Gravitas Spark CrowdFunding

Tag: Markets

  • A Quick Guide For Private Investors In Start-Ups

    A Quick Guide For Private Investors In Start-Ups

    One of our portfolio companies ceased operating this week. Lesson learned? Yes. Would we use the same vetting process again? Yes. And, no, Einstein’s definition of insanity is not in play here. Let’s be very clear that mistakes will continue to be made. We just can’t forecast the future. In fact, human beings are not particularly good at the forecasting thing. However, we can control the controllables,  and one of the critical things for a private investor to control is one’s investment process. Call it a check list. Then, know that we probably turn down 10 opportunities for every one we offer on the Spark platform. So here’s a quick guide as to how we compile a score card for companies seeking new investment capital. Note we will expand on some areas in later articles but, for now, this could be an outline framework used by any wannabe early-stage investor….

     

    Founders: This is probably the most fundamental factor in any company assessment. The calibre of the founders is critical to our confidence that the key people in a startup have the energy, resilience, expertise, discipline and ‘market-listening’ gene to drive a project or business to success.

     

    Solution: A laser-like focus on solving a consumer or business problem which can be clearly defined should underpin any analysis of a company’s product or service.

     

    Validation: Revenues generated by the product or service are the ultimate validation. Note business customers are ‘stickier’ than main street consumers so it is not surprising that business-to-business (B2B) investments tend to attract more investment. Other elements of validation like awards, patents or industry thought-leader financial backers can also add weight to the pitch.

     

    Market Opportunity: Huge global market spend numbers sound good but also attract plenty of competing products and services, and imply a danger subsequent funding rounds shift to the perceived ‘winners’. A niche focus on a particular segment of the market can be an easier ‘sell’ and gain better traction with both prospective customers and investors.

     

    Communication: We just mentioned customers and investors together. For good reason. Founders and startups must be on top of their communications and messaging. A poorly worded investment pitch should raise investor concerns about the primary challenge – forget funding, what about founders’ abilities to win over prospective customers?

     

    Endorsement: Many pitches feature impressive testimonials or endorsements. However, there is a higher impact endorsement – money. Typically, in a funding round we would expect founders to bring some financial/investment endorsement to the table. Think about it – if the founders can’t ‘sell’ their business to ‘warm’ friends, family or commercial counterparties, it’s going to be a lot harder to convince ‘cold’ investors to back a project.

     

    Financials: Of course, not everyone is an accounting wizard. However, returning to our comment about ‘forecasting the future’, whatever projections are put in a business plan are most definitely going to be ‘wrong’. The thing to control is unsubstantiated growth trajectories or ‘hockey stick’ forecasts. Initial projections should show an understanding that a slower grind in the early years is a better (and more credible) base case.

     

    Business Model: Company’s when first entering a market will try out different pricing strategies but there’s a bigger strategic consideration than price. The payment framework for the customer is critical: monthly/annual subscription, up front/service models, wholesale, distribution partnerships etc. Investors should be clear as to how an investee company is going to be paid.

     

    Valuation: This is another area/assessment which is going to end up being completely wrong. However, a base valuation can be derived from the projected revenues/profits in the next two forecast years (and previous 12 months if any). Also, where it is very early days with minimal revenues, a good way to think about a business is to calculate how much would it cost to build the product/company/service today. Monies invested in a company to date are a good basis for valuation. And watch out for technology overspend (so so common) and marketing waste (lots of Google ads algorithm sob stories). On the other hand, proprietary databases built in a niche area can support a business valuation.

     

    Last Mile: Very often investors see great products or services and wonder why the business ultimately does not succeed. This writer increasingly believes ‘the last mile’, aka commercial intensity/engagement, is where analytical frameworks need to beef up risk metrics. Clearly, ‘build it and they will come’ is not a business strategy in today’s world. Scaling up customer bases and revenues is a real challenge for early stage companies. Hence, investors should be very clear about what the marketing/distribution/partner strategy is for a start up business. In many ways, fuzziness on this question makes estimates on the size of a market opportunity (with juicy TAM and SAM numbers) completely irrelevant. A roadmap with milestones, skills/talent build, later funding series, and customer mix evolution should be sufficiently clear for investors to understand the plan and the building blocks required to scale.

