to stabilise its currency, but not necessarily cheered by stock market investors. In fact, the yen-dollar relationship is often used by traders as a proxy measure of ‘risk’. The trend in markets for the last 15-18 months has been ‘risk on’. In other words, asset prices have generally rallied as investor confidence grew. A shift to ‘risk off’ could hurt some of the higher flying assets of recent times. I note Goldman Sachs’ investment division is growing wary of US technology (“Magnificent 7”) but there’s another newer asset class which might also stall its impressive return to form.

    Bizarrely, this new asset class was designed and built to escape the scrutiny and influence of the all-powerful global central banks. I’m talking cryptocurrencies and Bitcoin which has quietly risen to its historic pricing highs of $72,000. However, rather than become independent of the traditional global financial system, Bitcoin has become an asset used by traders to increase risk exposure (buy Bitcoin) or reduce risk (sell Bitcoin).  So, if ‘risk on’ trends are due a pause or reversal, it will be deliciously ironic that decisions in an office in Nihonbashi, Tokyo, by Bank of Japan officials could drive the price action of cryptocurrencies like Bitcoin. However, cryptocurrencies are not the only technology asset on a serious upward trend but facing a few teething problems. The hottest investment topic on the planet right now is AI. However, like central banking, there seems to be an emerging divergence of fortunes…

    The remarkable feature of the AI investment boom, compared to crypto and metaverse, is the sheer scale of investment. It’s not just hype. Nvidia, the $2 trillion poster child of AI and manufacturer of the chips powering AI learning models, is booking real orders and reporting real 6-fold revenue growth in little more than 12 months. However, the future ‘winners’ in providing these AI services are less visible. Of course, Big Tech, with Amazon, Microsoft and Google leading the charge, are busy building or acquiring chips, talent, language models, data and technologies to win the AI race. This race requires vast amounts of investment capital and the smaller players are beginning to struggle. Once upon a time, London-based StabilityAI had raised $100 million at a $1 billion ‘unicorn’ valuation but has ended up with a CEO/founder departure, a Getty Images lawsuit, $99 million of debt and just $11m of revenues. A recent Forbes article suggested the firm had run out of cash to pay its Amazon(AWS) cloud computing bills. Clearly, the overall AI investment trend is intact but it is important to understand the nuances and risk-shifts within that structural story. Now, for an excellent example of that point.

    The simultaneous growth of global GDP and an ageing demographic has ensured a steady flow of pensions and savings capital into equity markets. This has resulted in long-run returns for investors in developed equity markets of 6-7% per annum over the decades. However, as the investment pool of retirees increases my little ‘risk radar’ is seeing a problem and a solution. Firstly, many readers will be aware of the Irish stock exchange(ISEQ) and the mighty London Stock Exchange (LSE) losing constituent companies to other major exchanges(NYSE, Nasdaq) or publicly listed companies being bought out by private capital. Only this week we were forced to ponder a scenario where the LSE could possibly lose FTSE 100 index titans, Royal Dutch Shell (move to a higher valuation US stock market listing) and BP (reports of a bid from Adnoc, Abu Dhabi’s national oil company). From a simple numbers perspective, the investment opportunity pool on a public market/exchange (LSE) is not just shrinking by hundreds of billions (in market capitalisation) but also potentially losing two of the 5 biggest income generators (dividends) for pensioners in the UK. That’s a problem. Now, the solution.

    Jamie Dimon, CEO of JP Morgan, in a recent CNN interview highlighted the same problem; at its peak in 1996 the US had 7,300 publicly listed companies. Today that number is 4,300. However, like AI, investment capital might just have shifted into a different corner of the same opportunity pool. In fact, it has. The number of US companies backed by private equity firms has grown from 1,900 to 11,200 over the last two decades (Source: JP Morgan). So, the solution for investors is to expand their investment horizons into private equity funds, private buy-out deals, EIIS investments etc. Until incentives are improved for companies to go public (regulation, quarterly reporting burdens, costs, PR etc), this public-private shift will continue and investors/pensions will have to find opportunities and income/dividends in private companies. Bluntly, the future is bright, but it’s private. And, it is no accident that Spark Private Portfolio investors are currently being offered an exclusive opportunity to expand their portfolios into an interesting private healthcare buy-out deal. Unsurprisingly,  the most valuable private companies right now are very much looking at the future – check out Open AI ($100 billion ) and SpaceX ($180 billion) – but what about that other Musk combination of new tech and transport, Tesla?

