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Investors’ Chronicle: JD Wetherspoon, IG Group, Argo Blockchain

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BUY: JD Wetherspoon (JDW)

Wetherspoon’s current challenges — reflected in share price weakness in 2020 — present opportunities for investors, writes Megan Boxall.

Previous recessions have sparked a decline in property prices, which presented opportunities to well-funded companies. That is the thinking behind JD Wetherspoon’s £93.7m fundraising. Institutional investors who backed the placing — including its largest existing shareholder Columbia Threadneedle — agree with the logic. The company raised the full amount it was asking for at 1,120p a share — only a slight discount to the mid-market closing price of 1,183p a day earlier.

Private investors, who have been diluted by this placing, will hope that the money can help Wetherspoons replicate its last post-recession performance. Between 2009 and 2019 the company opened a net 185 pubs and increased average weekly sales from each pub by almost £20,000. 

Not all pub groups will be as well funded as Wetherspoons and opportunities are almost certain to emerge as peers go out of business — government restrictions have made it almost impossible for smaller businesses to survive. Curfews, lockdowns and a ban on takeaway alcohol sales have reduced Wetherspoons current revenue to zero, while pre-Christmas restrictions removed the seasonal spike in business that most pub groups usually enjoy. 

The company also points to the fact that it spent £13m on measures to keep its establishments “Covid-secure”. That expenditure offsets the aid offered by furlough schemes and business rate reductions — support that is set to unwind far too quickly.

Margins are weaker at Tim Martin’s company than they are at some of its peers, so investors looking for more certainty from a pub group should perhaps look to Youngs. But the fundraising is grounds for optimism.

BUY: IG Group (IGG)

The recent bitcoin price rally has been good news for IG whose crypto asset holdings tripled in value in the six months to November, writes Alex Newman.

A strong set of interim results for IG Group were trumped by news of the investment platform’s proposed acquisition of fast-growing US online brokerage tastytrade, in a $1bn (£733m) deal funded by $300m in cash and the issue of 61m new shares.

Founded in 2011, tastytrade comprises two entities: a financial education network with an audience of just under a million “knowledgeable” traders, and a fast-growing online options and futures brokerage in the world’s largest derivatives market.

As is standard practice, IG shareholders have been assured the transaction will prove accretive to earnings per share — albeit by low single digits and on an adjusted basis — in the first full year post-completion. The company points to minimal risks associated with integration, client attrition and absence of cost synergy targets as sources of optimism.

Numis saw this is as reason to lift its adjusted earnings expectations to 63.7p per share for the year to May 2022, though FY2021’s forecast was held at 72.3p. Some investors will require more convincing, judging by the muted immediate market reaction to the deal.

One concern could be valuation. IG is paying just over 20 times’ tastytrade’s pro forma pre-tax profits for 2020, a banner year for client activity but one in which the pre-tax margin also slipped from 57 to 42 per cent. By contrast, IG trades on less than eight times’ trailing pre-tax profits for the 12 months to November, while margins climbed to 55 per cent for the half-year period, up from 40 per cent the prior year.

Having canvassed plenty of opinion, chief executive June Felix told us she is convinced IG is buying into a long-term secular shift toward self-directed trading, rather than a Covid-inflated bubble. “This is not Robinhood, this is a deal focused on customers who know what they’re doing,” she said.

Nevertheless, wherever retail-focused derivatives platforms go, twitchy regulators are never far behind. What assurance does IG have that tighter market oversight is not coming, particularly with the incoming Securities Exchange Commission chairman Gary Gensler yet to lay out his priorities?

“No one can predict regulation,” acknowledged Ms Felix. “But this is a well-established, well-regulated business today. There’s much more understanding of equities markets [in the US], of which options and futures are a sub-set.”

Shareholders can at least take comfort from a proactive attitude toward the UK financial watchdog, which last week warned cryptocurrency investors should be prepared to lose all of their money. IG says it is winding down its crypto products and positions here.

All of which feels like further vindication of IG’s international push, and a sign that the trajectory is towards growth, however volatile.

HOLD: Argo Blockchain (ARB)

Argo’s share price has doubled since the start of this year. But that ascent has been punctuated by ups and downs, writes Harriet Clarfelt.

Cryptocurrency miner Argo Blockchain has raised £22.4m via a private placement just days after bitcoin served up a reminder of its inherent volatility, soaring past the $40,000 (£29,380) milestone before retracing some of its gains.

Argo, which floated in London in the summer of 2018, announced this week that it would issue 28m shares at 80p each to certain institutional investors who had already subscribed to the placing.

The group plans to use the net proceeds “for working capital and general corporate purposes”, which it said included the expansion of its mining capacity in the first and second quarters of 2021, bolstering its installed computing power.

Argo says its goal is to run an “efficient mining infrastructure that supports the continued growth, innovation, and function of the world’s top blockchain networks”.

Blockchain refers to the technology underpinning the trading of bitcoin and other cryptocurrencies, removing the need for third-party banks and traditional financial infrastructure partners. As Argo explains it, cryptocurrency mining “is the process of verifying transactions and adding new blocks to a blockchain ledger”.