     

    Exit: Healthy deal activity for smaller businesses, a sector’s track record of consolidation, cash-rich global players as serial acquirors, the network of the founders etc all help paint an exit picture for an investor. For investors, make sure there is plenty of colour in the answer.

     

    The above is not an exhaustive list but captures the main pillars in our analytical framework, and could become a regular check list for a private investor. Of course, each section features mere highlights and headlines but at the same time this should not be ‘rocket science’. Many of the questions you, the investor, want answered need to be answered by customers and partners too. And, we know clear communication is critical to customer success. So, understand the fundamentals of a business and that’s a decent start to building a robust investment score-card. That’s all you can control. Or as ‘Cousin’ Greg in Succession might say… you don’t need to know everything, just the key business/relationship levers which matter.

  • Check Out Two Big Wins For Banks And EIIS Investors

    Check Out Two Big Wins For Banks And EIIS Investors

    Ok, I was wrong. I really thought that rising interest rates to over 5% over the last four years would cause greater stress in bank loan books. Yes, commercial real estate loans are causing angst in the global financial system but thanks to private equity, pension funds and family offices it’s not just the banks on the hook this time. Clearly, the rise of private investment vehicles in financial markets has helped to de-risk the banking system. Of course, the investor muscle memory of the 2008-2009 credit crisis has had a double impact too. First, consumer protective regulation has forced banks to build huge capital buffers (reserves). Second, bank customers through a combination of lack of finance education, risk aversion and behavioural inertia have added to those buffers. European bank customers in particular have left trillions of euros of cash in the bank earning almost no interest because they have not sought out specific interest-earning deposit or money market accounts. Ireland, with almost €150 billion euro sitting in accounts earning miniscule interest, is the worst European offender.  Here are the numbers:

     

    • Across the EU banking system there is €16 trillion of customer cash sitting in bank accounts.

     

    • 54% of that cash earns on average 0.13% in low-interest overnight accounts. Implicit in that number is that 46% of customer cash is in longer-term deposit accounts. In other words, almost half of European bank customers commit cash to ‘term deposit accounts’ which, in exchange for waiving access to the cash over defined time periods, pay depositors average rates of 2.65%.

     

    • Ireland has a VERY different mix of customer behaviours. Just 12% of customer cash earns income in term accounts. A whopping 88% of Irish cash sits in overnight accounts, earning almost nothing.

     

    Clearly, this is a win, if not a scandal, for Irish banks. On the other hand, the European banking system is in pretty good shape, steering capital away from higher returns but also higher risk. As an illustration of the European bank risk culture, I was staggered to see that US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks. So, Europe’s banks are doing ‘ok’ but not exactly chasing higher returns for their shareholders which translates into underwhelming valuations. However, if you thought this was a hit piece on banks you’d be wrong. The other eye-popping data point I discovered this week was that in the critical world of customer experience (CX) – now a main priority for 80% of companies per Gartner – banks in seven major economies outside Ireland now top the CX league tables. That just wasn’t on my 2024 bingo card. In fact, that banking ‘bingo card’ is putting together a very interesting string of numbers….

     

    • US and global stock markets are hitting all-time highs again after August wobbles. Yes, the US tech sector has been the star sector of the last 12 months (+42%) but you might be surprised to see US Banks in second spot with a 29% return.

     

    • Euro area banks handed out €71 billion in loans for house purchases by consumers in July, the highest level since August 2022.

     

    • Italy’s Unicredito bank is signalling increased executive confidence with a shock swoop for a 9% stake in Germany’s Commerzbank. The Italians have asked permission of the German government to pursue merger discussions. Wow. Cross-border M&A featuring major European banks has not been seen for years.

