TheChek News Flow

Valuation has fallen as analysts are less optimistic that dual antitrust cases will leave company unscathed

The federal government is a long way from actually breaking Google up. Investors are starting to treat the possibility as a foregone conclusion.

The trial for the Justice Department’s second antitrust case against the internet titan started Monday. That comes a month after Google lost the first case, with a federal judge ruling that the company engaged in illegal practices to maintain its dominance in internet search. The current trial challenges Google’s position in the ad-tech industry, where the company’s tools play a major role in the buying and selling of online advertising.

The first case could result in an order to separate the search business from the company’s Android and Chrome platforms. In the second case, the government is seeking an order that would force Google to divest itself of its ad-tech services.

Threats of government crackdowns have swirled around Google and its big tech peers for years now. That has done little to dent their business momentum or appeal to investors; the combined market capitalizations of Apple AAPL -0.12%decrease; red down pointing triangle, Microsoft MSFT 0.84%increase; green up pointing triangle, Amazon AMZN -0.27%decrease; red down pointing triangle, Google-parent Alphabet GOOGL 1.79%increase; green up pointing triangle and Facebook META -0.19%decrease; red down pointing triangle-parent Meta Platforms totaled a little over $12 trillion by the end of June—up 146% from the beginning of 2020. That is more than double the S&P 500’s performance in that time.

ut Google’s parent has recently broken from that pack. Alphabet’s stock is down nearly 14% since the start of the current quarter—a notable drop even against other major tech stocks that have slipped in that time due to market rotation dynamics and growing worries about artificial intelligence investments.

Microsoft and Amazon, Google’s closest peers in AI and cloud computing, have seen their share prices slip nearly 4% each this quarter. And at around 19 times forward earnings, Alphabet is also the only megacap tech stock trading at a discount to the S&P 500 on that measure, according to FactSet data. Apple, Microsoft, Amazon, Meta and AI chip titan Nvidia NVDA -0.03%decrease; red down pointing triangle average 31 times projected earnings.

Wall Street is still relatively positive on Google; 78% of analysts rate Alphabet’s stock as a buy, according to FactSet. But among analysts, there has been a notable shift in tone lately about the company’s regulatory challenges.

“At the margin, we are more cautious on Google’s shares,” wrote Mark Mahaney of Evercore ISI in a report Monday, projecting “significant uncertainty” for the next 12 months. Mark Shmulik of Bernstein wrote earlier this month that “it’s hard to envision Google escaping the battles unscathed.”

The stakes in the two cases aren’t exactly equal. The ad-tech lawsuit targets a business that produced about $20 billion in revenue in 2020, according to filings in the case—about 11% of Alphabet’s total revenue that year. But nearly three-quarters of that was shared with Google’s partners in the form of traffic acquisition costs, making it a far less profitable business than the company’s core search offering.

Justin Patterson of KeyBanc Capital estimates a full divestiture of ad-tech would knock only 1% to 2% off Alphabet’s project per-share earnings in 2025. Still, Patterson says Google wields “disproportionate market share” in this business. “We believe this is a difficult trial for Google to win,” he wrote in a Sept. 9 report.

The search case is potentially more damaging. Google has long paid Apple billions of dollars a year to be the default search option on Apple’s mobile devices. The ruling last month found that deal and other similar ones have limited competition in the search marketplace, where Google has long maintained a global share of more than 90%, according to Statcounter. Among the penalties the government reportedly is seeking is forcing Google to divest itself of its Android mobile operating system and Chrome browser.

Most analysts doubt that outcome, given that neither really work as stand-alone businesses. But other penalties are possible, such as banning Google from paying companies like Apple for preferred search placement, which could open the door for competitors like Microsoft’s Bing engine to secure those slots. “We believe the status quo is no longer possible, and we expect the judge to decide on a remedy that will be punitive for Google,” wrote Doug Anmuth of JP Morgan in a Sept. 3 report.

But any outcome in the search lawsuit won’t be clear for some time, as the judge presiding over that case doesn’t plan to issue a ruling on the remedies until next August. And Google will almost certainly appeal any adverse ruling, which could tie up the matter for at least another year beyond. That gives the company plenty of time to strengthen its businesses and plan for multiple outcomes, but that could also mean a long overhang for the stock. The only certainty for Google at this point is that nothing is going to be certain for a long while.

F1’s master of aerodynamics Adrian Newey puts his reputation on the line

Motor-racing supporters wait to see whether star engineer can repeat his success at Aston Martin

During a career spanning more than 40 years and 25 world championships, Formula One engineer Adrian Newey has shown his talent for turning “mad ideas into reality” in building elite racing cars.

In a sport known for technical precision, Newey’s approach has been to repeatedly ask the same four questions. “How can we increase performance? How can we improve efficiency? How can we do this differently? How can I do this better?” he wrote in his 2017 memoir.

A master of aerodynamics, Newey is a rare car designer celebrated in a sport where gladiatorial drivers dominate screen time. When the 65-year-old revealed his intention to leave reigning champions Red Bull this year, the speculation quickly went into overdrive. However, nobody thought retirement would appeal to a man once described by F1 legend Frank Williams as “more competitive than his drivers”.

In joining the Aston Martin F1 team as its managing technical partner, Newey is putting his reputation back on the line. All eyes are on whether he can repeat his success at a fourth team and to further justify his status as an industry legend as well as his annual pay package north of £20mn.

“He had alternatives. He could be sailing. He has taken the opportunity to join with Lawrence Stroll to try and repeat [his success],” said Eddie Jordan, the former F1 team owner and Newey’s manager. 

By hiring Newey, billionaire Stroll has signalled his determination to win championships in historical British racing green.

“I can tell you, Adrian is a bargain,” Stroll said. “I’ve been in business for over 40 years now, and I’ve never been more certain. It’s not an investment. He’s a shareholder and a partner.”

Newey, who will officially start at Aston Martin next year, has also been given some equity in the F1 team in a move that he describes as having “skin in the game”.

