FT : Takeovers and weak pound put spotlight on UK aerospace and defence

Takeovers and weak pound put spotlight on UK aerospace and defence
Contracting British ownership renews debate over future of vital industry

Britain’s aerospace and defence sector has been a rare bright spot, defying the shrinking trend of the country’s manufacturing base for more than 30 years, with a core group of heavyweights such as BAE Systems and Rolls-Royce surrounded by a cluster of key suppliers.

But in the past three years, several of these suppliers — Cobham, Meggitt and Ultra Electronics — have fallen to bids from overseas suitors. Ultra and Meggitt delisted from the London market in the past two months. In September, another stalwart — privately owned Pearson Engineering, based in Newcastle — was sold to an Israeli company.

The contracting British ownership of a vital industrial sector has renewed debate about its long-term prospects. Companies still recovering from the Covid-19 pandemic face new headwinds of inflation and rising interest rates, while the weakness of the pound has heightened expectations that more groups will fall prey to suitors.

Kevin Craven, chief executive of ADS, the aerospace industry trade group, said he expected more UK companies to draw interest from overseas.

“The weak pound, on top of the UK’s attractive engineering skills, means there will be a higher amount of [takeover activity]. I expect there to be more interest from foreign buyers,” he said.

Sir Nigel Rudd, who as chair sold Boots and Meggitt, said he expected successful companies to remain vulnerable.

He added that there were two big issues driving the rush of takeovers across UK markets: the valuations of similar companies in the US were typically 20-30 per cent higher than those of UK peers and British investors “hate debt”.

“The problem is UK companies can’t buy US ones. They don’t have the firepower to do it . . . And as a rule, UK investors are pretty risk averse.”

Even before the pandemic, Britain’s position as the world’s most important aerospace and defence market after the US had already been weakened by Brexit. Apart from the additional bureaucracy, the UK has been shut out of important pan-EU research programmes.

New figures from industry trade body ADS show Britain’s civil and military aerospace activities generated a turnover of £22.4bn in 2021 — 37 per cent lower than that recorded before the coronavirus crisis.

In contrast, although hit by the pandemic, data from Germany’s trade body show the sector, which for decades trailed the UK, has consolidated its recent lead with revenues of €31.4bn or £27.8bn in 2021.

Craven said the UK figures still reflected the impact of Covid-19 and stressed that there was no evidence yet of a “structural shift or diminution of the UK’s competitiveness”.

One challenge for British companies, however, was the skills shortage, with some groups struggling to rehire people as the aerospace market recovers, he said.


Craven also cautioned against a “knee jerk reaction” that all takeovers were “a bad thing”, noting that the focus should be on “making sure that key assets are retained in the UK with the right assurances around how the integration [with the acquiring company’s operations] might happen”. 

In the cases of Meggitt and Ultra, the government reviewed both takeovers before ultimately giving the green light after extracting a series of commitments from the respective buyers.

Both America’s Parker Hannifin, which took over Meggitt, and private-equity backed Cobham, which bought Ultra, have promised to protect sensitive technology and beef up spending on research and development.

The takeover of Ultra, which makes submarine-hunting equipment as well as control systems for the fleet of Trident submarines that carry the UK’s nuclear deterrent, caused particular concern over national security.

Meanwhile, Israel’s Rafael Advanced Defense Systems, which took over Pearson Engineering, said the deal would lead to an increase in the number of jobs in Newcastle.

Nevertheless, some industry experts question whether the rush of takeovers could lead to a hollowing out of the sector’s closely integrated supply chains.

Others are worried that critical research and the development of technologies for electric and hydrogen aviation might not take place in the UK if the owners are not committed for the long term.

In aerospace, the government this year committed more funding towards the development of new technologies through the Aerospace Technology Institute, set up in 2014 to allocate state funding for innovation in the sector.

However, some industry executives stress that deeper funding will be needed to realise the UK’s ambitions to be a leader in net zero aviation.

“The UK by virtue of Brexit has not only made itself much less attractive as a manufacturing base due to things like additional paperwork, but it has also got itself out of all of the EU-funded R&D programmes,” said one former small business owner.

Paul Everitt, former ADS chief executive, said the UK was a strong player in the industry, with big global companies, including BAE and Babcock International, and inward investment from leading European groups such as Airbus and Leonardo. But added that Britain does face challenges “further down the supply chain”.

“Meggitt, Ultra and others were the route to market for the smaller manufacturing and engineering businesses in the UK,” he said.

In defence, several executives said the government needed to encourage a more focused procurement approach, rewarding companies based in the UK and offering a reliable stream of contracts. This, they said, would help drive innovation and domestic capabilities.

“With the pound so cheap, it makes a lot of the UK companies vulnerable to takeover and the government needs to insist the research and development activities stay in the UK,” said Kevan Jones, a Labour member of the House of Commons defence select committee.

FT : China on high alert as Covid cases rise ahead of Communist party congress

China on high alert as Covid cases rise ahead of Communist party congress
Latest data reveals another blow to economy that has been throttled by zero-Covid policy

China has been placed on high alert as Covid-19 cases creep up just days before President Xi Jinping is set to start his third term as Communist party leader.

On Sunday, China reported more than 1,700 cases over the previous 24 hours, more than triple the figure from the previous week. The growth in infections follows a week-long national holiday as travellers returned from tourist spots with Covid outbreaks.

“Over the National Day Golden Week holiday, China’s overall Covid situation evidently deteriorated,” Ting Lu, Nomura’s chief China economist, wrote in a note.

The growth in cases is being fuelled by BF. 7, a spin-off of the Omicron sub-variant BA.5. The US Centers for Disease Control and Prevention has warned that BF. 7 “appears to be more infectious” than previous Omicron strains and predicted it would cause a surge in infections this winter.

