FT : The UK’s piecemeal approach to foreign bids

The UK’s piecemeal approach to foreign bids
The referral of Cobham’s bid for Ultra will be a bellwether

Not for the first time, the UK finds itself caught between duelling philosophies. Brexit was meant to revive a Global Britain open for business but the pandemic has spurred a desire for more self-reliance and control of critical supply chains. How the government deals with foreign bids for UK defence and aerospace companies will test which tenet prevails. A bellwether will be the referral by Kwasi Kwarteng, the business secretary, of Cobham’s £2.6bn bid for Ultra Electronics for investigation on national security grounds. He was right to do so, given Ultra’s provision of key technology to the Royal Navy. But the current piecemeal approach to sensitive foreign bids needs formalising. Sweeping powers that take effect next year will help but clarity is needed from the government about when and how it might deploy those new tools and how it defines national security. 

UK companies of all stripes are currently attractive targets. Here, too, the forces of Brexit and the pandemic are felt as they have depressed valuations. Cheap debt abounds, fuelling a record number of takeover approaches, including Cobham’s for Ultra, a £7.1bn bid for Meggitt, a civil aerospace and defence supplier, and the sale of Babcock International’s Frazer-Nash unit. This has prompted concern about the hollowing out of Britain’s defence industry, with the wider frenetic deal activity raising questions about the role of private equity. While the UK should be largely agnostic about ownership, there can be exceptions, including around strategic assets. The bid by Cobham, now owned by private equity firm Advent International, therefore merits further inquiry.

Private equity typically seeks a profitable exit within a few years. The rump of Cobham combined with Ultra’s assets may make sense — and the US and the UK have shared a relatively open market for years — but it is a future sale by Advent that the Competition and Markets Authority should worry about (during national security referrals, the CMA is advised by the Ministry of Defence). Meggitt’s approach from US rival Parker Hannifin stems from a desire to combine in a consolidating market. The government is taking an “active interest” in this deal too. That may intensify with the arrival of TransDigm and a counterbid. While TransDigm is not a private equity firm, it emulates the sector’s “culture”, according to its website. If it plans to flip Meggitt, then that too should raise a red flag.

Advent knows the process, at least. It can be sanguine about hue and cry, given that its last CMA referral did not prevent it buying Cobham in the first place. The fact that Advent made commitments at the time and was able to sell half of Cobham within 18 months without breaking them underlines the need to eke out tougher, longer-lasting pledges during bids in sensitive sectors.

Despite the UK’s historic — and almost unique — open-door policy to foreign bids, the government has shown itself willing to intervene. Six of the 14 referrals on national security grounds since 2003 were made in the past two years, including Nvidia’s $40bn bid for Arm, the UK chipmaker, which the CMA on Friday flagged as problematic. The open door may be more surveilled from January: new national security rules mean takeovers in 17 sectors, including defence, will have to be notified to a dedicated unit if they pass certain thresholds or face swingeing fines. But until some kind of record builds up, uncertainty will persist as to what will pass muster. The government ought to spell out what it prioritises: keeping high-value jobs and suppliers in the UK or keeping the door open. 

FT : In building the heart of a star, humans inch closer to net zero

In building the heart of a star, humans inch closer to net zero
Nuclear fusion offers near limitless power from minimal fuel but the challenge for scientists is taming it

The fireball at the heart of our solar system is powered by nuclear fusion. The crushing pressures in the sun’s core squeeze hydrogen nuclei together so powerfully that they overcome their natural repulsion and fuse. These nuclear clinches generate larger particles with masses that are not quite the sum of their parts.

The missing mass becomes energy, a fiery embodiment of Einstein’s equation E=mc2. The equation shows that, in terms of energy production, a tiny bit of mass goes a long way thanks to the colossal multiplier of c, the speed of light (300,000km per second), squared.

Scientists, lured by the prospect of almost limitless power from minimal fuel, have long dreamt of replicating nuclear fusion in the laboratory. This month, researchers in the US shifted the dial significantly by approaching “ignition”, where a tiny pellet of hydrogen plasma fuel, bombarded by 192 lasers, began to fuse, producing enough energy to continue heating the rest of the fuel in a self-sustaining way.

Professor Jeremy Chittenden, from Imperial College in London, hailed the breakthrough at the National Ignition Facility in California as the biggest in nearly half a century. Chittenden, who collaborates with the NIF, likened the challenge of reaching ignition to striking a match so that it produces a flame. “Ignition is the key process through which we can produce large energy gains because it’s a self-sustaining process — for as long as we can hold the burning plasma together.”

