The Lex Newsletter: cyclical trend will remain no friend in 2023

Dear reader,

We’re off to the races. A new investment year has started. Lex is recording the scene in global capital, publishing seven days a week. All of human life is here, as it was when WP Frith painted his great panorama “The Derby Day” featuring the smart operators, suckers, tipsters, honest brokers and swindlers of Epsom Downs.

We look forward to making sense of this year’s mayhem with you. Please share your thoughts — including topic suggestions — by emailing me at Lexfeedback@ft.com.

This year, as in every year, asset prices will respond to cyclical and secular factors. Inflation, interest rates policy and the economics of the developed world fall into the first bucket. Innovation, the east-west political split and emerging economies occupy the second.

Lex correctly called a US market peak in November 2021 and a sucker rally last summer. Stocks have become more affordable since, judging from Robert Shiller’s cyclically adjusted price/earnings ratio, among other indicators.

But we think asset prices are likely to come down further over the next few months. Claims that inflation has peaked seem premature, though this will surely occur this year.

The current optimism is inspired in part by cheaper energy. Europe started 2023 with falling gas prices and storage about 84 per cent full. The outlook for next winter has improved, though the continent would still be in a tight spot if Russian gas flows cease and temperatures drop steeply. Further structural reform of the European energy market is needed.

In the US, the benchmark Henry Hub natural gas price for February delivery has dropped from $10 per million British thermal units to $4. Independent drillers such as EQT, Comstock and Range made money hand over fist from liquefied natural gas exports to Europe. This year is set to be tougher for them than the last.

Groceries price inflation remains high, hitting a year-on-year total of 14.4 per cent in December. Lex expects UK supermarkets such as Tesco and J Sainsbury, which will trolley out Christmas trading statements next week, to have increased sales by proportionately less. We think they are taking a margin hit to forestall a political backlash.

Steep food prices squeeze the budgets of tenants, some of whom will fall into arrears. That will be bad for buy-to-let landlords and their specialist lenders, including Paragon and OSB. A lean period lies ahead for them.

Disaster artists

Damage will continue accumulating this year from the effects of the pandemic and from asset bubbles popping.

Debt-laden movie theatre chain Cineworld, parts of whose business are in US Chapter 11 protection, is trying to sell assets. But the cinema industry faces an uncertain future. Streaming companies continue to burn great heaps of their investors’ money on must-watch viewing. This will keep punters out of multiplexes. It looks like the final credits are rolling for the business.

Crypto-land meanwhile experienced its first genuine bank run. Customers have rushed to withdraw money from California’s Silvergate Capital. This counts as a real bank rather than just a trading platform pretending to be one. The shares have slumped but Silvergate says it is in business for the long term. Just as well — it will be a while before a new generation of crypto true believers comes through.

Chinese banks have poor prospects too. The pandemic raging across the world’s most populous country is a bigger challenge than the continuing downturn in the property market. Party officials will be twisting the arms of lenders such as Bank of China and Industrial and Commercial Bank of China to bail out struggling enterprises with soft loans and forbearance.

The problems of Southwest Airlines look modest in comparison. The inadequate IT systems of the US low-cost carrier were shown up by a brief cold snap.

Southwest deserves credit alongside other disrupters for democratising US air travel. It now needs to invest.

Nonstop techno

Technological innovation is the wellspring of secular growth. Its value was proved by the rapid success of mRNA-based jabs against coronavirus. We expect the same technology, deployed by the likes of Moderna and Merck, to produce vaccines against some forms of cancer. Science is finally starting to cut the Big C down to size.

Lex is also a long-term bull on commercial space companies, which can split their efforts between commercial satellites and helping status-hungry sovereign governments with their own space programmes. The problem with SpaceX, a private US business at present seeking fresh financing, is that it is run by Elon Musk. He is also supposed to be supervising Tesla, Twitter and a bunch of other ventures.

In the case of SpaceX, Musk can’t even resort to the excuse that “running this business isn’t exactly rocket science”.

We have greater faith in the reliability of Grace Wang, founder and chief executive of Luxshare. As we predicted, the Chinese contract manufacturer is expanding its market share at the expense of Foxconn, where Wang used to work. Apple is expected to offer Luxshare its first big order to produce premium iPhone models. The shares have promise.

We have yet to make up our minds about cloud businesses amid turmoil at Salesforce, the US specialist in customer relationship management software. Its $27.7bn acquisition of Slack during the pandemic now looks like an expensive mis-step. Amid a tech spending downturn, it is decimating staff numbers and closing offices.

Businesses specialising in cloud-hosting look a better bet to us in the short term than companies focused on selling cloud-based applications. Big organisations with multiyear programmes to move data to the cloud will keep investing in that but may spend less on cloud-based software.

However, server capacity ultimately looks like a commodity, where price-down pressure may become irresistible. That was the dynamic in telecoms bandwidth, after all, where content ended up ruling the roost.

Let us know what you think.

Stuff I enjoyed this week

Hail to the chief! Hargreaves Parkinson, founder of the Lex column more than 90 years ago, wrote several books including Scientific Investment (1933). I am reading this. Parkinson believed investment decisions depended on clear, real-world data, not hunches and mumbo jumbo. That is as true today as it was then.

Lex colleague Elaine Moore meanwhile pointed out in a sharp Top Line column that Google’s search results page is so cluttered with ads that it is not much use any more.

I also liked Emma Jacobs’ piece on the perennial subject of pointless meetings. Ecommerce platform Shopify has apparently promised to liberate more than 76,000 hours of productive time for workers by cancelling about 10,000 events.

I wonder how many meetings were required to take that seismic decision.

Finally, I have enjoyed watching a BBC nature series on dogs, wolves and their relatives. My own Nature Therapy column for the FT, just published, is on the same subject.

Have a good weekend,

Jonathan Guthrie
Head of Lex