Stellantis, the name for the mash-up that includes Fiat, Chrysler, Peugeot and Citroen, has a little problem with a rounding error. It’s the owner of the old Vauxhall plant at Ellesmere Port on The Wirral. The plant is tiny in the company’s scheme of things, but it supports about 1,000 attractive jobs, with an estimated five times that amount in the local supply chain, and not for the first time, its future hangs in the balance. In a world oversupplied with car plants, it is too small. In a business with too many second division brands, closure looks like an obvious, if painful decision for the Stallantis board, far away in Amsterdam, at their meeting this week.

They have another reason to drive Ellesmere Port and its Astra off the road, unless Kwasi Kwarteng, the Business Secretary, comes up with a particularly juicy bung from the UK taxpayer to save it. Last autumn, after similar soul-searching, Stellantis boss Carlos Tavares committed to building a new petrol-powered model there, thus securing at least its medium-term future. Within weeks, the UK government slashed his tyres by announcing a ban on the sale of new petrol cars from 2030.

Building a car which cannot be sold in its home market would never make sense, while the cost of a complete retool of the plant to build electric in less than a decade destroys an investment case which was far from compelling in the first place. Besides, Stellantis plans to build electric elsewhere in its sprawling empire. Understandably, the company does not seem in a mood to help the government out of its hole. One source told the Daily Telegraph: “Stellantis wants long-term assurances. It won’t make a short-term decision that affects its long-term competitiveness.”

Mr Kwarteng is desperately trying to persuade the company to persevere, but it is hard to see why Mr Tavares should believe a word he says. Like so much else from this administration, the petrol ban came out of the blue, a political feel-good gesture with no thought for the consequences. Whatever Mr Kwarteng says today about pledges for the long term, it would be rash to place any reliance on his promises. If this really is the end for Ellesmere Port, after sustained efforts from management and workforce, they will all know who to blame.

Just get that debt down, guys

Oil company accounts are largely impenetrable to outsiders, and most of us are reduced to asking two simple questions: how much debt, and how much dividend. It would be a comfort to think that those inside the empires know better, yet the evidence this week shows that they can produce thousands of numbers, and still leave us little the wiser.

Here is Bernard Looney at BP. He has done so well with disposals on the way to his green nirvana that he reckons he can use some of the cash to buy in its own shares. Never mind that such programs have cost remaining shareholders dear in the past, or that replacing equity with debt makes BP more vulnerable to the sort of collapse in the oil price that we saw a year ago. His target of $35bn of debt is still quite a lot for a business valued at $60bn.

In contrast to BP, the Royal Dutch Shell dividend never went down – until a year ago. Then the board panicked at the lowest point in the oil price plunge, and slashed the payout by two-thirds. Since then, it seems that last March was not the end of the oil age after all, and Shell is now raising it again, albeit at a rate which will take 28 years to return to the previous level. Shell’s history of buy-backs shows even worse value destruction than BP’s, so we should be grateful that nothing is imminent.

To keep the market informed, Shell this week revealed that the Texas Big Freeze has cost it $200m. Is this a lot or a little? Who knows? The shares barely twitched. You can judge for yourself here, and after the analysts have finished their reading, Shell will obligingly publish their consensus for earnings later this month, followed by “enhanced voluntary disclosures” next. That promises more stats than you can shake a stick at, but still. The dividend? And the debt?

One world, one corporation tax rate, one April Fool?

If we can’t have world peace, then how about a world rate of corporation tax? Coming from anyone less distinguished than Janet Yellen, head of the US Treasury, such an idea would quickly go the same way as Esperanto or global disarmament, but it really does deserve to follow them into the realms of wishful thinking.

Getting global businesses to pay their “fair share” of tax has always been tricky, and never more so than in a world where companies can choose the country where their profits arise. A single world-wide rate would mean that the incentive to cheat would disappear, but this is where the problems start. If it’s the same everywhere, companies could decide which countries they should favour with payments – and which countries would favour them in turn.

Then there is the question of “fair share”. A rate of 25 per cent sounds fair, but in Yellen’s fantasy, the pressure from cash-strapped governments to raise it would be relentless. The most awkward question of all is: what is a taxable profit? Private equity groups have become world masters at financing with debt, which can be offset as a business expense, instead of equity, which must be rewarded out of post-tax earnings.

Small countries can struggle to attract investment, and a low rate of corporation tax is one of the few legitimate ways they can do so. Finally, the idea of the Chinese authorities agreeing to allow anyone else to tell them what to do is risible. Perhaps Ms Yellen was just having a late April fool. It wasn’t funny, though.

What do you think these statements mean: “Our clients’ interests always come first.” Or: “Integrity and honesty are at the heart of our business.” They, or something like them, are part of the “mission statement” at almost every bank in the world, but what do they actually mean in practice? The Supreme Court in New York is being asked for an answer, with a little matter of $13bn lost by appellant pension funds in the 2008 crash at stake, and the court is really struggling.

On the face of it, if these statements have any meaning, it seems clear that Goldman Sachs (for it is the Vampire Squid itself) has not put the clients’ interest above its own, while bankers always struggle with tricky words like honesty and integrity. No, no, not at all, smoothed the banks’ defence, these are what everyone in the industry says. They are just standard boilerplate PR, or “exceptionally generic and aspirational statements in the face of overwhelming and unrebutted evidence that the statements had no impact on the stock price.” Besides, they went on, any conflicts of interest within the bank were already in the public domain, so there.

But Goldman does have a problem. The lower court ruled that the pension funds have a case, which is why it has got this far, and no wonder that the court is finding it hard. There is little dispute about the facts. It’s all about whether the bank actually means what it says, and can be held accountable for the consequences.