However, his price tag, which is more than what many drivers and even some top football players earn, has raised eyebrows among some F1 insiders. Others question his recent contribution to the Red Bull’s recent success, pointing to the strength of the team, including its technical director Pierre Waché.

The matter of credit for Red Bull’s success reared its head last year, when Newey’s wife Amanda posted: “What a load of hogwash” on social media in response to an article in industry publication Motorsport that touched on how Red Bull’s technical prowess had evolved.

Growing up in Stratford-upon-Avon, Newey picked up a passion for four wheels — and engineering — from his veterinarian father, who worked on cars in his garage. Newey would sketch out his own race car designs. By 12 he knew he wanted to design race cars for a living.

Attracted by a wind tunnel used by F1 teams, he studied aeronautics at the University of Southampton, reasoning that race cars are more like aircraft.

Newey was a pivotal influence as the sport embraced the importance of aerodynamics in performance, with the “downforce”, the vertical air that pushes cars downwards, increasing grip and speed around corners.

He wrote his name into F1 lore at Williams and McLaren for his role in championship-winning cars in the 1990s. He also experienced tragedy with the crash that resulted in the death of legendary Brazilian driver Ayrton Senna in a Williams car in 1994.

Newey was hired by the late Dietrich Mateschitz, billionaire co-founder of Red Bull from McLaren soon after he bought the old Jaguar F1 team in 2004. The team went on to win both championships — drivers and constructors — four years running from 2010 to 2013. 

After seven years of Mercedes domination, Red Bull returned to the front of the grid in 2021, when Max Verstappen controversially won the drivers’ championship from Lewis Hamilton. The team’s RB19 last year was one of the most dominant F1 cars ever, winning 21 of 22 races.

Newey’s potential at Aston Martin is not the only reason the sport has been gripped by his move. F1 supporters will also be watching how Red Bull will adjust following disruption this year when a female employee accused team boss Christian Horner of inappropriate behaviour. Horner denied the allegations and was cleared after an investigation.

The engineer, who still uses a pencil to sketch instead of a computer, will lead Aston Martin’s drivers — double world champion Fernando Alonso and Stroll’s son Lance — in turning a middling outfit into champions. Since Stroll rebranded the team, Aston Martin has finished seventh, seventh and fifth in the championship.

He will also need to tackle the next F1 regulatory overhaul in 2026, which requires the construction of an all-new generation of F1 car, more agile with revamped aerodynamics.

The designer will have the freedom of a newly built F1 factory and wind tunnel. Honda, which helped to drive Red Bull’s recent championships, has signed up to supply the engine.

Damon Hill, who drove a Newey-designed Williams to championship victory in 1996, says the designer has a special understanding of what drivers need.

“He understands the car is a tool for the driver and it’s no good creating a beast nobody can drive,” Hill told the Financial Times. “He actually understands your bum is in that seat and if it spooks you, it’s not going to be good.”

While Hill likens F1 to an “unexploded bomb” that can “explode in your face”, he says Newey’s experience means he is ready. “If he can’t get [Aston Martin] out of the midfield to the front end, I’d be astonished,” he said.

Contact lens supplier is looking for buyers to separate from indebted parent company

Bausch + Lomb, one of the world’s largest contact lens suppliers, is exploring a sale as a way out of a messy separation from its heavily indebted parent company, which has been opposed by lenders including Apollo Global Management.

The eye care business — which was carved out of Bausch Health, formerly known as Valeant, in 2020 — is working with advisers from Goldman Sachs to test interest from potential buyers, said people familiar with the matter. Bausch + Lomb was likely to draw interest from private equity groups, they added.

A target sale price could not be ascertained but Bausch + Lomb’s enterprise value including debt stood at just over $10bn, based on its share price at market close on Friday.

Any deal to sell the business was likely to come at a sizeable premium to the current valuation as Bausch + Lomb’s business has been performing well, the people said, adding that the sale process may not result in a transaction. Bausch + Lomb’s chief executive Brent Saunders is a well-known dealmaker who oversaw Allergan’s $63bn sale to AbbVie.

Bausch Health retained an 88 per cent shareholding in the eye care subsidiary after listing the group in 2022. But it planned to offload the remainder of shares by striking a deal with its investors to exchange Bausch Health stock for Bausch + Lomb stock.

However, the process became unstuck as doubts arose over whether the parent company would still be solvent after separating from its revenue-generating subsidiary because of Bausch Health’s huge debt pile. Bausch Health would have to pass a solvency test in order for any spin-off to be approved.

After a string of acquisitions, Bausch Health has accumulated a $21bn debt pile, almost $10bn of which is coming due by the end of 2027. A group of Bausch Health creditors, including Apollo Global Management, Elliott Management and GoldenTree Asset Management, had raised concerns about a spin-off of the eye care business because of the impact it would have on the parent company’s balance sheet.

Bausch Health’s top shareholders, funds run by Carl Icahn and John Paulson’s fund Paulson & Co, had supported the completion of a spin-off as it would give them a large shareholding in the more profitable eye care business.

A sale to private equity could potentially find a route out of the impasse, allowing Bausch Health to settle some of its debts with the proceeds of the sale and satisfying Icahn and Paulson, both of whom have board representation at the parent company as well as its subsidiary.

Bausch + Lomb said: “We don’t comment on rumours and speculation.” Goldman Sachs also declined to comment.

Bausch + Lomb is projected to generate $4.7bn in revenues and nearly $860mn in adjusted earnings before interest, taxation, depreciation and amortisation this year. Nearly three-fifths of Bausch + Lomb’s revenues come from its contact lens and eye drug business. It also sells surgical equipment used by ophthalmologists.

Before Bausch + Lomb was listed in 2022, it received interest from private equity groups, but decided to proceed with a listing of the unit believing it would unlock more value. But the stock’s performance has underwhelmed: the enterprise value of the business stood at $10bn at market close on Friday, not much more than the $8.7bn Bausch Health paid for the business in 2013.