As Beijing prepares to host the Communist party congress, the capital has tightened interprovincial travel to prevent residents from returning from their holidays.

Zhang Ke is one of the many Beijingers unable to return home because their health code records them as having been near a Covid outbreak. Many others have taken to social media to complain that they have been locked out of the city, despite not having travelled to a high-risk area.

The 27-year-old hospitality worker returned to Zhangjiakou in Hebei province to spend the holiday with her family. She had only been at home a day before her family’s compound was put under lockdown.

“I never left the neighbourhood after coming home from the high-speed railway station,” she said.

Zhangjiakou has not declared a citywide lockdown, but Zhang said “95 per cent of the residential compounds are closed. Shopping malls and supermarkets are closed. No one is on the streets.”

Some analysts were optimistic that Xi would use the congress, which begins next Sunday, to ease his contentious zero-Covid policy that has throttled growth and created a cascade of social and political problems.

But Ting noted that the dismissal of local officials in Hohhot, the capital of Inner Mongolia, for failing to confine an outbreak confirmed that the policy “remaining fully intact”. 

China’s adherence to zero-Covid has stunted growth, prompting economists to revise down their gross domestic growth forecasts for the world’s second largest economy.

The World Bank forecast China’s economy would grow by 2.8 per cent this year and that its economic output would lag behind the rest of Asia for the first time since 1990. In April, the bank had predicted growth of between 4 and 5 per cent.

Chinese economic data reveals the continued economic damage wrought by the implementation of lockdowns. In September, when Chengdu in Sichuan and Dalian in Liaoning were under lockdown, services activity contracted for the first time in four months.

On Saturday, the Caixin services purchasing managers’ index fell to 49.3 in September from 55 in August. Any reading below 50 indicates a contraction in activity.

The threat of lockdowns has also dampened consumption. The Golden Week holiday is usually a time of peak domestic tourism and consumer spending when far-flung corners of the country welcome visitors who prop up the local economy.

But this year, battered consumer sentiment and widespread fear of getting caught up in lockdowns far from home have severely curtailed travel.

The daily number of passengers travelling around China during this year’s festival week was about 60 per cent below 2019. Revenue from tourism fell by more than 55 per cent in the same period.

>>> Weekend Papers Summary

Weekend Papers Summary


NEW YORK TIMES
-A fire erupted on the sole bridge linking the peninsula to the Russian mainland, and part of the 12-mile crossing collapsed into the sea.
President Vladimir Putin seized Crimea from Ukraine in 2014, and the bridge is a vital supply route for Russian troops.
-A distracted Russia is losing its grip on its old Soviet sphere. Russia’s domination of Central Asia and the Caucasus region is unraveling as the Kremlin focuses on the war in Ukraine — and border violence is flaring.
-On Vladimir V. Putin’s 70th birthday, his faltering military continued to show that it could use its advantage in long-range munitions to rain death and destruction far from the battlefield.
-Hurricane Ian has been linked to the deaths of at least 119 people after it hit Florida. More than half of the victims were at least 60, and dozens died by drowning.
-Herschel Walker urged woman to have a 2nd abortion, she says. The Georgia Senate candidate’s ex-girlfriend said he wanted her to terminate a pregnancy in 2011. She chose to have their son instead.
-Ron Johnson and Mandela Barnes clash in Wisconsin senate debate. Mr. Johnson, one of the Senate’s most vulnerable Republicans, faced Mr. Barnes, the lieutenant governor, in the first of two scheduled debates.
-US job growth eases, but is too strong to suit investors. The gain of 263,000 was shy of recent monthly totals but still robust. Stocks fell on fears of a harder, longer Fed campaign to fight inflation.
-The Supreme Court’s latest portrait was released on Friday. For more than 150 years, the class photos told a story. Here’s how to see it.
-The new limits on the sale of semiconductors to China aim to cripple Beijing’s access to technologies needed for supercomputing and guiding weapons.
-Columbia University to pay $165M to victims of former doctor Robert A. Hadden, a gynecologist, pleaded guilty in 2016 to abusing 19 women, but got no prison time. He is currently facing federal charges.
-Covid defies china’s lockdowns, creating chaos ahead of top meeting.
Tourists are stranded, residents confined at home. Covid flare-ups and the accompanying lockdowns are causing disruptions ahead of a key Chinese Communist Party meeting.
-Judges in Ohio and Arizona temporarily block states’ abortion bans. The decisions offered a window into which legal arguments might be working in the broader strategy to re-establish abortion rights through state courts.