     

    • Europe’s financial markets are increasingly pricing in climate-related risks. ECB reports that eurozone banks were charging companies in the top 25% of carbon emitters monthly interest rates 14 basis points higher on average than those in the lowest 25%

     

    • You may not have heard of Tether but it is a fintech platform specialising in trading digital currencies which track/tether to traditional major currencies using blockchain. These asset-backed digital instruments are known as stablecoins. Tether has 350 million stablecoin users globally and, incredibly, has generated more profit ($12 billion) than the world’s biggest asset manager, Blackrock, and its $10 trillion portfolio since early 2023.

     

    • Perhaps it’s no big surprise that Revolut is reportedly about to launch a stablecoin for its 45 million customers, of which 2 million reside in Ireland.

     

    One of the other big messages in the CX world these days is that brands suffer without innovation. Keeping the status quo is really going backwards. We have written before about the massive data/AI opportunity for banks and the ultimate platform play: payments. Trillions of dollar wealth has accrued to innovators in the social media and cloud computing platforms. Now, it could be the turn of payments to deliver trillion dollar opportunities. While we write of opportunities might we suggest another?

     

    As tax-return season kicks in, private investors should note that EIIS tax-friendly opportunities just became more lucrative. Thanks to changes in last year’s Finance Bill, many investments in early-stage companies currently attract 50% income tax rebate opportunities for Irish investors. Now, think about all that cash sitting in bank accounts with inflation of say 3.5% eroding its purchasing power. Here is a quick illustration of wealth destruction:

     

    • Keep €20,000 in overnight deposit as usual.
    • Hold for 10 years while asset prices inflate by 3.5% per annum.
    • Spend the €20,000 after 10 years but get only ‘value’ of €14,000 due to asset inflation/purchase power erosion.

     

    Or….. try this EIIS investment strategy.

     

    • Invest €20,000 in portfolio of 7-8 early stage companies.
    • Receive €10,000 back in income tax rebates.
    • In 10 year’s time, if your €20,000 investment has returned just €4,000, you have beaten the bank.
    • That €4,000 hurdle requires just one of your investments to double in value while all the others go to zero.

     

    Gotta be worth thinking about. Certainly, if you’re sitting on cash which will lose 30% of its purchasing value over the next 10 years. Better still, move some money into term deposit accounts and look for 3% long-term rates. Then think about using EIIS to offset the taxes on that deposit income. In the “real” world of tax savings that 3% interest earnings (offset with EIIS rebates) on your deposit equates to a 6% gross return typically promised on other types of assets, like a property or multi-asset wealth portfolio. Definitely worth a chat with your accountant.

     

    Finally, from a Spark perspective, we can promise our investors a very interesting pipeline of up to 8 EIIS deals spread across SaaS software, biopharma, medtech, ESG/sustainability and AI before Santa arrives and the EIIS window closes for 2024. And, if we were in Santa letter-writing mood we’d be tempted to ask government and banks to join the dots and incentivise specific support for small early-stage businesses via bank deposit accounts. Showing my age here, anyone remember SSIA’s of the early naughties? Answers on a post card to Apple or the Department of Finance with a recent €14 billion windfall/capital infusion to kick things off….

     

     

  • 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.

  • 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.

     

     

  • 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.

  • 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.

     

     

     

     

  • Which Global Themes Are Flying?

    Which Global Themes Are Flying?

    Only one sleep to go until “Sixmas”, or the 6 Nations. Giddy. Another 28 days to go in the “Freezbrury” cold water swim challenge. Not so giddy. Such is the emotional ebb and flow of life but what do we make of the January investment emotional roller-coaster? Dare we say January was a game of three ‘halves’? The early days of the year saw markets puke, only for the next three weeks to see markets roar higher on familiar big tech AI giddiness, interest rate cut hopes and stronger economic numbers out of the US and Asia. Then, more fear. As always, the cost of money (rates) drives all asset markets. So when the Fed said “not so fast” on March rate cut expectations markets had another little tantrum to close out the month. Now, ignore all that trading noise. Let’s stick to longer-term thinking and revisit a few themes we flagged for 2024.

