Home Training Weekly Review, July 4, 2022

Weekly Review, July 4, 2022


We start today’s weekly roundup by scaling up.

Scaling up

The Economist reported that the UK is a good place to start a company, but bad place to expand.

Britain’s financial services industry employs 1.1 million people, generates 7% of the country’s economic output and accounts for a tenth of tax revenue for the Treasury. But all too often, when it comes to turning a promising startup into a domestic heavyweight, equity capital dries up along the way.

The newspaper notes the difference in the age of large companies:

Of America’s five largest companies by market capitalization (Apple, Microsoft, Alphabet, Amazon, and Tesla), three were founded after 1990, and the rest in the 1970s. Four of them are valued in the trillions.

The average age of the five largest companies headquartered in Britain (Shell, AstraZeneca, Linde, HSBC and Rio Tinto) is 135 years. None are worth more than $250 billion.

UK share of global venture capital funding by rounds

The UK has a lot of early-stage venture money, but less at later stages (although it still punches above its weight at 3% of global GDP).

  • The worst situation is for “deep technologies”, where you need to burn money for a long time before making a profit.

Only 49% of UK deep-tech companies have reached a second round of funding, compared to 63% in the US. A medium-sized US deep-tech firm has raised £113m in its sixth funding round; the British average is just £25 million. After adjusting for GDP, deep tech companies in America, China, Israel and Sweden are better funded than the UK.

In the UK we want to make money today, not promise growth tomorrow.

UK VC funding

The second article looks at a possible solution – allowing pension funds to invest in these firms.

The main priority is to channel the £4.6 trillion ($7.4 trillion) assets held by British pension and insurance funds into more productive areas. Less than 1% of these assets are in unlisted stocks. The distribution of defined benefit pension schemes in the UK stock market has fallen from 48% to below 3%.

Major obstacles to more PE and venture capital is a pension levy cap that rules out high-fee arrangements and accounting rules that make shopping safer sausages than shares.

  • The third recommendation is to consolidate small pension funds (including more than 90 local government schemes) into large funds.
Green bonds

Sally Hickey

This was reported in FT Adviser by Sally Hickey the NS&I Green Savings bond failedgrossing just £288 million.

  • NS&I’s core products raised £4.4bn, including £10.3bn from premium bonds and £7.8bn from guaranteed and income bond outflows.

Proposed environmental projects included zero-emission buses, offshore wind, low-carbon technologies and flood protection.

The low rate reflects the low rate – just 0.65% per annum for three years.

  • The second issue in February 2021 offered 1.3% per annum.

Rumors of an original launch date of October 2020 suggest that the Treasury’s target for the bond was £15bn.

  • That would be quite a disadvantage, but that goal included Green Pigsthat really collected this amount.

Laura Suter, Head of Personal Finance at AJ Bell, said:

Those who have put their money down to fund the government’s green projects may also be a little disappointed to learn that the government has two years to put in the funds, meaning two-thirds communicationDuring the term, the money can be in the account without benefit.

Sarah Coles of Hargreaves Lansdown said:

NS&I found out the hard way that we don’t want to put our money into anything with a green label regardless of the stake – even if it comes from an incredibly reliable brand.

Green bonds remain for very dedicated green investors with an unwavering commitment to NS&I. Everyone else will look elsewhere for a better return.

NS&I doesn’t seem concerned. CEO Ian Ackerley said:

It has been a successful year for NS&I in which we met all our financial targets and restored customer service to our usual high standards.

After a challenging period during the pandemic, I’m proud of the work we’ve done to recover and provide what our customers deserve – the ability to save on our unique products with fast, responsive and friendly customer service.


Joachim Clement

I promised more reaction to the latest Fed news interest rate hike.

By early January, both the Fed and the Bank had argued for moderate rate hikes, while markets were pushing for a much faster rate hike to around 2% in late 2022. In their policy meetings in January, Powell and Bailey abruptly reversed tack and delivered very sharp statements that were essentially in line with what the markets were telling them to do.