Goldman’s argument that bragging about how well it behaves had nothing to do with the price of the securities the pension funds bought is true enough. Their managers are unlikely to have thought: “These things that they trying to sell us look jolly risky and we don’t really understand them, but it’s OK, because Goldman always puts our interests first, and we know that honesty and integrity are at the heart of their business.” More likely, they thought: “These instruments pay more than Treasuries, and an awful lot must go wrong before any impairment reaches us. And Goldman are offering five basis points more than Morgan Stanley.”

A finding against Goldman would open the floodgates to claims of losses from the 2008 crash big enough to swamp some of the banks, a thought which has doubtless occurred to the court, although the judges hardly dare admit it, even to themselves. Perhaps Goldman might choose the moment to think up some new slogans, like “Our clients’ interests usually come first” or “Honesty and integrity are at the heart of our business as long as it’s profitable”. Whatever the court decides, if the case marks an end to the self-serving, virtue-signalling nonsense which has spread like a virus through company reports everywhere, it will not have been fought in vain.

Re-Branding is a pain in the Nurofen

We’re not told how much the exciting rebrand of RB has cost the shareholders. RB, you ask, who they? Well, one of the largest companies in the FTSE100, trading as Reckitt Benckiser, best known inside the City for the extravagant rewards to successive chief executives, and outside it for Dettol, Nurofen, Durex and dozens of other brands. The board has now decided that since nobody noticed the brand name change to RB, they might as well go back to plain old Reckitt.

Naturally, such an important change needs a new logo, and the usual raid on the thesaurus, to “better enable us to communicate our corporate purpose to the world, and to do so in a way that is powerful, consistent and impactful.” Here it is, if you can bear it.

These rebrandings seldom help. Scrapping the perfectly serviceable Capital Shopping Centres for the gruesome Intu was a harbinger, if not actually the cause, of disaster. Imperial Tobacco’s directors decided that Imperial Group sounded more inclusive and less carcinogenic. The dividend, previously rock-solid, was cut last year.

There’s no doubt that the name of a product can be important. The Oxford vaccine had overtones of academe and careful research by dedicated scientists, while Astra Zeneca has been pilloried as a greedy drugs company. For a ridiculously large fee, I could organise them a rebrand to “AZ.”

Hamfisted

So we now know the full cost of the Disastrous Daves at Hammerson, the shell of a business which was once the UK’s third-largest property company. The accounts are something of a contrast with the past, lacking the traditional pages of smiley happy people thronging the shopping centres at Brent Cross and Bicester Village. New chairman Robert Noel manages a thin smile as he catalogues the disaster that was 2020, and manages the briefest of thanks to David Tyler, his predecessor, and David Atkins, the CEO whose 11 years in charge wiped out most of the company’s equity.

The accounts reveal that he did not receive a bonus for last year, but has been given £50,000 to help him find another job. The chair of the rem. com, Gwyn Burr, has been asked to stay on, on the argument that Hammerson has lost enough directors for one year. Going forward, in the deathless prose of these reports, is new CEO Rita-Rose Gagne, with a package of pay and perks that mean she will become rich if she can persuade the tenants to start paying again and make those shopping centres fizz. The poor battered shareholders will hardly complain if she does.

“Guarantor lending services” sounds like a reasonable line of business. This is how Amigo Holdings is described, but the reality is altogether less reasonable. Amigo grew like topsy on the distinctly doubtful model of lending you money if a credit-worthy mate or relative would guarantee to pay it back if you failed to do so. Whether you did or not, the interest rate charged is a scorching 49.9 per cent.

The scope for moral blackmail here is obvious: “Honestly, I’ll pay it back mate, all you have to do is fill in a form, you don’t have to lend me a penny.” The stock market, in its amoral way, decided that this business was so attractive that it was valued at £1.2bn after it listed in 2018. Since then it has been an entertaining (for outsiders) tale of internecine strife and a realisation of just what an unfriendly business Amigo really is.

As more customers have been forced to understand what the word “guarantee” really means, so the defaults and claims that the original loans were mis-sold have risen, to the point where they threaten to overwhelm the company. The shares have joined the 90 per cent club, down from 297p to just 14p, and Amigo is seeking approval to use a “scheme of arrangement” to avoid going bust. If the scheme fails, compensation claims may be worthless. Rather, take (much) less than you may be due, and we’ll top up with 15 per cent of the profits we make over the next four years.

That presupposes there will be meaningful profits from a lending business which is a better alternative only to gentlemen with baseball bats. But without the scheme, Amigo’s current management told The Guardian, the outlook is a messy collapse. This could wipe out any compensation claims, but is unlikely to do the same for the borrowers’ outstanding debt. The Financial Services Authority is being urged to get involved; it is stuck between a rock and a hard place, and has decided that the creditors should decide. The whole shambles comes before the court next month.

An offer you can refuse

If you have savings of any size, you will probably have received a stiff, formal-looking invitation from St James’s Place – not the palace, sadly, but from a business which would like to look after your money. It is a highly successful business, at least for the executives and, recently, for the shareholders as the price has regained its pre-pandemic peak. With £129bn to look after, SJP can claim to be the UK’s largest wealth management company.

Quite why this should be so is something of a mystery, since it does not seem to be all that good at managing the wealth. A comprehensive analysis by Yodelar, a firm of investment advisers, shows just how poor the performance of the funds has been. It concludes that eight out of 10 funds have “consistently underperformed” their benchmarks and that “the SJP Alternative Assets fund has been the worst performing of all 145 funds in its sector over the last 1, 3 & 5 years.”

Few in the industry will be surprised by Yodelar’s findings. The managers of the funds are probably no worse than the (very mediocre) industry average, but the real cost to the owners ls the capital is the fees. SJP has found many ways to charge its clients, in addition to the more standard costs. David Stevenson at Citiwire describes SJP’s Balanced unit trust portfolio as “bog-standard” but it charges a 5 per cent initial fee and 1.58 per cent a year thereafter. A better description would be off the top of the scale. To outperform the market by 2.58 per cent a year over five years is not easy, but unless SJP can do this, its investors will have lost out. It’s quite hard to find any comparable pooled investment that charges more for a similar service.

