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Tag: Microsoft

  • Time For A UK Recovery?

    Time For A UK Recovery?

    Crikey, twice in one week. A positive thought on the UK. Maybe, it’s my subliminal way of keeping the rugby gods happy before Twickenham? It’s certainly not Rishi Sunak’s sole splitting toe-curler of an interview with Grazia – surely the place where political careers go to die or promote blissful dishwasher habits. No, seriously. Anyway, Budget Day comes this week in the UK but that won’t move the recovery dial. No, I’m looking for inspiration elsewhere and, as fortune would have it, we hosted a launch event in London last week. The guest speaker on the night, Chris Johns – author, podcaster, economist, fund manager, strategic thinker with a big following – made the interesting point that, in a year where 4 billion people on the planet are due to vote, the UK might be in a unique position. Its voters will most likely reject the trend of chasing populist pipe dreams.

    The 14-year suffering electorate in the UK has already tried populist politics, and it is entirely possible that a curious fixation with ‘taking back control’ and a nostalgia for historical glories could bring the Tory party to an election wipe-out where less than 100 of their Westminster parliamentary seats will survive. That’s what happens when the Dambusters theme music leads to machine-gunning dinghy policies and taking back control doesn’t quite lead to ‘ruling the waves’. In fact, quite the opposite of control, as the nation empties its bowels directly into UK waterways at a pace not seen since Nosferatu Rees-Mogg first walked the cholera-ridden streets of London in 1866, with Nanny. The toilet humour may feel misplaced in a crisis but infrastructure decay is at the root of UK decline, and pre-dates Brexit. The bottom line is that the UK, both in the public and private sector, has been under-investing for decades.

    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. So, why my optimism? Well, I’m schooled in the financial market orthodoxy that the rear-view mirror is a wealth destructor and that the greatest opportunities can be found at the maximum point of despair and disarray. The disastrous 49-day PM reign of Liz Truss and the international bond market near-strangulation of UK pension funds in September 2022 was possibly that moment. Truss’s recent reinvention as on-stage Tommy Robinson (UK civil court adjudicated racist) cheerleader with MAGA extremist, Steve Bannon, at the fascist CPAC conference merely highlights the passage of populism past the point of no return. Not even the suspended Tory Deputy Chairman, Lee ‘Anderthal’, went that far. However, the financial returns possible to investors in the UK might be about to turn for the better. In our recent “Private Portfolio Thoughts” Newsletter we highlighted a couple of interesting data points:

     

    The Quest quants team at Canaccord are pointing out that UK companies’ level of capital expenditure is at multi-year lows. This means there is plenty of gun-powder to acquire other companies. Also, the machine-learning macro data at Quant Insight is pointing to lower credit spreads (higher lending confidence) driving financial markets right now.

     

    This combination of pent up investment capability and improved borrowing conditions for UK businesses creates a very opportune environment for the purchase of UK companies by other UK companies. One could view it as a capital expenditure ‘sprint’ ie why invest organically when you can buy an existing business, customers and expertise? There are also a few other factors to consider….

    Valuation: Mid-sized UK companies which are listed in the FTSE 250 index are trading at 25-35% valuation discounts to other developed markets. Some equity research houses have boldly referred to the UK mid-market as being on ‘emerging market’ valuations of 11-12x earnings multiples compared to US markets on 19x and world developed market averages of 16x.

    Currency: Consider the Brexit devaluation of the Great British Peso (GBP) by 15% and a foreign buyer could be looking at a “50% Off, For Sale” opportunity. And, it’s not just us thinking about foreign acquirers…

    A 2023 survey conducted by London-based investment bank, Numis, showed that a whopping 90% of FTSE 250 company directors believe UK firms are vulnerable to foreign takeovers due to depressed valuations and a weak GBP. Oh, and then Numis was bought by Deutsche Bank! That’s certainly ‘walking the talk’. However, this is not just an isolated corporate coincidence. There are other headlines signalling a growing awareness of opportunity and interesting company moves:

     

    *Britain Isn’t Such a Basket Case Anymore, At Least To Investors – Bloomberg (March 5th 2024)

     

    *UK Insurer Direct Line Rejects Ageas’s $3.9 billion buyout – Reuters (February 28th 2024)

     

    *Dutch Fintech Bunq moves top exec to UK to lead post-Brexit return – Financial News (March 4th 2024)

     

    *Currys shares soar as Chinese retailer enters takeover battle –   The Guardian (February 19th 2024)

     

    *Santander-backed Ebury reportedly eying £2 billion London IPO – Reuters (March 5th 2024)

     

    That last headline is a striking confirmation of two themes we have recently highlighted on these pages. Firstly, Ebury is a UK payments fintech and the UK fintech sub-sector, despite Brexit, remains the best place in the world outside Silicon Valley to attract venture capital. Second, the payments sector within fintech is ‘hot’ and could follow digital processing and social media as the next mega-trillion dollar network. In contrast, the overall UK market has gone cold and lost its “equity culture”. No wonder the CEOs of major UK companies have been pressuring Chancellor Jeremy Hunt to bring some Budget relief or ISA incentives to UK investment. The data is damning.