On top of its large debt pile, Bausch Health faces uncertainty as its lead drug — Xifaxan, a gastrointestinal medication used to treat conditions such as irritable bowel syndrome — is set to come off patent by 2029. Bausch Health’s market value has dropped to just $2.2bn as fears over its solvency grow and the company has become embroiled in legal battles over Xifaxan’s patent.

Abu Dhabi’s Mubadala takes stake in Revolut

Sovereign fund invests through share sale that nets London-based fintech founder Nik Storonsky at least $200mn

Abu Dhabi sovereign investor Mubadala has taken a stake in Revolut for the first time, participating in a share sale that last month secured the London-based fintech a $45bn valuation and netted at least $200mn for its founder and chief executive Nik Storonsky.

The Middle Eastern fund was among investors such as Coatue, D1 Capital Partners and Tiger Global that took part in the sale of $500mn of shares by Revolut employees in August, according to three people with knowledge of the transaction. The size of Mubadala’s investment could not immediately be ascertained.

Storonsky, who co-founded the bank in 2015, sold between $200mn and $300mn worth of his shares in the sale, according to a person familiar with the deal. The estimated value of the stake sold by Storonsky in August was first reported by Sky News.

The stake sold by Storonsky represented about half of the total worth of the deal, in which thousands of employees sold about $500mn of their shares, the person added. His proceeds could benefit Storonsky’s effort to build up venture capital fund QuantumLight, which he established two years ago.

The investment company headed by chief executive Ilya Kondrashov aims to identify the next generation of tech winners with “AI-driven investing”, build a proprietary system to track “the entire universe of venture-backed companies since the ‘90s” and identify “robust and stable success patterns”, according to its website.

Before he reduced his stake through the share sale, Storonsky’s holding in Revolut would have been worth almost $8bn at a $45bn valuation, according to a Financial Times analysis of corporate filings.

Mubadala’s investment comes as the sovereign fund steps up its efforts to deploy capital in Europe, its most active region for venture deals after North America, according to data provider PitchBook. The investor took part in at least 28 European deals over the past five years, accounting for more than a fifth of its transactions globally.

It has also invested in the Swedish fintech Klarna but had not previously backed Revolut.

The sale of a stake to Mubadala also comes as Revolut pursues an aggressive global expansion plan.

The fintech received a long-anticipated UK banking licence in July, which it hopes will allow it to secure further regulatory approvals in key markets including the US. Revolut’s application was delayed by issues including a warning from its auditor that the bulk of its 2021 revenues “may be materially misstated” before the issue was resolved.

Revolut already has more than 45mn customers globally, including roughly 9mn in the UK. It has an EU banking licence from authorities in Lithuania and was granted one in Mexico this year. The company swung to pre-tax profit of £438mn in 2023, from a £25mn loss in 2022.

Japanese investor SoftBank, which participated in Revolut’s previous fundraising, did not take part in the latest sale after it was forced to give up its priority class of shares as Revolut sought to satisfy regulators in its quest for a UK banking licence.

China’s Economy Slowed Further in August, Extending Gloomy Summer Slide

Data show weakness across the board, igniting fresh calls for more support to fend off the threat of a Japan-style slide into deflation

SINGAPORE—China’s economic plight is deepening, heaping pressure on Beijing to step up support for households or risk getting stuck in a low-growth rut beset by tumbling prices and squabbles over trade.

Figures published Saturday showed activity weakening across the board in August, with home prices recording their steepest annual fall in nine years.

Beijing has signaled more help is on the way. But the policies being floated, such as cuts to banks’ reserve requirements, add to a menu of piecemeal measures rolled out in the past year or two that have so far failed to kick the economy into higher gear.

China’s leaders instead remain wedded to their longer-term goal of fashioning China into a technological colossus impervious to Western meddling, even if that comes at the expense of short-term growth or rebalancing a lopsided economy that is too dependent on investment and industry. Money is pouring into factories, and especially into priority industries such as electric vehicles, semiconductors and renewable-energy gear.

Without more forceful stimulus directed toward boosting spending instead of expanding supply, the risk, economists say, is that China will slip into a damaging period of falling prices and subdued growth similar to Japan’s decadeslong stagnation, or the painful debt workouts that followed past real-estate crises in Europe and the U.S.

“It seems like they’re just floundering,” said Katrina Ell, director of economic research for Asia-Pacific at Moody’s Analytics in Sydney. “I can’t see anything that brings me optimism.”

A run of downbeat data captures the anxiety: Consumer confidence sank in July while inflation remains pinned near zero. Business surveys in August recorded sinking profits and swelling inventories at Chinese manufacturers, telltale signs that factories are churning out goods far faster than China or even the world can scoop them up. Car sales fell in August for the fifth straight month. Yields on 10-year Chinese government bonds have plumbed new lows, indicating investors are souring on the economy’s prospects.

Saturday’s data showed retail sales rose just 2.1% year over year in August, slowing sharply from a 2.7% year-over-year rise the previous month. Industrial production rose 4.5%, down from 5.1% in July, while investment in buildings, equipment and other fixed assets slowed to 3.4% for the year through August, from 3.6% in the first seven months.

Home prices fell 5.7% year over year in August, data showed, the steepest decline in nine years, despite government efforts to stem the property crisis by lowering interest rates, relaxing home-purchase restrictions and pledging to buy unsold homes.

The only bright spot is exports, which rose 8.7% year over year in August, easily outpacing imports, which eked out growth of just 0.5%.

Many on Wall Street have taken an ax to their economic forecasts for China this year and next. Few now think Beijing’s target of around 5% growth for the year can be achieved without greater central bank and government aid. Mizuho Securities was the latest firm to join the downgrade parade, on Friday reducing its growth forecast to 4.7% this year from 4.8%, citing what it called a growing risk of delayed or insufficient policy responses to the mounting challenges.