Which, currently, is only a tenth of a billionth of a second. That is because of the extraordinary process that the fuel pellet undergoes. First, it is targeted by the lasers — collectively the most powerful in the world. The rapidly heated outer surface explodes away, prompting the plasma fuel within to reactively collapse. The peppercorn-sized pellet implodes to the width of a human hair, reaching a pressure of hundreds of billions of atmospheres and 100m degrees Celsius, sparking fusion. NIF scientists managed to keep the pellet together long enough to burn about 2 per cent of the available fuel.

The energy produced, 1.3 megajoules, was about 70 per cent of the energy used by the lasers and several times the output of previous attempts. Crucially, it was deemed sufficient to be on the threshold of ignition (there is active debate over the definition). The next hurdle is to reach “break even”, where the energy produced by fusion matches the energy expended to kickstart the process.

The ultimate goal is for the energy out to exceed the energy in, creating a clean, abundant power source (fusion itself is emissions-free and the associated nuclear waste is less than that produced by current nuclear fission reactors, which split atoms rather than fuse them).

The NIF approach is one of several fusion technologies under study. The best known is magnetic confinement fusion, in which hydrogen fuel is trapped and squeezed by powerful magnetic fields. The International Thermonuclear Experimental Reactor in France is a 35-country collaboration to build the world’s biggest tokamak — a magnetic confinement device. This is viewed as a more stable and controllable way of generating fusion power in the long term. It has not yet reached break-even but optimism remains buoyant, especially given the dash to net zero.

The UK government has pledged to build its own prototype tokamak-based fusion energy plant by 2040. Scaling up will not be easy: a viable plant needs an energy output equivalent to hundreds or thousands of the energy produced by the NIF experiment, every second.

Plugging it into national grids and regulating a new form of nuclear power also present bear traps. But the high risks are balanced by potentially astronomical rewards. Investors, including Amazon founder Jeff Bezos, ploughed an estimated $300m into private fusion companies in 2020.

Chittenden emphasises that the NIF is geared towards fundamental science rather than energy production: proving it is possible to build the heart of a star in a laboratory to aid understanding of nuclear processes, including nuclear weapons. “This is a much more extreme state of matter than has ever been made before,” he says. “We can study material that’s under conditions comparable to the first few minutes after the Big Bang.”

Such is the intensity of the electromagnetic radiation that it may even be possible to observe the spontaneous creation of matter, as energy becomes mass. Nuclear fusion, in lighting a path to the future, might one day illuminate our distant cosmic past.

Barrons : Demand for Luxury Watches Is Picking Up. Why It’s Time to Invest in Sw

Demand for Luxury Watches Is Picking Up. Why It’s Time to Invest in Swatch.

The shutdown of international travel and the closure of shops due to the pandemic hurt luxury watchmakers—an industry that has been slow to develop its online business.

In 2020, Swatch Group (UHR.Switzerland), the owner of Omega, Longines, and Tissot, posted its first annual loss since 1983 and cut its dividend by 37%. But there are signs of improvement, with solid demand in Greater China, which accounts for 40% of Swatch’s global sales.

The company’s stores are reopening in the U.S. and Europe, and despite the uncertainty of the Delta variant, the stock has gained 45.5% over the past 12 months to 291.80 Swiss francs ($317).

But they could have further to go. Swatch benefits from a manufacturing model in which it owns 30 production companies that supply the components for its watches, while Swatch also sells these components to third parties. This means Swatch controls its supply chain—at a time when some rivals have supply chain issues because of Covid. It also allows Swatch to make bigger profits by keeping costs low.

Swatch can also keep prices high because demand for some of its brands, including Omega and Longines, has resulted in a backlog of orders.

Rogerio Fujimori, an analyst at broker Stifel, wrote in a note that this “creates the ideal environment for pricing action at a time when there is a clear justification for that (Swiss franc strength and higher gold prices). Swatch is one of the very few inexpensive stocks in our coverage.”

Jie Zhang, an analyst at research house Alpha Value, estimates Swatch’s operating margin in the watches-and-jewelry segment has increased to 17% from 13.4% in the first half of 2019, and forecasts the stock will rise 23% to CHF360.

Swatch, which is based in Biel, Switzerland, employs 32,424 workers in 50 countries and has a market value of CHF15 billion. It fetches a multiple of 20.1 times this year’s expected earnings and is valued at a 30% discount to its peers.

In July, the company posted net income of CHF 270million for the first six months of 2021, compared with a net loss of CHF308 million for the same period in the previous year. Net sales were CHF3.3 billion, up from CHF2.1 billion.

The company said in a statement in July that “the easing of Covid restrictions announced by Europe and Asian countries, as well as resumption of tourism in many regions, will provide a further boost in sales.”

