More Blue Sky Than Blue Monday

Apparently, the Monday of this week is the worst every year for negative thought. Furthermore, the new UK Foreign Secretary, Lord Cameron, fresh from launching war in the Red Sea, told us in a weekend TV interview that “the lights are absolutely flashing red” on the global risk dashboard. Excellent. Well, that’s settled then – I mean Lord “Call Me Dave” gets all the big calls right doesn’t he? Ok, let’s not invite the rest of the world to turn the air blue. In fact, let’s do what should have been done in 2016 and pay attention to what’s really happening in the world right now. Not surprisingly for this writer, January is already confirming themes established and developing from earlier years and we are more than happy to keep screaming about them until we are blue. So, here we go with a little whistle-stop tour of the real world….

We truly believe the ‘convergence’ of various technologies is about to turbo-charge the acceleration of change in the global economy. An existential crisis also helps focus minds and….. money. The climate change crisis has prompted the greatest capital shift in history as $6 trillion of annual spending on cleantech is forecast every year until 2050 (Source: McKinsey). Indeed, one of the key investment destinations in moving away from fossil fuels has been electric vehicles(EVs), and the batteries used to store energy and power these vehicles. Chemistry advances have been key in driving costs down and capacity up where lithium-ion type batteries are the predominant storage technology. However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%.

Yep, Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction,  but also counter an unhealthy commentariat focus on AI ‘safetyism”. The social and economic basics of health, shelter, mobility and food are in dire need of blue sky thinking but might just have found a genuine innovation accelerator. Microsoft themselves have told the BBC that one of the company’s missions was “to compress 250 years of scientific discovery into the next 25.” Thankfully, this was not the only positive solution speed surprise of recent weeks.

The IEA has confirmed that renewable energy capacity increased globally by 50% in 2023 alone(!). That’s the biggest growth seen in more than two decades. At that pace, it is conceivable renewable energy could be 50% of electricity generation by 2030 and, brace yourselves… would actually meet the renewables ‘tripling’ target agreed at Cop 28. Germany – not getting great economic press in recent times – is already at the 50% renewable electricity production level with CO2 emissions currently at a 70-year low. Furthermore, coal usage at a 60-year low in Germany makes for clearer skies but the gloomy headlines could have obscured another Teutonic trophy win.  The EU has given the go-ahead for Germany to provide €902 million of state aid to battery producer, Northvolt, for the construction of a gigafactory producing EV batteries. Without that aid, Northvolt would have probably moved the project to the US. Instead, the €2.5 billion project at Heide will be the first to avail of the new ‘matching aid’ exception allowed by the EU to support more flexible/higher amounts of state aid to prevent an investment exodus to the US.  Expect more good European news on this front as the region is forecast to build a further 250 battery factories by 2033 (Source: Buck Consultants). These are real actions and projects (not headlines) but companies are also showing confidence with more traditional strategic moves.

We perennially write “watch what they do, not what they say” and the big “tell” is often M&A activity. Given acquiring other companies results in wealth destruction almost 50% of the time, we tend to see a flurry of M&A activity as a positive illustration of executive confidence and found the headlines of recent weeks interesting.  You might think the announced $14 billion purchase of Juniper Networks by HP was just another example of the technology sector enjoying the benefits(and valuation multiples) of a stellar 2023 but back in the ‘old economy’ things are stirring too. And, if M&A was tricky enough why not try to acquire a national icon, as a foreign company? Cue the Japanese execs at Nippon Steel have decided to swoop for US Steel in another $14 billion deal. Once the most valuable company in the world, US Steel could become a political football but both boards have agreed the deal and are acutely aware that the most recent offer from domestic rival, Cleveland Cliffs, was just over $7 billion. You don’t need the finance gurus to figure that one out. Anyway, they are busy too. The world’s biggest asset manager, BlackRock, has announced the $12.5 billion purchase of Global Infrastructure Partners (owner of Gatwick Airport and Melbourne Port). Clearly, the $10 trillion giant sees a future for the old stuff.  As for the new stuff…

The SEC in the US has just approved funds (ETFs) which invest in cryptocurrencies (Bitcoin). This is massive for the crypto and blockchain ecosystem. In simple terms, this approval by the SEC means funds invested in Bitcoin are now regulated and can be considered an asset class in their own right. Nine funds (ETFs) have been approved to trade on New York regulated exchanges, and in the first two days of trading attracted $1.5 of investor inflows. BlackRock’s fund led the way with $500m followed by Fidelity’s fund bringing in $422m. For me, cryptocurrencies are a very good indicator of risk appetite, or confidence. So, if Bitcoin is trading close to $40,000, this feels like the world is not about to fall apart. Other new stuff is doing well too.

We’ve already touched on AI’s benefits to humanity but, if you’re an investor, the AI posterchild is still Nvidia. While the broader equity markets have spluttered in January, Nvidia continues to march to new record highs. Its market value is now in the region of $1.4 trillion. For context, if Nvidia’s share price increases by another 15% its valuation will match that of Amazon. Then consider Microsoft, another AI play, which overtook Apple this week as the most valuable company in the world. You might think all the AI excitement is in the big tech names but CB Insights has published data showing AI start-ups benefitting from  significant valuation premia when raising capital. Median valuations for early stage/seed fundings were 21% higher, larger Series A fundings saw a 39% premium and Series B funding rounds clipped an extra 59% from investors compared to non-AI companies. Get ready for more AI references in investment ‘story telling’, but also watch out for the continuing battle for authentic stories and content needing no AI.

Over the weekend, the exclusive rights to the NFL game between the Miami Dolphins and the Kansas City Chiefs were sold to NBC’s streaming service, Peacock, for $110 million, or $1.8 million per minute of game time. According to the superb sports finance newsletter, Huddle Up, this is all about Peacock/NBC being given a foothold by the NFL as streaming overtakes cable consumption over the next 5 years.  That means Apple, Amazon and Netflix will be a big part of media rights negotiations in many sports in the coming years. Think Hulu and Wrexham, then marvel at the Rightmove data showing Wrexham as the busiest property rental market in the UK in 2023. That certainly wasn’t forecast on those Brexit red buses in 2016.

Of course, a market whistle-stop tour would not be complete without a check on the ‘Big Daddy’ driver of all asset classes; the cost of money. Here too, the news was not blue. The cost of two year money in the US in the past week (measured by the yields on traded 2 year US Treasuries) was back to levels not seen since May 2023. In fact, the world’s most profitable bank, JP Morgan, didn’t just announce record profits last week but also told investors they believe the Fed will cut interest rates SIX times in 2024. We shall see, but it is clear that capital is “climbing a wall of worry” in lots of interesting parts of the global economy. That does not mean we can ignore the concerns of some serious and credible analysts. The world’s risk experts continue to watch Russia vs Ukraine, Israel vs Hamas and China vs Taiwan. More than enough volatility, and enough for Ian Bremmer, CEO of the Eurasia Group consultancy, to describe this year as…

“Politically it’s the Voldemort of years. The annus horribilis…. and then there’s the biggest challenge in 2024… The United States versus itself”.

Again, voting like sport doesn’t need AI. Who would have thought that US democracy would be the greatest geopolitical risk of 2024? Simply stunning. Yet, I am hopeful that younger voters, business leaders, investment capital and credible domestic influencers will begin to spell out the true potential cost of burning the US Constitution in front of the whole world. Just imagine fighting the “Red” threat of totalitarian Communism for decades and then discovering you have your very own Red totalitarian party at home? Now that must make more than a few voters go blue……

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