Even leader Xi Jinping has toned down his expectations. In a speech Thursday, he urged Communist Party cadres to “work hard” to meet the government’s goal. As recently as July the instruction from the party’s top officials was to “unswervingly insist on achieving” that target.

Missing the official growth goal would be unusual, though the “around 5%” target gives Beijing some wriggle room, and economists broadly expect modest additional fiscal and monetary support in the remainder of the year to inch the economy over the line. A senior People’s Bank of China official hinted in a press briefing this month that the central bank is considering a cut to banks’ reserve requirements, freeing up more resources for lending. Officials have announced plans to buy up unsold homes and turn them into affordable rental housing.

But big-ticket stimulus is out. Beijing last month dismissed a large-scale property-sector rescue proposal from the International Monetary Fund as too expensive, unnecessary and likely to stir up financial trouble further down the road. Officials have stuck doggedly to their incremental approach to nudge the economy forward when it stumbles but not jolt it into higher growth, citing concerns over debt, exchange rates and financial stability. Revisions to social security, taxation and healthcare that would put households on a surer financial footing have been punted into the future.

The root of China’s problems is a still-festering property meltdown that is sapping government revenue, holding back investment and keeping consumers from spending more freely. Economists at Barclays estimate that if home prices nationwide fell in line with the 30% drop recorded in top cities since 2021, then China’s real-estate slump has cost the economy $18 trillion in vanished wealth—a staggering sum that adds up to around $60,000 for the average three-person household in China.

“There is a real crisis of consumer confidence in China,” Anthony Capuano, chief executive officer of hotel chain Marriott International said at a Bank of America conference in New York this month, according to a transcript of his remarks published by the company.

Beijing is trying to make up for the weakness at home by juicing factory output and exports, and reorienting investment away from real estate and toward advanced manufacturing and other high-tech sectors to forge a stronger and more self-sufficient economy.

But that strategy is meeting increasing pushback from trading partners alarmed at a rising tide of cheap Chinese goods. India this week said it would hit imports of some Chinese steel products with tariffs of 30%, the latest in a flurry of trade measures affecting China enacted by major emerging economies. Advanced economies including the U.S., the European Union and Canada are throwing up barriers to Chinese-made electric cars and channeling taxpayer dollars toward sensitive industries such as computer chips and renewable energy to shield them from the onslaught of Chinese competition.

Former President Donald Trump, the Republican presidential nominee, has said he would raise tariffs on Chinese imports to 60% if he wins the election in November, which would be a much tougher challenge for China’s economy than the trade war fought during his first administration. Vice President Kamala Harris, the Democratic nominee, is expected to mostly stick with the Biden administration’s focus on shielding specific sectors with tariffs and other restrictions, and limiting Chinese access to American technology.

For many economists, China’s most urgent challenge is deflation. A prolonged spell of falling prices makes debts harder to bear and tends to dissuade people from spending, in anticipation of a better deal in the future. Corporate profits and hiring suffer.

“I think right now they should focus on fighting deflationary pressure,” former People’s Bank of China Governor Yi Gang said last week at a panel discussion at the Bund Summit, a financial forum in Shanghai, referring to senior Chinese officials.

Consumer prices in China rose 0.6% in August, but strip out volatile items such as food and energy and the rise was just 0.3%—the lowest rate of core inflation in more than three years. Producer prices, the prices charged by companies for goods as they leave their factories, have been tumbling for almost two years. A broader measure of price changes across the whole economy has fallen in six of the past seven quarters.

Lower interest rates and higher government spending would help, economists say, but so too would measures to lift consumers out of their funk. Short-term support such as vouchers or handouts through e-payment apps might spur spending briefly, but a lasting fix would require the beginnings of recovery in the housing market, economists say.

“As long as households are this cautious, deflationary pressure will persist,” said Lynn Song, chief economist for Greater China at ING in Hong Kong.

Delayed Transpennine rail upgrade reviewed again ahead of Budget

Electrification of Manchester-Leeds route being studied for potential cost savings

The long-delayed electrification of the Manchester-Leeds rail line is being reviewed again ahead of October’s Budget, raising concerns in the rail industry about potential cuts to transport projects.

The upgrade to the Transpennine route, which is now under way but had stalled for years due to successive government attempts to control costs, is being studied to see if it can release in-year savings, according to three people familiar with the matter. 

Two said the project had been asked to find £100mn in savings ahead of the Budget on October 30. 

The process forms part of a “zero-based capital review” of projects being undertaken within the Department for Transport, which requires every project to justify its cost, after chancellor Rachel Reeves asked ministries to find billions of pounds in savings. 

That has in turn raised concerns in the rail industry and among mayors about which projects could be at risk. 

The upgrade to the Transpennine route holds particular significance in the north of England as a lack of investment in its Victorian infrastructure has led to notoriously unreliable and overcrowded services.

In 2011, then-chancellor George Osborne promised to electrify the 70-mile line, which connects Manchester, Huddersfield, Leeds and York, with work supposed to start in 2014.

Four years later the project was paused, with infrastructure body Network Rail blamed for rocketing costs, before being reinstated.  

After the 2017 general election it was repeatedly redesigned and rescoped, resulting in £190mn of wasted public money, according to a report by the National Audit Office public spending watchdog in 2022. 

The NAO pointed to repeated tinkering “to meet differing ministerial priorities and budget constraints”, despite the “fundamental need” for the project remaining unchanged. 

Work finally began at the end of that year. It is currently expected to be completed between 2036 and 2041, more than a decade behind its original schedule. 

But as Whitehall gears up for Reeves’s first Budget, three people familiar with the process said that the project was again being looked at for potential cost savings. 

One said the impetus was to slow down spending in order to hit short-term budgetary targets within the Treasury, even if that meant the project could cost more in the long run. 

A second said the project east of Leeds had been asked to find £50mn in savings while that to the west was tasked with finding the same amount. 

A government source confirmed the project was being “looked at ahead of the Budget”.

The Department for Transport said it did not comment on speculation.