    First, we go big. The “Magnificent 7” big tech names have been driven to new all-time highs on the continuing AI theme with Microsoft hitting a $3 trillion market valuation for the first time, and AI poster-child, Nvidia, adding another 24% to its value in January alone. However, if you’re a Tesla shareholder, you might need access to the Elon Musk drugs cabinet to dull the pain of a January 24% crash in the value of the once biggest EV manufacturer in the world. As we write of potential regime shifts, I am reminded of a mandatory Thursday lunchtime every quarter in the naughties being glued to my desk and screen awaiting Nokia’s latest earnings report from Helsinki. The equivalent global pulse-check these days is one evening every quarter in New York when Microsoft and Google tell us how their cloud(AI) business is doing. This week the update was 30% and 26% cloud revenue growth respectively. Let’s just say theme intact.

    Now, go smaller. Well, not so small. On the Microsoft analyst call, Ireland’s very own An Post received a shout out from Microsoft CEO, Satya Nadella, as an example of a customer using its AI CoPilot Studio. This did prompt some thought about small companies and start-ups using AI. We probably don’t give technology and digitalisation enough credit for empowering founders and scaling up businesses over the past two decades. With a website, e-commerce applications, security/payment apps, and cloud hosting/workflow support, a start-up business no longer had to sink capital into up-front infrastructure costs but, instead, could pay software subscription fees (SaaS) to big tech and go to market quickly. This writer is just wondering could AI be an additional accelerant for start-up businesses? Maybe it’s not just me. Review site, Yelp, recently published data on a record 762,200 new US business openings in 2023, up 20% on 2022. Furthermore, US government data confirms the pandemic-inspired “entrepreneurship boom” is alive and kicking going into 2024.  However, some start-ups do need serious up-front capital….

    Check out our cleantech theme. The initial construction of huge EV battery gigafactories, renewable energy installations and decarbonised manufacturing (see steel, fertiliser, cement etc) requires billions of investment capital dollars. Encouragingly, we are seeing some really big funding deals get over the line. Sweden’s Northvolt announced a $5 billion debt financing round in January and a week later another Swedish name, H2 Green Steel, raised €4.5 billion in debt and equity. And, it’s not just cleantech start-ups being backed by significant banking syndicates. Despite the gloomy macro headlines, it feels like banks are feeling better about life in general. Note the record $188 billion of bond issuance by US companies in January and the index(ETF) which tracks the US Banks sector (XLF) hitting a 2-year high. No wonder Bloomberg was leading with a headline this week “The Credit Market Is Quietly Booming again”.

    Of course, in our earlier 2024 themes article we expected continuing stress in global real estate so it’s not all good news for banks. The slow-moving Chinese train crash of Evergrande finally hit its liquidation wall in the Hong Kong courts but the potentially more significant real estate news came out of Tokyo this week. Aozora bank shares plunged 20% after it revealed a $191 million loss for the year due to write-downs on its loans to the US commercial real estate (CRE) sector.  Meanwhile, back in the US, New York Community Bancorp reported a $185 million charge-off on just two CRE loans and watched its share price crater 38% in a matter of hours.

    Expect more of this but the key global credit swing factor will be China. For now, Beijing’s efforts to stimulate the economy is pushing capital into the wider Asian economy as the Chinese manufacturing engine ramps up activity. Evidence of early policy traction across Asia might be seen in the bellwether South Korean economy and its PMI survey of factory activity showing expansion for the first time in 19 months. Of course, with interest rate cuts firmly expected in 2024, central banks and investor want a “goldilocks” outcome rather than economies running excessively hot. We shall see, but in the area of healthcare it sounds like one form of excess has been whipped. More specifically, we are revisiting our weight-loss and healthcare/biology theme.