THE FINANCIAL TIMES
-Ukrainian troops have reported outages of their Starlink communication devices on the frontline, hindering efforts to liberate territory from Russian forces, according to its officials and soldiers.
-US president Joe Biden warned the risk of nuclear “Armageddon” was at its highest since the Cuban missile crisis in 1962 and said he was trying to decipher Vladimir Putin’s “off-ramp” to avoid further escalation.
-A decade-long party for homeowners is coming to an end. The cost of servicing mortgages in the UK, Europe and the US has spiraled at the same time as disposable incomes have been squeezed, and predictions of a downturn or even a house price crash are now common.
-High petrol prices have continued to serve as the Republicans’ main weapon on the campaign trail despite an overall decline in recent months. But the Federal Reserve’s steep interest rate increases this year have given them additional ammunition by triggering a swift rise in mortgage rates to levels not seen since the 2008 housing-led financial crisis.
-As Russian troops continued their retreat in southeastern Ukraine, the Kremlin-appointed “governor” of the Russian-occupied Kherson region made a suggestion to Russia’s defense minister Sergei Shoigu. “A lot of people are saying that a defense minister who let things get to this state could shoot himself, like an officer,” Kirill Stremousov said on Thursday.
-The robust pace of US jobs growth cooled in September but the unemployment rate unexpectedly dropped, firming expectations that the Federal Reserve will raise interest rates by another 0.75 percentage points at its next meeting in November.
-The $500M-plus sale of Pink Floyd’s music catalogue has hit a wall, with the auction delayed by months of arguing between band members over tax, assets, and bassist Roger Waters’ claims that he is on an assassination hit list in Ukraine.
-On Wednesday, the Jewish holy day of Yom Kippur, Saudi Arabia and its oil allies — which now include Russia in the OPEC+ group — moved to upend the world’s energy order again. Their decision to slash 2M barrels a day from production targets, or 2% of global supply, might sound modest. But doing so while Brent crude was trading at a lofty $90/bbl — almost twice its long-term historical price — is a threat to a global economy stalked by inflation and mounting consumer anxiety about energy prices and shortages.
-In corporate boardrooms as well as defense ministries, concern is growing that mutually assured economic destruction may not keep the peace in the Taiwan Strait. Multinational businesses have invested many billions of dollars in both Taiwan and China on the assumption that war is simply too costly. Even corporate leaders who see the risk of war as remote can’t ignore more immediate policy changes driven by the US-China microchip war. The US continues to tighten its chip choke, rolling out new restrictions limiting China’s access to chip-making software and equipment.
-The US has warned that Hong Kong risked becoming a haven for Russian oligarchs after the Chinese territory said it would not enforce western sanctions on a superyacht owned by billionaire Alexei Mordashov that has docked in the city’s waters. The US state department also said Hong Kong’s business outlook could be further clouded by its government’s inaction as the former British colony’s “reputation as a financial center depends on adherence to international laws and standards”.
-Carmakers Renault and Nissan are embarking on talks to break a deadlock over intellectual property, which could potentially pave the way for a historic reshaping of their alliance within weeks. Renault chief executive Luca de Meo has jetted into Tokyo for a weekend of talks with Nissan boss Makoto Uchida in a move that will kick off a month of negotiations including examining the possibility of Renault reducing its stake in Nissan from 43% to 15%, said people familiar with the matter.
-Catalonia’s governing coalition shattered on Friday night as disagreement over how hard to push for independence prompted one member of the alliance to quit in disgust.
-In early September, Mark Zuckerberg rushed to a Meta lab in Pittsburgh, sat before more than 100 high-resolution cameras and prepared to prove his metaverse critics wrong. The photo shoot was designed to generate a more realistic avatar in the Meta chief executive’s likeness, as the social media giant scrambled to demonstrate that its $10B a year bet on a futuristic 3D digital world known as the metaverse was not a flop.
-Handling the irrepressible and mercurial Elon Musk is not something any adversary would sign up for. That Parag Agrawal, Twitter CEO, faced down the world’s richest man and this week appeared to be on the brink of victory is likely to be the highlight of his stint at the top. But the low-key engineer who has suffered the indignity of Musk’s public insults is now facing likely ejection from his post — albeit with a $60.1m golden parachute strapped to his back.

NY POST
-It had been months since Mayor Adams first sounded the alarm about an influx of migrants coming from the southern border and pushing our city’s homeless shelter system to its breaking point. Yet since then, while his administration has scrambled to house, feed, and care for these thousands of new arrivals and place their children in our schools, not one leading Democrat in this state or this country has offered New Yorkers anything but lip service. Nothing. Not even an acknowledgment that a crisis actually exists. Until Friday, when Mayor Adams finally said the words: state of emergency.
-CNBC’s Jim Cramer unloaded on Elon Musk on Thursday, arguing the billionaire had no choice but to reverse course and buy Twitter after miscalculating his ability to back out of the deal. Musk proposed buying Twitter this week at the original price of $44B, or $54.20/share. The Tesla CEO’s proposal came just days before Musk and Twitter were set to face off in Delaware Chancery Court – with many legal experts predicting he was likely to lose the case.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: In the weeks ahead, the Dollar is likely to weigh on earnings for big US multinationals.

Cover Story:
-In the weeks ahead, the Dollar is likely to weigh on earnings for big US multinationals. In the years ahead, it could hold back gains for S&P 500 fund holders, judging by one recent analysis of the link between currency strength and returns. On the other hand, that means there is a double discount available now to US shoppers in battered stock markets overseas. Japan looks particularly attractive.

Interview:
-Europe has had a punishing year. The fallout from the war in Ukraine has caused food and fuel costs to spike, forcing central bankers to move aggressively to curb inflation. Given the crises Europe has weathered this year, Katrina Dudley, manager of the Franklin Mutual European fund, is less worried today than she was a year ago. What’s more, she sees glimpses of blue sky behind the clouds, in part because so much bad news is already baked in and some European companies are well positioned for longer-term trends.

Tech Trader:
-For years, Adobe bears have said that the leading software provider for creative professionals risked getting disrupted by web-based start-ups. While Adobe has adapted to cloud-based subscriptions, much of its products remain rooted in the traditional desktop-software model and lack the collaboration architecture of the latest players. Figma, without legacy roots, has been more successful with the web model, which likely explains why Adobe is making such an expensive run at it.

The Trader:
-Barron’s urges readers to start thinking about tax-loss selling. That’s the term for selling a stock at a loss and using that to offset gains elsewhere in one’s portfolio. It can be hard to do in up markets, when so many stocks have risen on the year. For instance, in 2021, just 69 stocks finished the year lower. Some 416 stocks have dropped so far in 2022, though, making it more likely than not that investors have something to sell.
-Banks have been a lousy investment this year, just as so much else has. The SPDR S&P Bank ETF has dropped 16.5% in 2022, faring only slightly better than the S&P 500, which has fallen 23.6%. But the near symmetry in performance is even more shocking given the expectations heading into 2022. Consumers and businesses were expected to resume borrowing after more than a year of pandemic stimulus buoyed their cash piles. Banks were expected to earn more on those loans as the Fed lifted interest rates five times this year from a range of near-zero to 3.25%.