    Tesla’s 30% share price decline in 2024 might be perceived as a Musk-specific governance issue but the entire electric vehicle sector (EV) is encountering some growing pains. Check out these headlines:

     

    EV Sales Revved Up. Now Buyers Are Pumping The Brakes – Barrons

     

    Ford to delay rollout of new electric pickup and SUV as EV sales slow –   The Guardian

     

    China’s first quarter EV sales growth slowest in a year –  Reuters

     

    As the benchmark player, Tesla’s poor recent results and actual year-on-year sales decline in the US prompted the commentariat to quickly ask whether this was an EV market blip or something more structural. From this Dublin desk, and a country with an abysmal track record on timely infrastructure modernisation, it looks like the charging infrastructure (not enough charge points on routes) for the EV revolution is due some catch up globally. In particular, US consumer surveys continue to cite charging/range anxiety as a factor. More short-term factors probably include high interest rates (falling soon?), consumer expectations of continued manufacturer discounting and new super-cheap Chinese alternatives. This all sounds very familiar to long term observers of global durable goods manufacturing cycles, and with so many companies investing to win the EV landgrab, there will be casualties among manufacturers. Just ask the computer chip industry. In fact, that industry gives us a chance to conclude on a positive note.

    If anyone doubted the Bidenomics manufacturing revolution in the US, then this week was seismic. Taiwan’s chip manufacturing giant, TSMC, confirmed an expansion of its capital investment in the electoral swing-state of Arizona. The new TSMC investment number is $65 billion compared to an initial plan of $40 billion and will result in 3 chip factories being built in the state. Critically, a mix of US government grants and loans offered to TSMC will add up to a whopping $11 billion of investment incentives. That’s great news for Arizona, albeit TSMC might have to plan for male-only recruitment. It looks like the AI chips of the future will be built in Arizona, but the state’s Supreme Court is definitely searching for the past. In imposing a total state-wide ban on abortion this week, the state’s highest court had to travel back in time to revisit supportive legal text in the statute books from …..1864. Now, that is exhausting.

  • Welcome To Growing Sports Opportunity

    Welcome To Growing Sports Opportunity

    “Sports is now no longer a hobby for rich guys” was the introductory quote in this week’s Fortune magazine profile of ex-Goldman Sachs dealmaker Gerry Cardinale. The day before, it was the turn of an earlier Gravitas name-drop and breakfast ‘buddy’, Todd Boehly, to appear in Forbes magazine. One owns AC Milan, the other Chelsea FC – both former investment bankers. Two articles in two days….hmmm. Curiosity tweaked, I did a bit more reading and my sense is that sport as a business has evolved significantly and is staring down the barrel of a seismic technology shift. Let’s start with evolution.

    In a week when Taylor Swift becomes music’s first billionaire on personal performances and song-writing alone (Source: Forbes) we are reminded of the increasing value attributed to exclusive entertainment. Sport is a form of entertainment but the lines between showbiz and professional sport are beginning to blur. Swift’s attendance at her boyfriend’s Kansas City Chiefs games might have helped NFL TV viewing figures but that’s a superficial coincidence and misses the critical building blocks required to create wealth in sport these days. One could easily presume that the huge growth in value of sports franchises in recent years can be attributed to simply more (and wealthier) buyers than there are available suitable selling franchises. Yes, Saudi Arabia’s sovereign wealth fund(PGA golf, Newcastle Utd),  the UK’s richest man Jim Ratcliffe of INEOS(Man Utd) and Wall Street’s finest (Boehly, Cardinale etc) are buying assets but, to use a property analogy, they are developers not real estate landlords/traders. These purchases are not about spotting undervalued assets to trade, but are all about building franchise value across the entire operation.