    In recent days Danish pharma company, Novo Nordisk, became just the second European company to  pass the $500 billion valuation mark. Its obesity drugs, Ozempic and Wegovy, have revolutionised the prospects of this 100-year old company and can only focus investor minds on further medical opportunities. We have previously highlighted the intersection of biology and technology as a theme so recent news from Cambridge University was intriguing. Scientists in recent weeks have published research on the successful re-programming of microbes to unlock new materials. This could lead to a whole range of innovative products from new drugs to enhanced carbon-absorbing materials. Here were our own thoughts on new materials and speed to discovery from a few weeks ago:

    “However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%……Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction”

    One final thought which is not so much a theme but is a necessity for these themes to accelerate; our investors always ask “where’s the exit?”. The text book response is that investor exits usually happen through a trade sale(M&A), buy-out (Private equity) or listing shares on public markets via IPO. Private equity house, Bain Capital, reckon global M&A activity of $3.2 trillion was down 15% in 2023 to its lowest in a decade. Meanwhile, EY’s global IPO report indicated listing activity was down 33% in value terms compared to 2022, and Goldman Sachs said it was the worst IPO year since 2016. The good news is that many advisory teams in the investment banks are quietly confident of an uptick in IPO pipelines for 2024. Indeed, the expected New York listing of Chinese fast-fashion play, Shein (ask the kids!), with a $90 billion valuation will be an early test of lift-off. The big global themes will still play out but juicy sales and exits would definitely confirm things are really flying. Also, and more importantly, confidence spreading outside the “Magnificent 7” to smaller businesses would be very good news.

     

  • The Value Of Good Times Revisited

    The Value Of Good Times Revisited

    My first year on this planet was the first for humanity on the moon. A good year but no memory of it. Probably my earliest happiest memory was lying on the floor playing with Airfix toy soldiers in a Waterloo battle scene at Christmas time as Simon & Garfunkel’s ‘The Boxer’ played on my parents’ hi-fi. Happy times, and always grateful for plenty more over the following decades. However, last week another ‘good times’ feeling was prompted by the radio belting out “The Boxer”, quickly followed by a news update on another lunar expedition. Yep, it was Japan’s turn to visit the moon but also a reminder of how much I loved living in Tokyo in the ‘90s. Good years, many memories. I won’t be visiting there any time soon but the memory-jog from the East could be timely. Japan might just be about to revisit its own good times…..

    The main stock market index in Tokyo, the Nikkei 225, recovered to a 34-year high this week. That’s a positive headline but doesn’t escape the fact that the Japanese stock market has only returned to index levels last seen when I first landed in Japan. However, there’s a lot more going on than headlines highlighting 34-years of zero wealth creation. In fact, I’d almost use the word ‘progress’. Progress might not sound like a big deal to readers, and I might have shared that very same view until I came across a fascinating piece of data in the Financial Times(FT) in recent weeks. Thanks to the Google AI tool, Ngram Viewer, one can explore language usage trends over time by searching millions of books, documents and other text sources.

    According to the FT’s John Burn-Murdoch, usage in the West of English, French and German words for “progress, advance, future, rise and improvement” have been in decline since a few years after Apollo 11’s daring touch-down on the moon. Meanwhile, usage of the words for “threat, worry, caution, risk and caution” have increased significantly to suggest a multi-decade cultural shift to risk-aversion, or ‘safetyism’ which is being used a lot these days in AI discussions. Indeed, a recent excellent David McWilliams podcast with Burn-Murdoch explored this potential connection between culture, language and growth. For Japan, this analysis must genuinely resonate. After decades of trying to unwind huge debt levels in its financial system, and persuade its ageing population to spend, there are interesting developments which point to a significant cultural shift.

    Leaving aside the ambition to be only the 5th nation in history to successfully ‘soft’ land on the moon, Japan is flexing its ‘progress’ and ‘advance’ muscles further afield. How about the daring move by Nippon Steel last September to buy iconic US industrial asset, US Steel, for $14 billion? Or Softbank swooping for Ireland’s Cubic Telecom in a €473m deal pre-Christmas? Perhaps the even bigger deal is the incoming capital landing on the island nation. Last April we wrote about Warren Buffett buying up significant stakes in Japanese sogo shosha, 150-year old industrial trading houses, described by Buffett himself as “a cross-section of not only Japan, but of the world”. In some ways, Japan is the beneficiary of a global China de-coupling. Indeed, its trading houses could be considered a new de-risked staging post to access the Asian middle-class; a cohort which will account for a stunning two thirds of the global total by 2030. And….Buffett is not the only financial guru revisiting Japan.