Features:
-On Friday evening, Rivian sent a notice to its customers indicating that a recall notice would be posted shortly with the National Highway Traffic Safety Administration, or NHTSA. The company reached out just before the notice was posted on the government website so customers didn’t miss it. The recall is for a fastener connecting the front upper control arm and steering knuckle. If there’s a problem with the connection, Rivian vehicles could have a problem with steering.
-The ‘Best Airport’ in the World, as Voted by Condé Nast Traveler Readers is Istanbul Airport. A fleet of robots directs passengers to their departure gates in the newly built facility. The 818M ft2 hub has won architectural accolades and awards for reducing energy. Known as IST, the Istanbul airport opened in 2018. IST services 90 flights per hour and more than 200 airlines.

European Trader:
UK house prices have quintupled since 1992. That’s significantly more than in the US, where prices have quadrupled over the past 30 years. The strong growth shows the power of demand for homes in Britain, especially when so much of the country’s housing stock consists of small, damp Victorian dwellings. Nevertheless, some of the country’s biggest builders— Persimmon, Barratt Developments, and Taylor Wimpey—have been among the FTSE 100’s worst performers in 2022, all down about 50%. Tack on the British Pound’s steep depreciation against the Dollar this year, and the declines look even worse.

Emerging Markets:
A Lula victory in Brazil could be a win for amazon rainforest. Amazon deforestation accelerated by some 75% during President Jair Bolsonaro’s first four years in power as he ridiculed conservation and slashed enforcement budgets. Challenger Luiz Inácio Lula da Silva cut deforestation by two-thirds during his 2003-11 presidency, and promised “net zero” deforestation during the current campaign. He won 48.4% of the first-round vote to Bolsonaro’s 43.2%. “Lula was able to show we could protect the Amazon and still have a vibrant Brazil,” says Patricia Pinho, deputy science director at the Amazon Environmental Research Institute.

Commodities:
-OPEC’s latest controversial decision to cut production signals that the cartel has a new price floor for crude—one that might upset the US government but should be very lucrative for oil producers. Brent crude, the international benchmark, briefly fell below $85 last month, but is now firmly above $90. Raad Alkadiri, an energy expert at Eurasia Group, said OPEC is signaling that a “healthy” oil price is considerably higher than it used to be. “Their idea of market balance is at $90 to $100,” he said. “They are willing to take proactive measures at a higher price than might have been seen in the past.”
Darwei Kung, head of commodities at asset manager DWS, said that $90 is increasingly looking like a “soft floor” for OPEC.

Streetwise:
-This week, Jack Hough considers vehicle prices. He thinks that even if inventories are growing, you should not expect a discount on your next new car or truck. Indeed, among drivers who financed new cars and light trucks last quarter, a record 14% agreed to monthly payments over $1,000, up from 8% a year ago. Buyers are overpaying. Separately, BofA Securities reports that vehicle inventories rose to 33 days’ worth of supply in September, from 29 in August and closer to 20 a year ago. And an index of used-vehicle prices came in 3% lower for September than August.

Barrons : Adobe-Figma Deal Is Like Instagram’s Buyout. Why That’s Trouble.

Adobe-Figma Deal Is Like Instagram’s Buyout. Why That’s Trouble.

Regulators have come under fire in recent years for allowing a decade of technology deals that helped turn major tech platforms into de facto monopolies. While the government has signaled a tougher stance under the Biden administration, so far the deals have continued. Amazon AMZN –4.77% ’s $8.5 billion purchase of film studio MGM closed earlier this year without government interference, suggesting that big tech companies still have permission to bulk up.

Now, Adobe’s $20 billion deal to buy start-up Figma is setting up to be a key test case: Regulators are getting another chance to prove their seriousness about protecting competition.

For years, Adobe ADBE –3.23% (ticker: ADBE) bears have said that the leading software provider for creative professionals risked getting disrupted by web-based start-ups. While Adobe has adapted to cloud-based subscriptions, much of its products remain rooted in the traditional desktop-software model and lack the collaboration architecture of the latest players. Figma, without legacy roots, has been more successful with the web model, which likely explains why Adobe is making such an expensive run at it.

Founded 10 years ago, Figma is forecasting $200 million of annual recurring revenue this year, making the $20 billion purchase equal to 100 times revenue—much pricier than the multiples for even fast-growing public cloud-software stocks.

According to FactSet, the average price-to-sales ratio for cloud-software companies in the WisdomTree Cloud ComputingWCLD –5.89% exchange-traded fund (WCLD) is just five times.

“Given the high valuation, most investors think Adobe was compelled to acquire Figma in response to increasing competitive pressure,” Bernstein analyst Mark Moerdler wrote last month. “For many it solidifies investor concerns around competition.”

When asked about concerns that the deal could be boosting Adobe today by stifling future competition, an Adobe spokesperson says the company and Figma are “not meaningful competitors,” adding, the “combination of Adobe and Figma will deliver tremendous value to consumers, advance complementary yet distinct product categories, and create new market opportunities.”

They might not be competitors now, but Facebook could have said the same thing about Instagram when it acquired the photo-sharing app 10 years ago for a billion dollars. Two years later, Facebook paid $19 billion for WhatsApp. Those deals opened the door for Facebook to dominate social networking as both grew into multibillion-user behemoths.