The broader point here is the familiar one, that the fund management industry works for the fund managers, not for those whose money it is managing. The managers are interested in performance only insofar as it draws in more money to manage, and thus raises their fee. Despite the growth of low-cost tracker funds, this shows few signs of change, but at least investors know what to do if one of those fancy invitations drops through the letterbox.

Who needs shareholders?

For decades, the John Lewis Partnership model has been enthusiastically lauded from all quarters. Look what we can do without those greedy shareholders! See the happy staff, knowing that it is their business and that a generous pension awaits them after their loyal service? Recently, enthusiasm has been lacking. The hubristic expansion under the previous management has ended in tears, and the store closure programme, which newish chairman Sharon White has been forced to implement, means job losses and even encompasses some outlets which have only just opened.

The earlier expansion has left John Lewis so financially weak that it may lack the capital needed to compete in the post-high street age. If only it had some of those greedy shareholders. They might see the potential in one of the great names in UK retailing, and put up more of their capital to see the business through the crisis. After all, they have subscribed to rescue far worse cases, like shopping mall group Hammerson and cinema group Cineworld. John Lewis customers have a deep reservoir of goodwill, but the employee ownership model would have to go. Charlie Mayfield, who oversaw the ill-judged expansion, ran the Commission for Employment and Skills, a quango “providing strategic advice and insight on skills and employment issues”. It’s not likely that Dame Sharon will be consulting him.

A nasty crack appeared this week in the magnificent edifice of regulation, erected to contain the industries which used to be owned by the British state. At first sight, it looks rather a small crack, soon to be papered over, and posing no big threat to the structure. In reality, the power and position of the regulators has been seriously, perhaps irreparably damaged.

Look carefully, and you can already see the water seeping through the crack, since it is water regulation that has taken the hit. When Ofwat, the industry’s regulator, imposed its final rulings for water pricing over the next five year period, four companies – Northumbrian, Anglian, Yorkshire and Bristol – scuttled off to the Competition and Markets Authority to argue that the permitted rate of return on their capital (which is how these things are stated) was too low. Ofwat had imposed 2.9 per cent, while the companies wanted 3.6 per cent.

Now the CMA has ruled. Looking through its rather dry (sorry) prose, it seems to have split the difference, imposing a rate of 3.2 per cent. This looks suspiciously like a “don’t know” reply to the question, but the implication, that Ofwat didn’t know what it was doing, is clear enough. Other companies which reluctantly swallowed a low rate will be feeling foolish – 0.3 per cent of the very large numbers in this industry is still a very large number. Ofwat says its own proposal was worth an extra £13.3bn over five years to the four companies.

However, the others will not be feeling half as cross as Ofwat itself. You can almost hear Rachel Fletcher, the CEO, grinding her teeth as she said: “I am grateful to the CMA for its engagement with us and the considerable analysis it has conducted.” In practice, the CMA has opened Pandora’s water-carrier; next time Ofwat’s negotiating position will be fatally weakened even before the talks start.

Ofwat had been trying to claw back some of the grotesque rewards many water company owners have made. The extreme example remains Thames, where systematic replacement of initial equity with debt by Macquarie left the balance sheet too weak to finance the Thames super-sewer. Public anger at the shocking state of the nation’s rivers after 30 years of privatised ownership reflects the result of an industry which was out of control of the regulator. Ofwat has tried to impose financial discipline and better behaviour. It will find doing so much harder in future.

Getting Hammered

We must wait a little longer to find out how much the pair of Daves who wrecked Britain’s third-largest quoted property company have been paid to go away. The innumerable pages of Hammerson’s results announcement last week couldn’t find space for this. When the accounts are published, their final rewards will be about the only numbers that we don’t already know.

The ones we do paint a truly depressing picture, the culmination of years of mismanagement which needed a capital reconstruction and a share consolidation to avoid the embarrassment of becoming a penny stock. Perhaps the darkest hour for chairman David Tyler and his CEO David Atkins was in 2018, when the pair attempted to believe two impossible things before breakfast. They wanted to issue shares at a discount to pay £3.4bn for the (now bust) rival Intu while simultaneously rejecting a takeover approach at a premium which valued Hammerson at £5bn. Sell low, buy high, is not generally a successful investment strategy.

No number of Daves could have foreseen the impact of the virus last year on the shopping centres at Brent Cross in London and the Bullring in Birmingham, but the 2019 accounts, issued as it struck, were a picture of complacancy, mostly full of drivel about how wonderful everyone was. The endless pages devoted to board pay under head of rem. com. Gwyn Burr were a model of how these things are done today – impenetrable to outsiders, yet producing a healthy result for the executives.

By May both men had signalled their departure, and in August came the £550m rescue; at the low point in September, that new money just about equalled the market value of the entire business. The tenants in the shopping centres are revolting, paying only 54 per cent of rent due in the first quarter of the year.

Since then, things have looked up. Robert Noel, recently retired from running Land Securities, accepted the hospital pass to become chairman, and the splendidly-named Rita-Rose Gagne is CEO. Perhaps all is not lost after all. Perhaps we will flock back to the biggest and brashest shopping centres when this lousy war is over, while finding imaginative uses for those properties which will never recover. Perhaps Hammerson, shorn of its Daves, is the way to play this future. Perhaps that is why the shares have perked up in the week since the results.

Inflation, but not as we know it

Such a comfort to know that the boys and girls at the Office for National Statistics are keeping up with our changing spending habits. They have chucked out those sickly white chocolate bars and the accompanying ground coffee from the basket they use to calculate the Consumer Prices Index, the official measure of inflation. In come training weights and smart watches, perhaps because that’s what shows on Zoom. In come electric cars, even though they remain unpopular and far too expensive except for Uber drivers and show-offs. No pressure from the government here, of course.

