The Lex Newsletter: is a leather jacketed CEO a sell signal?

Dear reader,

Tongue-in-cheek comments posted under articles are one of the joys of journalism. We examined the financial and market position of US chipmaker Nvidia this week. Our sober assessment was undercut by a reader’s suggestion that the trademark leather jacket of the chief executive was “a major overhang on the stock”.

That was certainly a rule of thumb on the FT Companies section back when PR photos arrived by post and were mounted in stacks. A business was heading for trouble, we reckoned, when a male boss sent pictures of himself in black leather to the pink newspaper. It smacked of macho posturing.

Dress codes have loosened up since. But Jensen Huang, previously a measured public performer, is becoming bombastic in his claims. Nvidia’s chips are key tools for developing artificial intelligence. The technology will be “bigger than the internet”, Huang said this week.

A market capitalisation of $1.2tn is apt to boost a person’s confidence. But Nvidia has a lot of work to do to fend off competition and justify its valuation.

At present, greed and fear are evenly balanced. It will be time to sell if the new H200 chip flops. Or equally, if Huang is pictured astride a motorcycle in an old-school bike jacket. What worked for Mumblin’ Marlon does not work so well for middle-aged bosses.

More reassuringly, Nvidia is a conventionally constituted company whose chief executive is firmly in charge. But its fortunes depend partly on those of OpenAI, a non-profit whose board was in turmoil this week. Within the space of a few days, Sam Altman was sacked, hired by partner Microsoft and then reinstated.

Lex’s view is that the generative AI specialist, regardless of Altman’s visionary status, is under the sway of its tech giant investor. The lossmaking start-up is dependent on Microsoft for cloud computing resources and $10bn of capital.

To comment on this or any aspect of our coverage, please email me at Lexfeedback@ft.com.

Intel is a Johnny-come-lately to AI, as it has habitually been in other chip sectors since the heyday of desktop PCs. It is developing products to compete with Nvidia’s sought-after H100. But its stock trades at one-ninth the sales multiple of Nvidia. It has reported $985mn in net losses in the past nine months.

Lex charitably suggested that Intel has bad luck. This reminded me of Gary Player’s comment: “The more I practise, the luckier I get.” For decades, Intel has resembled an out-of-form golfer who blames everything from the weather to their clubs for persistent defeats.

Intel can now look forward to the financial equivalent of a caddie who furtively kicks its ball from the rough on to the fairway. The group is expected to benefit heavily from $39bn in subsidies the US has earmarked for domestic chip production.

The incentives are luring the likes of Resonac, a Japanese supplier of materials for chipmaking. The business, previously known as Showa Denko, makes etching gas for cleaning equipment, among other things. Reflecting its humdrum métiers, its shares are cheaper than those of rivals closer to hardware critical to the AI revolution.

Hunt bawl

Here in Blighty, it was Autumn Statement time. Chancellor Jeremy Hunt claimed he was making “the largest business tax cut in modern history”.

This was not really true. But Hunt is a politician, so you have to make allowances.

His set-piece cut was to allow businesses to write off 100 per cent of equipment purchases against tax on a permanent basis. The Treasury claimed this would be worth £11bn a year. That is £8bn more than the maximum figure independently estimated by the Institute for Fiscal Studies.

But it is still £7bn shy of the additional costs businesses have shouldered this year in the form of corporation tax increases.

My hunch is that George Osborne, who sequentially reduced the levy last decade, cut business taxation more in real terms than Hunt has.

The current chancellor is trying to rally investment in British business with heftier capital allowances and such innovations as multi-employer pension pots.

He is up against the US, where long-term investment returns outstrip those recorded by the UK and which offers huge subsidies.

Hunt can at least take credit for rallying confidence in the financial stability of the UK. This was shaken by unfunded tax cuts in last autumn’s “mini” Budget from Liz Truss and Kwasi Kwarteng.

Speaking of swivel-eyed libertarians armed with chainsaws, Javier Milei was elected president of Argentina this week. He plans to slash state spending and dollarise the economy. Both plans have merits. But ditching the bombed-out peso could cause economic and social turmoil.

Like the UK last year, Argentina needs stability. That does not appear to be the forte of this self-professed “anarcho-capitalist”.

Lex steers clear of the toxic and divisive politics of the Middle East as a subject. We have restricted our analysis of the horrendous Israel-Hamas war to the financial consequences for investors. These appear muted.

Steeper military spending will triple Israel’s fiscal deficit next year. But the shekel has bounced back and the country has little dependence on flighty foreign capital. Providing the conflict does not escalate, the local stock market should track global peers upwards next year.

Siena thriller

Such loyalty as I have to Siena is restricted to a horseracing faction whose crest sports one of the few examples of the heraldic caterpillar (un bruco coronato alla granducale, passante su un ramoscello di rosa . . . etc).

Local bank Monte dei Paschi (established in 1472) is a lot less fun but is also very old. This appears to be one reason Italian politicians have strived to keep it alive. You could equally have argued that MPS has had a good run and could justifiably be put out of its misery.

The politicos failed to dump the struggling lender on UniCredit. They were thus forced to lead a recapitalisation and, mirabile dictu, MPS appears to have turned the corner. The government has just sold 25 per cent of the shares to institutions for €920mn.

We gave chief executive Luigi Lovaglio due credit. The business, which is subscale, may now make a decent takeover target for midsized lenders BPER or BPM.

Another deal, UBS’s purchase of Credit Suisse, meanwhile poses challenges for Julius Baer. We had expected the Swiss bank and wealth manager to gather rather more of the assets shaken loose by the acquisition.

Instead, this week Julius Baer took a SFr70mn ($79mn) write-off. The red ink was widely thought to flow from problem loans owed by businesses of flamboyant Austrian property mogul René Benko. A steep drop in the shares implied there may be more to come.

The interest rate cycle is peaking, as results from Virgin Money underscored. But the good times just keep on rolling for Mastercard and Visa. There is a whiff of duopoly emanating from these card payment giants.

Proponents of open banking, such as TrueLayer, are aiming to disrupt that. But Visa and Mastercard have formidable network advantages and are moving into direct payments. My money is on the incumbents for now.

Things I enjoyed this week

This smart paper from the IFS points out that Jeremy Hunt’s full expensing tax break gives debt-financed investors the opportunity to double dip.

Books-wise, I am relishing Joseph Roth’s The Radetzky March, a saga of fathers and sons set in the Austro-Hungarian empire. I also enjoyed rereading TH White’s The Goshawk while prepping for this column on sparrowhawks.

Pleasingly, Lex writers won three trophies in the State Street UK Institutional Press Awards this week. Thanks go to the organisers.

When I was young and cynical, I poked fun at industry awards in a couple of columns. When you finally get an award yourself, you suddenly realise just how incredibly deserving recipients are.

Hoping you have an award-winning weekend, or at least one that is worthy of judges’ commendation.

Jonathan Guthrie
Head of Lex

This newsletter was amended after publication to correct Julius Baer’s writeoff figure.