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EM stocks and currencies come under pressure as US dollar jumps

Hedge funds that had piled into emerging market stocks are rushing to reassess their positions as the US and Israel’s attack on Iran sends shares and currencies in some developing countries sliding.

MSCI’s broad EM equities index slid almost 2 per cent on Monday as shares in markets including Turkey and India came under pressure. JPMorgan’s EM currency index slid 0.7 per cent.

It marked a turnaround for EM equities, which were up 14 per cent this year as of Friday’s close, as the dollar’s decline lowered developing countries’ dollar debts and the cost of their imports. Low oil prices also provided a boost for countries that rely heavily on energy imports.

But the attacks on Iran risk upsetting those trends. The dollar has strengthened as investors have sought out haven assets, and the price of Brent crude jumped about 6 per cent. Asian and European gas prices also surged.

“I think the EM trade is a big risk now,” an executive at a large macro hedge fund told the FT. 

“There is a lot of leverage in the system. [Funds betting on gains] in EM equities and fixed income have been a very easy one-way trade and I think it will be hugely challenged. It will have implications for the whole hedge fund community,” the person added.

India’s Nifty 50 index fell 1.2 per cent on Monday, while Hong Kong’s Hang Seng declined 2.1 per cent and Taiwan’s Taiex lost 0.9 per cent. Turkey’s Bist 100 gauge slid 2.7 per cent.

Goldman Sachs’ latest prime brokerage report, covering the week to last Thursday, showed hedge fund allocations to EM stocks, as a proportion of their total exposure, were “hovering near five-year highs”.

Betting on EMs was among the most favoured trades for the week on a dollar-value basis, with stocks in South Korea and Taiwan particularly popular, the report added.

Investors who have in recent months diversified away from Wall Street stocks amid concerns about AI disruption said the Iran conflict had thrown their plans into doubt.

“We are actively looking at our EM exposure” because of the high degree of oil imports in the emerging Asian economies, said Salman Ahmed, global head of macro at Fidelity International. The asset manager had been bullish on the asset class going into this year and built up an overweight position.

Others stressed that only an extended conflict in Iran would lead to a long-lasting sell-off for EM indices, which have also benefited from heavy inflows into chipmakers, including TSMC, Samsung and SK Hynix.

“If this becomes a prolonged conflict, the crowded emerging market trade is at risk. Everyone is piled into emerging markets. Most macro returns have come from being long emerging markets,” said a portfolio manager at a big macro fund.

Investors who have added to their EM positions in recent months “need the conflict to be over soon”, the person continued.

EM currencies that usually move in line with global risk assets declined on Monday. The Hungarian forint, South African rand and Brazilian real declined between 1 and 2 per cent against the dollar, so far a lesser hit than last year’s “liberation day” carnage in markets over Donald Trump’s tariffs.

The Turkish lira also traded flat against the dollar following steps by the central bank to relieve pressure on its currency. Indonesia’s central bank also signalled that it was ready to defend the rupiah.

For an oil-importing country such as Turkey, “it would be inflationary if prices stayed this high, or higher, for longer than a few weeks,” but the country had reserves to defend the lira, said Carlos de Sousa, a portfolio manager at Vontobel.

“The fundamental drivers of the good performance in emerging market fixed income are still there,” he added, with countries having spent years reducing their reliance on imports and foreign capital flows.

“Current account deficits are much lower than they were in the past . . . we also don’t see exuberance in positioning,” said de Sousa.

In the past year, hedge funds had piled back into the local debt markets of Egypt and Turkey in particular, after these countries offered double-digit interest rates to support weakened currencies. As conflict over Iran grew closer in recent weeks, some investors exited these trades, with foreign holdings of Egyptian debt falling by $2bn to $30bn according to Citigroup.

But others bought protection to stay in the trade on the bet that the conflict would not last. “In the last few days, there had been hedges put on in Turkey, Egypt and some of the more crowded positions in local markets,” including through credit default swaps and forward bets on currencies, one investor said.

There was no sign yet of “serious outflows” from EM trades as a whole, they added. “Things haven’t reached that panic event. It’s not that kind of liquidity event where those lines are cut and there’s a flight to safe havens. That is the really painful event for emerging markets historically, and we’re just not there yet.”

Apple could deepen its reliance on Google for cloud services after years of underinvesting in its own infrastructure.