However, a senior rail figure said that in practice, savings on such a substantial project — now costed at up to £11.5bn — amounted to a minor moving of milestones rather than anything with significant impact on delivery. 

A spokesman for the project said they did not recognise the suggested savings figure, adding that 60 per cent of the project is now under way.

Nevertheless railway infrastructure executives are also concerned that other projects could be in line for cuts, including East West Rail, a scheme that will re-establish a rail link between Cambridge and Oxford, and electrification upgrades. “There is a whole mood of doom in the industry,” one said.

Some mayoral bodies are also concerned that cash provided for local projects by then Prime Minister Rishi Sunak last year, in lieu of HS2’s cancelled northern leg, is also at risk. 

Since taking power Labour has repeatedly insisted that difficult spending decisions will be required in order to close what it claims is a £22bn “black hole” it inherited from the Conservative government.

North Sea output to halve by 2030 under Labour tax proposals, warns report

Wood Mackenzie says sector risks being ‘fatally wounded’ by the government

Oil and gas production in the North Sea could halve by 2030, far faster than currently expected, under tax proposals that would cause “irreversible damage” to the sector, according to a report from energy consultants Wood Mackenzie. 

North Sea oil and gas companies have already dramatically scaled back their activity while they wait for a decision on taxes in next month’s Budget. “The ongoing uncertainty makes planning extraordinarily hard and financing all but impossible,” said the report.

Companies will have to pay 78 per cent tax from November, after an increase in the “energy profits levy” (EPL) windfall charge that was originally introduced in the wake of Russia’s full-scale invasion of Ukraine, when energy prices jumped.

They also face the prospect of losing capital expenditure and investment allowances, after the government said it planned to close “unjustifiably generous” tax loopholes.

Wood Mackenzie said in the absence of more information, companies have made contingency plans for the EPL to continue indefinitely and for all allowances to be removed.

“This scenario would wipe out £19bn, or 65 per cent, of the UK’s remaining development capital expenditure, halve UK production by 2030, and all but eliminate industry cash flows by the 2030s,” said the report, circulated among its clients and seen by the Financial Times. 

In a better-case scenario for oil and gas companies, in which the EPL expired in 2030 and capital allowances were retained, oil and gas production would fall by 30 per cent by 2030.

Graham Kellas, one of the authors of the report, said they had chosen those scenarios because they are what oil and gas companies themselves are using to make their plans.

Several North Sea oil and gas companies have paused or halted new projects this year, and the industry has warned that new investments will not be possible.

The Wood Mackenzie report added that it was also likely that smaller companies would fail, leaving their partners, and potentially the UK government, on the hook for future decommissioning costs.

The North Sea Transition Authority, which regulates the industry in the basin, believes that the cost of removing oil platforms and capping wells at their end of their lifetime will be £40bn.

While Wood Mackenzie’s analysts said they did not expect the government to choose the worst-case scenario for the industry, the report added: “Having stated it believes UK oil and gas must be kept healthy and productive ‘for decades to come’, [the government] is creating an investment environment where the industry is fatally wounded in less than five.”

Wood Mackenzie is one of the most respected consultancies in the energy industry but has historically specialised in, and still draws many of its clients from the oil and gas sector. 

Following the dramatic rise in oil and gas prices in late 2021 and 2022 and the introduction of the energy profits levy in May 2022, tax revenues from the sector reached a peak of £9.8bn in 2022-23, compared with £2.6bn the year before, official figures show.

By 2028-29, the receipts from various oil and gas taxes are forecast to fall to £2.2bn. The Office for Budget Responsibility, the UK’s independent forecaster, said in April that future tax revenues will wane as investment and production in the North Sea dries up.

In September, Offshore Energy UK, a lobby group, said the government’s tax proposals would put 35,000 jobs in the North Sea at risk and would see companies cut back their capital investment in UK projects from £14.1bn to just £2.3bn between 2025 and 2029. 

Fraser McKay, another of the authors of the report, said: “The UK does not have four or five years to get this wrong because of the maturity of the basin. That is why we use the word irreversible in the report.”

In July, the Treasury said it recognised “the importance of providing the oil and gas industry with long-term certainty on taxation” after a series of changes to the tax regime in the past.

Slow momentum boosts expectations Beijing will need to boost stimulus

China’s industrial output and retail sales faltered in August as the economy lost momentum, adding to expectations Beijing will step up stimulus efforts in the final months of the year.

Industrial output grew at the slowest pace since March while retail sales, a gauge of consumption, had their second-slowest month of the year, data from the National Bureau of Statistics showed, despite August being the summer holiday month.

The NBS said “in general the economy was operating smoothly in August”. But it said economic activity “still faces many difficulties and challenges in its continued recovery”, blaming an adverse external environment and “insufficient” domestic effective demand.

Industrial output rose 4.5 per cent year on year, down from 5.1 per cent in July and missing the average forecast of analysts polled by Bloomberg of 4.7 per cent. Retail sales rose 2.1 per cent against a year earlier compared with 2.7 per cent in July and against analysts’ average forecasts of 2.6 per cent.

President Xi Jinping this week called for officials to meet the country’s annual economic and social development goals, which analysts interpreted as urging them to hit this year’s gross domestic product growth target of 5 per cent year on year.

Xi has focused on industry, particularly in the high-tech manufacturing sector, to offset a three-year property slump that has hit household consumption and undermined investor confidence.

The housing crisis has created what analysts call a two-speed economy, with exports increasing rapidly, especially in terms of volumes of shipments, while domestic demand has been more sluggish.

“China’s growth momentum has slowed rapidly in recent months,” Raymond Yeung, chief economist, Greater China for the Australia and New Zealand Banking Group, said this week.

He said the gap between China’s official growth target and the final figure could be as much as 0.4—0.5 per cent. “This will likely prompt the authorities to release a stimulus package,” he wrote in a report.

The August data also showed that fixed asset investment grew at the slowest pace since last December while the housing market continued to plunge.