After escalating from roughly 20p on Christmas Eve to an all-time high of 145p on January 8, Argo’s shares have since endured a rather bumpy ride.

The volatility of cryptocurrencies is one the reasons behind mounting concerns about the risks they pose to ordinary investors. The Financial Conduct Authority warned this month that consumers buying into high-return cryptocurrency “should be prepared to lose all their money”.

That said, some might argue that those seeking to engage with the crypto market would be better off looking into “pick and shovel” plays — the stocks facilitating cryptocurrency transactions, rather than the digital assets themselves.

Chris Dillow: Gold and inflation

Gold has been a fantastic protection against inflation over the very long run. It has kept pace with 2,000 years of wage inflation. It’s been a fantastic long-term store of value.

In the short term it’s much less obvious that gold protects us against inflation. There are two different ways of looking at the numbers here.

One way is to consider the correlation between annual inflation and annual changes in the sterling price of gold. If gold protects us from inflation, this correlation should be high. But it’s not: it’s been just 0.28 since 1971.

In fact, gold has been poor protection against inflation even over quite long periods. In sterling terms, it was lower in 2005 than in 1980, even though the cost of living tripled in this period.

We can put this another way. If gold were a great short-term hedge against inflation its price in real terms — that is, adjusted for inflation — should never fall. But it can do so, and by a lot.

But there’s another perspective here. Instead of looking at actual inflation we can look at expected inflation, as measured by the gap between conventional five-year gilt yields and their index-linked counterparts. If we look at the 10 biggest annual rises in this measure since data began in 1985, we see that gold rose on nine of these occasions. This suggests that gold can indeed protect us against fears of inflation.

In truth, though, the ability of gold to protect us from inflation depends upon why inflation rises.

There are some types of inflation that do see gold do well — such as those caused by rising commodity prices or a fall in the pound.

But there’s another type of inflation which can be bad for gold — that caused by a cyclical upturn. Such upturns can see gold fall for two reasons. First, stronger economic growth can increase investors’ appetite for risk, causing them to dump safe haven assets such as gold. And second, economic upturns raise expectations for interest rates. And because gold pays no interest, it becomes less attractive when investors anticipate higher returns on competing assets such as cash.

It was for these reasons that gold did badly during the late 1980s inflationary boom and during the 2010-15 upturn.

This is a problem, because if inflation does rise in the next couple of years it is likely to be the result of a stronger economy, in which case gold might not do well.

Now this does not mean you should dump it. For one thing, the Fed and Bank of England have promised to keep interest rates low until the economic recovery is secure — and if interest rates don’t rise much, gold won’t fall much. And for another, this upturn might be largely already discounted by equities — and if shares don’t rise much the safe-haven demand for gold will remain strong.

Instead, we should think of gold as a protection against some types of bear market in equities — such as those caused by investors becoming more risk-averse. This makes the metal worth having, regardless of your opinion about inflation.

Chris Dillow is an economics commentator for Investors’ Chronicle



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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How Jennifer Granholm will reshape the US Department of Energy

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Two things to start: ExxonMobil appointed two new directors to its board, its latest effort to placate activist shareholders. And Texas’s largest power co-op Brazos Electric went bust yesterday, as the financial damage from the arctic storm continues to mount.

Oh, and after the hiatus caused by the pandemic, energy-related emissions are rising again, according to the International Energy Agency. They were higher in December than a year previously, the agency said.

Welcome to another Energy Source. Our main item today is on Jennifer Granholm, whom the US Senate last week confirmed as the country’s new energy secretary. Myles McCormick reports on her plan to revitalise her department and reorient it towards clean energy.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Granholm looks to reboot the Department of Energy

From scuppering the Keystone XL pipeline to freezing the allocation of new drilling leases on public lands, Joe Biden’s plans to shake up the American energy system are well under way.

Next on the president’s agenda is an overhaul of the sprawling leviathan that is the US Department of Energy. And the woman that will lead that process is now in situ.

Jennifer Granholm, a former two-term governor of Michigan, took the reins of the $35bn a year government agency five days ago. And already it is clear there will be a shift in its focus — away from promoting fossil fuel exports and towards driving innovation in clean energy and climate technology.

This is what Granholm wrote in a blog post last Thursday, her first day on the job:

“President Biden has tasked the Department, his in-house solutions powerhouse, with delivering a cornerstone of his bold plan: the goal of achieving net-zero carbon emissions by 2050. For DoE, that means developing and deploying the technologies that will deliver a clean energy revolution.”

That will require a shift in priorities at the “in-house solutions powerhouse” — but one that analysts said Granholm was well suited to execute.

“She understands the economic benefits of transforming the agency into the Department of Clean Energy,” said Mitch Bernard, president of the Natural Resources Defense Council.

Jennifer Granholm was sworn in as energy secretary on February 25 © Getty Images

What can the DoE actually do on climate?

American energy policy is divvied up among several government agencies, of which the Department of Energy is just one. Traditionally its primary responsibilities have been the US nuclear weapons programme, environmental clean-ups and scientific research and development through its oversight of the country’s national laboratories.