The CPI is currently rising at an imperceptible 0.7 per cent a year, according to the ONS. The elephant in the inflation room, or rather in the room you’d like to own, is the soaring cost of houses, up by 5.2 per cent in the last year on the Halifax index. The statisticians don’t view this as inflation, and it’s generally reported as a cause for cheer, vindicating all previous purchases. It also means that homes are not only unaffordable without lender and borrower taking on increasing risk, but prices become ever more vulnerable to setbacks, as government measures to keep them up become ever more desperate.

It’s been life assurance week in London. You probably noticed. Three of the leaders in this opaque business, with £2.2tn (that’s £2,200,000,000,000) of our money to play with, reported to the market. Sadly for two of them, the reports are not a pretty sight. However well they did for the holders of their funds under management (mostly, not particularly well) the companies’ shareholders have had a miserable time for many years.

So let’s start with Standard Life Aberdeen, with £540bn of savers’ money. The newish CEO, Stephen (“got the”) Bird seems to be pursuing a philosophy of “Beatings will continue until morale improves”. In January he told the staff to forget any thoughts of a bonus, and this week he slashed the dividend by a third, promising not to raise it again until SLA can generate a bit more capital from the business. Considering that the old Standard Life dividend had really looked “sustainable”, in the modern argot, the admission that it has fallen prey to incompetent management is another nasty blow. The shares now cost the same as they did a decade ago. At 294p they yield (a very fixed) 5 per cent.

Next up, our old pals at Aviva. This dinosaur of a business is struggling to make money from £366bn under management. The operating profit on this vast haul last year was just £85m, and once again at the annual meeting the management will be invited to explain what’s in it for the shareholders. The accompanying annual report continues the Aviva tradition of pages of nauseating platitudes, smiley happy people and enthusiasm for the fashionable aim of contributing net zero carbon. The dividend is up! Well, yes it is, but only compared with 2019, when under “guidance from regulators” the final dividend was scrapped. Not my fault, guv, implies the chairman, a smiley George Culmer. There’s been plenty of activity from his new CEO, a smiley Amanda Blanc, who has been the whirlwind of activity she promised, and the share price is now back up to 390p, the level it was a decade ago.

Our third example is Legal & General, with £1.3tn of our funds under its belt. It has the rare distinction of resisting pressure from the authorities during the great panic of last March, and paying an unchanged dividend. It’s unchanged again, but for us shareholders and those who can understand life assurance accounts, it looks sustainable (that word again). In the last decade the shares have risen from 117p to 281p according to Morningstar. The contrast with the other two is embarrassing.

Aviva and SLA go a long way to explaining why the FTSE100 has had such a miserable decade, and been such an easy benchmark to beat in recent years. Add in the banks, where profits (and dividends) are at the whim of central bankers, and the oils, where management hubris has met climate hysteria, and underperformance was almost guaranteed. Still, we are always being told that past performance is no guide to the future. We can only hope so.

Fix your mortgage for 40 years?

The idea of a long-term fixed-rate mortgage has always been attractive. No more fretting about where interest rates may go next; as long as you keep paying the same amount every month, you are fireproof, even if the value of your house goes down for a decade or two. The idea has recently become attractive enough to warrant official encouragement, and with long-term bond yields at today’s price it makes more sense than ever.

The problem is that lending for 40 years is not really a banking transaction, since the bank’s funds are effectively short-term deposits. This lending is far more suitable for life and pension funds, to provide assets against their long-term liabilities, but they are wary of getting into consumer products where they must assess the credit-worthiness of the borrower.

There are some signs that this may be changing, but painfully slowly. Habito, a mortgage broker, is offering 40-year fixed mortgages, but is unlikely to be killed in the rush. For a buyer putting up 60 per cent of the property cost, the fixed rate is 4.2 per cent. For the buyer looking for a 90 per cent mortgage, the rate goes up to 5.35 per cent. This is pretty expensive money by today’s standards, and reflects the lack of proper competition. No amount of competition will bring the rate down to the 1.25 per cent the UK government pays, but there is plenty of margin for big, long-term lenders to get stuck into this vital market.

Red, or at least pink, hot topic

You thought cryptocurrencies were disruptive? asked the FT this week. The paper is always keen to hear from its readers, or so it tells us, but in this case the question was strictly rhetorical. Those wanting to answer it were unable to do so, as a line at the foot of the piece read: This article is closed to comments due to a history of posts on this subject that breach FT user guidelines.

Perhaps this is just a sensible precaution, since bitcoin arouses even more passion than R.v Megan, dividing those who see cryptocurrencies as a means of escaping the tyranny of fiat money from those who see a godsend for drug dealers and arms traders. Since it can’t be uninvented, and Jo Biden is telling the US treasury to print money like never before, this one will run and run. Pity about the suppression of FT readers’ views, though.

ESG update

Quick: name the five highest rated companies in the FT100 by Environmental, Social and Governance scores. Bet you can’t, unless you have read the latest missive from Hargreaves Landown. The investment company’s top two are no surprise. Astra Zeneca and Glaxo Smithkline are no longer big bad pharma, but saviours of the nation from permanent lockdown. Number three, would you believe it, is British American Tobacco, because it cares for its farmer producers and tries to prevent employment of child labour. Number four is also something of an eyebrow-raiser. Glencore is a rough, tough mining company, but it is trying to live down its past by encouraging more sensitive behaviour from middle executives. Finally, here’s Coca Cola HBC, Coke’s European bottler, which says it doesn’t like all those discarded botles and cans any more than you do, and is trying to mend its ways to make less waste. But still, don’t forget to brush your teeth – and take ESG with a mouthwash of scepticism.

