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Johnson bows to the inevitable after surge in Covid cases

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What started as a ragged retreat ended up as a rout, with Boris Johnson finally surrendering on Monday evening to the coronavirus winter surge and ordering England into a third lockdown.

The schools that the prime minister had fought to keep open will have their gates locked until the February half term, and the economic agony caused by Covid-19 will persist.

Faced with vertiginous graphs showing infection rates and hospital admissions spiking and scientists’ warnings about the threat posed by a vicious new strain of the virus, Mr Johnson bowed to the inevitable.

The prime minister had earlier faced fresh claims that he was too slow to act against Covid-19, leading to chaos in the country. Former health secretary Jeremy Hunt pleaded on Monday morning in a Tweet: “We need to close schools, borders, and ban all household mixing RIGHT AWAY.”

On Sunday, Labour leader Keir Starmer, dubbed “Captain Hindsight” by Mr Johnson, urged the prime minister to stop dithering and introduce another lockdown. Labour MPs responded on Monday by dubbing their boss “Captain Foresight”.

Hunt Tweet © Jeremy Hunt/Twitter

Nicola Sturgeon, Scotland’s first minister, announced her country was going into lockdown on Monday afternoon, following similar drastic measures in Northern Ireland and Wales. Mr Johnson was the last man standing.

The prime minister’s previous move to offer England some Christmas relief from Covid-19 was well-intentioned, but ultimately doomed. A winter surge in the virus had long been predicted — its new highly transmissible strain just made things much worse.

Charts showing that Covid test positivity rates are still soaring in London and now all of England

Mr Johnson’s decision to announce in November a festive relaxation of social restrictions — to allow three households to mix for five days over Christmas — was viewed as reckless by scientists. In the end he abandoned the idea on December 19, when many holiday plans had already been made.

His attempt to keep England’s schools open was widely welcomed by parents and pupils, but on December 22 the government’s Scientific Advisory Group for Emergencies said they should close to slow down transmission of the virus.

The issue split the cabinet. Michael Gove, Cabinet Office minister, and Matt Hancock, health secretary, argued that schools should be closed after the Christmas break or the country’s hospitals could be overwhelmed.

But Mr Johnson backed Gavin Williamson, education secretary, who proposed a staggered return for school pupils in January. The plan was abandoned in the face of soaring infection rates and opposition from local authorities and teachers’ unions.

Mr Johnson’s reluctance to get ahead of the virus has sometimes been attributed to his optimistic outlook or his reluctance to take unpopular decisions.

But he has also been subject to pressure from Conservative MPs to keep the economy open as far as possible — a position shared by chancellor Rishi Sunak. A handful of Tories said Mr Johnson should quit.

Mark Harper, chair of the Covid Recovery Group of Conservative MPs that is sceptical about lockdowns, said Mr Johnson needed to set out a clear plan for rolling out vaccines that would lead to a “return to normal life”.

Charts showing that Covid-19 hospital admissions are rising across most of the UK, breaking records in many regions

But Mr Johnson, who briefed his cabinet on the lockdown plan on Monday afternoon, won full backing from ministers who confessed to being shocked at the trajectory of graphs showing the winter surge of the virus.

Mr Johnson’s allies rejected suggestions that the prime minister was performing another U-turn, saying instead that he was responding to a startling turn of events. “My jaw dropped,” said one aide shown the latest data on positive Covid-19 tests.

The cabinet was shown a series of grim data, including a 29 per cent increase in Covid-19 patients in English hospitals last week. On Sunday, that figure was almost 25,000 — a third higher than during the previous April’s peak.

The case rate in England was 476.9 per 100,000 people on December 29, three times higher than the 151.3 recorded at the start of the month, in a clear sign that the government’s tiered approach to restrictions to control the virus had failed. In London the rate was more than 900 per 100,000.

Mr Hancock said that in addition to the new Covid-19 variant that appeared to originate in Kent, he was now “very worried” about a South African strain that might be even more transmissible.

In the Scottish parliament, Ms Sturgeon dropped a none-too-subtle suggestion that Mr Johnson should have seen this coming.

Charts showing that Covid-19 deaths are rising again in the UK, driven by steep climbs in London and the South East

Announcing her country’s lockdown — and the closure of schools north of the border until February — she described Scotland as “four weeks behind London”.