It looks like demand in China will remain healthy. Fujimori wrote in a note that searches for Omega and Longines on Baidu, China’s most popular search engine, are a useful indicator of “brand heat,” and he said those brands have made year-over-year gains over other luxury brands in the first half of 2021.

Swatch also owns Harry Winston, a luxury jewelry maker, and Hour Passion, a retailer with boutiques in airports and discount outlets.

Hour Passion sells more than 40 of Swatch’s watch brands, including Calvin Klein, Balmain, and Rado, according to its website. Swatch also owns Tourbillon boutiques, which sells its brands such as Breguet, Omega, and Blancpain in upscale resorts and shopping districts.

Swatch has another hidden jewel that could make the stock a long-term play. Swatch owns EM Microelectronic, a semiconductor manufacturer that makes low-power chips used in the auto industry. It’s a small part of the business—EM, along with two other Swatch-owned firms, contribute about 5% of total revenue—but Zhang suggests it has real potential. “Swatch will invest heavily in expanding production in the coming years,” he says.

>>> Barron’s Weekend Summary: Over three days in late July, America’s tech giant

Barron’s Weekend Summary: Over three days in late July, America’s tech giants put on an impressive show. Apple, Microsoft, Alphabet, Amazon.com, and Facebook had thrived in the pandemic, and their latest earnings reports hammered home the point.

* Cover Story: -Over three days in late July, America’s tech giants put on an impressive show. Apple, Microsoft, Alphabet, Amazon.com, and Facebook had thrived in the pandemic, and their latest earnings reports hammered home the point. The five companies generated a combined $332 billion in revenue from April to June, up 36% from a year earlier. All of their profits were better than expected. The twist is that all of their stocks, save for Alphabet’s, sold off on the news. The negative reaction reflects the paradox surrounding America’s Big Tech complex. Their products are being used more than ever, just as the companies have become increasingly disliked.

* Tech Trader: -Palantir Technologies is one of the world’s quirkiest tech companies, and last week the story got weirder than ever. But beneath the surface, there’s an oddly compelling case for the business and the stock. Palantir (PLTR) provides data analytics software to both commercial and government clients. The 18-year-old company has two primary platforms—Gotham, for government applications, and Foundry, for commercial customers. Palantir has a long history of serving U.S. military and intelligence agencies, but lately it’s been building out its sales team to bulk up its commercial business. That plan seems to be getting traction.

* The Trader:
-Walmart (WMT) entered the week of its earnings release having gone almost nowhere this year, gaining just 5.8%, even as the S&P 500 had risen 19%. Comparing it to other retailers is even worse. Target (ticker: TGT) gained 50%. Home Depot (HD) It rose 28%. The SPDR S&P Retail exchange-traded fund (XRT) jumped 49%. But this looked to be Walmart’s quarter. Its stock had gained 6.9% in the month before the earnings announcement, and R5 Capital analyst Scott Mushkin was so sure of the results that he upgraded the stock to Buy from Sell one day before the release.
-Semiconductors might be the new oil—and that could make the 2020s the new 1970s. Back then, the world ran on oil—and any change in supply had a massive impact on demand. When OPEC embargoed the U.S. in the 1970s, the price of crude rose from about $3 a barrel at the beginning of the decade to $13 a barrel by its end. The U.S. even issued gas ration coupons in 1974.
-Tapering, the term used to describe the winding down of the Federal Reserve’s bond purchases, was the big topic of conversation this past week—even though we all knew that quantitative easing is living on borrowed time. Still, we read The Wall Street Journal article gathering all the hawkish Fedspeak in one place this past Monday, and waited for the minutes from the Fed’s July meeting on Wednesday, even though we all had a pretty good idea what they’d say.

* Interview: -This week, Barron’s interviews Claudia Sahm. She is best known as a former section chief at the Federal Reserve Board of Governors, a top economist in the Obama administration, and, from 2019 to 2020, director of macroeconomic policy at the Washington Center for Equitable Growth. Sahm is also the inventor of the so-called Sahm Rule, a real-time indicator that determines whether an economy has entered a recession. But Sahm stirred up controversy last year on a different topic: She is the author of the popular blog macromom, where she published an incendiary post detailing the indignities suffered by women and other underrepresented groups in the economics profession. Sahm argued that a lack of diversity and inclusion is degrading economic knowledge and policy advice. Today, Sahm is senior fellow at the Jain Family Institute and runs her economics consultancy, Stay-At-Home Macro. Barron’s asked her about: when people are getting back to work, her outlook for inflation, and the need for diversity.