There’s nothing like the fire, fury and confusion of a Budget speech to divert attention from favours to your friends. Rishi Sunak knows plenty about private equity (PE) from his previous life in the City, so his former colleagues will be secretly delighted with the proposal to raise corporation tax from today’s 19 per cent to a stiff 25 per cent. There will be routine complaints about the dampening effect of tax rises on their animal spirits, but they will quietly note that this change tilts the balance of capital financing still further away from equity (dividends paid after corporation tax) to debt (interest is a business expense).

The move might be less inequitable were it to be combined with reform of the “carried interest” scam, which allows the PE executives to treat the, often life-changing, bonuses on the sale of a company as a capital gain, taxed at 20 per cent, rather than income, taxed at 45 per cent. These rules already drive PE financing towards as much debt as the underlying business will bear at the time, with a thin sliver of equity.

If things go well, the equity can multiply in value many, perhaps hundreds, of times, before the business is sold. Timed right, the lack of any capital cushion against tough times or market evolution need not matter. Older examples of debt overload requiring subsequent rescue include Saga and the AA, and more recent ones like Aston Martin or the ghastly Amigo. The most egregious case is probably that of Debenhams. As Covid accelerated the high street revolution, the highly-geared business lacked the capital to invest to compete. Now thousands have lost their jobs.

He may have failed in curbing the PE excesses, but the Chancellor has been quite clever with business carrot and stick. The pain of profits taxed at 25 per cent is less when each £100 of investment reduces that liability by £130, providing a powerful incentive for boards to take a longer view than many do today. Unfortunately, the investment allowance is for two years only, expiring just as the higher rate of corporation tax comes into force. This is Treasury prestigidation at its finest, but two years is an age away in Budgetland, so it does allow our dear chancellor time for amendment of life.

The inflation dragon stirs

Much has been made about how the UK government’s cavalier approach to debt is helped hugely by its near-zero cost of borrowing. There is less analysis of why the long-term rates are so low. Are investors really rushing to lend for 40 years at 1.25 per cent? The answer is that, with few exceptions from funds which are obliged to cover future liabilities and traders looking for a turn, the buyer is the Bank of England. The Bank is, of course, owned by HM Government, and so the magic of Quantitative Easing allows the state to borrow from a bank that it owns.

This has worked splendidly while us pessimists have been so wrong for so long on inflation. Now, though, there are just a few signs that the prices worm may be starting to turn. The world’s semiconductor makers are all reporting lengthening order times, oil seems established above $60 a barrel, metal prices are booming, and all while consumer demand has been artificially depressed by Covid lockdowns. Businesses which survive will be looking to raise prices to repair battered balance sheets, while the 40-year chart of declining bond yields has turned sharply upwards in 2021.

After trying to encourage inflation back up to 2 per cent, the world’s central banks may suddenly find themselves succeeding only too well, at a time when the political pressure to hold down interest rates is intense. As we discovered in the 1970s – when the UK government was forced to pay 15.5 per cent for 20-year money – once the inflationary genie is out of the bottle, it’s a long and painful process to put it back in.

When it comes to eating capital…

Are you looking forward to eating out again at Garfunkel’s, or Frankie & Benny’s, or even at Chiquito? What, you say, are they still going? Well, yes, some of them, insofar as any restaurant chain can be said to be going during lockdown. These tired old formats belong to The Restaurant Group, better known today for Wagamama, bought expensively from its private equity owners in November 2018. The TRG shareholders revolted at the £357m price tag (plus £200m debt) and were bounced into putting up £315m in an absurdly discounted rights issue (13 for 9 at 108.5p, against a share price of 275p before the news). The dividend was cut, for good measure.

Within months, the CEO who did the deal resigned. Andy Hornby, who rose to fame in the great HBOS disaster, took over, but things did not improve, and last February the rest of the dividend went, along with over 100 of the group’s sites. Then came Covid. The lockdown necessitated a desperate £57m equity fund-raise at just 58p a share, a Creditors Voluntary Arrangement with the landlords, 125 more sites closed, followed swiftly by an admission that a tenth of the rest would never reopen.

To add to the gaiety of nations, the directors helped themselves to a handsome new incentive scheme as they laid off 4,200 staff from the restaurant chains. This week they paid a distinctly spicy 7 per cent interest on a £500m debt refinancing, just in time with a £225m Wagamama bond due in June. Yet here’s the thing. Without that Wagamama deal, the group might not have survived at all, with the pandemic administering the coup de grace to those tired old “casual dining” brands it owned. Perhaps the previous CEO, who had to leave for personal reasons, could sense stinking fish and realised he had to pay up for a chain with a future. The shares are a shadow of the pre-deal price, but have doubled from their pandemic panic low to 112p. The business may have a future after all.

Bernard Looney would rather Trinity College Cambridge did not sell its shares in oil companies. As CEO of BP, it’s understandable that he should believe that turning your back on them is no way to encourage a change in behaviour. It is unlikely that the college grandees are listening. Enough of the students have been convinced that oil is evil to overwhelm anything as intellectual as an investment case. For them, no price is too low to justify holding these destroyers of the planet.

Similar pressure is being brought to bear on local authorities. Friends of the Earth, a militant anti-carbon pressure group, has calculated that the authorities’ pension funds hold £10bn of shares in fossil fuels, including – shock – £3.5bn in coal. Trinity has already capitulated and agreed to sell, and the councils are similarly unlikely to resist. Yet it may not be so easy. Trinity has holdings in 172 fossil fuel companies, but 168 of these are through tracker funds, so the college would have to sell the funds to get out of the earth-destroyers.