    Steve Cohen, has opened a Tokyo office of his Point72 hedge fund and US private equity player, Ares Management, has announced plans to do the same in 2024. Ken Griffin’s Citadel, the most successful hedge fund in history, has also decided to reopen its Japan office. So what’s the deal? Well, when an iconic Japanese industrial giant like Toshiba agreed in September 2023 to a $14 billion sale to local private equity firm, Japan Industrial Partners (JIP), that was a very big deal. Not the size, but the business cultural signal. Typically, underperforming companies on the Japanese market have stubbornly rebuffed shareholders’ demands for maximizing returns on invested capital. In fact, the Japanese authorities have frowned upon the unfettered threat of Anglo-Saxon-style unsolicited takeover bids. Without the threat of takeovers, Japanese companies, in aggregate, have displayed the following unique features:

     

    • Japan’s listed companies sit on enormous cash piles amounting to almost 45% of their market capitalization. That’s about three times what UK or US companies hold (Source: IMF)
    • Prior to Covid-19, Bloomberg reported that total cash held by Japanese companies on their balance sheets had reached 90% of Japan’s $5 trillion GDP.
    • 40% of companies listed on the Tokyo Stock Exchange finished 2022 with net cash holdings equal to more than 20% of their equity. (Source: Carlyle)
    • 50% of companies listed in Japan are trading below the value of the assets on their balance sheets. In financial valuation terms this is expressed as a price-to-book ratio of less than 1x. (Source: Schroders)

     

    So, cash is king. But, in a super-low interest rate Japan, un-deployed cash is killing investment returns. This is reflected in so many companies trading on valuation multiples less than 1x price-to-book, but is now poised for a shake-up. The Tokyo Stock Exchange (TSE) has formally instructed all listed companies whose price-to-book ratio is less than 1x to raise their multiple above 1x, or risk being de-listed. One way to do that is to reduce the book value in the ratio by handing cash back to shareholders. The TSE has published a “name and shame” list and this is raising investor expectations of better governance and deployment of capital. In fact, more than 50% of Japanese companies have increased their cash dividends to shareholders in the last year. Sounds like Warren, Ken and Steve have their eyes on the ball. And, if you like ball games, then Japan is making waves there too..

    Shohei Otani from Iwate Prefecture has just signed a $700 million contract with the Los Angeles Dodgers baseball franchise. This is the biggest individual contract signed in history, in any sport, and it feels like ‘a moment’ for Japan. I sense other moments too. Tokyo’s stock exchange has just passed out Shanghai in market value and regained its place as Asia’s biggest equity market. And, it’s not just investment capital coming to Japan. Back in the mid-1990s tourist numbers were just over 3 million. That number had rocketed to over 30 million before Covid struck. Anecdotally, Japan seems to be on so many ‘bucket lists’ as the last advanced economy which is truly a different experience for travellers. Also, thanks to its price stagnation problem over the last 30-years Japan is presenting far better relative value attractions than its “pricy” reputation. Of course, value is a huge factor in financial markets so my final Japan revelation might surprise.

    We mentioned earlier that Japan’s stock market has only just returned to levels last seen in 1990. In other words, the long-run multi-decade returns on Japanese assets (on average) have been close to zero. However, the annual valuation “bible” published by Nobel Prize winner, Eugene Fama, and Kenneth French has just thrown up an amazing bit of data. Japanese stocks which qualify as value stocks (low valuation ratios like Price-Earnings, Price-Book etc) have compounded returns at 6.5% annually in the period 1990 to 2022. In a global market recently dominated by Big Tech and “Magnificent Seven” turbo-charged valuations and share price gains this is a timely reminder of Warren Buffett’s super-power, TIME, and his focus on value for long-run returns. For investors today, the investment question should always address value but also… timing. Right now, watching these moments, I’m wondering is it Japan’s time for good times again?  It certainly has a fighting chance.