Fixed asset investment grew 3.4 per cent between January and August, compared with 3.6 per cent between January and July. Analysts polled by Bloomberg had forecast about 3.5 per cent.

Excluding real estate, however, fixed asset investment increased by 7.7 per cent year on year between January and August, with infrastructure investment — one of the main targets of government stimulus — up 4.4 per cent year-on-year and manufacturing investment 9.1 per cent higher.

Real estate development investment, meanwhile, fell 10.2 per cent while the sales area of ​​new commercial housing — estimated in square metres — was down 18 per cent.

The government has so far announced only incremental measures to try to stabilise the housing market and rekindle household demand.

But China’s two-speed economy faces growing risks, analysts said, with its lack of domestic demand and increasing export volumes generating tensions with trade partners.

“Real exports are up 14 per cent over the past year, and China may face more tariffs from trading partners if there is sustained further expansion in the goods trade surplus,” Goldman Sachs said in a research note.

“China may have to stimulate domestic demand to balance the risk of new tariffs dragging on growth and exacerbating disinflation.”

“Our cycle model, the Regime Indicator, just shifted from Upturn to Downturn,” wrote the stock market strategists at BofA Securities this past week. That had my attention, even though my own model, Tactical Sloth, calls for ignoring market cycles. I don’t do sector or theme rotations. I’ll do a tire rotation, but grudgingly.

Sector swappers are abuzz about power companies outrunning artificial-intelligence giants since the end of June. The iShares U.S. Utilities exchange-traded fund has returned 12%, while the iShares U.S. Technology ETF has slipped 4%. For an S&P 500 fundholder, it’s no big whoop. The stuff that’s working has outweighed the stuff that isn’t, and the fund has returned a couple of percent over that stretch. For more-tactical investors, it raises the question of whether it’s too late to take tech profits and buy something boring.

It isn’t too late, according to BofA. Tech looks “egregiously expensive,” and earnings growth there is impressive but decelerating. The S&P 500 carries “extreme concentration risk,” with Apple, Microsoft, Nvidia, Alphabet, and Amazon.com together making up more than a quarter of the index. Volatility is likely to be elevated in years ahead, says BofA, and for that, investors will want quality, stability, and income. Over the past decade, dividends have contributed just 16% of returns, but going forward, they could chip in something closer to their historical average of 40%.

That favors utilities, which pay close to 3% in dividends. They remain cheaper than average relative to the S&P 500. And BofA notes that utilities aren’t as sleepy as billed; since 1980, they’ve returned 11% a year, close to the Nasdaq’s 12%. Utilities are quiet tech beneficiaries, especially as AI data centers create soaring demand for power.

The real estate and energy sectors have even higher dividend yields than utilities. Buy real estate investment trusts, says BofA. They look cheap relative to funds from operations, and troubled office REITs have a tiny sector weighting relative to healthier players in telecom towers, retail, healthcare, and data centers. REITs have done even better than utilities since summer. Energy, on the other hand, is a “value trap,” where rising supply and slowing demand could create an oil glut next year.

You might think that consumer staples and healthcare fit well into the new call for stability and dividends. In good times and bad, we spend with snack companies to get fat, and with drug companies to treat our resulting diabetes and heart disease. But the new obesity meds threaten this symphony of capitalism. BofA is Underweight both staples and healthcare. Instead, it favors banks, which have steady earnings and lower leverage than in the past, and consumer discretionary companies, which benefit from rising wages and falling interest rates.

Changing topics, sort of: This past week I spoke with Stephen Byrd, who once worked in the power industry and now heads sustainability research at Morgan Stanley. He sees a “severe shortage” of U.S. data centers brewing, and power is a key constraint. To accommodate the number of chips being sold, the industry will need new data-center capacity equal to 10 gigawatts of electric power, but it’s building about half that. Some markets have a shortage of electricity being generated; others see long delays for new hookups. One key county for data centers in Virginia sent notices to prospective customers saying the timeline could be seven years. “Seven years in the world of AI is a lifetime,” says Byrd.

That bodes well for some obvious beneficiaries, and some less obvious ones. It suggests healthy growth ahead for solar power and natural gas; think First Solar and GE Vernova. Cummins could gain from more demand for backup power. Growing power demand makes a U.S. nuclear renaissance increasingly likely. Hyperscale cloud companies could even make deals directly with nuclear power companies.

Earlier this year, Amazon bought a 960 megawatt data-center campus from Talen Energy, which emerged from bankruptcy last year. The campus is powered directly by Talen’s nearby Susquehanna Steam Electric Station, which generates 2.5 gigawatts of power. Ongoing power sales to Amazon will give Talen steady cash flow. Talen shares have tripled to over $150 since last fall.

“We believe Constellation [Energy] and Vistra will do the exact same thing,” says Byrd. “They’ll sign extremely large power deals with very large companies that want to build supercomputers.”

And then there are the crypto miners. I’ve written some skeptical things about the long-term usefulness of crypto. It turns out that one use is that if you set up a large-scale crypto mining operation and squander vast amounts of electric power to produce make-believe internet coins, and if there’s an acute shortage of power hookups for AI data centers, then companies will pay you to stop making make-believe coins, so they can use your power hookups.

“These Bitcoin sites can often offer a three- or four-year time advantage relative to connecting a data center to the grid the old-fashioned way,” says Byrd. “For a hyperscaler, which is extremely interested in getting its chips powered up, the value of time is immense. These chips depreciate so quickly.”

An April Bitcoin event called the halving, which reduced the financial rewards for miners, has many of them eager to find new business models. Byrd points to Core Scientific, which recently emerged from bankruptcy, as an example of how that can pay off for investors. It has partnered with a Nvidia-backed start-up called CoreWeave to make its infrastructure available for data centers. Since spring, Core Scientific shares have risen from $3 and change to more than $10.

Byrd’s price-per-watt calculations point to potential upside for Cipher Mining, BitDeer Technologies, Applied Digital, and Hut 8.

