The Lex Newsletter: floating stock prices should bring more smiles

Dear reader,

I’m not sure I’ve got the metaphor right on this as I’m agnostic about share price direction. Yet watching equity market indices arc ever higher every week, I feel like a kid gaping at a sky-bound balloon. First, there’s awe, then a lot of squinting. After that, any spot of colour is just way up there, somewhere.

Mostly, the target of my helpless staring is the US stock market’s various indices, as pulled along by a few gargantuan constituents such as Nvidia and Broadcom.

Memories of what happened to shares last year have not fully faded. A burst of market optimism from late 2022 was quashed pretty quickly last spring by another bout of stubborn inflationary pressures. Indeed, not even all the typical cheerleaders — which Helen noted last week — are fans. Speaking to me earlier this week, one senior executive at a premier US investment bank felt no need to cheer on this latest rally.

While chatting about Davos, deals and the Dow Jones, he described the past few months of rising asset prices as a mere “window” of opportunity for corporations. A sombre mood weighs on his clients’ board members. They’re feeling nervy about everything from regulation to election outcomes. Deal ideas have not stirred their interest.

I’ll take that back. Not everyone’s so gloomy. In the US, where there is pessimism about President Joe Biden and the cost of living, a new poll by Pew Research suggests that maybe more folks have begun to look up.

Of those surveyed, 28 per cent said economic conditions were either excellent or good. OK, that’s not much to applaud, but that’s still 9 percentage points better than a year ago after a similar run-up in share prices. That low optimism might explain why the average US retail investor has not necessarily thrown their cash at stocks, of late. Our best-read Lex of the week was on this exact subject.

US investors as of the end of 2023 have preferred to park their cash in money market funds for steady returns, rather than equities. Money market balances earning more than 5 per cent have hit a record, noted Lex, while net inflows to equity funds have declined. US online broker Charles Schwab opened 3.8mn accounts last year, but overall share trading fell more than 4 per cent.

Of course, when and if interest rates do begin to decline, that cash will have legs. That capital may well return to the stock market.

One of the world’s largest equity investors, BlackRock, did however feel the time was right to buy. Earlier this month, it announced the acquisition of Global Infrastructure Partners for $12.5bn. Apart from enriching a select group of partners of GIC, this week Lex wondered what happens to the other senior mid-career employees of the private capital investor, who will now work within a publicly traded company. As Lex wrote, “the tension between fund investors, public shareholders and employees creates a high-wire act” for them.

At the other end of the fund management spectrum sits Abrdn. “Stitching together Standard Life and Aberdeen Asset Management in 2017” created a Frankenstein’s monster. The deal’s thesis was to offer the two groups protection against the threat of passive investing. In the end, about £10bn of shareholder value has disappeared since their coming together.

The announcement of another £150mn of cost-cutting from chief executive Stephen Bird this week did little to revive the moribund share price, which is down 17 per cent over the past year. That is far worse than the broader UK stock market.

If high interest rates encourage investors to shift to cash, pricey money has at least forced some overly acquisitive companies to stop eating up their rivals. Consider European food delivery groups, which in Lex’s words “have paused their value-incinerating land grabs”. Business has begun to improve.

At least there are signs of profits ahead, with all three of the delivery groups — Deliveroo, Just Eat Takeaway and Delivery Hero — expecting to report positive ebitda for last year. Of these, only the first can claim to have the affection of shareholders. Its shares are up by half from a year ago, while those of the other two have fallen. Still, signs that these delivery groups, about which Lex has shared plenty of doubts, are beginning to find sufficient scale suggests better times ahead.

Another profit-erasing fight, this one among television streaming companies, might just be coming to a conclusion. Netflix has won. Disney and other entertainment companies have opted to license more shows to Netflix this year. While Disney battles activist Nelson Peltz, the company has had to address its bloated costs from streaming and must recover as much income as possible.

Disney still has operating losses within its direct-to-consumer division, which houses streaming. These compare unfavourably with Netflix’s double-digit operating margins. Cutting costs at Disney’s streaming unit should benefit Netflix. Nevertheless, this may only count as a partial victory for the latter, says Lex. Netflix needs to lift its profitability. Also, it must still contend with YouTube, which has plenty of free content and close to double the profit margins.

Lex is not only a newsletter. The contents of the daily columns can be found online here. Subscribers can get an email alert each time an article is published by adding Lex to instant alerts at myFT.

Do you know all this already? Email Helen at helen.thomas@ft.com.

Things I have enjoyed

I do like the FT’s Unhedged column. This week’s interview with Rob Arnott, of $130bn asset manager Research Affiliates, included his theories about how stock market narratives — “themes” — can distract the patient investor. He gave one of these themes a name, “Big Market Delusions”, thereby creating a meta-narrative about distracting stock market narratives. Loved that.

For those of you who missed this essay by my FT colleague Martin Sandbu, he wrote eloquently about the philosophy behind effective altruism. Until my son had mentioned this theory on charity recently, I had not realised its influence in recent years.

Finally, I found The Guardian’s discussion of the life and times of Nicholas Saunders fascinating. I knew nothing of this “hippy, capitalist, grocer, guru”, founder of famed London foodie havens such as Monmouth Coffee and cheese shop Neal’s Yard.

I hope you find something appetising to eat and read this weekend,

Alan Livsey
Lex Research Editor