The Takeaway

Now there’s a chance Apple could deepen its cloud dependence on Google even more. At Apple’s request, Google has investigated setting up servers inside its data centers to run an upcoming version of Siri, Apple’s digital assistant, that will be powered by Gemini while also abiding by Apple’s privacy standards, said two people with knowledge of the talks. Apple already relies on Google Cloud for services like online storage and training of Apple’s in-house AI models.

In the past, Apple has said it sends complex AI queries by its users to an Apple system called Private Cloud Compute that runs on Apple servers equipped with its own custom silicon chips (Apple processes simpler AI queries on its devices).

For years, Apple aspired to be self-sufficient in cloud computing. Various leaders at the company have attempted to build up its internal infrastructure to reduce its reliance on cloud providers like Google and Amazon Web Services.

But those cloud efforts have been stymied in the past by Apple finance executives that treated cloud computing as an irksome cost center rather than a strategic priority, according to roughly a dozen former Apple executives and engineers. Apple’s resistance to making big investments in its own infrastructure has led to ongoing departures of cloud experts from the company, some of those people said.

In recent years, as questions have mounted about Apple’s lack of data center spending in comparison to others, the company has told investors that its “hybrid” approach to its infrastructure needs—which combines public cloud services and Apple-operated infrastructure—is serving it well.

Apple’s cloud difficulties parallel and in many ways are linked to its stumbles in AI. Over the past year, it has struggled to deliver the AI-powered overhaul of its Siri digital assistant on time, and the AI features it has delivered have received a lackluster response from the public.

Reflecting that struggle, only 10% of Apple’s Private Cloud Compute capacity is in use on average, according to former employees. The usage is low enough that some servers intended for Apple’s AI cloud are still in warehouses and haven’t been installed, the people said. Apple’s need for AI compute could change very quickly, though, if the new version of Siri, which Apple says will debut this year, takes off with users. That could explain why it’s talking with Google about hosting the assistant.

Apple’s reliance on Google in cloud computing stands in contrast to the company’s focus on controlling many of the most essential ingredients in its products. It is well known for designing the most important parts of those products, including the hardware, software and chips, so it can give its devices an edge over those of rivals.

At the same time, Apple is also known for its tightfistedness, especially when it comes to making the huge up-front capital expenditures required for efforts like building data centers. While Meta Platforms, Microsoft, Google, Amazon and others have gone on history-making spending sprees in recent years to construct data centers that accommodate soaring AI use, Apple has largely sat on the sidelines.

Instead, its financial leaders are more comfortable renting AI computing capacity and other services from outside cloud providers. To be sure, owning your own data centers isn’t a prerequisite to be considered a leader in AI, as OpenAI and Anthropic have shown. But at some point, they may regret depending so much on external firms if the cloud providers choose to raise costs, potentially forcing the AI companies to build out more of their own internal server capacity.

Perhaps the bigger issue, said former Apple cloud engineers, is that Apple’s culture still revolves around selling devices, which accounts for the vast majority of its sales. That remains true even as it has begun to make more money from music, its App Store and other services, all of which run either in its own cloud infrastructure or on servers it rents from other providers.

Apple’s messy back-end internal infrastructure only adds to its difficulties. Many parts of the company use their own servers or various cloud offerings, a contrast to other large tech firms like Google that have a single pool of computing resources for engineers to pull from.

“Apple and Google have two very different engineering cultures,” said Igor Naverniouk, who left Apple in December after working on a next-generation version of Siri and previously spent more than a decade working on Google’s infrastructure. “At Google, most things are centralized. Everybody is using the same supercomputer. At Apple, technology choices are siloed.”

Controlling Costs

Apple’s cloud troubles go back decades.

With the launch of the iTunes Music Store in 2003, the company began expanding its small data center footprint to handle what would become a booming new business in selling digital music.

As Apple began expanding its online offerings, it did so using a hodgepodge of different systems to run them. For example, it built iTunes Genius, a personalized playlist feature it launched in 2008, on technologies and servers that were separate from those of iTunes. The reason: Apple wanted to anonymize the data from its analysis of users’ music libraries.

Around that time, Apple began to rely increasingly on public cloud services, a then-novel concept pioneered by Amazon Web Services that involved renting out its huge data centers to external business customers. AWS was an early provider of online storage capacity for iCloud, the storage service Apple launched in 2011.

But when Apple wanted to release features for iCloud photo backup, it struggled with the huge costs of storing data in the public cloud as droves of iPhone users began snapping pictures. To save money, it began building out its own servers to back up iCloud photos. Doing so had other benefits: When Apple told AWS what it was up to, Amazon slashed the cloud fees it was charging the company by half, a former Apple executive involved in the process said. Apple continued to use its own servers, along with those of cloud providers.