The councils will find themselves in the same bind, should they crumble before the FoE pressure. Besides, there may be a serious financial penalty in selling. A year ago, a switch from BP to Orsted, market leader in the offshore windmill business, would have looked smart. These shares more than doubled to their peak in January, while BP halved to their worst, when Covid briefly collapsed the oil price. But the Texan freeze-out exposed an uncomfortable truth about wind farms, and Orsted shares have fallen by a quarter in two months. BP, meanwhile, are 40 per cent above their low. This may owe more to the realisation that oil and gas will remain central to the world’s economy for many years yet than to Mr Looney’s homilies about being nice to “companies who are leaning into the transition”, as he puts it.

One that is not leaning is Total, whose CEO not only believes that shares in green energy companies are in a bubble, but has put his company’s money where his mouth is, selling a half share of its wind and solar farms to Credit Agricole. Like everyone else in the West, he aspires to get to net carbon zero by 2050, but as the Chinese keep demonstrating, when it comes to climate change, words and figures do not agree.

Staberdeen in the back

Nobody would claim that the merger of Standard Life with Aberdeen Asset Management has been a resounding success. When it was announced four years ago, Standard was worth £7.5bn and Aberdeen £3.8bn. The combine is valued at £7bn today. The twin-headed CEO structure has gone, and Stephen Bird, the newish single incumbent, is understandably fed up with it being dubbed Staberdeen.

The usual remedy is a change of name to draw a veil over the past, or as one reader of Wealth Manager website put it, to disguise the sell-off of the Standard Life name, which despite devaluation over the years, probably still has some brand value. The deal to sell it, to the existing partner Phoenix, is described as a “simplification” process, although nothing is simple in the world of life assurance, and the market was unimpressed. On a yield of 6.6 per cent, investors suspect the SLA dividend might be “simplified” too, in a downwards direction. Fortunately for the nation’s savers, there are some reasonable performers among the £500bn of funds that Staberdeen manages. Not those holding SLA shares, obv.

Newts on the line

They know they’re in trouble on the Great White Elephant project when they can’t even look after a few wintering newts. Yes, it’s Britain’s most expensive comedy show, sometimes abbreviated to HS2, the railway few want and nobody needs. It’s now under investigation for “wildlife crimes” for failing to set newt traps properly, leading to the death of at least one unfortunate shrew. If found guilty, there’s the prospect of unlimited fines. Great Crested Newts can be jolly pricey; I K Gricer, my engineer surveying the old railway line which used to join Bicester to Bletchley, calculates that it will cost him £10m to comply with the rules protecting them, providing another excuse for HS2 to over-run its £100bn budget.

Still, help could be at hand. Beleaguered Grant Shapps at the Department of Transport is advertising for a non-executive director for HS2 Ltd, giving someone “a real opportunity to shape the direction of this critical and highly visible project” as it scythes its way through the English countryside. For £950 a day, two days a week, he/she will be holding the leadership to account, with “particular focus is on improvements in HS2’s approach to communications and engagement with communities along the route.” The bureaucrats at DaFT should watch out for an application from Daniel Hooper. Aka Swampy, he may soon find himself able to spare a couple of days a week between burrowings.

How on earth do a couple of second-generation immigrants from a small terraced house in Blackburn take over the UK’s third-largest supermarket group? The short answer is unremitting hard work over many years. The longer answer is a fearless approach to debt, which has culminated in the sight of institutional investors rushing to lend £2.25bn at 3.25 per cent in the largest-ever sterling-denominated junk bond. Mohsin and Zuber Issa, the driving force behind the purchase. have used the City’s finest financial engineers and put up just £800m to pay £6.8bn for Asda. The rest is debt and disposals, including the junk bond.

Not that the brothers actually have the £800m lying about in the bank. Much of it is also borrowed from their existing petrol station empire, which they have built up from a single site 20 years ago to 5,900 worldwide today. From nothing to control of a grocer with £23bn of sales is a terrific story for our times, combining enterprise and courage. It is also a sign of how desperate the controllers of capital have become in an era of near-zero returns from government debt. The wannabe lenders put up no less than £8bn for the Issas’ bond.

It is not their money, of course, but that of the banks, insurers, sovereign borrowers, hedge funds or pensioners for whom they work. Between them the providers and advisers charged £165m in fees for finding the money, led by Barclays Bank. The wiring diagram for the fund-raising looks like the circuitry for Apollo 13 even after the Competition and Markets Authority insisted on simplification. It also spells life-changing bonuses for the individuals concerned. Those at the top could comfortably retire on their shares of the loot.

Gearing on this scale leaves the underlying businesses highly vulnerable to unexpected setbacks, or even market evolution, as the former employees of Debenhams and Arcadia are finding out the hard way. Grocery may be less vulnerable than clothing, but it is much more competitive. Tesco is refocusing on the UK, Aldi and Lidl are still gaining market share, while the world’s longest-running food retail revolution, Ocado, seems to have injected new life into Marks & Spencer. There may be room for all of them in a post-Covid world, but those with the most debt start with a significant handicap.

Should the brothers find that stripping assets out of Asda is harder than they thought, those loans might look less solid than the buyers believe today. By then, those who took the fees will be long gone, their bonuses with them. It’s hard to imagine a better incentive for loan managers to subscribe to this fund-raising, regardless of whether it is really in the best interests of those providing the capital. Never mind. As one banker who turned the offer down put it: “You’ve got to take your hats off to the two brothers, they really did start with one petrol station. But that doesn’t mean you should lend to them.”

A cheap stock, cough, cough

Here’s a large, liquid share with wonderful cash flow, an impregnable international market position, a history of rising dividends and a yield of 8.2 per cent. Oh, and it is “recognised for its ESG performance”, so it ticks that box as well. Give up? Investors, it seems, find giving up holding British American Tobacco easier than giving up smoking during the pandemic. Perhaps it makes them feel more virtuous, but selling at today’s £26 a share is pretty painful on the wallet.