The Federal Trade Commission and Justice Department allowed them to proceed. But what was good for Facebook was bad for consumers. The FTC now argues in its antitrust lawsuit against Facebook parent Meta Platforms META –4.04% (META) that the purchase deprived users of the benefits of competition. An independent Instagram, the government says, would have encouraged product innovation, better privacy, and less reliance on advertising.

Two years ago, the FTC said that it was looking back at older tech deals to “deepen its understanding of large technology firms’ acquisition activity.” The commission should use that newfound understanding in evaluating Adobe’s Figma acquisition, which looks like a 2022 version of the Instagram and WhatsApp deals.

The FTC didn’t respond to a request for comment about Adobe and Figma.

Thus far, investors have voted with their feet, with Adobe shares tumbling by roughly 20% since the Figma deal was announced on Sept. 15. The government should weigh in, too.

Barrons : U.K. Home-Builder Stocks May Be a Buying Opportunity as the Pound Tank

U.K. Home-Builder Stocks May Be a Buying Opportunity as the Pound Tanks

They say an Englishman’s home is his castle. It’s also a disproportionate amount of his net worth, which should make buying shares of companies that build new homes a relatively safe bet.

U.K. house prices have quintupled since 1992. That’s significantly more than in the U.S., where prices have quadrupled over the past 30 years. The strong growth shows the power of demand for homes in Britain, especially when so much of the country’s housing stock consists of small, damp Victorian dwellings.

Nevertheless, some of the country’s biggest builders— Persimmon (ticker: PSN.UK), Barratt Developments (BDEV.UK), and Taylor Wimpey (TW.UK)—have been among the FTSE 100’s worst performers in 2022, all down about 50%. Tack on the pound’s steep depreciation against the dollar this year, and the declines look even worse.

Yet all three companies are profitable and are returning money to shareholders, boasting dividend yields of around 10% or more.

The reason for the rough ride comes down to rising interest rates. The Bank of England started lifting its benchmark from close to zero in December to 2.25% today. Economists see it rising to at least 4% before the central bank eases off the gas.

That’s a tough blow for borrowers who have already seen mortgage rates double this year. In the U.K., homeowners typically refinance every two to five years—banks tend to offer steeply discounted rates for the first few years of a home loan before reverting to a higher one, encouraging customers to swap deals relatively frequently. That was a boon for borrowers between the 2008-09 financial crisis and last year.

This year saw a sudden reversal. On Sept. 23, the new government under Prime Minister Liz Truss inadvertently sent the pound, along with U.K. stocks and bonds, plunging by unveiling a new budget that included a raft of tax cuts. It was a bid to boost growth that markets didn’t find credible. As the turmoil unfolded, domestic newspaper headlines focused on mortgage lenders pulling products and jacking up rates at jaw-dropping speeds, further hurting home-builder shares.

Persimmon has a market value of 4.2 billion pounds sterling ($4.8 billion). It fetches 5.9 times this year’s expected earnings and trades at a 10% premium to its peers. Shares are down 56% this year to £12.71. It boasts a dividend yield of 18.1% and receives a Buy rating from eight out of 14 analysts on FactSet.

Barratt Developments, with a market value of £3.3 billion, fetches 5 times this year’s earnings and is valued in line with peers. Shares are down 53% this year to £3.55. Eight of 13 analysts on FactSet rate it a Buy, and its dividend yield is 10.4%.

Taylor Wimpey, with a market value of £3.2 billion, trades at 5.2 times forward earnings, in line with its peers. Shares are down 46% this year to £0.94. Its dividend yield is 9.7%, and nine of 12 analysts rate it a Buy on FactSet.

Higher interest rates, rising unemployment, and the prospect of a recession will almost certainly dent U.K. house-price growth in the coming year—some analysts predict the first annual drop in prices since the financial crisis. But there are some bright spots.

Truss promised to loosen planning laws to speed up new housing developments. One of the tax cuts was on stamp duty, a levy paid by buyers in home transactions. Truss earlier capped household energy bills, which should make it easier to make mortgage payments with inflation running in the double digits.

U.K. home builders may not be out of the woods yet. But it’s also conceivable that prospects improve dramatically in the near future.

Barrons : Europe Is Headed for Recession. A Top Stockpicker Is Confident It Can

Europe Is Headed for Recession. A Top Stockpicker Is Confident It Can Survive.

Europe has had a punishing year. The fallout from the war in Ukraine has caused food and fuel costs to spike, forcing central bankers to move aggressively to curb inflation. Yet, tighter monetary policy is colliding with looser fiscal policy, as governments seek to mitigate the impact of rising costs on household budgets.

The result is a macroeconomic mess, which has pressured stock markets from London and Paris to Berlin and Rome. The FTSE 100, in Britain, is down 4% year to date and down 6% since mid-August; the Stoxx Europe 600, a pan-European index, is off 18%, versus the 21% loss in the S&P 500.

Given the crises Europe has weathered this year, Katrina Dudley, manager of the Franklin Mutual European fund (ticker: TEMIX), is less worried today than she was a year ago. What’s more, she sees glimpses of blue sky behind the clouds, in part because so much bad news is already baked in and some European companies are well positioned for longer-term trends.

Dudley started her career as an accountant, valuing businesses and assets, initially in Sydney. That early training informs her approach as a stockpicker for the value-oriented $688 million Franklin Mutual European fund, whose 8% loss in the past year beat 97% of its peers and whose ability to eke out an average annual 0.93% return over the past five years bested 87% of peers, per Morningstar.

Dudley recently discussed with Barron’s the investment opportunities she’s finding in Europe, and what types of companies may be in for more pain as the economy slows. An edited version of our conversation follows.