Homeownership is likely to remain out of reach for millions of Americans. What’s ahead for buyers and builders.

Today’s housing market is either a bounty of riches or a landscape of despair, depending on your side of the fence.

You’re probably thrilled if you’re an investor or bought a home in recent years. Home-builder stocks are up 110% since early 2021. Millions of owners are sitting on home-equity gains, thanks to a 38% increase in average prices. If you were fortunate enough to buy or refinance during the pandemic, when 30-year mortgages hit a record low of 2.65%, your loan is so cheap it’s like putting free money in your pocket every month.

The flip side is a housing-cost crisis—fueled by the very same trends. People aiming to buy are getting shut out by high prices, low supply, and mortgage rates too steep for average households. The Atlanta Fed’s affordability index was at 68.5 in June, hovering near its lowest levels since 2006. Ownership costs (including mortgage, taxes, and insurance) are eating up nearly 44% of median household income, well above the 30% level considered a threshold for affordability, last seen in 2021.

Some relief is coming: The 30-year mortgage is down from north of 7% to the low 6% range in tandem with declines in the 10-year Treasury note, in anticipation of Federal Reserve rate cuts. A quarter-point cut probably wouldn’t push mortgage rates down, but if the Fed opts for half a percentage point, it may pull the 30-year mortgage down a bit more.

High housing costs are also a hot topic in the presidential campaign. Vice President Kamala Harris is proposing grants for first-time buyers and incentives for developers. Former President Donald Trump has talked up regulatory cuts, building on federal land, and mass deportations of immigrants in the U.S. illegally as cures.

Yet these measures, even if enacted, will take time. And it’s far from clear whether they will really work. Modest rates cuts are no panacea and may only push up prices by encouraging more home sales. It’s also unclear whether Trump or Harris could get their proposals through a gantlet of hurdles, including Congress and legal challenges.

The one measure that almost everyone agrees would really help is a big increase in new housing units. But that won’t happen fast, either. The country needs up to seven million new houses to alleviate shortages, yet builders are only putting up around 850,000 single-family units a year at their current pace. Nor have they shown much appetite to step up production due to concerns about a slowing economy and cost pressures.

The backdrop does look favorable for home-builder stocks. Falling mortgage rates are usually a tailwind for the sector. And if Washington steps up with more financial incentives, it could provide a lift, especially to builders focused on entry-level homes.

While these forces work through the market, millions of prospective buyers are likely to be shut out. Nadia Evangelou, director of real estate research for the National Realtors Association, doesn’t see 2025 as much of a pivot year for improving affordability. Analyst Alan Ratner of real estate firm Zelman & Associates doesn’t see much relief until 2026. “There’s no quick fix,” he says.

House Rich, Cash Poor

Homeownership had been rising steadily before the pandemic but has since stalled. It now holds at 66%, about the level of the late 1990s and well below the 69% during the 2000s housing boom, according to the U.S. Census Bureau.

Affordability is the big headwind, of course, as mortgage rates and prices have surged while incomes haven’t kept pace. The median existing home is selling for $422,600, up from $266,300 in 2020.

Rising rents are a culprit, too, making it tough to save enough for a down payment. Many first-time buyers are resorting to family, friends, or retirement savings to come up with enough cash for a loan, according to surveys conducted by the National Association of Realtors.

The longer people wait to buy, the more it affects everything from household formation to long-term financial health. By age 60, homeowners who bought between the ages of 25 and 34 had $72,000 more in housing wealth than those who bought a decade later, according to the Urban Institute. “If you don’t get into your starter home, it prolongs your period of rent and hinders your savings in the form of building equity,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School.

The rising costs of shelter reflect a market still being distorted by the pandemic and its aftershocks. The Federal Reserve cut interest rates sharply to avoid a recession, and the 30-year mortgage fell below 2.7% in 2021. That prompted a frenzy of buying, which pushed up prices and dried up inventory.

Then, almost overnight, that cheap financing disappeared as the Fed embarked on a rate-hiking campaign to stamp out inflation. Mortgage rates surged from about 3% at the end of 2021 to nearly 6.5% by the end of 2022 and hit a peak just under 8% in late 2023.

Inventories of homes for sale never recovered. Though they have been climbing lately, they remain well below historic levels, partly because people with low mortgage rates aren’t moving as much. More than half of homeowners with a loan are sitting on mortgages below 4%. While that’s great for their finances and the economy—putting more disposable income in consumers’ pockets—it’s creating deep-rooted incentives to stay put.

“You’d have a hard time going back in history and finding three-year periods where housing became so unaffordable so quickly,” says Mark Calabria, who held top economic and housing policy positions in the Trump administration.

First-time buyers are in a crunch. Starter-home prices would need to fall 32% to a median $244,000, mortgage rates would need to drop to 3.15%, or incomes would need to rise by nearly 50% to make a house affordable for a typical first-time buyer, according to estimates by the NAR’s Evangelou.

Cheaper home loans should help a bit. Rates on 30-year fixed-rate mortgages have dropped a percentage point since May to 6.2%, according to Freddie Mac. That has pushed average monthly payments down to $2,700 from $3,000 early in the year, according to Apollo Global economist Torsten Sløk.

Aside from making payments more affordable, lower rates have the knock-on effect of increasing market inventory by enticing existing homeowners to trade up to a bigger house. That could free up starter homes for first-time buyers.

But shelter costs are still rising, up 5.2% over the past year, according to the latest inflation reading. While shelter inflation has been easing, a return to prepandemic levels of affordability won’t happen over the next few months or even quarters, says Fannie Mae Deputy Chief Economist Mark Palim. “It’s likely to be something that will take multiple years to accomplish,” he says.

One big hurdle is that new housing isn’t coming fast enough. Even if construction ramped up to 1.1 million units a year, it would take until at least 2029 to reduce the country’s housing shortage, says National Association of Home Builders economist Danushka Nanayakkara-Skillington.

