Ageing Gun

Despite mixed initial reviews, Top Gun became an iconic film from the 80’s. By 2015, the United States Library of Congress even selected the film for preservation in the National Film Registry.  The re-make of the 1986 film about the US Navy’s Fighter weapons School starring Tom Cruise Top Gun: Maverick, has been 30 years in the making but has become another victim of Covid-19 with its launch delayed from June 2020 to July 2021. At an implied age of 57, should Tom Cruise still be flying, but more importantly is the age of Top Gun pilots coming to an end? 

Earlier this year, Elon Musk told an audience at a military conference in Florida that the ‘fighter-jet era has passed.’ He suggested the US F-35 fighter jet would, in the future be a drone, remotely controlled by a human with manoeuvres augmented by autonomy. ‘The F-35 would have no chance against it.’ After Tesla and the recent success of his SpaceX Dragon Capsule who would bet against Elon Musk? 

The US Air Force intends to pit an advanced autonomous aircraft against a piloted fighter in a challenge set for July 2021. The head of the Pentagon’s Joint Artificial Intelligence Centre has called the test ’a bold, bold idea.’ 

In the UK, in 2018 the then British Defence Secretary Gavin Williamson announced at the Farnborough Air Show the proposed development of the BAE Systems Tempest, a sixth-generation jet fighter that will be able to fly unmanned and use swarming technology to control drones. It will incorporate artificial intelligence deep learning and possess directed-energy weapons. The Tempest is being developed by a consortium involving a number of UK defence contractors as well as Italian companies Leonardo and MBDA. 

Meanwhile, in mid-2018 China released images of a new, unmanned stealth fighter jet, called ‘Dark Sword’. Sounds like a great title for an action film but with no pilot – no role for Tom Cruise? 

The technology race whether it’s big data analysis, artificial intelligence or 5G is moving at an incredible pace no more so than in the defence sector. In a Covid-19 lockdown world, technology has been the saviour of many of us – but it is also the new battleground between the US and China. 

What have we been watching?    

While Covid-19 cases continue to grow, a combination of positive early vaccine trial data (Novoavax), takeover activity in the US technology sector, improving manufacturing activity indicators and hopes of further US fiscal stimulus were all supportive last week. The US NASDAQ technology index hit another high as Microsoft jumped on its potential TikTok acquisition. 

France, Spain and Greece were among the European countries to record marked increases in new Covid-19 cases, fuelling fears of a second wave as the holiday season gets underway. Australia is set to introduce more travel restrictions as it battles a new wave of infections. However, there was some encouraging vaccine trial news. Novavax announced that a phase I clinical trial had shown its vaccine produced high levels of anti-bodies against Covid-19. 

Tension between the US and China over technology continue to focus minds. Secretary of State Mike Pompeo announced that President Trump would take action against Chinese-owned software companies that he believed posed a national security risk. In the meantime, president Trump has said he will ban the TikTok app, which is owned by China’s ByteDance by mid-September if there is no deal with Microsoft. In addition, the US imposed sanctions on Hong Kong Chief Executive Carrie Lam, the territory’s current and former police chiefs and eight other top officials. Meanwhile, Chinese and US officials will meet later this month to review progress against the earlier trade deal.

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Brexit – here we go again! The Department of Health has urged UK pharmaceutical companies to have six weeks of drugs stockpiled as there will be no extension to the transition period after 31st December 2020. This follows warnings from the pharmaceutical industry that medical supplies had been ‘used up entirely’ by Covid-19. 

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In the UK, July manufacturing PMI hit its strongest pace of expansion since March 2019, as more factories resumed production while new orders expanded at their fastest pace since 2018. New car registrations increased by 11% helped by pent-up demand as car showrooms re-opened, although are down by 40% on the same month last year. The number of people on furlough is now 9.6 million, however the cost of the scheme is increasing even though more businesses are re-opening. The weekly cost of the furlough scheme had risen from £1.1bn in mid-July to £1.9bn by the end of July and at the beginning of August had increased to £2.1bn. At least the government can borrow more cheaply with the 10- year gilt yield at another record low of 0.074%.

The Bank of England (BoE) said that while the UK faced its sharpest recession on record the slump would be less severe than expected although the recovery would take longer. The BoE expects the UK economy to contract by 9.5% in 2020, grow by 9% in 2021 and by 3.5% in 2022. The economy should return to its pre-Covid-19 size by the end of 2021. The BoE also said that while negative interest rates remain as a policy tool, that such a move could have ‘unintended consequences.’ Sterling moved above $1.31.

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The Eurozone ISM manufacturing PMI recorded a third-straight month of growth although employment remains weak.

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In the US, the ISM manufacturing index recorded a third-straight month of growth with new orders improving but some companies suggested that workforce reductions will be necessary. Meanwhile, a number of members of the US Federal Reserve have called for further fiscal support for the US economy. US Treasury Secretary Steve Mnuchin said that the Democrats and the Trump administration could reach agreement on a stimulus package this week. However, Trump decided to proceed with a number of executive orders over the weekend facing questions from lawmakers around effectiveness and legality. These actions include the suspension of the payroll tax and $400 per week additional unemployment benefits, 25% of which to be funded by the states.

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China’s service sector remained in growth in July as the economy maintained its recovery from Covid-19, although the level of activity was slightly below that of the previous month. Industrial activity climbed back to pre-Covid-19 levels and factory deflation eased driven by the rise in global oil prices.

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Iraq has promised to cut output by a further 400k barrels per day over the next two months in order to compensate for its overproduction in the past three months. On Sunday, Saudi Aramco’s chief executive, Amin Nasser, made a number of upbeat statements regarding the resurgence in oil demand in Asia and other markets, with China’s gasoline and diesel demand almost at pre-Covid-19 levels. The oil giant reaffirmed its pledge for an annual $75bn dividend payout, despite only generating $6.1bn of free cash flow for the period.

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Finally, the Royal Institute of Chartered Surveyors (RICS) has warned of a ‘polo mint’ effect – the hollowing out of UK city centres due to more people working from home. RICS believes shops and businesses in city centres may need more support as people shop more within their neighbourhood.

 

Read Last Week’s Alpha Bites – Space Wars

 

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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.