Some UK ministers admitted that even if Mr Johnson was right to order the fresh lockdown, they could not understand why his decision was not taken earlier.

One minister said: “The fundamental problem is Boris hates all of these restrictions, it’s against everything he’s ever stood for in politics. He’s always reluctant to introduce further measures until it’s too late. That’s why we’re always behind the curve and chasing mess after mess.”

 



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Analysis

Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend

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Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.

BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.

“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.

“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”

Column chart of By downloads (% of total) showing Top US mobile payment solution apps

BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.

Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.

The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.

Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.

The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.

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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.

The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.

“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.

Square’s gross payment volume

Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.

“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”

Square’s entry into BNPL comes as the sector is becoming increasingly competitive.

Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.

Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.

PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.

Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.

“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”

A bigger threat still is the sector’s immature and inconsistent regulatory environment.

“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”

Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.

The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.

In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.

Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”

Additional reporting by Richard Milne



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UK pushes floating wind farms in drive to meet climate targets

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In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.

Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.

Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.

Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.

Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.

Map showing the location of Kincardine offshore floating wind farm, offshore from Aberdeen on Scotland's east coast

Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.

Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.

The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.

Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.

The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.

A Norwegian flag flies from a boat near the assembly site of offshore floating wind turbines in the Hywind pilot park, operated by Equinor
Norway’s Equinor is among the companies competing to build floating turbines in Scottish waters © Carina Johansen/Bloomberg

UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050. 

Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.

WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.

Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.

Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.

An offshore wind turbine off the coast of Fukushima, Japan
A wind turbine off the coast of the town of Naraha in Japan’s Fukushima prefecture. Japan is one of the countries pursuing floating technology © Yoshikazu Tsuno/AFP/Getty Images

Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.

The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.

“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.

Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.

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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.

Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers. 

The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.

The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.

But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.

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China tech crackdown claims ETF victims

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Exchange traded funds updates

Beijing’s regulatory crackdown on some of its biggest companies in technology and education has delivered a bruising blow to highly specialised China-focused exchange traded funds.

Broad-based tech ETFs have sailed through virtually unscathed, but some narrowly focused thematic instruments have taken a beating. Among those most affected, the KraneShares CSI China Internet ETF (KWEB) has nearly halved in value since its peak in February.

Some ETF buyers are hunting specifically for targeted strategies, despite the risks. But Kenneth Lamont, senior fund analyst at Morningstar, said this highlights the potential drawbacks of tracking a narrow theme without the flexibility to shift tactics.

“The [passive thematic] strategy has no way to quickly react to bad news and will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks,” Lamont said.

Line chart of Total returns, year to date (rebased) showing Narrow vs broad tech ETF

He noted that for the KraneShares ETF, one Chinese education group alone — TAL Education Group — was responsible for knocking 2.8 percentage points off performance from the end of June.

Global X Education ETF (EDUT), which has a large exposure to the Chinese online education sector, was also badly affected.

Actively managed ETFs, such as Ark Invest’s ARKK flagship Innovation fund, can react more quickly. After voicing her optimism for the prospects for China’s tech disrupters earlier this year, Cathie Wood, Ark’s chief executive, shed millions of dollars worth of shares in four China-domiciled companies.

Line chart of Number of shares held (millions) showing ARKK has been selling Chinese technology holdings

Investors in ARKK have not been rewarded as well as those who simply put their money in broadest based funds such as the Vanguard Total World Stock Index Fund ETF (VT), but they have still managed to ride out the China tech storm far better than more exposed counterparts.

Line chart of Returns, year to date (rebased) showing ARKK vs Vanguard Total World Stock ETF (VT)

Some investors insist Chinese investments can bounce back. Mark Martyrossian, chief executive of UK-based Aubrey Capital Management, said he believed many of the affected tech companies would maintain their market leadership.

“The gravy train may have slowed but you disembark at your peril,’ Martyrossian said.

Lamont said badly hit funds had suffered such losses because they were doing exactly what they had promised to do — provide narrow exposure.

More nimble active investment strategies also face their own challenges, said Elisabeth Kashner, director of global fund analytics at FactSet. “Active managers may successfully anticipate market reversals, but they can also miss them, sometimes seriously tanking returns,” she said. “Some people can be skilful and some people can be lucky and if you’re lucky and skilful in one period you might be lucky and skilful in the next, but you might not.”

Additional reporting by Steve Johnson

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