Gravitas Spark CrowdFunding

Tag: Stock Markets

  • A Few Pictures Of Promise

    A Few Pictures Of Promise

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

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

     

     

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

     

     

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

     

     

     

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

     

     

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

     

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

     

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

     

     

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

    Keep looking at the big picture…

  • Mr Copper To Sing Again?

    Mr Copper To Sing Again?

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

     

    Massive copper shortage on the horizon –  The Week 

     

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

     

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

     

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

     

    Copper shortage threatens EV transition – DPA Magazine

     

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

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

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

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

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

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

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

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

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

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

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

    D-Day Lesson For These Roaring ’20s?

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

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

     

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

     

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

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

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

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

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

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

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

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

  • 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.

     

     

  • 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.

  • 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.

  • 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.

  • 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