By 2013, Apple’s finance department began getting frustrated with the company’s ballooning costs from both the public cloud and its own servers. Managers from that department began asking members of Apple services teams if they were making full use of the internal infrastructure the company already had at their disposal.

It became clear those teams had not coordinated with each other on their server efforts, resulting in duplicate infrastructure and unused capacity, former Apple engineers said. For example, when iTunes’ servers had unused cloud capacity, other Apple teams couldn’t tap into it, said the people.

In 2013, Apple tasked Patrick Gates, then a director of engineering at the company, with figuring out how to consolidate its sprawling server infrastructure into a common pool every team could access. He began leading a new group, dubbed Platform Infrastructure Engineering, to build that pooled resource, modeling it on how modern cloud systems worked at Amazon and Google.

‘ACDC’

But Gates struggled to get various parts of the company working on the centralized platform and left Apple in 2018, former Apple engineers said. In 2019, Mike Abbott, a former vice president of engineering at Twitter and an early engineering leader of Microsoft’s cloud, took charge of what was left of the Platform Infrastructure Engineering group to continue the project.

Abbott sought to instill a more cloud-oriented culture at Apple. In 2021, he started a virtual event inside Apple, Infrastructure Summit, with the goal of encouraging the entire company to collaborate on shared infrastructure.

He pushed other new ideas, most notably Project ACDC, an effort to bring Apple’s chip expertise to its servers for its own data centers. The project—the name of which stood for “Apple chips in data center”—began as a means to conform the data centers running Apple online services to the same strict privacy standards Apple used on its devices.

He also proposed that Apple consider eventually renting out its servers to external developers, similar to the public cloud services Amazon and Google sell, The Information previously reported. Johny Srouji, Apple’s chip chief, was a big backer of the project, seeing it as an opportunity to offer the chips his team had built to business customers, a former leader of the project said.

But Abbott struggled to move his various projects ahead due to pushback from Apple’s finance team, which didn’t want to invest in more Apple-owned cloud services because not enough of the company’s existing server capacity was in use, former employees on the team said. Relying on outside cloud vendors would give Apple more control over its infrastructure costs, the finance team believed.

In 2023, Abbott left Apple and joined General Motors. His departure soon prompted a cloud brain drain from Apple as many of the people he had hired soon followed him to the automaker.

Warming to Google Cloud

The launch of ChatGPT 3.5 in late 2022 was a seismic moment for the entire tech industry. It also shook up Apple’s ideas about AI and the cloud.

Before ChatGPT came out, Apple’s priority with Siri was making it run as efficiently as possible so it could handle user interactions on Apple devices rather than in the cloud. That approach would better protect the privacy of user data, Apple felt. After ChatGPT showed the possibilities of huge cloud-based models, Apple realized it couldn’t stick with its old approach and needed to tap the power of the cloud more.

There was a problem, though: Apple’s internal AI infrastructure was beginning to decay. In 2023, the company was in the process of decommissioning a large number of older Nvidia chips in its data center that were starting to fail, people involved in the effort said. This was a job the company had wanted to do for years, but it had fallen by the wayside. Apple needed to replace the older Nvidia chips with newer models better suited to the latest AI.

Pushed by its finance team, Apple chose instead to move ahead with its AI plans primarily using outside cloud providers, as it had done for other services such as storage. AWS, already a longtime Apple cloud provider, became the company’s first big partner in its AI push. Apple was also an early customer for Amazon’s in-house alternatives to Nvidia AI chips, Inferentia and Trainium2.

Partnering with Google proved trickier. For years, Apple had banned its AI engineers from using Google’s cloud because of privacy concerns. Siri handled personally identifiable information from users of Apple devices, and Apple didn’t want to run any risk of exposing such data to outside companies. Apple software chief Craig Federighi, who also acts as Apple’s de facto privacy czar, repeatedly vetoed Google Cloud as an option for its AI compute needs.

But in 2023, Google made updates to its security systems that satisfied Apple’s privacy concerns. Apple quickly began adopting Google Cloud for its AI needs, including using Google’s custom chip, the tensor processing unit—which Apple calculated was significantly less expensive to operate than Nvidia’s comparable chips.