Barron’s: How would you describe the economic situation in Europe compared with the U.S.?

Katrina Dudley: We are seeing costs rise much more significantly. For example, the German consumer has seen a 100% increase in electricity and heating bills. That has ramifications for consumer spending. We also see supply-chain issues in Europe, but on a greater scale. Both the Federal Reserve and the European Central Bank are looking to use rate policy to curb inflation, but higher rates could drive us into a recession. Since Europe isn’t coming off such a high-water mark and we have a fully employed economy, any recession is likely to be mild.

Borrowing costs are spiking for debt-laden countries such as Italy. Are you concerned about another financial crisis in Europe?

Many of the concerns have been the result of the rise of populist parties that are nationalistic and more closely aligned with anti–European Union policies and in favor of policies that reduce income gaps.

OVERSEAS MARKETS DATA
Europe, Middle East, Africa and Asia

We have been positively encouraged by the actions contemplated by European policy makers to lessen the burden of rising energy costs on consumers, especially low-income households. For example, the United Kingdom is capping household energy bills for the next two years. Italy approved a 17 billion euro [$17 billion] package to shield companies and consumers from rising energy costs, Spain cut the value-added tax on electricity, and Germany passed relief packages for households. If the current parties hadn’t acted to assist households most impacted by rising costs, there was a risk of rising populism and rising nationalism.

What is the fallout of the recent financial turmoil in the U.K., which sent the British pound falling to a record low against the dollar?

The market is mainly composed of multinational companies headquartered in the U.K. As a result, the lower pound means overseas earnings translate back to sterling at higher levels. That is a tailwind. But the lower pound also means higher inflation, which is negative for the economy and the consumer, and means rates will need to go higher to contain it.

What are two U.K. holdings?

We own the pharma company GSK [GSK]. The durability of its vaccine business isn’t well appreciated, and the company isn’t getting credit for the turnaround in its pharmaceutical business, while recent concerns around Zantac litigation are being disproportionately reflected in its share price.

Another holding is global real estate services company Savills [SVS.UK], which evolved from a pure broker-based business and pivoted toward less cyclical property and facilities management and investment management.


What else do you want to own in this economic backdrop?

I look at my children—all four would rather give up food than their cellphones. There’s a change in the dynamics of sectors; 20 years ago, food, drink, and tobacco were staples. Tobacco and alcohol are no longer staples. People aren’t smoking as much. But cellphones have become a staple.

What is the best way to invest in that idea?

Deutsche Telekom [DTE.Germany] is German quality with a U.S. cash-flow machine. It is a strong, entrenched German franchise that is well run, with an interest in U.S. mobile operator T-Mobile US [TMUS], and the stock is inexpensive. T-Mobile is investing and taking that short-term pain of restructuring and integrating. That has cash costs associated with it, but once through that, T-Mobile will turn a corner and start seeing cash flowing.

Who else is well positioned to weather the type of recession you see ahead?

We own AerCap Holdings [AER], an aircraft leasing company. It has so much bad news in it that it can’t get much worse. It has already been knocked by Russia, where it had aircraft on lease and the Russians kept the aircraft. Now, there is litigation.

Normally, in a recession we would expect airline travel to decline. That has already happened [due to the Covid pandemic]. A recession is already in AerCap’s numbers: The stock trades at a significant discount—roughly 80% of its book value. AerCap also recently acquired GE Capital Aviation Services, a business that has a lot of upside.

Where in the market is the bad news not already factored in?

The typical playbook when we see demand destruction is that businesses cut back travel and entertainment spending, trade shows, and discretionary spending. But those things have already been curtailed. We are starting to question the number of companies that will be able to generate historical levels of incremental margins because they don’t have the natural cost-savings buffers of the past.

You want to look at cyclical stocks. We are overweight industrials, which have unique characteristics that [make the margin pressure] not an issue.

Can you give an example of such a company?

Alstom [ALO.France], which suffered from working-capital outflows as a result of its acquisition of Bombardier Transportation because it paid suppliers that hadn’t been paid [by Bombardier]. I always like [transactions] where the company has already done the playbook themselves. Alstom has already reduced cash-flow volatility within its own operations, and now it’s taking the same playbook and laying it over Bombardier’s operations.

What happens to demand as Europe goes through a recession?

Alstom is a key beneficiary of political momentum behind the transition to greener technology—for the generation of electricity or, in this case, greener transportation. We see long-term structural drivers that are very much government supported. This is an investment for the long term. Structural drivers are in place, and you are seeing a lot of progress.

Energy stocks have been one of the bright spots in the market. What’s the outlook now for some of the companies you own?

If we look at Shell ’s [energy] transition, it’s probably the most progressive in terms of decarbonization and doing it as it generates strong free cash flow. Higher oil prices mean even stronger free cash flow, and that supports the distribution to shareholders. As value investors, we like that.

Shell [SHEL] knows it has to eventually replace the lost oil-and-gas profits. It is looking at a 20% reduction of carbon intensity by 2030, which we think is very impressive. Versus peers that have focused on transition and are moving into renewables, Shell is taking a different tack. It’s looking at ways of selling electricity, and different ways to address carbon footprint, such as with carbon capture and storage as a service.

You also own a couple of Dutch insurers. What is the draw?

ASR Nederland (ASRNL.Netherlands) was founded in the 1720s. As value investors, cash is key. It has good organic growth and is acquisitive, which we see driving cash generation. It has improving underwriting and is focused on making business more efficient—a key driver of earnings. ASR generates midteens return on equity. The Dutch nonlife insurance market has seen a lot of consolidation, which leads to more rational pricing. We also own NN Group (NN.Netherlands). The market’s focus is on profitability rather than market share.