    Gerry Cardinale’s RedBird has merged sport and entertainment in investments across football (AC Milan), media (LeBron James’s Spring Hill), Formula 1( Alpine Racing team with Ryan Reynolds) and stadium hospitality(Legends Hospitality) and he’s a believer in layering event expertise on top of sporting excellence:

     

    “Sports is a multibillion-dollar live event entertainment business, and you have to bring relationships and multidisciplinary skill sets across a range of activities to be able to get these things done”

     

    The formula for modern sports ownership needs deep pockets and is focused on three key areas:

    Brand:  The on-boarding of multi-year sponsors requires relationship and story-building skills.

    Infrastructure: Building world-class stadiums, training grounds and player rosters.

    Rights: Expertise and finance skills in the area of media rights are critical in modern sport.

     

    Clearly, investment in the product (arenas, players) builds the brand and leads to the showbiz discussions where audience and finance are the key leverage points. It is no accident that the owner (Boehly) of the LA Dodgers and Chelsea FC is also the owner of Hollywood’s Golden Globes awards event and Oscar-winning film production company A24. Boehly also was once a bond trader for Guggenheim which brings a world-class grasp of financing and risk. So, should we be surprised that it was he who structured the richest individual sports contract in history for the LA Dodgers’ signing of baseball star, Shohei Ohtani? The deal is worth $700 million but Ohtani has agreed to be paid only $20 million of the package until 2034, then the balance over the next 9 years to 2043. Meanwhile, the Dodgers press conference introducing the deal and their new star drew an audience of 70 million and sold more jerseys in 48 hours than Lionel Messi did when going to Miami’s soccer franchise.

    Phasing payments over decades is only one side (liabilities) of the balance sheet evolution of sport. On the assets side of the franchise balance sheet, the LA Dodgers back in 2014 signed a 25-year broadcasting rights deal with Time Warner Cable for…..$8.4 billion. Now consider that Boehly and his Eldridge investment vehicle bought the Dodgers two years earlier for $2 billion. Smart business, but there’s another smart thing in the Eldridge investment approach. The sports and media portfolio of Eldridge holds more than 100 companies and includes Bruce Springsteen’s song catalogue as well as betting site, DraftKings. Yes, for those using Spark’s EIIS Private Portfolio service, the risk-sensible ‘portfolio approach’ is music to our ears. Now, let’s hit the senses with five more data points before we tackle the technology revolution coming.

    • The average Gen Z consumer is spending $56 per month on streaming subscriptions (Spotify, Netflix etc)
    • Netflix has done a $5 billion deal over 10 years for the live broadcasting rights to wrestling franchises, WWE and UFC, owned by the TKO Group.
    • Investment firm, Sixth Street, is the first to launch a sports team from scratch – the 14th franchise, Bay FC, in the US national women’s soccer league.
    • NBC’s streaming service, Peacock, paid $110 million in January to broadcast a single NFL play-off game between the Miami Dolphins and the Kansas City Chiefs. That works out at $1.8 million per minute of game action.
    • Legal sports betting in the US reached $119 billion in 2023 (Source: American Gaming Association).

     

    That Peacock-NFL streaming experiment annoyed plenty of sports fans but did draw a world-record live sport streaming audience of 27.6 million (Source: Nielsen). And, there’s a simple reason why the NFL risked fan fury and tried out new broadcasting tech. Streaming (via internet) is set to pass out cable viewership at some point this decade. This is a monster media technology shift. It means that the existing sports broadcasting giants like Fox, Sky, ESPN, Time Warner etc will be battling the likes of Apple, Amazon, Peacock and Netflix for live sports media rights. Please remember not that long ago Netflix said they had no interest in live sports broadcasting rights. Well, they do now and shocked everyone with the WWE deal. So, more buyers…..and then you do wonder what happens next to the value of sports broadcasting rights, particularly as live sport betting in its infancy in the US goes stratospheric? However, be wary of ‘build it and they will come’ expectations and strategies despite Sixth Street success in little more than 12 months. Note the various skillsets employed by the new sports investment giants – brand building, player and facilities investment, finance/media expertise and use of AI powered datasets. Also, recall that Formula 1 has no facilities or stadia. In essence, it is a travelling event circus. The success of Netflix’s “Drive to Survive” fly-on-the-wall series was the audience and brand build.

