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The Curious Investor - 'Market Resurrection'

31 May 2024

Last week that we learned the date of the General Election and that inflation is even stickier than expected. However, the big news was that the capital markets function of the UK stock market returned from the dead. Within 48 hours of watching a bedraggled PM in D(r)owning Street declare July 4th the date than the stock market, believed by many to be permanently deceased, sprang to action and price over £8bn of equity, including two large rights issues and several secondary placings.

However, the market’s sudden resurrection shouldn’t have been a surprise; several positive straws have blown in the winds. Much healthier share price actions revealed higher liquidity flows from hopes of lower rates. This liquidity fuelled improved net fund flows, which added to record share buybacks, higher dividends, and increased M&A activity has given the market a much better feel. Last week alone, there were M&A approaches worth over £7.5bn to UK midcap companies, Keywords (£2bn), XP Power (£600m), and Hargreaves Lansdowne (£5bn).

Healthier liquidity has stiffened resolve among investors and PLC boards not to roll over and accept the first offers that come along. Boards are entertaining offers from PE and strategic buyers and even running processes without public disclosure. It is not so much a case of Barbarians at the Gate as Trojans in the Boardroom, raising serious fiduciary duty and transparency issues in the relationship between PLC’s and their investors. The logical extension of this changing dynamic is that the number and value of all approaches being made to UK listed companies is almost certainly a multiple of what has come to light recently.

As the UK market is seeing many quality investment opportunities bid away by third party acquirers it is vital that we start to see new and exciting companies looking to begin their journeys to public listing. Step forward UK computer board supplier Raspberry Pi which seems to fit the bill for the UK market’s track record of nurturing niche technology companies while they grow their TAM and know-how, and compound returns for shareholders over many years. Sage, Aveva, Kainos and Softcat are examples. Unusually Raspberry Pi is a hardware supplier, but there is every chance it can become well understood and thrive on the UK market just as these successful growing software suppliers have done.

However, Chancellor Jeremy Hunt remains more ambitious for the UK and returned recently to a favourite theme of his, that we really should be more like NASDAQ. He told the FT that, “I’d like to see a British Alphabet. I’d like to see a British Microsoft, a UK company with a $trillion market cap.” To be fair when he said this, he didn’t realise he might only have six weeks left in post to affect it, but even with six years it would be a big ask.

To realise Jeremy Hunt’s ambition, UK investors would need re-learn the nature of risk, specifically, develop the means to evaluate life-or-death risk and back ideas and people with the resilience (ideally antifragility) to adapt to a radically uncertain world. It requires backing genuine existential risk-taking of the type Walter Isaacson described in his biography of Elon Musk. Risk-taking that only follows from the conviction of a total obsessive with skin in the game. How many UK public company executives would be allowed to take on the type of risks that Musk has with Tesla, Reed Hastings did with Netflix, Mark Zuckerberg with Meta and Michael Saylor buying all that Bitcoin at MicroStrategy?

Economist John Kay and Mervyn King, the former Bank Governor, think that some uncertainties are resolvable considering further information and where some objective basis exists for constructing a probability distribution of outcomes. These risks the UK market can evaluate, and assessing Raspberry Pi will fall into this bracket.

However, what King and Kay call radical uncertainties are not resolvable in such ways; we do not know what will happen, and we cannot even describe the range of things that might occur. This type of uncertainty requires resilience (or, even better, antifragility). In the week that Nvidia grew by the value of three HSBCs following better than expected Q2 results, its founder CEO Jensen Huang reminded students the importance of resilience in successful growth.

Unlike actuaries and financial regulators, who equate risk to the volatility of return and seek to minimise it, Kay and King (and Huang) consider uncertainty unavoidable and welcome. Uncertainty gives rise to investment return and is, philosophically, fundamental to human life. Our very existence results from our relentless risk-taking to overcome entropy. As Nietzsche put it, “To live is to suffer; to survive is to find some meaning in the suffering.”

For investors, minimising risk does not mean eschewing ‘risky’ assets but evaluating how to incorporate them into their risk profile optimally. As Kay, who led an enquiry into the state of the UK’s pension industry, later said, “Legal restrictions on trustee investments have cost widows and orphans far more than they had ever lost to corrupt or foolish trustees.”

The critical message is that no objective meaning, or measure of risk exists. The key question is, ‘What risk?’ and ‘For whom?’ Elon Musk has repeatedly gone all-in on new Tesla models, giga factories, and rocket launches. It worked for him, but such risk profiles would not work for 99.9% of people.

To change UK investor risk attitudes sufficiently to price the radical uncertainty involved in the evolution of Nvidia is a long-term project involving critical pre-requisites including market structure, oversight, and regulation. But investor risk preferences also need to change. One thing seems certain, for the UK to birth such a $ trillion company and fulfil the Chancellor’s dream extends well beyond his recently shortened expected tenure.

Written by Jeremy McKeown



Jackson’s Chart: FTSE 250 WEEKLY (An Analysis by Jackson Wray)


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FTSE250 (Weekly) – In issue 10 of the Curious Investor, in November, the FTSE250 was pivotal, having rejected 3 points at 16700. The longstanding 2008 trend line, horizontal support and previous lower low provided enough support to move the index higher to restart its battle with the descending trend line for the sixth time. We left it just below, and the bulls overcame the bears the following week. It broke through aggressively and began to move steadily through minor resistances towards the critical 20,600 level, the location of the previous higher low. With this now being met and subsequently breached, a double bottom (otherwise known as a W bottom) formation has been confirmed, which is a strong indicator that the bottom is in and a change in trend is likely. An important point is that the time between the two lows helps guide the probability that a reversal could occur; in this instance, it is almost one year. Following a confirmed W, a technical guide to the potential move is given by using the depth of the low to high and projecting upwards, meaning the level is considered to be 24,500. With this being said, technical analysis projections are never a certainty, although, in this instance, the weighted probability is impacted by several strong factors.


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