    Pension fund allocations to the UK’s stock market have fallen from 53% of total investment to just 6% in the space of 25 years. In fact, the entire UK market is valued at $3 trillion which is less than the market value of a single US company, Microsoft.  This could be viewed as a long-term UK downward spiral but ….a marginal pick-up in M&A, investment and foreign capital inflows could have an outsized ‘FOMO’ impact on perceptions. Think of Japan’s recent resurgence and then consider what might happen to the UK market if investors believe the worst is in the rear-view mirror and the future is investment, not puerile populism. Watch for corporate leadership and action. Then, follow the 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.

     

  • Internet Trends of 2019 – How Did We Miss That?!

    Internet Trends of 2019 – How Did We Miss That?!

    There is one report worth a read every year. Veteran Wall Street analyst and technology investor, Mary Meeker, publishes an annual “Internet Trends” slide deck which has become a valuable source of information for business owners.

    It can be downloaded at www.bondcap.com and is just the 330 pages long(!)

    For those a little bit time poor we thought it might be helpful to flag a number of the key trends. Some of them might even have been covered previously in this corner.

    America is already great – the greatest it has ever been. Eight of the ten most valuable companies in the world are US owned and six of them are from the technology sector. As ‘Agent Orange’ in the White House threatens trade wars across the globe, readers should be mindful that only 30 years ago it was Japan who filled eight of those top 10 spots. Fingers crossed for the G20 meet this week!

    Technology is the new oil. The tech sector’s phenomenal ability to scale rapidly has ensured its position as the ‘fuel” to power almost all business activities. As recently as 1980 six of the ten largest companies in the world were oil companies. More than half the human population( > 3.8 billion) is now online but user growth is slowing to a single digit growth rate of 6%.

    The business future is East. The Asia Pacific region now accounts for 53% of global internet users with China and India combined making up a third of the global user base. However US technology companies are the leaders occupying 18 of the top 30 positions in the valuation tables for the global technology sector. China holds 7 of those slots but expect that to grow with its more than 800 million strong mobile user base!

    Advertising spend is chasing user behaviour changes. In 2010 US consumers spent 8% of media time on mobile with mobile ad spending at barely 0.5% of total ad budgets compared to TV time and spend at 43%. Fast forward to today and mobile user time and ad spend is at 33% compared to TV at 34%. Expect 2019 to witness mobile as the top recipient of advertising spend as time spent on mobile, estimated at a daily 226 minutes, will overtake TV at 216 minutes. Also, watch out for the likes of Amazon, Twitter and Pinterest to gain additional share of those advertising revenues from Google and Facebook.

    Humanity is returning to the caves. Early human communication was delivered via images/stories. Our brains are wired for images. Writing was a hack, a detour, but we are now returning to what is most natural. The principal delivery platforms of digital images, YouTube and Instagram, are gaining share of daily user time from Facebook and TV. Digital video consumption as a share of total watching time vs TV has doubled from 14% to 28% in just 5 years. Possibly more stunning is the fact that another image-based activity, interactive gaming, has become a social platform in its own right with total players now standing at 2.4 billion(!). Thank you Fortnite…..

    Video didn’t kill the radio star. Arguably, voice is on the come-back trail. Podcast usage has doubled in 4 years while the Amazon Echo installed base has doubled to 47 million US users in just one year.

    Banks beware. In the week that Facebook announces its own crypto-currency and Bitcoin rockets through $10,000 again the whole area of mobile payments is exploding. As European bank valuations plummet how would you value Alipay in China? This payment platform has more than 1 billion users and doesn’t just do payments; this is a full- blown financial services player providing loans, wealth management and insurance products to hundreds of millions of consumers and millions of businesses. Even closer to home, Monzo raised money this week pushing its valuation over £2 billion; and another European bank challenger, Revolut, has seen its user base double to 4 million in just 10 months.

    Cloud deployment is booming. Cloud service revenues for Amazon, Microsoft and Google are growing 58% year-on-year. The cloud has also been instrumental in allowing businesses scale up using ‘freemium business models’ – Gaming, Google G Suite and Zoom are good examples where excellent free user experiences drove subscriber revenues for additional functionality. Slack in the week of its successful IPO is also worth a mention as a business service following in the footstepos of Wix, Dropbox and SurveyMonkey. According to Mary Meeker we are only just getting started with freemium business models for business and the consumer. It was gaming which proved the model – just the 2.4 billion players later and yet we are only now writing about freemium models for enterprise/businesses. Perhaps those 330 slides of Internet Trends might be worth a closer look if you want to get a better picture of the digital future of your business……

    “Data is now fundamental to how people work & the most successful companies have intelligently integrated it into everyone’s daily workflow… Data is the new application.”
    Frank Bien – CEO & President, Looker, 6/19