    Interestingly, I am currently involved in two sports finance projects and, in both cases, the ‘story’ and the product/people will likely be the key value drivers. It is increasingly apparent that both these elements – brand and product build – require planning before any financing comes into play. Not every story can rely on Hollywood stars like Ryan Reynolds and Rob McElhenney in Disney’s “Welcome to Wrexham”. Watch carefully as sport and web streaming services grow commercially closer and you never know, opportunities might appear closer to home than even Wrexham. Oh, and this is not our first sporting call. We did suggest watching back in 2019….

    “No Netflix, no WAG nor streaming device can generate the social capital of watching sporting thrills and greatness in real time. So, for those with an entrepreneurial bent get thinking. There’s a strong possibility governments and private investors will sit up and take notice of the rich returns available in sport in a low returns world. Sport loves a crowd and one would be confident that equity crowdfunding will equally love a sports story. Tell it soon with the data and, as they say, if you’re not in you can’t win”

     

  • Buying Privately Begins To Work Out

    Buying Privately Begins To Work Out

    So, Adam Neumann wants to buy WeWork out of bankruptcy, and Don Poorleone is apparently a billionaire again. Yep, the Donald’s social media platform, Truth Social, has cracked a $7 billion valuation by moving from the private market to listing on a public market, the Nasdaq exchange in this instance. Amazingly, this valuation is based on annual revenues of barely $3 million and operating losses of almost $50 million. That doesn’t work for me but perhaps a Trump Bible (oh Lordy) is needed or a quick chat with Adam Neumann. Remember Adam tried to list WeWork publicly via IPO  in 2019 with a $47 billion valuation. After a nano-second of Wall Street scrutiny that valuation and IPO was pulled, Adam was removed and we eventually had to wait until 2021 for a $9 billion listing to happen. Today, WeWork is a zero. Such is life in the racy world of high-ego IPOs but there’s a positive aspect to these two shame-free deals. A healthy financing market needs buy-out and IPO activity to pick up. In particular, private markets where we focus our efforts need to see exits via buy-outs and IPOs. Happily, recent developments in both areas are encouraging and involve more credible leaders. Let’s see what’s really working.

    Sticking with IPOs as a signal of good funding health, Californian AI play, Astera Labs, rocketed up 72% on its Nasdaq debut on March 20th giving it a $9.5 billion valuation. Social media platform, Reddit, followed suit the next day with a 48% IPO bump up and a matching $9.5 billion market capitalisation. These significant post-IPO spikes in value will bolster the confidence of others considering IPOs, and boost exit valuations. As always, confidence is critical to funding activity and a giddy IPO ‘shop window’ always helps the mood. However, regular readers will know the ‘Big Daddy’ driver of financial markets is the cost of money (or investment capital). Here too, there is increasing giddiness and activity.

    Funding costs(or interest rates) reflect two things: central bank interest rates and then the extra bit (the ‘spread’ in financial jargon) added on to reflect the commercial and economic cycle risks. Well, you might be aware that central banks in most advanced economies have stopped hiking interest rates and have signalled potential rate cuts. However, the investment markets have already started to cut their add-on bit (spreads) which is a really big deal. Consider the following headlines:

     

    Junk Issuers Rush To Refinance With Spreads Lowest Since 2022 – Bloomberg

     

    Investors Pour Money Into US Corporate Bond Funds At Record Rate – Financial Times

     

    Junk Bond Sales In Sterling Surge At Fastest Pace Since 2021 – Bloomberg

     