Joachim compares Ukraine’s supply shock to the 1973 oil crisis and the 1990 invasion of Kuwait.

In 1973, the Fed panicked and started to grow interest rates to curb inflation. We know today that this was one of the biggest policy mistakes in central banking history and the start of the stagflation of the 1970s. Compare that to 1990, when the Fed did nothing under Alan Greenspan.

The main thing is to distinguish inflation caused by demand and supply:

Supply-side inflation due to supply chain disruptions or boycotts of energy exports cannot be contained by monetary policy measures. These supply-side events act like tax increases, and I don’t think anyone will appreciate it if central banks increase interest rates to combat inflation caused by the 5% increase in VAT.

Central banks learned in 1991 not to deal with supply shocks by raising rates, and the 1991 recession was mild and inflation began to fall six months later.

To know how much you should raise rates, you need to know what proportion of core inflation is due to the demand shock. Also, you should focus on core inflation rather than headline inflation, which includes volatile food and energy prices.

Core inflation is already falling, and Joachim does not expect a recession:

The question is no longer “if” we’ll hit a recession, but “when.” The sooner the Fed and the Bank of England raise rates, the sooner this recession will begin.

And it could be even worse:

My fear is that if Mr. Powell and Mr. Bailey don’t find their backbone, the market will force them to cut rates just when inflation was falling anyway and demand was increasing.

Means for a rainy day

Sonia Rach

In the FT Adviser, Sonia Rach reported on Pensions Minister Guy Opperman’s idea firms should offer a savings product alongside an occupational pension.

The guy assumes (probably right) that the pensioners are not happy:

If you talk to young people about what they are really interested in, then for a guy, first of all, it is buying a car. And if you’re a couple, it’s definitely buying a mortgage. When you add in the savings as part of the entry package, it’s amazing for staff retention.

I’m not an expert on recruitment and staffing, but I would suggest that this is also not within the remit of the Minister for Pensions.

He wants to see the collection as a percentage of the workplace savings:

It’s not a situation where you’re giving a raise, but they’re paying you and creating a 1 percent savings bank that will very quickly create a cushion that everyone wants to have. We should have rainy day savings as a de facto policy.

We need more savings over the years, but there are two options for this new pot:

  1. There are severe restrictions on when and how you can access and in this case it is a mandatory distribution of 1% cash within the occupational pension (not a good idea in the long term)
  2. There is no limit, and in this case, this pot will not live to retirement and has no long-term purpose

The best news is that Guy sees auto-enrollment fees increase from 8% to 12%.

The holiday allows

After cracking down on small buy-to-let landlords, the government has turned its attention to short-term rentals, which still benefit from the previous, more generous tax treatment.

  • A formal market review (England only) has been launched to ensure accommodation is “up to standard” and to address concerns that popular destinations are not being used by local residents.

There are two obvious problems here:

  1. Short-term accommodation is rarely ideal for long-term living as a primary residence (it’s small), and
  2. People are priced out of whatever is popular (as measured by demand relative to supply) – that’s how pricing works.

Tourism Secretary Nigel Huddleston said:

Over the last few years we have seen a huge increase in the number of affordable holiday homes. We want to take advantage of the short break boom while protecting the interests of the community and ensuring that there is high quality tourist accommodation in England.

Housing Minister Stuart Andrew said:

This review will give us a better understanding of how short-term rentals are impacting local housing supply to ensure the tourism sector works for both residents and visitors.

I’ve been thinking about buying a seaside cottage, but maybe I’ll wait and see.

Quick links

I have five for you this week, the first two from The Economist:

  1. The economist looked what past market crashes looked like
  2. And at the great shaker of Silicon Valley.
  3. Alpha Architect wrote about combining factors in multifactor portfolios
  4. Musings on Markets took a look at venture capital and the markets to decide if we have it a temporary setback or a long-term setback
  5. UK dividend stocks say S&P 500 CAPE says it a bear market can go a long way.

Until next time.

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