The Lex Newsletter: bearishness is so 2022 these days

Dear reader,

Human beings have to divide continuums into arbitrary chunks to avoid going crazy. Time, for example. Zero degrees longitude historically passes through Greenwich, UK, setting a reference point for time zones for the rest of the world.

One way of trying to appear smart as an investment writer is to point to the arbitrariness of calendar periods for performance measurement. Now is a good time. We are deemed to be experiencing a New Year equities rally, which looks like this:

That might, calendrically speaking, compare with a 2022 that was mostly bad for US and Asian equities — but good if you have an abiding affection for the FTSE 100, which is overweight banks and miners.

Of course, the economic drivers that stock prices respond to are not delimited so neatly. Central banks are still struggling to cope with inflation that started motoring in the back half of 2021. Recent data suggests rate rises are having the desired impact.

Lex remains sceptical about the rally. We think there may be one or two shocks still to come. But there is certainly a more positive mood, as evidenced in this week’s run of financial and corporate news.

The claim that reliance on arbitrary time periods is a mistake, meanwhile, contains a flaw of its own: it would only hold good if human cognitive biases did not skew asset prices for extended periods.

Moreover, suppose you are a fund manager — say at Franklin Resources of the US, which has suffered $236bn of outflows over eight years leaving assets under management of $1.38tn. Your boss might not buy your argument that the past quarter is a hopelessly arbitrary period over which to measure your underperformance.

“I’m perfectly happy with my cognitive biases, thanks,” he or she might say, “Also, you’re fired.”

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Ode to joy

The standout trend in 2022 was the slump in tech stock valuations, as investors jacked up discount rates to reflect tougher interest rate policy.

Silicon Valley shares are now rallying in response to two factors. First, moderating expectations of Federal Reserve increases to policy rates. Second, sheepish and belated cost-cutting by tech giants that are still mostly spending heavily on the vanity projects of bosses.

Even Meta, which owns Facebook, has been tightening its belt. It will reduce capex by $4bn to a range midpoint of $31.5bn this year.

Lex thinks it should go further. We reckon the metaverse is one of those tech brainwaves customers will have limited appetite for in the real world. That has been the fate of smart speakers. Gadgets such as Amazon’s Echo and Alexa have not become invaluable home concierges as fans expected. Purchasers mostly use them as voice-activated jukeboxes.

Peloton bikes are another piece of tech-related domestic clutter that has gone from hot to not. Appropriately, the US company has slimmed down. It broke even in free cash flow terms in the fourth quarter. We believe it is now a sustainable business.

Chronicle of a crash foretold

Lex highlighted the risks of investing in Adani Group companies last September. To crash the shares of the highly leveraged industrial conglomerate we evidently needed an apocalyptic name and spicier allegations than the belief that published financial data was bonkers. The feat was achieved by Hindenburg Research.

The short seller alleged that Adani manipulated its stock price and engaged in accounting fraud. Adani denies the claims, but its shares tanked anyway and the company pulled a $2.4bn equity sale.

The Adani affair is driving foreign money away from India, in our view. Gautam Adani’s high-level political connection implicates an elite that allows corruption to flourish, suppressing business competition and growth in wages for hardworking ordinary Indians.

Loose foreign capital is increasingly heading to China. There is plenty of corruption there too, but it appears less inimical to economic performance. Chinese growth is enjoying a boost as the country emerges from the pandemic. This should bolster local brokerages, such as CICC, CSC and Guotai Junan. A surge in Chinese visitor numbers should meanwhile benefit Oriental Land, which operates Tokyo Disneyland.

Island fling

The UK market is also optimistic at the moment, or at least as optimistic as you can get with a baked-in discount. Investors are still enjoying the impact of the energy price boom. This gave Lex the chance to pay rare tribute to a historic takeover — in this case, Shell’s purchase of natural gas specialist BG Group for $54bn in 2015. Gas is generating plenty of profits right now.

Moreover, natural gas will function as a key fuel for the energy transition. ExxonMobil is hoping this will not happen. Good luck with that.

We have greater faith in the foresight of Hein Schumacher, new boss of Unilever, than that of Exxon’s Darren Woods. We believe Schumacher has a good chance of fattening margins at the UK-listed consumer products company — with a few judicious prods from US activist Nelson Peltz.

Other stuff I enjoyed this week

“You’ll end up standing around watching construction work” is apparently how Spaniards chide friends who are getting old before their time. 3D printing of houses using AI-driven concrete squirters is strangely compelling to watch. Lex doubts it can fix America’s housing crisis, however.

My incipient paranoia was, meanwhile, pleasurably stimulated by a Lex note on the scope for big companies using dynamic pricing to manipulate customers and trustbusters alike.

Outside our section, FT data guru Alan Smith explained amusingly why humans are theoretically more pessimistic than chimpanzees in replying to market research surveys. I was also entertained by the attempts of Alphaville’s Louis Ashworth to catch up with Jo Johnson, a former head of Lex, who has just resigned in apparent embarrassment from the board of Adani investor Elara.

That creates a vacancy. But I’m not rushing to send them my CV.

Enjoy your weekend,

Jonathan Guthrie
Head of Lex