The Lex Newsletter: hair-trigger selling brings High Noon to equities

Nuclear physicist Niels Bohr, a fan of cowboy movies, hypothesised that shoot-outs were typically won by the duellist who drew his pistol second. Reactions are faster than actions, he believed. Simulations apparently bear this out.

The “gunslinger effect” has been at work in equity markets this week. Investors have meted out fast and devastating retribution to fumbling businesses.

Shares in Siemens Energy fell 34 per cent, or €2.5bn in market capitalisation terms. The German industrial group said it was seeking government guarantees for the projects of Siemens Gamesa, a subsidiary that makes wind turbines.

The market already ascribed negative value to Gamesa, which Siemens might conceivably dump into bankruptcy. Hair-trigger selling, therefore, looked like a reaction to proof of a thesis already fully formed in investors’ minds.

The thesis is this: renewable energy stocks have been a bubble inflated by over-optimistic forecasts of the energy output and financial returns from wind and solar projects.

Investment has been sloshing back into hydrocarbons. This has been reflected in rebounds in the stocks of oil majors. Chevron is therefore using shares to buy Hess Corporation at a valuation of $60bn. Like Exxon, which is acquiring Pioneer for $64bn, it is bulking up for the long game.

The woes of Worldline rhymed with those of Siemens Energy. The Paris-listed payments company issued a humdrum profit warning. Growth for the year will be about 6 to 7 per cent against forecasts of 10 per cent.

The shares halved. That reflected “a massive loss of faith, rather than a purely arithmetical reaction to bad numbers”, according to Lex. You can comment on that or any other aspect of our coverage at Lexfeedback@ft.com.

In the payments sector, the doctrine that has been tested and found wanting prophesied that consolidation would create network advantages and fatten margins. Worldline’s €7.8bn purchase of Ingenico may therefore have been a costly mistake, like FIS’s disastrous $43bn takeover of Worldpay in 2019.

Meanwhile, mature payments businesses such as American Express are doing nicely enough, albeit with weaker consumer spending dragging on sentiment.

Meta investors are the ultimate hair-trigger sellers. The stock of the social networks group crashed 26 per cent in February of last year following a disappointing growth forecast. It was the largest one-day reduction in a US company’s market value ever. In this case, the thesis under fire was the view that tech giants were still growth businesses.

The shares have clawed back most of their losses since then, thanks to strong advertising and greater financial discipline. If 2023 has been Meta’s Year of Efficiency, 2024 will be its Year of Artificial Intelligence, we opined. Microsoft is already showing positive early results from deploying the technology in its products.

Algorithms, the precursors to AI, have been big factors in securities markets for years. Trading programs tend to increase the speed and scale of hair-trigger sell-offs.

So does broader volatility, which is boosting the profits of futures exchanges such as CME Group. The main debate here is whether US interest rates are set to peak soon. The market is so sceptical of this that the 10-year Treasury yield this week briefly exceeded 5 per cent for the first time since 2007.

Lex is sitting on the fence, for the moment. Forecast returns on high-yield bonds look tempting at 7 to 9 per cent. But a sharp economic downturn would hurt creditworthiness and dent those headline paybacks.

One augury of moderating rate expectations is the depressed price to tangible book value of European banks such as UniCredit, Barclays and NatWest. The Italian lender is performing better than the blue-liveried Brit.

NatWest is doing dreadfully. It is dealing with the aftermath of its politically correct but morally deficient decision to close the bank account of Brexit rabble-rouser Nigel Farage. More materially, it has cut guidance for lending margins.

Narrowing net interest margins and politicisation is the reason European bank valuations are bombed out again, after a modest, rate-inspired improvement.

Lex’s previous bullishness on renewables stocks has been proved badly wrong. But our longstanding advice for unconstrained investors to stay out of European banks has been spot on.

The drop in NatWest shares on Friday does not qualify as true hair-trigger selling, though. The fall was too small — about 10 per cent — and did not involve an Emperor’s New Clothes moment for a secular growth thesis. The same applies to reversals for Taiwanese iPhone maker Foxconn and Japanese electric vehicle motor manufacturer Nidec this week.

Their respective challenges are an increasingly hostile Chinese government and the popularity of small EVs powered by lower-output motors.

Happy talk

A cartoon by the mordant Tom Gauld depicts Transcendentalist writer Henry Thoreau moping that “the mass of men lead lives of quiet desperation”. His friends tell him to cheer up.

Readers have been telling me to do the same after last week’s morbid riff concerning cosmic undertaker Charon. So here are four pieces of good news that emerged among market gyrations:

• UK stocks are not the victims of deep structural undervaluation when compared with US equities on a like-for-like basis.

• General Electric, which is slimming down to its jet engines business, is enjoying a strong rebound on the back of resurgent air travel, outpaced only by Rolls-Royce.

• The travel boom is also boosting US long-stay hotels such as Choice, inspiring imitation by the likes of Blackstone and Starwood.

• Continuity candidate Ted Pick is the right person to lead Morgan Stanley’s expansion in wealth and asset management.

You do not have to be a diversity vigilante, however, to notice that Pick looks like a younger version of James Gorman, whom he will succeed as chief executive. Both could have come straight from the talent agent at Central Casting specialising in stereotypical bosses of US banks.

The tendency of the latter to be tall, white, well-educated, middle-aged men has made life easier for researchers in the arcane field of workplace good looks. Academics at the University of Vaasa in Finland found that attractive bankers were paid more than the rest of this otherwise homogenous group.

Our article inspired some surprising readers’ comments, including the claim that Jamie Dimon, the prominent chief executive of JPMorgan, is “a silver fox”.

Things I have enjoyed this week

I liked Chris Giles’s enumeration of the crimes we commit against logic when thinking about inflation. This was the subject of his new FT newsletter on central banks.

I was also tickled by the FT’s revelation that UK shadow chancellor Rachel Reeves lifted chunks of her new book on women economists from Wikipedia.

Outside work, I have been enjoying hearing the calls of tawny owls, which reach a peak around Halloween a few days from now. My column on the subject is here.

Enjoy the celebration if it’s a thing where you live. With any luck you will be able to appease smaller emissaries of the supernatural with doorstep offerings of candy.

Jonathan Guthrie
Head of Lex