    The term ‘junk’ refers to higher risk borrowers and is relevant to our risky world of start-ups and private equity. The headlines point to a stampede by investors to lend( through debt/bonds) to higher risk companies. In the US alone, corporate bond funds have attracted $22.8 billion of investment in the first quarter of 2024. So, this combination of greater debt availability and all-time-high equity markets attracting IPOs is the perfect environment for increased traditional private equity buy-out activity (using debt and equity). The year 2023 was one to forget for private equity deals but check out the following encouraging developments in recent weeks:

     

    Private equity firms Advent International and CVC Capital have joined forces to make a €2 billion bid for UK-based Partner in PetFood (PPF).

     

    US private equity firm Bright Path Sports Partners has bought a 40% stake in Ipswich Town football club for £105 million.

     

    Canadian private equity house, Brookfield, is looking to buy a $3 billion stake in Australia’s second largest telco, Optus.

     

    Grant Thornton US is going to sell a majority stake to private equity firm, New Mountain Capital.

     

    Switzerland-based Partners Group has launched a $12 billion private equity secondary strategy fund.

     

    Clearly, this mix of firms from different parts of the world are spotting opportunity. It is worth pointing out one more factor potentially in private equity thoughts. The headlines have been full of stories about technology sector domination of stock markets, AI euphoria and the concentration of investor expectations in a small group of US tech names, aka the “Maginificent 7”. However, with perfect timing, the Financial Times this week has highlighted “US small-cap stocks are suffering their worst run of performance relative to large companies in more than 20 years”. In fact, since 2020 small caps on average have risen by 24% compared to a 60% move by larger companies. That divergence in performance equates to a significant ‘discount’ valuation opportunity for anyone looking to buy smaller companies. So, what happens next?

    It is reasonable to expect more buy-out activity of smaller companies which, in turn, will raise expectations and valuations in early-stage companies. The trickle-down effect of buoyant public equity markets and greater access to cheaper debt will certainly attract institutional investment capital. And, the good news is that private investors can benefit too by building a diversified portfolio of early-stage companies. Even better, Spark’s Private Portfolio investors can invest in our first ever buy-out deal of an established profitable business in the coming weeks. Yep, profitable. Call it the difference between ‘working’ and WeWork. That really is the truth, and we’d even swear on a Trump bible to that.

  • How To Trade A Trump Win

    How To Trade A Trump Win

    The financial text books and academia will tell you that stock markets tend to reflect investor views 6 to 9 months ahead of events. In financial ‘jargon monoxide’ it is said that stock markets ‘discount’ future events or, in main street terms, it’s a bet. It should also be said that this is real investment money taking a view. Bluntly, opinions are cheap, even worthless. So, when I read the frequent headlines about poor polling numbers for President Biden and a likely November election win for ‘The Accused’, Donald J Trump, my instant reaction is to check the ‘money view’. Polling responses are ‘free’ and we are now entering into that critical stock market focus period of 6-9 months ahead of a significant macroeconomic event. Real money should be starting to show its teeth and the latest financial indicators might surprise.

    The Trump policy manifesto, aside from staying out of jail, is focused on four key messages for the GOP cult.

    1. The US is the largest importer in the world – the US Office of Trade Representative puts the annual import figure at $3.2 trillion (in 2022).  Trump has proposed a 10% across-the-board tariff on all imported goods which would have a seismic impact on all parts of the US economy and instantly add to inflation pressures.
    2. Immigration: Trump plans the detention and deportation of millions of undocumented immigrants while the economy is in full employment. This is another potential inflationary stimulus.
    3. As an undisguised (but curiously skirted around by US media) fan-boy of Orban and Putin, the Trump policy line is to cut off Ukrainian funding support and force a settlement with Russia. The implications for front line European nations like Poland, Finland and Estonia are enormous.
    4. Fossil fuels: Trump has made clear that the climate change crisis and sustainability initiatives of the Biden administration will be reversed, keeping the oil and gas industry happy….and paying into Trump-related coffers.