Despite the department’s name, Granholm’s ability to effect the Biden climate agenda is constrained. She does not have oversight of emissions targets (which fall to the Environmental Protection Agency) or oil and gas drilling licences (the Department of the Interior).

“I do think the DoE’s ability to advance climate goals is fairly limited,” Nader Sobhani, climate policy associate at the Niskanen Center, told ES.

But what it can do is reinvigorate the department’s R&D role.

“I think there will certainly be a shift in the programmatic focus of this DoE as compared to the previous administration, in that there will be a concerted effort to innovate, develop and deploy clean energy technologies that are critical to combating climate change,” said Sobhani.

That means driving forward research on carbon capture and storage, electric vehicle charging infrastructure, energy storage technology and zero-carbon fuels such as green hydrogen.

How will it set about doing this? The department has a few tools in its toolkit:

  • There are the 17 national laboratories, which are hotbeds for tech breakthroughs.

  • There are grant and loan programmes it can use to drive innovation and de-risk new technologies to coax in private sector investment. Granholm has already indicated she will restart a $40bn loan programme that was left untouched by the Trump administration.

  • Plus, it has regulatory authority to encourage energy efficiency in certain appliances and new transmission lines.

But all of this will require funding. While Congress ensured the agency was not financially gutted by the last administration, ramping up its R&D role will require more money. Biden has pledged $400bn over the next ten years for clean energy and innovation.

Granholm’s record on spending big — sometimes without the desired effect — has already sparked criticism from some quarters, with conservatives arguing her selection “should frighten every American taxpayer”.

Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco
Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco © Bloomberg

New leadership

Just as important as finance will be the shift in tone Granholm will bring.

While money kept flowing under the Trump administration, the agency lacked the strategic drive needed for clean tech innovation, said Emily Reichert, chief executive of Greentown Labs, North America’s biggest start-up incubator.

“When people look back on it, it was an absence of leadership — on innovation, on policy, on decisions, on strategy — that we needed to move forward faster,” she told ES.

The DoE’s role in convening experts from across the US has been central to driving the development of new technology. But as a divided country shifts rapidly towards a new approach to energy, that outreach role will be even more important.

That makes the appointment of Granholm key. A Michigan native, with years of experience dealing with the Detroit auto industry, she will be able to bring the climate change narrative to parts of the country that coastal liberals have often failed to reach.

“I think that Jennifer Granholm coming from a Midwestern perspective is a real game changer in terms of bringing the focus of this activity to the middle of the country, and recognising that the middle of the country can also get engaged in this developing the innovations around climate,” said Reichert.

But most importantly — four years after Donald Trump appointed an energy secretary who thought the department should be scrapped — Granholm’s championing of clean energy should get investors excited to spark the influx of funds needed for the “clean energy revolution” her boss has promised.

“The market signal it sends is that, one, the US is back in the game,” said Reichert. “And two, that climate related technology solutions around decarbonisation are a good place to invest your money, your time, your talents, and to move your assets.”

(Myles McCormick)

Data Drill

The energy transition could lower oil prices in the long term by $10 a barrel — by far the biggest threat to the net present value of oil companies, according to new research from Rystad Energy that assessed the resilience of 25 large operators. The consultancy quantified the risk to NPVs of stranded assets as less than 1 per cent, and that from rising CO2 costs at mostly below 10 per cent.

Oil sands and tight oil companies are most exposed to price risk because of high break-even costs. Oil sands would suffer most from higher CO2 costs. And ExxonMobil’s revenue risk is higher than its supermajor peers’, “primarily because its portfolio includes several large, capital-intensive projects”, including the Permian Basin assets and Guyanese shale.

Bar chart of Impact on net present value (%) showing The energy transition's corporate hit, quantified

Power Points

FT Energy Source Live

The FT Energy Source Live event will be taking place on 24 — 25 May 2021. Join industry CEOs, thought leaders, energy innovators, policymakers, investors and other key influencers to hear the latest thinking and insights on the future of US energy leadership and its global context. Find out more here.

Endnote

IHSMarkit’s CERAWeek, cancelled by the pandemic last year, is back on — and it has a new look.

Keynote speeches and panel discussions have moved from the Hilton’s plush ballrooms in downtown Houston to a slick new web interface. Many have been pre-recorded. Deals that came together in the hotel’s executive suites will have to wait. Journalists are missing the free lunches.

Still, the conference’s agenda boasts a who’s who of the energy industry, and increasingly beyond, as the sector grapples with the low-carbon energy transition — a topic that was scarcely mentioned just a couple years ago.

Andy Jassy, the head of Amazon’s cloud business, who has been picked to succeed Jeff Bezos as the company’s CEO later this year, had some advice that cut to the heart of the dilemma facing oil executives.

“If you want to be a company for a long period of time — which by the way turns out to be really hard to do — you have to be able to reinvent yourself, sometimes several times over,” said Jassy in a session with BP’s Bernard Looney, who pitched his company’s own transition away from oil.

“If something is going to happen, whether it’s good for you or not, if it is good for customers it is going to happen,” added Jassy. “So you have a couple of choices: you can howl at the wind and wish it away as a lot of companies do — big leading companies do — when there are new shifts technology, or you can embrace it.”

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



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