A Softer Bank and a greener future

In July 2016, following Brexit, Japanese conglomerate SoftBank acquired Cambridge-based semiconductor chip designer Arm Holdings (Arm) for over £23bn. Theresa May hailed the deal as a vote of confidence in the UK post-Brexit vote, but it was more an opportunistic move following the sell-off in UK equities.

Last year, SoftBank took advantage of the US AI buying frenzy and higher US tech equity valuations to float Arm on NASDAQ. At the time, SoftBank, which retained ownership of over 90% of Arm, secured a valuation of £43.6bn. Currently, Arm has a market value of £130bn!

Last week, Bristol-based AI chip designer Graphcore was acquired by SoftBank for an undisclosed sum, thought to be about $500m. This is considerably less than the $2.8bn valuation placed on it in its previous financing round in 2020. Graphcore was founded in 2016 and was seen as a potential competitor to Nvidia in the AI sector with its Colossus series computer chips. However, higher-for -longer interest rates have proved a challenge for many start-up businesses, such as Graphcore. Indeed, last year, one of its US venture capital backers Sequoia Capital, said it had written off its stake in the company. Graphcore had to close its offices in Norway, Japan, and South Korea. Clearly, Graphcore will need substantial capital, but it now appears to have found a long-term supportive backer in SoftBank to develop its AI technology.

While the deal looks like excellent news for Graphcore, its management, and its employees, it does raise the same old question about the UK failing to support entrepreneurial businesses. The UK appears to be great at creating new technology but not so good at supporting it through to full global commercialisation. The new Labour government is keen to grow the UK economy, and in the King’s speech last week, it announced plans to create a National Wealth Fund to use public finances for long-term investment. What a pity this has been ‘pipped at the post’ by SoftBank for Graphcore. Will we one day also see SoftBank float Graphcore on NASDAQ?

Backing start-up ventures comes with a high degree of risk, and while some will fall by the wayside, others can be real money-spinners. At least the National Wealth Fund (NWF) looks like a step in the right direction.

While sounding similar, the NWF is not a sovereign wealth fund. Instead, it is likely to act as a policy bank. This is a government-owned financial institution investing to help deliver government policy and being financed through government borrowing or taxation. The highlighted priority sectors where NWF capital could help stimulate private investment include green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports.

What have we been watching?

With Joe Biden stepping down and the failed assassination attempt, Donald Trump’s chances of being elected appear to have been enhanced. As we highlighted previously in Alpha Bites, this could present uncertainties for the world. The ‘Trump trade’ assumes the chances of tax-cut extensions and higher trade tariffs, which could exacerbate the US fiscal deficit. Trump would no doubt also put the Federal Reserve under intense pressure to cut interest rates as inflation continues to ease. It sounds as if investors will need to track the 10-year US Treasury yield – which is currently around 4.2% – closely for any signs of angst. Trump’s ‘Make America Great Again’ is likely to benefit domestically focused US industrials and small-caps with more tariffs on competitors. US presidential election speculation also saw Bitcoin jump 8% at one point as Trump is a fan of crypto-currencies!

There is also the matter of the ongoing trade ‘Cold War’ between the US and China to consider. Global technology companies wobbled last week, including the US NASDAQ, which dropped over 3% on reports that the Biden administration could further tighten restrictions on exports of semiconductor equipment to China. Donald Trump also made comments that Taiwan, the world’s biggest producer of chips, should pay for its own defence adding to concerns about global supply security. Meanwhile, China has suspended negotiations with the US on nuclear non-proliferation and arms control in response to Washington’s weapons sales to Taiwan.

The week ended with a global IT meltdown as US cybersecurity firm Crowdstrike’s faulty security update caused some 8.5million Microsoft Windows computers around the world to crash. Everything, from airlines to GP surgeries were affected. Crowdstrike’s shares fell by 20% at one point and contributed to a bruising week for US tech shares.

Trump picked JD Vance as his Vice-President, who, in an alarming development for future relations with the new Labour government, joked that Britain is ‘the first truly Islamist country to obtain nuclear weapons.’ If Trump wins, there could also be friction over NATO spending. This is because Germany has announced plans to halve its military aid for Ukraine by £3bn next year due to budget pressures.

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In the UK, the King’s Speech set out the new Labour government’s plans to grow the UK economy. This includes a ‘Budget Responsibility Bill’ to ensure that the disastrous Liz Truss mini-Budget is never repeated. Will the proposed 39 bills be transformative? We must wait for the Office of Budget Responsibility (OBR) report for the answer. If the OBR does not believe Labour’s plans will boost economic growth significantly, then it is difficult to see how it can avoid raising taxes or making public spending cuts in the forthcoming Autumn Budget. New Chancellor Rachel Reeves faces her first test with suggestions of a 5.5% public sector pay rise this summer. How will this be funded and what will the Bank of England (BoE) make of an above-inflation pay rise? The chances of an August interest rate cut have been pared back in recent weeks.    

Encouragingly, headline UK June CPI inflation remained on target at 2% while core inflation was also stable at 3.5%. However, service sector inflation remained ‘sticky’ at 5.7% albeit the BoE must have factored in the Taylor Swift effect within this. However, wage growth continued to slow in the three months ended May to 5.7%.  Sterling held around $1.29.

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The European Central Bank (ECB) left interest rates unchanged this month, as expected with the deposit rate at 3.75%.

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In the US, while the presidential election has captured all the headlines, markets continue to focus on the Federal Reserve’s interest rate guidance. Markets are currently pricing in a 97% chance of an interest rate cut in September.

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China’s ruling Communist Party third plenum did not produce any major stimulus measures but instead agreed on the need to ‘further deepen reform and actively expand domestic demand’ while ‘preventing and resolving risks in key areas such as real estate and local government debt.’

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Brent oil held at $85 as concerns remain about China’s economic growth.

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Finally, given the global IT meltdown, is the future still contactless payment, or is it wishful thinking? The Roman Baths have lost £90,000 of revenue after stopping coin donations to its wishing well and switching to contactless payments instead. Bath & North East Somerset Council argue that it was taking too long to drain the baths to collect the coins, some coins could not be banked while the process wasted water. Possibly, but contactless payment just doesn’t have the magical appeal of throwing a coin into a wishing well, does it?

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Read Last Week’s Alpha Bites – Russia, are you taking the proverbial?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.