The Lex Newsletter: Europe heats up and markets cool down


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Dear reader,

Tech stocks led US markets into their worst first half in more than 50 years. Rising inflation and fears of recession are dragging down previously record-breaking valuations. Has all the bad news now been baked in? Or will the second half of the year be just as bad?

Second-quarter earnings are being sifted for clues. Netflix offered a glimmer of hope. The streaming service was forecasting a 2mn fall in subscribers but reported fewer than 1mn. That’s sort of good news for anyone worried that rising prices will instantly change consumer habits and stop them spending. But any loss is negative for a company that relies on growth instead of profits to underpin its share price.

Tech is losing its power to shock. Amazon’s $3.9bn deal to buy One Medical was shrugged off by healthcare stocks. Companies know the sector is out of favour with regulators.

US chipmakers did get a boost this week in the form of a vote on a $52bn package of subsidies for semiconductor manufacturing. Lex says the plan will also change investment in China. China’s local industry appears to be moving towards chipmaking self-sufficiency but the companies still need external funds.

Elon Musk may also soon be in need of external funds if he is forced to go through with his $44bn bid to buy Tesla. This week, a Delaware judge granted Twitter its fast-track trial. Not that Musk was there. He was busy being photographed cooling off on a boat in Mykonos.

What else was there to talk about in Europe this week but the weather? The UK recorded its hottest temperature while wildfires erupted in France and Spain. As the world warms up, Lex expects to see an increase in climate litigation. That does not mean that payouts for wronged consumers and their commercial backers will increase, however. Cases tend to lack clear pots of damages. Proving loss can be difficult.

Still, fossil fuel companies should brace for more cases. Particularly coal companies, which are experiencing a mini-boom. Russia’s energy squeeze has lifted prices for thermal coal used to generate electricity. The price of coking coal used in steelmaking has collapsed but Lex thinks that coking coal reserved for steel may switch uses.

Rising heat is already transforming global agriculture too. The result will be more attempts by resource-poor countries to seek land deals overseas. Turkey, for example, is trying to revive an old lease on land in Sudan. Developers argue they are providing jobs on land that was untouched. But land ownership is emotive. Countries that agreed to resource-extraction deals in the past are understandably wary.

Australia is the biggest target for foreign buyers looking for land, according to Grain, an NGO. In a recent request for feedback on the Lex column, one reader suggested that we take a look at more Australian companies. Your wish is our command. This week, we examined Australia and New Zealand Banking Group’s deal to take over insurer Suncorp’s banking arm — a deal Lex thinks comes at a risky moment. The price valued Suncorp’s banking unit in line with peers. But ANZ is absorbing about A$45bn ($31bn) of mortgages just as the central bank is raising rates.

Around the world, central banks are set on rate rise trajectories as they try to address inflation. Bank exposure became clearer this week after more US lenders released their quarterly earnings. Lex points out that banks have struggled to unload bridge loans this year after credit markets turned. No need to panic though. JPMorgan Chase chief executive Jamie Dimon estimates that the overall volume of leveraged loans on bank balance sheets is $100bn — that’s a fifth of financial crisis-era levels.

In China, local banks are going to bear the brunt of the fallout of unhappy homeowners refusing to pay their mortgages too. Lex points out that Chinese president Xi Jinping is close to a third term in office. Damping down unrest is crucial. Banks are going to have to take the strain.

In the UK, Direct Line cannot lift premiums fast enough to keep up with rising prices. That led to a profit warning this week. The buyback has been cancelled. Should the dividend fall too? Management says there is no need. Lex points out that paying out will lower the solvency capital ratio. Cuts could be coming.

Finally, so many people I know in London have Covid-19 for the second or third time. Will more vaccines follow? US government advisers recommended redesigning the vaccine to target the latest variant.

That would boost the flagging vaccine market. But not for everyone. The mRNA technology used by BioNTech/Pfizer and Moderna allows for rapid redesign. Vaccines made from a modified adenovirus by Oxford/AstraZeneca, not so much.

Enjoy your weekend and be well,

Elaine Moore 
Deputy Head of Lex

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