The Lex Newsletter: Goldman Sachs, JLR and Blackstone take the Bowie test

Dear reader,

The musician David Bowie attempted one of his numerous reinventions in a 1980 video shoot. Costumed as a 19th-century Pierrot, he planned to walk up a beach flanked by New Romantics dressed like nuns and pursued by a bulldozer.

The filming was disrupted by an old man walking his dog. “Don’t you know who that is?” the director asked him, pointing at the famous musician.

“Of course I do,” the old man replied, “He’s a twerp in a clown suit.”

To the indifferent public, any performer is a twerp in a clown suit* until their reinvention succeeds. This applies to chief executives at businesses as varied as Goldman Sachs, Jaguar Land Rover and Blackstone. These are struggling with secular change or face the challenges of sheer size.

Be strong, Messrs David Solomon, Adrian Mardell and Stephen Schwarzman. Just ask yourselves: “What would Bowie have done now?”

Admittedly, it is easier to change tack if you do not have a vast legacy business model. Bowie changed course slickly in the 1980s by embracing funk and soaring to a zenith of global stardom.

Goldman’s purple period as the world’s best-known investment bank ran from the 1990s to the 2010s. But rising capital costs in the wake of the financial crisis — and investors’ growing awareness of them — imposed an increasing drag during the latter decade.

Weak second-quarter earnings showed the malaise continues. Leverage no longer juices trading returns. M&A fees are scarce. The annualised return on equity was a feeble 4 per cent.

Lex defended Goldman’s ill-fated push into consumer banking. This was flawed in execution rather than concept, we think. The question for Solomon is whether to attempt another diversification or stick with the diminished investment banking niche where Goldman excels.

Change is unavoidable for JLR. The UK-based maker of luxury cars has been lamentably slow to develop electric vehicles. Now Indian owner Tata is playing catch-up. It plans to build a £4bn battery gigafactory in Somerset.

The heavily political announcement was satirised by Lex reader “Ex Tory” in our comments thread, as follows:

Mr Tata: “Hi Rishi, old mate. Thanks for your £500mn offer, which just matches Spain.”

Rishi Sunak: “Yeah, Mr T, it would be really helpful if we could formally announce something very soon. You know, before these three little by-elections we have?”

Mr Tata: “Make it a nice rounded £1bn and we have a deal.”

Lex calculated that the planned investment was equivalent to $125mn per GWh of capacity, much higher than for rival plants. Tata lacks battery expertise. In an ideal world, a technology leader such as Samsung or Panasonic would build a plant supplying the entire UK car industry.

The judgment encapsulated in our headline was that the gigafactory is “a pricey trophy the UK cannot do without”.

Blackstone has a different problem: how to follow up on 20 years of extraordinary success.

On Thursday, the US alternatives manager announced it had surpassed the $1tn threshold for assets under management. Public data shows that blended annualised returns on Blackstone buyout funds were a net 15 per cent. Even more impressively, the real estate division has pulled off the same feat.

Blackstone should benefit from a soft economic landing. But the next $1tn will be harder to achieve. Leverage and liquidity will be less available in higher-rate years to come.

The $10tn in assets under management achieved by passive fund manager BlackRock has meanwhile slipped to $9.4tn. Its own shares are worth less than those of Blackstone, which gives you some sense of the relative level of fees.

BlackRock is still the world’s largest fund manager, prompting accusations of over-dominance in shareholder votes. To deflect criticism, it is introducing a scheme allowing fund investors to choose such alignments as “pro-union” or “Catholic.” We think that if fundholders cannot be bothered to pick stocks, they will not bother selecting an ideological stance either.

One of the main rules in consumer-facing businesses is never to underestimate the apathy of the general public.

I will conclude this week’s survey of reinvention attempts with the extraordinary and heartening revival of drug development. A few years ago a pharma analyst fretted to me that “there are no blockbuster drugs left to discover”. Pharma groups had sunk billions into treatments that did not work.

Since then, new immunotherapy drugs have pushed back cancer and mRNA vaccines have ended a pandemic. Japan’s Eisai and Eli Lilly of the US are now making progress against Alzheimer’s disease.

An entirely new class of dementia drugs could result, we wrote. To comment on this or any other aspect of Lex, please email me at Lexfeedback@ft.com.

As for David Bowie, bosses should note that he was always more afraid of becoming obsolete than taking a risk on something new.

Money in motion

Capital has been charging back into US and European equities. The S&P 500 and the Euro Stoxx 600 indices are up about a quarter since the start of October. Having correctly predicted an equities correction in the first three quarters of last year, Lex is sanguine about current valuation levels.

US stocks are a little frothy at 18.5 times earnings, but tech strength plays a role in that. European shares look cheap at 12 times.

Higher interest rates are likely to jolt the financial system as last year’s gilts rout and spring banking turmoil did. But shocks should be surmountable.

We are expecting earnings to beat forecasts this year with the caveat that the outlook for 2024 will weaken accordingly.

We have been bearish on China for much longer than many foreign investors now forsaking it. China’s prospects have dimmed because of east-west trade tensions, a weakening economy and the clumsy interventions of the Communist party in business.

We initially figured that contagion from faltering real estate groups such as Evergrande would be contained within their sector. We now see a wider impact in tumbling high-yield bonds, albeit that most of these are issued by property companies.

Real estate group Dalian Wanda is selling down its stake in Legendary Entertainment, a US movie studio best known for sci-fi blockbusters such as Dune. This is a signal that core property assets are unsaleable at a decent price.

The overseas success of online ultrafast fashion companies Shein and Temu is a brighter aspect of Chinese business. However, Lex believes it is hard to create and hang on to competitive advantage in an industry where the only determinants of success are cheapness and fast turnaround times.

A legal scrap between the pair over supplier contacts highlights these difficulties.

Investors in developing economies have switched their attention to India. The private sector there is flourishing, reflected in impressive profits this week from HDFC Bank. This is now the world’s seventh-largest lender, thanks to a merger with its parent, a significant mortgage group. The weakness of state-owned banks is an opportunity for HDFC.

These charts help paint the picture.

I lived in India a long time ago and found it a bit of a paradox. It has millions of smart, well-educated people who are good at business. It also has high levels of poverty, corruption and public sector jobsworthism.

Fingers crossed that this time India really is the economy of the future.

Stuff I enjoyed this week

I loved a post from Alphaville’s Louis Ashworth on the price of lager. It would be an understatement to say that he “built on” a Twitter post by Colin Angus on the subject. Louis erected an entire Bavarian fantasy castle with turrets and flying buttresses comprised of beer-related statistics.

Very funny. Very tongue in cheek.

I was entranced but saddened by a small exhibition of paintings by Ukrainian artist Maria Prymachenko at the Saatchi Gallery in London. This folk artist mingled surrealism with evocations of rural life as Marc Chagall did. Much of her work was burnt last year by the thugs of the Russian army in the early days of Russia’s full-scale invasion.

During my years as a columnist on British business life, I wrote a couple of pieces mocking industry awards. Did I, therefore, shrug last week when columns on Ukraine won me the title “Campaigning (investment) Journalist of 2023”?

Not on your nelly. I was delighted. Thanks go to Willis Towers Watson for organising the event.

It seems like only yesterday I picked up the title “Best Technical Pensions Writer of 1997”. Just 26 years to wait until the next accolade.

Hope you have an award-worthy weekend,

Jonathan Guthrie
Head of Lex

* The terminology used by the old man in the anecdote was unprintable, so I paraphrased