     

    That’s the plan. And, the polls say Trump will win. However, financial markets don’t seem to believe it, or follow that probability with the obvious trades. Allow me to illustrate the point with a few trading examples.

    Firstly, the import and immigration shockers in Trump’s policy golf bag should not just impact inflation but should also really spook the most important and intimidating market in the world – the bond market. And frankly, it’s not looking too fussed. The bond market and the Fed are still thinking – and trading – inflation (with the odd wobble like last week’s report) is on a glide path to 2-3% and will be accompanied by 3-6 interest rate cuts by the Fed going into 2025. For context, the global bond and debt markets are three times the size of the headline grabbing stock markets which dominate the first 29 pages (of 32) in the Financial Times. As we always say, the cost of money(rates) drives the prices of all financial assets. But, let’s humour the stock market followers…

    Agent Orange seems pretty keen to throw Ukraine and NATO under the bus. So, one would have thought Poland would be terrified of being abandoned by the US while it acts as temporary home to 3 million Ukrainian refugees. In fact, a macro commentator who I hold in high esteem has recently asked the question as to how long before Poland requests or sources its own nuclear weapons for location on its sovereign territory? Terrifying stuff, but again financial markets are more sanguine about the Trump threat. Poland’s stock market – tracked by the $EPOL exchange traded fund (ETF) – was the best performing major country-specific stock index in 2023 – up an almost tech-like 50.8%. Furthermore, Poland’s benchmark index is chugging along at chirpy 3% gain year-to-date in 2024. And, Warsaw is not the only place defying the US polling forecasts.

    Germany is not without its challenges but it has surpassed Japan as the world’s 3rd largest economy. This economic feat has been powered by the most formidable export engine ever seen and, again, would be hugely threatened by a Trump across-the-board 10% tariff on any company exporting to the US. Guess what? Germany’s stock market is hitting all-time-highs. Note, this is not even a country specific phenomenon. The US tech sector might be grabbing all the AI headlines but Europe’s own exporting superstars, nicknamed the “GRANOLAS” by Goldman Sachs, are absolutely flying and don’t seem to be catching any of this Trump (head)wind either. Clearly, investors are not betting on exporting chaos for these companies. In fact, we recently highlighted financial market excitement and the tech-like performance of these 11 companies in our new Private Portfolio Newsletter:

    More strikingly, the Granolas have matched the 63% gain achieved by the US-based Magnificent 7 since January 2021, and paid out much higher dividends. Whoodathunk!! For the curious, and those holding pharma and medtech startups, here are the 11 names: LVMH, ASML, SAP, Nestle, Novo Nordisk, L’Oreal, Sanofi,  GSK, Roche, Novartis and Astra Zeneca.

    Finally, climate and science denial might be very good news for the US oil and gas industry. However, even an almost-broke Trump knows that money talks. So, check out the US Oil & Gas sector represented by the exchange-traded-fund (ETF) known by the ticker “$XOP”. Stunningly, in a Ukraine crisis dominated energy market the US oil and gas sector has inched upwards by barely 4% since the beginning of 2023. For context, one could have earned a higher return by buying a risk-free US Treasury bond over the same period. In fact, US oil production levels are ironically rocketing toward 14 million barrel per day levels under Biden, or as “Honest Don” – no seriously he suggested this name – would say “like never before seen in history”. Go figure, or quiz the GOP!

    That’s real money, investing (or not) in real outcomes in 6 to 9 months’ time and offers certain investors the biggest trading opportunity of a lifetime. The financial instruments referenced above are clearly trading at the ‘wrong prices’ if Trump is set to win the 2024 US Presidency in November. The ‘MAGA Trump Trade’ involves buying inflation-protection bonds (TIPs), buying oil and gas stocks, selling German and Polish stocks and exiting any property funds sensitive to increased inflation and higher interest rates. However, there is one tiny catch. You have to believe the polls and Trump. And….. remember neither has any money.