* Features:
-1) Beneficiaries of Social Security are likely to get the biggest percentage bump in 40 years after the announcement of the 2022 cost-of-living adjustment thanks to inflation that has surged amid the pandemic recovery. With inflation subdued in 2020, Social Security recipients received an increase of 1.3% in January, which resulted in an estimated average benefit increase of about $20 per month, according to the Senior Citizens League, a nonpartisan advocacy group for seniors.
-2) Jefferies Financial Group (JEF) may be first among investment banks to report earnings each quarter, but it is rarely the first to come to mind when people think of Wall Street. With a market value of $8.4 billion, Jefferies is less than a tenth the size of Goldman Sachs Group (GS) or Morgan Stanley (MS). Yet this well-managed investment bank is increasingly able to take on its bigger, better-known rivals. And there’s plenty of growth potential in the stock, even after a 38% gain this year.
-3) Investors should count on Covid-19 being a lasting threat. This means that a substantial market for vaccines and booster shots could persist for many years. That would help justify the sky-high valuations of companies like Moderna (MRNA) and BioNTech (BNTX) and give support to the Pfizer (PFE) bulls who say the company’s shares should be getting more credit for its Covid-19 vaccine. It also means that there are substantial opportunities for companies like Roche Holding (ROG. Switzerland), AstraZeneca (AZN), and others that are working on Covid-19 treatments, an area that has seen significant commercial success despite the relatively modest scientific progress made so far.

* Europe: -It’s time to look at Swatch Group (UHR). The shutdown of international travel and the closure of shops due to the pandemic hurt luxury watchmakers—an industry that has been slow to develop its online business. In 2020, Swatch, which owns such brands as Omega, Longines, and Tissot, posted its first annual loss since 1983 and cut its dividend by 37%. But there are signs of improvement, with solid demand in Greater China, which accounts for 40% of Swatch’s global sales. The company’s stores are reopening in the U.S. and Europe, and despite the uncertainty of the Delta variant, the stock has gained 45.5% over the past 12 months to 291.80 Swiss francs ($317).

* Emerging Markets:
-China wants a piece of Afghanistan’s $1T worth of natural resources. In the past years, China has scoured the globe for natural resources to feed its prodigious growth, sinking billions into Peruvian oil fields or cobalt mines in the Democratic Republic of Congo. Now it can look to next door, Afghanistan. The Taliban’s now control billions of dollars’ worth of strategic minerals. A decade-old U.S. government report estimated a $1 trillion-plus mother lode of valuable metals and stones beneath Afghan soil, some of which are particularly interesting, including posited reserves of rare earth metals, essential for modern electronics and weaponry, and lithium, the basic ingredient in electric-vehicle batteries. A declassified Defense Department note described Afghanistan as “the Saudi Arabia of lithium.”
-A policy paper from the Washington-based Peterson Institute for International Economics attempts to gauge the macroeconomic consequences of the plans to reach carbon neutrality by 2050 or 2060, as already pledged by countries representing some 70% of the world’s gross domestic product and carbon emissions. The paper issues a sobering warning: The green transition will be costly, it could amount to a global economic shock comparable to the oil crisis of the early 1970s, and governments should start preparing their public opinions for what could be a painful few years before the world embarks on a new, cleaner and greener type of growth.

* Commodities: -Iron-ore prices touched record highs this year, but look to suffer their biggest monthly loss ever as China’s curbs on carbon emissions include limits on the output of steel, hurting demand for the raw material used to produce it. “The market is not short iron ore, but short in terms of consumption as steel mills have their hands tied in a market where global steel demand is healthy and yet mills find themselves unable to produce,” says Rhys Pittam, head of ferrous operations at Marex.

* Streetwise: -This week, Jack considers the question of whether “stocks are still attractive” in his podcast. He answers listeners’ questions to determine whether investing has fundamentally changed and how.

>>> US Early premarket gappers


Early premarket gappers

  • Gapping up:
    • CHRS +20.2%, DLO +19.9%, LQDA +8.9%, CFMS +5.6%, SNPS +4.6%, BBWI +4.6%, DIBS +4.5%, VXX +3.8%, GFI +2.4%, NVDA +2.1%, FHI +1.8%, WGO +1.7%, MNR +1%, TLT +0.9%
  • Gapping down:
    • HOOD -12%, RRGB -10.2%, VSCO -8.6%, YY -8%, EDU -6.2%, BZUN -5.3%, BILI -4%, APPN -2.9%, TAL -2.6%, USO -2.3%, VRRM -2%, WFC -2%, ZTO -1.9%, HSBC -1.8%, GOTU -1.8%, PRTK -1.7%, XLE -1.7%, IWM -1.4%, XLF -1.1%, CSCO -1%, ABBV -0.9%, EQR -0.8%, AMTX -0.8%, DIA -0.7%, WDAY -0.6%, STWD -0.6%, SPY -0.6%, SPTN -0.6%, ILMN -0.5%, QQQ -0.5%