Private Cloud

Apple needed to show the world it was taking AI seriously. ChatGPT’s explosive growth had forced Google, Amazon and nearly every major tech company to come up with their own plans to deliver more intelligent, conversational forms of AI to users. At Apple’s annual Worldwide Developers Conference in 2024, the company made its move, announcing Apple Intelligence, a suite of AI tools based on the types of generative models popularized by ChatGPT.

Apple tasked the team working on Project ACDC, the cloud effort previously led by Abbott, to help out with the Apple Intelligence launch. While that project wasn’t initially AI focused, the team working on it rushed to build Private Cloud Compute, code-named Project Thimble, to create a server system that would power Apple’s next-generation AI products more privately. Although Apple announced Private Cloud Compute alongside Apple Intelligence in June 2024, the system wasn’t actually working yet and was six months behind schedule, said former employees who worked on it (it finally launched in late 2024).

In the following months, Apple began trickling out parts of Apple Intelligence—such as AI writing tools and notification summaries—but the public and technology critics mostly greeted the features with disappointment. A bigger issue for Apple was that an overhauled, more conversational version of Siri simply wasn’t ready to ship.

Apple’s talks with Google about hosting Siri could be a sign that Apple wants to be prepared for a surge in AI activity on its devices when the new Siri comes out later this year.

Another factor in those talks could be that Private Cloud Compute hasn’t worked very well so far inside Apple’s own data centers. Updating software on its AI servers can take much longer than on other kinds of servers, said former employees. In addition, the Apple chips on Private Cloud Compute servers weren’t designed for AI and are not well equipped to run big models like Google’s Gemini, said former Apple cloud engineers and AI employees.

BlackRock’s GIP and EQT make $33bn bet on electricity demand

Pair team up to purchase power plant operator AES which has struggled on stock market

BlackRock-owned Global Infrastructure Partners and EQT are buying one of the biggest listed US utilities for more than $33bn, betting on surging electricity demand.

The two private capital groups said on Monday that they will pay $15 a share for AES Corporation, in an all-cash deal that values the utility group’s equity at $10.7bn — a 40 per cent premium to the share price before reports of takeover interest first emerged last July. Including its $22.7bn of debt, the deal gives AES an enterprise value of $33.3bn.

US pension fund Calpers and Qatar’s sovereign wealth fund will also participate in the deal.

AES, which owns and operates power plants in the US and 13 other countries, has struggled on public markets in recent years despite rising investor interest in utilities following the AI boom.

Shares in AES fell 16 per cent to $14.44 in pre-market trading in New York, bringing the slide over the past five years to about 45 per cent.

The takeover comes amid a flurry of deals in the power sector, which is benefiting from surging demand linked to the AI revolution. US energy demand is projected to rise by 25 per cent by 2030, driven mainly by rapid data centre expansion and increased electrification, according to research by consulting firm ICF.

Private equity-owned power producer Calpine was sold to Constellation Energy for nearly $30bn last year, while Blackstone last year struck an $11.5bn deal for TXNM, a large utility in the US south-west.

GIP itself has already been an active buyer of utility companies, striking a $6bn-plus deal in 2024 to acquire Allete, a utility based in Minnesota, although that deal is yet to close.

AES has invested heavily in recent years in renewable energy grids, which play a crucial role in supplying power to data centres owned by technology giants such as Microsoft, Meta and Alphabet.

Infrastructure investment groups are now betting that they can increase the capacity of utilities outside the scrutiny of public markets to help meet surging power demand.

GIP and EQT said on Monday they planned to continue expanding AES’s renewable operations and that the deal would offer “financial flexibility” to invest in new power plants.

Listed utilities such as AES pay large dividends to investors, sometimes creating the challenge of balancing new investment with payouts.

GIP and EQT have also bet heavily on data centres in recent years and are among the world’s largest investors in such facilities. Late last year GIP struck a $40bn deal to buy private data centre operator Aligned Data Centers, in the sector’s largest takeover.

GIP co-founder Adebayo Ogunlesi said: “AES is a leader in competitive generation, and at a time in which there is a need for significant investments in new capacity in electricity generation, transmission and distribution, especially in the United States.”

Executives signal mid-2027 debut for rocket that is central to billionaire’s Mars and Moon ambitions

SpaceX expects to have its flagship Starship rocket ready to launch a new fleet of its Starlink satellites by the middle of next year, as the company prepares for a crucial test ahead of an initial public offering.

Speaking at the Mobile World Congress event in Barcelona, executives at Elon Musk’s rocket company gave the clearest timetable yet for the commercial debut of its next-generation rocket.