Why aren’t builders stepping up? One reason is labor shortages, including skilled tradesmen like electricians and plumbers. Builders also say their margins are getting squeezed by higher labor costs, tariffs on raw materials like lumber, and rising land prices. Concerns about a slowing economy are weighing on builder confidence, and low affordability points to a “coming slowdown” in housing starts, according to Sløk.

“When interest rates were down, a lot of things got hidden even as policies drove up the price of land,” says Carl Harris, a small builder in Wichita, Kan., who chairs the National Association of Home Builders. Even as prices in his area have risen, Harris says his margins have fallen. Also driving up prices, according to the NAHB, are regulatory costs like building codes and zoning issues, which now account for nearly a quarter of the cost of new homes.

A Helping Hand From Washington

No entity affects housing more than the federal government, which influences everything from lending standards to mortgage rates and loan forgiveness. Harris and Trump are promising pro-housing policies, which industry groups applaud. “It’s gratifying to hear, finally, that supply is truly the answer to the affordability crisis, not more demand,” says NAHB President Jim Tobin.

For first-time buyers, Harris wants to provide up to $25,000 for down payments, with the most going to first-generation buyers. She also wants to expand tax credits for developers who build affordable rental housing and create a $40 billion “housing innovation fund.” The Harris campaign says the combined proposals would lead to the construction of three million new units.

“You have to change the economics to get builders to build what we need. It’s a change that would unleash private capital,” says housing consultant Jim Parrott, who advised on the plan.

Whether these incentives would really help is debatable. Critics say the down-payment assistance could push up prices as more buyers enter the market. The developer incentives could be difficult to implement and wouldn’t address more intransigent issues, like higher land and labor costs. A $25,000 down payment would go a long way in most parts of the country and could qualify buyers for an FHA government-backed loan for a home up to $714,000. But it will make less of a difference in high-price parts of the country like California, New York, and suburban Washington, D.C.

Trump’s plans aren’t clear. The GOP platform says that Trump would “promote homeownership through tax incentives and support for first-time buyers,” without giving details on what such support would entail. The former president “has a real plan to defeat inflation, bring down mortgage rates, and make purchasing a home dramatically more affordable,” said campaign spokeswoman Karoline Leavitt in a statement.

Other measures, according to Trump’s campaign, include cuts to environmental regulations, which some builders say would reduce costs. He has also said that mass deportations of illegal immigrants would lower housing costs by reducing demand, though builders lament that it could diminish their labor pool.

Another Trump idea is building on federal land, a concept that has made it into the GOP platform and Republican-sponsored bills in the House and Senate. Calabria, who headed the Federal Housing Finance Agency under Trump, says the proposal could particularly help in Western states like Nevada, where the federal government owns 80% of the land.

“It also puts pressure on localities. If they want to preserve that land, then they need to come up with a real solution” to local housing problems, Calabria says.

Yet while the federal government can incentivize developers, projects are in the hands of state and local governments. California, with some of the highest home prices, has long epitomized the paralysis arising from fights over zoning, roads, and infrastructure, and local homeowners objecting to new development. Regulations are a popular explanation for why it takes longer to build homes in the Northeast and Western U.S. than in the South and Midwest.

Another roadblock is likely to be Washington’s typical paralysis. The next Congress will probably be split, with Republicans controlling the Senate and Democrats holding the House, both with razor-thin margins, according to the latest political forecasts.

It isn’t entirely bleak out there for buyers. Take Austin, Texas, where building boomed during the pandemic. “Right now, we’re seeing a lot of opportunities for buyers,” says Emily Chenevert, CEO of the Austin Board of Realtors. “There’s more inventory than there has ever been.” Prices in Austin in the second quarter were 14% below their pandemic peak in 2022, a rarity among the 100 largest metropolitan areas and one of the steepest declines.

But the pullback in Austin may reflect local factors far more than national trends. Nationally, listings of homes for sale in August were 26% below 2019 levels, according to Realtor.com. The difference is most pronounced in the Northeast, where listings are down an average 57%.

Betting on Home Builders

Builder stocks are trading near 52-week highs, reflecting hopes that the rate cut coming next week will be the first of many. Lower rates could ease pricing pressure on builders, reducing the need to offer mortgage “buy-downs” and other incentives. A buyer of a $400,000 home would save roughly $200 a month in payments, or $2,400 a year, if rates drop from 6% to 5%.

Investors could buy the group through an exchange-traded fund like iShares U.S. Home Construction. Some analysts also favor tilting to builders focused on the entry-level market, given that they are the most economically sensitive and stand to benefit if Harris’ proposals make it through Congress.

D.R. Horton, for one, was a Barron’s stock pick in August. Oppenheimer analyst Tyler Batory favors the stock in the event that Democrats sweep, saying in a recent note that the company “is uniquely positioned to gain share given its scale and focus on entry-level housing.”

BTIG analyst Carl Reichardt Jr. also likes builders geared to affordability, including PulteGroup, D.R. Horton, and Lennar, all rated Buys. “The companies most likely to provide affordable housing in a sea of unaffordability are the companies with the greatest scale and lowest costs,” he says.

Bill Smead, chief investment officer and founder of Smead Capital Management, has trimmed some of his builder stocks because he sees a market downturn in the short term. But he sees a long runway for the stocks and will be ready to step back in if they stumble.

“I want to be in them for the next 10 years,” says Smead, whose $6.1 billion Smead Value fund holds more than 12% in Lennar and D.R. Horton. “If these stocks go down 20% when the market gets slugged hard, that would be a great buying opportunity.”

For prospective home buyers, meanwhile, lower costs can’t come fast enough. Kristine Shanteau, for one, has struggled for years to save for a down payment in Huntington, N.Y., a Long Island suburb of New York City. Homes list for about $900,000, up 43% from 2019. That has put ownership out of reach for Shanteau, 51, who works at a cosmetology school. “I have a very stable job and make a decent living,” she says. “I cannot afford a house.”