What does China’s economic slowdown, geopolitical tensions, and coming political leadership transition mean for exporters like Siemens [SIE.Germany]?

It’s a transition. I don’t think it undermines the fact that China has and will continue to be a growth engine. It just may be there’s a one-year pause. From the point of view of Siemens, you aren’t going to stop investing in China, because in the long term there is a positive case and you have been in China for a long period of time. One of Siemens’ competitive advantages is its longevity of commitment to that region. What might be short-term pain, in terms of slowdown, doesn’t undermine the case for economic growth over the long term.

Where do you see the biggest risks in the market?

The risks today are much more identifiable and acknowledged than even a year ago, such as Europe’s energy-security issues. We were wondering when the ECB would raise rates, and that has started in a measured way—[it is] very cognizant of this need to balance raising rates for price stability but not too much to generate a recession. And Covid, which even a year and half ago was a risk, is less so. If you look at the risk profile of Europe versus a year ago, it’s lower. It’s just, at this moment, under a confluence of clouds.

What else could turn out in Europe’s favor?

Even if the euro doesn’t move from here, it will make Europe much more attractive for travel, and that generates economic growth. I think it’s a good setup.

Thanks, Katrina.

WSJ : Electric-Vehicle Makers and Suppliers Drive Into a Stormy IPO Market

Electric-Vehicle Makers and Suppliers Drive Into a Stormy IPO Market
Manufacturers of electric cars and their components are getting deals done, but investors are driving tough bargains

Electric-vehicle makers in Asia and the companies that supply them are rushing to capital markets to raise money, as they try to take advantage of a surge in demand for energy-efficient automobiles.

There has been a bounty of EV-related stock sales this year, even though much of the global market for initial public offerings has slumped. More than $23 billion has been raised in the year-to-date period by companies along the electric-vehicle supply chain via initial public offerings and follow-on stock sales in Asia excluding Japan, according to Dealogic data.

Bankers and investors say the burgeoning EV sector is one of the few industries still drawing money, thanks to its high long-term growth and profit potential. But the companies haven’t been immune to recent stock market turbulence; some have had to downsize their fundraising ambitions or accept lower valuations.

EV-related businesses from car manufacturers to battery producers are also pushing ahead with stock sales because they need to fund their capital-intensive activities.

“Many companies, particularly those that are unprofitable or burning cash, have no choice,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.

“They need that capital to grow. They need that capital to survive. They need that capital to become relevant in their own markets,” he added.

In Hong Kong last month, Leapmotor, a seven-year-old Chinese electric vehicle maker, raised $800 million in its IPO, far short of the $1.5 billion that the company had previously aimed for.

The company, whose full name is Zhejiang Leapmotor Technology Co. , said it planned to use the proceeds for research and development and to expand its production capacity and sales network. It intends to roll out seven new EV models by 2025. Last week, Leapmotor listed on a day that the city’s benchmark Hang Seng Index hit a 11-year low—and its shares plummeted on their debut.

On Thursday, CALB Co., a Chinese electric-vehicle battery supplier, started trading in Hong Kong after pricing its IPO at the bottom of its offered range, raising $1.3 billion. It fared better, ending its first day flat.

The electric-vehicle industry is currently at an inflection point, said Edward Byun, co-head of equity capital markets for Asia ex-Japan at Goldman Sachs Group Inc.

“The players want to capitalize on such a critical growth stage by embarking on new investments, which requires fundraising,” he added.

Goldman wasn’t involved in Leapmotor or CALB’s IPOs. The Wall Street bank earlier this year worked on multibillion share sales by EV battery giants LG Energy Solution Ltd. of South Korea and China’s Contemporary Amperex Technology Co. , or CATL. Both companies are major suppliers to Tesla Inc. and other car manufacturers.

LG Energy’s January 2022 IPO, which raised the equivalent of more $10 billion in its home market, was South Korea’s largest-ever listing. CATL, which is already listed in mainland China, raised the equivalent of $6.7 billion in June.

Many EV-related businesses are trying to scale up and gain a deeper foothold in China’s giant—and increasingly crowded—automobile market.

Even though overall growth in China’s economy has slowed sharply and its housing market is going through a deep slump, sales of electric passenger cars are booming, thanks in part to favorable government policies that include cash subsidies for buyers and purchase-tax exemptions. In August, about 24% of the 2.1 million vehicles produced in China were battery-powered electric cars and 7% were plug-in hybrids.

Many of the country’s less established EV manufacturers, however, are seeing losses pile up even as their sales rise. Rising battery prices and supply-chain delays have also pressured their margins.

Some investors say they prefer investing in companies that supply key components or parts to EV manufacturers, as well as firms that are already profitable. Christina Woon, investment director of Asian equities at Abrdn, said battery makers, for example, are better positioned to pass rising costs along and weather inflationary headwinds.

“The EV space has a lot of potential for growth but it is not an easy one to crack,” she said.

More IPOs from companies in the sector are in the pipeline. WM Motor Holdings Ltd., another electric-car maker, as well as Greatpower Nickel and Cobalt Materials Co., a supplier of materials used in EV batteries, have also filed paperwork for listings in the Asian financial hub.

Despite this year’s broader market downturn, Patrick Steinemann, Bank of America Corp.’s co-head of global mobility investment banking, is sticking to a forecast of $100 billion in IPO proceeds among EV makers, battery suppliers and charging companies from 2021 to 2023.

“Investors view the electrification theme as a massive one-time transition that is taking place over the course of the current decade,” he said, pointing to the fact that global EV sales are on track to hit 1 million monthly.

“This secular trend is bound to continue and may not be derailed by headwinds in the market including inflation and rising interest rates,” Mr. Steinemann added. Rising rates in the U.S. have dampened the prices and valuations of many high-growth stocks this year.