    “In the clearing stands a boxer
    And a fighter by his trade
    And he carries the reminders
    Of every glove that laid him down”      –    Simon & Garfunkel

  • More Blue Sky Than Blue Monday

    More Blue Sky Than Blue Monday

    Apparently, the Monday of this week is the worst every year for negative thought. Furthermore, the new UK Foreign Secretary, Lord Cameron, fresh from launching war in the Red Sea, told us in a weekend TV interview that “the lights are absolutely flashing red” on the global risk dashboard. Excellent. Well, that’s settled then – I mean Lord “Call Me Dave” gets all the big calls right doesn’t he? Ok, let’s not invite the rest of the world to turn the air blue. In fact, let’s do what should have been done in 2016 and pay attention to what’s really happening in the world right now. Not surprisingly for this writer, January is already confirming themes established and developing from earlier years and we are more than happy to keep screaming about them until we are blue. So, here we go with a little whistle-stop tour of the real world….

    We truly believe the ‘convergence’ of various technologies is about to turbo-charge the acceleration of change in the global economy. An existential crisis also helps focus minds and….. money. The climate change crisis has prompted the greatest capital shift in history as $6 trillion of annual spending on cleantech is forecast every year until 2050 (Source: McKinsey). Indeed, one of the key investment destinations in moving away from fossil fuels has been electric vehicles(EVs), and the batteries used to store energy and power these vehicles. Chemistry advances have been key in driving costs down and capacity up where lithium-ion type batteries are the predominant storage technology. However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%.

    Yep, Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction,  but also counter an unhealthy commentariat focus on AI ‘safetyism”. The social and economic basics of health, shelter, mobility and food are in dire need of blue sky thinking but might just have found a genuine innovation accelerator. Microsoft themselves have told the BBC that one of the company’s missions was “to compress 250 years of scientific discovery into the next 25.” Thankfully, this was not the only positive solution speed surprise of recent weeks.

    The IEA has confirmed that renewable energy capacity increased globally by 50% in 2023 alone(!). That’s the biggest growth seen in more than two decades. At that pace, it is conceivable renewable energy could be 50% of electricity generation by 2030 and, brace yourselves… would actually meet the renewables ‘tripling’ target agreed at Cop 28. Germany – not getting great economic press in recent times – is already at the 50% renewable electricity production level with CO2 emissions currently at a 70-year low. Furthermore, coal usage at a 60-year low in Germany makes for clearer skies but the gloomy headlines could have obscured another Teutonic trophy win.  The EU has given the go-ahead for Germany to provide €902 million of state aid to battery producer, Northvolt, for the construction of a gigafactory producing EV batteries. Without that aid, Northvolt would have probably moved the project to the US. Instead, the €2.5 billion project at Heide will be the first to avail of the new ‘matching aid’ exception allowed by the EU to support more flexible/higher amounts of state aid to prevent an investment exodus to the US.  Expect more good European news on this front as the region is forecast to build a further 250 battery factories by 2033 (Source: Buck Consultants). These are real actions and projects (not headlines) but companies are also showing confidence with more traditional strategic moves.

    We perennially write “watch what they do, not what they say” and the big “tell” is often M&A activity. Given acquiring other companies results in wealth destruction almost 50% of the time, we tend to see a flurry of M&A activity as a positive illustration of executive confidence and found the headlines of recent weeks interesting.  You might think the announced $14 billion purchase of Juniper Networks by HP was just another example of the technology sector enjoying the benefits(and valuation multiples) of a stellar 2023 but back in the ‘old economy’ things are stirring too. And, if M&A was tricky enough why not try to acquire a national icon, as a foreign company? Cue the Japanese execs at Nippon Steel have decided to swoop for US Steel in another $14 billion deal. Once the most valuable company in the world, US Steel could become a political football but both boards have agreed the deal and are acutely aware that the most recent offer from domestic rival, Cleveland Cliffs, was just over $7 billion. You don’t need the finance gurus to figure that one out. Anyway, they are busy too. The world’s biggest asset manager, BlackRock, has announced the $12.5 billion purchase of Global Infrastructure Partners (owner of Gatwick Airport and Melbourne Port). Clearly, the $10 trillion giant sees a future for the old stuff.  As for the new stuff…