The underlying numbers that BAT reported this week are compelling. Its “disappointing” results revealed operating margins of 38.6 per cent, £7.3bn of free cash flow before dividends and adjusted net debt of £39.5bn, slightly down on the year. As with some of the company’s customers, its demise has been much exaggerated.

Yet here’s the thing. While nobody wants the shares, its bonds are rather popular. The 2.25 per cent 2052 has slipped a bit recently, but still yields only 2.8 per cent at £80.32. The moral here is obvious. If the Issa brothers can attract £8bn in financing with essentially zero equity, just think how the bond markets would rush to support a private equity buyout of BAT. True, it’s a bit of a mouthful at £60bn plus a bid premium, but the free cash flow would deal with that, no trouble.

As the analysts at Ash Park did not quite say the other day, all that cash flow is wasted on the ungrateful shareholders (of which I am one). Oh, and as for that ESG badge, it’s all there in this week’s statement. What does the company do, again?

Green madness corner

Wearing the dunce’s cap this week is Drax, a business once best known for operating Britain’s largest coal-fired power station. Seeing which way the CO2 wind was blowing, it has progressively replaced its coal burners with wood pellets (please don’t call them wood chips) which it sources from America. A quirk of the rules allows the company to claim that these produce green power when burnt, even though they are only marginally greener than a wood-burning stove.

The pellets come from trees which are supposedly replaced (!), and having steamed across the Atlantic, have to be kept in special domes to avoid both damp and spontaneous combustion. Doubling down on this bizarre business plan, Drax has now bought a Canadian producer, but it turns out that these pellets need to be gas-dried first, which rather blackens their green credentials. CEO Will Gardiner can only say he will have to “figure out” some alternative method, so he hasn’t a clue.

Drax’s greenery attracts a subsidy of £790m for this charade, equivalent to 17 per cent of 2019’s sales, and rather more than the operating profit of £79m. For once, it is hard to argue with Greenpeace’s comment. Doug Parr, its chief scientist, calls this “a great example of the publicly funded madness.”

Here’s an unexpected winner from the lockdown – Davos man. In a normal year, the sight of hand-wringing plutocrats telling us how we must make the world better, between bites of caviar, before departing in their helicopters, is sickening. Somehow, faces on Zoom fail to have the same impact, even if the script is pretty familiar. It serves to disguise the contrast between the winners who have seen their wealth burgeon last year and the masses who have just survived, and gives the lie to any thought that we are all in this together.

Next month the Chancellor must start the long, painful process of slowing the runaway train of the UK’s public finances. The biggest target for revenue by a country mile is the top 1 per cent, whose wealth has risen dramatically during the lockdown. The cries of woe are already starting: don’t damp entrepreneurial spirits, don’t scare off the mobile wealthy, don’t jeopardise the recovery with tax rises. Oh, and can we keep subsidising the housing market with other people’s money, to avoid the terrible prospect of prices actually going down?

Nobody likes paying taxes, but Rishi Sunak should aim to follow Lawson’s Law: make them low, simple and compulsory. Complexity makes taxes voluntary, while the wholesale replacement of equity (which bears corporation tax) with debt (which doesn’t) has baleful long-term consequences. Not only do the highly-geared private equity groups escape tax, but when the debt swamps the likes of Debenhams and Arcadia, throwing thousands out of work, the cost of rescuing them falls on the public purse.

To add insult to injury, those running private equity businesses use “carried interest” to pay capital gains tax rather than income tax on their, often life-changing, profits. There are examples of companies which have been improved by a period in private equity ownership, but more frequently the gains are made from financial engineering and sacrificing the long-term needs of the business. Changing the rules to make corporate taxation compulsory is long overdue.

Tim Bond at Odey Asset Management argues for a wealth tax. This is beguiling because, he says, a one-off 5 per cent charge would raise almost 8 per cent of GDP, enough to bridge a whole year’s Covid-driven deficit. He does not explain how it would work, and experience in other countries indicates that it wouldn’t. Even measuring wealth is hard, given the lack of enthusiasm of the victims. Most people’s idea of wealth is owning a decent house, while we tend to think any tax should only fall on those who are wealthier than we are.

The chancellor is besieged with demands for a radical reassessment of the way commercial property is taxed, and changes to rebalance physical and on-line shopping costs are desperately needed before the high street is completely destroyed by the Amazon revolution. As for domestic properties, the dream of a land tax looks as far away as ever, but the case for adding new bands to the top of council tax is simple and pretty well unanswerable.

The rules on pensions, both for contributions and payment in retirement, are almost incomprehensible, but most of the tax advantage goes to the well-paid. Replacing the current contribution rules with a 30 per cent tax credit regardless of income would particularly help basic-rate taxpayers.

If Dishi Rishi feels particularly brave, he could tackle inheritance tax by cutting the rate from 40 per cent to 10 per cent, while chopping down the entire forest of exemptions, allowances and discounts which have proved so lucrative for the avoidance trade. At present IHT is paid only by the middling wealthy, or the rich who trust their relatives less than they do the taxman. Cutting the rate to a tithe on death would reduce those entertaining court cases, but would almost certainly yield more than it does today. He could disguise its true effect by calling it a concession to the newly impoverished private equity kings.

This is a stopgap Budget, but an opportunity to signal radical changes ahead. It’s not the Budget for 2p on a pint, 5p on higher rate tax, or for further punishment for owners of non-electric cars. For the first time Mr Sunik will be delivering bad news. It’s his acid test, if you like.

A black day for common sense

There is a depressing inevitability about the synthetic outrage over the Woodhouse mine. This project, which would provide 500 much-needed jobs in west Cumbria, has enthusiastic local support and planning permission. But – shock! – it’s a coal mine! The usual suspects have ganged up to bully the council to reconsider, and the pressure is likely to be more than the Copeland councillors can bear, even if the government can resist overriding the locals.