China already has multiple publicly listed EV makers, including Warren Buffett -backed BYD Co. , as well as U.S.-listed companies NIO Inc., Li Auto Inc. and XPeng Inc.

Joohee An, a lead portfolio manager at Mirae Asset Global Investments, said her fund prefers more established Chinese EV companies with strong market share, such as BYD, even after Mr. Buffett’s Berkshire Hathaway Inc. recently trimmed its ownership in the company.

“The competition is getting more fierce,” Ms. An said, adding that if companies are late, the market opportunities will be taken by others.

FT : Electric-Vehicle Makers and Suppliers Drive Into a Stormy IPO Market

Electric-Vehicle Makers and Suppliers Drive Into a Stormy IPO Market
Manufacturers of electric cars and their components are getting deals done, but investors are driving tough bargains

Electric-vehicle makers in Asia and the companies that supply them are rushing to capital markets to raise money, as they try to take advantage of a surge in demand for energy-efficient automobiles.

There has been a bounty of EV-related stock sales this year, even though much of the global market for initial public offerings has slumped. More than $23 billion has been raised in the year-to-date period by companies along the electric-vehicle supply chain via initial public offerings and follow-on stock sales in Asia excluding Japan, according to Dealogic data.

Bankers and investors say the burgeoning EV sector is one of the few industries still drawing money, thanks to its high long-term growth and profit potential. But the companies haven’t been immune to recent stock market turbulence; some have had to downsize their fundraising ambitions or accept lower valuations.

EV-related businesses from car manufacturers to battery producers are also pushing ahead with stock sales because they need to fund their capital-intensive activities.

“Many companies, particularly those that are unprofitable or burning cash, have no choice,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.

“They need that capital to grow. They need that capital to survive. They need that capital to become relevant in their own markets,” he added.

In Hong Kong last month, Leapmotor, a seven-year-old Chinese electric vehicle maker, raised $800 million in its IPO, far short of the $1.5 billion that the company had previously aimed for.

The company, whose full name is Zhejiang Leapmotor Technology Co. , said it planned to use the proceeds for research and development and to expand its production capacity and sales network. It intends to roll out seven new EV models by 2025. Last week, Leapmotor listed on a day that the city’s benchmark Hang Seng Index hit a 11-year low—and its shares plummeted on their debut.

On Thursday, CALB Co., a Chinese electric-vehicle battery supplier, started trading in Hong Kong after pricing its IPO at the bottom of its offered range, raising $1.3 billion. It fared better, ending its first day flat.

The electric-vehicle industry is currently at an inflection point, said Edward Byun, co-head of equity capital markets for Asia ex-Japan at Goldman Sachs Group Inc.

“The players want to capitalize on such a critical growth stage by embarking on new investments, which requires fundraising,” he added.

Goldman wasn’t involved in Leapmotor or CALB’s IPOs. The Wall Street bank earlier this year worked on multibillion share sales by EV battery giants LG Energy Solution Ltd. of South Korea and China’s Contemporary Amperex Technology Co. , or CATL. Both companies are major suppliers to Tesla Inc. and other car manufacturers.

LG Energy’s January 2022 IPO, which raised the equivalent of more $10 billion in its home market, was South Korea’s largest-ever listing. CATL, which is already listed in mainland China, raised the equivalent of $6.7 billion in June.

Many EV-related businesses are trying to scale up and gain a deeper foothold in China’s giant—and increasingly crowded—automobile market.

Even though overall growth in China’s economy has slowed sharply and its housing market is going through a deep slump, sales of electric passenger cars are booming, thanks in part to favorable government policies that include cash subsidies for buyers and purchase-tax exemptions. In August, about 24% of the 2.1 million vehicles produced in China were battery-powered electric cars and 7% were plug-in hybrids.

Many of the country’s less established EV manufacturers, however, are seeing losses pile up even as their sales rise. Rising battery prices and supply-chain delays have also pressured their margins.

Some investors say they prefer investing in companies that supply key components or parts to EV manufacturers, as well as firms that are already profitable. Christina Woon, investment director of Asian equities at Abrdn, said battery makers, for example, are better positioned to pass rising costs along and weather inflationary headwinds.

“The EV space has a lot of potential for growth but it is not an easy one to crack,” she said.

More IPOs from companies in the sector are in the pipeline. WM Motor Holdings Ltd., another electric-car maker, as well as Greatpower Nickel and Cobalt Materials Co., a supplier of materials used in EV batteries, have also filed paperwork for listings in the Asian financial hub.

Despite this year’s broader market downturn, Patrick Steinemann, Bank of America Corp.’s co-head of global mobility investment banking, is sticking to a forecast of $100 billion in IPO proceeds among EV makers, battery suppliers and charging companies from 2021 to 2023.

“Investors view the electrification theme as a massive one-time transition that is taking place over the course of the current decade,” he said, pointing to the fact that global EV sales are on track to hit 1 million monthly.

“This secular trend is bound to continue and may not be derailed by headwinds in the market including inflation and rising interest rates,” Mr. Steinemann added. Rising rates in the U.S. have dampened the prices and valuations of many high-growth stocks this year.

China already has multiple publicly listed EV makers, including Warren Buffett -backed BYD Co. , as well as U.S.-listed companies NIO Inc., Li Auto Inc. and XPeng Inc.

Joohee An, a lead portfolio manager at Mirae Asset Global Investments, said her fund prefers more established Chinese EV companies with strong market share, such as BYD, even after Mr. Buffett’s Berkshire Hathaway Inc. recently trimmed its ownership in the company.

“The competition is getting more fierce,” Ms. An said, adding that if companies are late, the market opportunities will be taken by others.