    The SEC in the US has just approved funds (ETFs) which invest in cryptocurrencies (Bitcoin). This is massive for the crypto and blockchain ecosystem. In simple terms, this approval by the SEC means funds invested in Bitcoin are now regulated and can be considered an asset class in their own right. Nine funds (ETFs) have been approved to trade on New York regulated exchanges, and in the first two days of trading attracted $1.5 of investor inflows. BlackRock’s fund led the way with $500m followed by Fidelity’s fund bringing in $422m. For me, cryptocurrencies are a very good indicator of risk appetite, or confidence. So, if Bitcoin is trading close to $40,000, this feels like the world is not about to fall apart. Other new stuff is doing well too.

    We’ve already touched on AI’s benefits to humanity but, if you’re an investor, the AI posterchild is still Nvidia. While the broader equity markets have spluttered in January, Nvidia continues to march to new record highs. Its market value is now in the region of $1.4 trillion. For context, if Nvidia’s share price increases by another 15% its valuation will match that of Amazon. Then consider Microsoft, another AI play, which overtook Apple this week as the most valuable company in the world. You might think all the AI excitement is in the big tech names but CB Insights has published data showing AI start-ups benefitting from  significant valuation premia when raising capital. Median valuations for early stage/seed fundings were 21% higher, larger Series A fundings saw a 39% premium and Series B funding rounds clipped an extra 59% from investors compared to non-AI companies. Get ready for more AI references in investment ‘story telling’, but also watch out for the continuing battle for authentic stories and content needing no AI.

    Over the weekend, the exclusive rights to the NFL game between the Miami Dolphins and the Kansas City Chiefs were sold to NBC’s streaming service, Peacock, for $110 million, or $1.8 million per minute of game time. According to the superb sports finance newsletter, Huddle Up, this is all about Peacock/NBC being given a foothold by the NFL as streaming overtakes cable consumption over the next 5 years.  That means Apple, Amazon and Netflix will be a big part of media rights negotiations in many sports in the coming years. Think Hulu and Wrexham, then marvel at the Rightmove data showing Wrexham as the busiest property rental market in the UK in 2023. That certainly wasn’t forecast on those Brexit red buses in 2016.

    Of course, a market whistle-stop tour would not be complete without a check on the ‘Big Daddy’ driver of all asset classes; the cost of money. Here too, the news was not blue. The cost of two year money in the US in the past week (measured by the yields on traded 2 year US Treasuries) was back to levels not seen since May 2023. In fact, the world’s most profitable bank, JP Morgan, didn’t just announce record profits last week but also told investors they believe the Fed will cut interest rates SIX times in 2024. We shall see, but it is clear that capital is “climbing a wall of worry” in lots of interesting parts of the global economy. That does not mean we can ignore the concerns of some serious and credible analysts. The world’s risk experts continue to watch Russia vs Ukraine, Israel vs Hamas and China vs Taiwan. More than enough volatility, and enough for Ian Bremmer, CEO of the Eurasia Group consultancy, to describe this year as…

    “Politically it’s the Voldemort of years. The annus horribilis…. and then there’s the biggest challenge in 2024… The United States versus itself”.

    Again, voting like sport doesn’t need AI. Who would have thought that US democracy would be the greatest geopolitical risk of 2024? Simply stunning. Yet, I am hopeful that younger voters, business leaders, investment capital and credible domestic influencers will begin to spell out the true potential cost of burning the US Constitution in front of the whole world. Just imagine fighting the “Red” threat of totalitarian Communism for decades and then discovering you have your very own Red totalitarian party at home? Now that must make more than a few voters go blue……