Michael Nicolls, senior vice-president for Starlink at SpaceX, said that Starship would be ready in time to launch a new, upgraded constellation of Starlink’s mobile satellites in “mid-2027”.

A Starship test flight is expected in the next “four to six weeks”, SpaceX’s president Gwynne Shotwell told the FT on the sidelines of the event. Musk had previously suggested in a social media post in January that Starship’s 12th test flight would occur by early March.

The launch will be closely watched by prospective investors ahead of an IPO that could value SpaceX at as much as $1.5tn later this year, in what would be the biggest stock market debut ever.

SpaceX successfully completed its 11th test of Starship from its Texas launch pad in October, with the rocket flying for more than an hour before landing in the Indian Ocean. It is expected to offer significant improvements in cost and capacity over SpaceX’s current Falcon launch vehicles.

Starship is pivotal to Musk’s ambitions to win more contracts from the Nasa space agency and transport humans to the Moon and ultimately Mars. Designed to be fully reusable, Starship will be capable of carrying up to 250 metric tonnes.

Starship’s success is central to the company’s pitch to Wall Street. Reusable vehicles promise to transform the economics of getting to space and could propel SpaceX to a new phase of growth.

The rocket’s expanded capacity will accelerate the pace at which SpaceX can grow its network of thousands of Starlink communications satellites, which are already used by millions of customers.

“We’ll be able to launch more than 50 satellites on every launch [using Starship] and we’ll begin launching in mid-2027,” Nicolls said. “With this, Starship will be able to deploy the constellation very quickly.”

Last month, Starlink Mobile surpassed 10mn monthly users and Nicolls said it was aiming to more than double that number to 25mn by the end of this year.

Nicolls said SpaceX hoped to deploy 1,200 satellites within six months of the launch next year, forming a new constellation with improved networking capabilities.

Starlink Mobile at present partners with operators such as T-Mobile US and the UK’s Virgin Media O2 to provide a mobile signal where terrestrial networks do not.

“Overall, the system may even replace the need to deploy terrestrial networks in certain locations,” said Nicolls.

Asked whether SpaceX’s priority was to reach the Moon or Mars first, Shotwell said both were important to the company’s mission.

“Elon has talked a lot about the Moon recently, but Mars is his passion,” she said. “Let’s call them co-priorities.”

Carriers have enjoyed strong demand and cheap fuel but escalating tensions threaten both

When oil markets are disrupted and prices leap, airline stocks are among the first to feel the effect. Fuel accounts for roughly a quarter of big carriers’ operating costs. But the timing, nature and geography of the current Middle East conflict pose bigger questions for investors to monitor.

In general, big airlines are in decent financial health — at least viewed from 30,000 feet. They have been bolstered by robust travel demand, particularly for premium seats, and subdued oil prices. The MSCI World’s passenger airlines sub-index has risen about two-thirds since a trough in September 2022, according to LSEG data.

Zoom in and the situation varies based on how a carrier’s flights criss-cross the globe. Without access to Russian airspace, European and most Asia-based operators are already navigating a crowded corridor south of the Black Sea and over Georgia, adding to costs and flying times.

Any additional long-term disruption to flights heading south of Iran could hit traffic between Europe and South Asia hard. Some 32 per cent of Lufthansa’s long-haul network involves Asia and the Middle East, according to Bernstein analysts. British Airways owner IAG’s exposure is lower at 17 per cent since its western European hubs favour flying to the Americas.

Cargo will be disrupted too. Increasing numbers of airlines have been selling underfloor space for more than mere suitcases, alongside dedicated freighter fleet operators. Qatar Airways and Emirates are the second and fourth largest carriers of air freight in the world in volume terms, slotting between FedEx and UPS, according to the latest annual data from the International Air Transport Association. Volumes in January between Europe and Asia increased 15 per cent year on year.

Should Doha and Dubai remain shut for any period of time, shippers will need to look for alternative hubs and carriers. Turkish Airlines’ shares fell 6 per cent on Monday, but the carrier, which is sixth by cargo volume, could be geographically well placed.

No airline is immune to higher fuel costs, should oil prices rise further. US airlines are more immediately exposed because they do not usually hedge, relying on ticket price increases. European rivals, meanwhile, typically buy protection. Even then, prolonged high prices raise the cost of that insurance too. Airlines have been schooled by past shocks; the unfolding Iran crisis will be a test of how well the lessons were learned.