The climate crusaders are refusing to see that the mine’s output will not be burnt in power stations, but is a vital component of steel-making. There are no commercially-proven alternatives, and the output of coking coal would displace imports, which bring their own carbon footprint with them. It is still possible that sense will prevail, but the attitude, from the Climate Change Committee downwards, seems to be: don’t give me the facts, I’ve already made up my mind.

They know what they’re doing!

“BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the coming energy transition while growing EBIDA and improving returns.” Morningstar’s summary analysis of BP’s new strategy.

“Sometimes I’ve believed as many as six impossible things before breakfast” The Red Queen in Alice in Wonderland.

David Cumming is the immensely experienced, relatively new chief investment officer for equities at Aviva, the perennially disappointing insurance giant. Aviva Investors controls over £350bn of capital, much of it in shares, so when Mr Cumming says he’s serious about global warming, the bosses of the companies in his sights would be well advised to take note.

These include the usual suspects, especially the oil and mining companies. Mr Cumming told the FT that he sees climate change as a “massive disruptor” of capital markets, and while he doesn’t want to end up selling these sorts of shares, by jingo he will unless the managements change their ways with CO2. This is all fine, crowd-pleasing stuff, and may even sell a few more motor insurance policies, and is surely not merely to provide cover for Aviva’s internal problems.

The company has a new helmswoman in charge, and the shares have risen, perhaps more in hope than expectation, that she can somehow get a few knots more out of the slow old boat. Morningstar calculates that the total annualised return from the shares has been 2.15 per cent over the last decade, as the shares have sunk, with the dividend firmly nailed to the mast.

Captain Amanda Blanc has chopped the divi down, and called for more speed, but Aviva is never going to be an America’s Cup contender. The ultimate owners of that £350bn under management might consider themselves fortunate not to have held just Aviva shares, but the performance of the funds has been pretty sluggish too, which begs the question of whether Mr Cumming is really in a position to lecture CEOs on how they should run their businesses. Going green is high fashion, but (so far, at least) low returns.

Co-incidentally, this week has seen results from two of his possible victims, the unloved oil duo of BP and Royal Dutch Shell. At BP, CEO Bernard Looney is making all the right noises to pacify the likes of Mr Cumming, but the market doesn’t believe that he can make anything like his promised 13 per cent return on capital by 2025. As with Mr Cumming, green talk makes him look good, but getting a decent profit on BP’s fashionable projects is another matter eniirely. Shareholders are likely to be grateful, rather than resentful, for the black stuff.

Analysing Shell defeats even the best-qualified analysts. On Thursday it reported third-quarter profits $200m short of their consensus $600m forecast, but the shares hardly budged, perhaps reassured that there was not to be a third change to the dividend policy. Unlike BP, Shell is only sipping, rather than drinking, the zero-carbon koolaid, but both companies have have too much debt and fortunes tied to the oil price, whether they like it or not.

Predicting where that price goes is as hard today as it’s ever been, but its history is full of surprises, and oil will power the world’s economies for many years yet. None of the big companies is looking for it any more, existing discoveries are being abandoned, and alternatives demand subsidies, either overt or covert, to be viable. Meanwhile, no government dares reveal the true financial cost of switching away from fossil fuels to the brave new world of renewables. Perhaps the oilmen should ask Mr Cumming what to do.

Modern Madness Trends

The Bank of England is not softening us up for negative interest rates. It is merely getting its ducks in a row with the clearing banks to ensure that they could cope. Thus this week’s report from the Monetary Policy Committee, essentially opening the door to this strange idea while saying it has no present intention of stepping through it.

The idea of the bank charging you to look after your money is just one of the side-effects of a policy which has seen government debt bought by the Bank (prop: HMG) and close to zero interest rates however long the lending term. It has even spawned a whole new school of economics, in the shape of Modern Monetary Theory, a discipline (if that’s the word) which says government deficits do not cause inflation.

Well, maybe. We are miles away from any useful historic economics guides today, and those of us who thought inflation would follow the bale-out of the banks more than a decade ago have been proved comprehensively wrong. Other, bigger, forces have been at work, in the shape of Chinese manufacturing, globalisation and population dynamics.

All three of these forces served to push the world’s output up while keeping costs down, almost regardless of individual governments’ policies. Now Prof Charles Goodhart, one of a select band of economists to have a law named after him, is arguing that these forces are played out, and we are on the cusp of The Great Demographic Reversal. Along with Manoj Pradham, he told us last week: “Our view of the future is not encouraging, but it is coherent and plausible.”

That the three forces are in retreat is surely not in doubt. There is a growing backlash against China, whose very success is starting to make her products less competitive. Globalisation may not go into reverse, but is no longer seen as an unmitigated good for economic policy. The world’s population is getting older, as average family sizes fall everywhere outside sub-Saharan Africa, driven by the move to cities and the need to educate the offspring. Looking after the elderly is a rapidly-growing, labour-intensive occupation.

This is good news for workers everywhere. There will be more demands on fewer of them, so they will regain some lost bargaining power. Governments will have to pay more, while paying for a growing army of the retired and their healthcare. The newly-empowered workers will be no keener to pay the extra taxes required than we are today, and the path of least resistance will lead to inflation. Well, not this year, given where we are starting from. And as the prof says, this outcome is not (necessarily) encouraging but it is coherent and plausible.

But cheer up!

Another broadside from the Global Warming Foundation at the conventional wisdom that we’re all doomed, choking on our carbon dioxide. Indur Goklany finds that “climate change is having only small, and often benign, impacts. Those from extreme weather events ― hurricanes, tornadoes, floods and droughts ― are, if anything, declining.”

“A recent study showed that the Earth has actually gained more land in coastal areas in the last 30 years than it has lost through sea-level rise. We now know for sure that coral atolls aren’t disappearing and even Bangladesh is gaining more land through siltation than it is losing through rising seas.”