Klarna, the world’s biggest buy now, pay later operator, looks like yet another storming success story for entrepreneurial Sweden. First, Ikea upended home furnishings. Then, Spotify revolutionised music.

Now, the fintech co-founded by chief executive Sebastian Siemiatkowski is championing Nordic iconoclasm again. Klarna, reinforced by a clutch of other BNPL operators around the world, has modernised payments for the millennial generation, challenging a cosy credit card market long dominated by Visa, Mastercard and the banks that issue their cards.

The Swedish group, in common with other BNPL operators, gives its customers a few months of interest-free credit on purchases large and small. It now trumpets that 147mn people use its services around the world, via 400,000 retail partners.

BNPL prospered during the economic boom times of recent years, and was given an extra spur during Covid-19, as people diverted spending to retail and did more shopping online. It is painlessly easy to buy no end of clothes, gadgets and other consumer goods. What’s not to like?

Well, quite a lot. Sceptics have long pointed to a business model that can be both cynical and fragile. And today, Klarna, along with its peers, may be confronting a multitude of pressures.

According to an analysis last year by Redburn, the British equity research house, the average BNPL transaction relies on a 4 per cent gross margin funded by a commission charged to the retailer. But profitability, even in the good times, has been ultra-thin or non-existent.

Of that typical 4 per cent, Redburn reckons 2 percentage points are swallowed up by fees to other companies in the payments chain; 0.5 of a percentage point is the average funding cost; leaving 1.5 points for credit losses and net profit. In BNPL’s short lifespan up to last year, Redburn estimated credit losses averaged 1.2 points, leaving room for a 0.3 point gross profit (before operating costs). Slim, but worthwhile if volumes are large enough.

Take a look at Klarna’s latest results, though, and the flaws in that model, even for a big-volume player, are obvious. In its first-quarter results, credit losses were equivalent to 1.9 per cent of customer lending (up from 1.8 per cent a year earlier), eating up a third of quarterly revenue and pushing Klarna to a net loss of SKr2.6bn ($265mn).

No wonder the company decided last month that it should lay off 10 per cent of its 7,000-strong workforce. And this before any economic pressure from the global downturn really kicks in.

Every element of the BNPL business model faces stress. Revenue is likely to falter as consumers curb spending. Klarna’s SKr62bn of customer lending was up 38 per cent in the year to the end of March, but it was virtually unchanged from December, reflecting more straitened times. The revenue pressure on BNPL operators is likely to be all the greater since users skew towards lower-income individuals.

At the same time, default rates are likely to worsen. Much of BNPL’s appeal is that it offers credit for which you don’t have to jump through hoops. The standard two or three-month deferred payment deals will typically involve “soft” credit checks if any, rather than full-blown checks that get flagged on your official credit record (though that is changing in the UK).

Funding costs are another pressure point. Klarna itself has a banking licence and funds most lending from deposits. But no one will escape the squeeze on margins from rate rises.

This is all bad news for BNPL operators and their investors. But the impact may be systemic, too. Though most estimates reckon BNPL accounts for only a few percentage points of overall consumer credit, the profile of borrowers may amplify the volatility of BNPL usage, crimping consumer spending disproportionately and magnifying the economic hit if it shrinks.

Customers tend to use multiple providers and rack up dozens or even hundreds of overlapping purchases. That not only means individuals’ finances can spiral out of control; it also makes it hard to grasp the macro effect.

Because the sector is unregulated, no one knows for sure how big it is. Estimates of the size of the UK market vary wildly from less than £6bn to as much as £16bn.

If there is one message for policymakers, it is this: Klarna does not make comfy sofas and warming meatballs like your favourite Swedish box retailer. BNPL operators are money lenders, pure and simple. It is time to regulate this industry properly before it blows up in all our faces.

Author's email: patrick.jenkins@ft.com

Fast Retailing, the owner of Japanese clothing brand Uniqlo, is taking it back to 2014. It will raise prices on some goods this autumn to compensate for cost pressures from the weak yen. The business tried something similar eight years ago, so we already know the ending to this story.

Prices on fleece goods and down jackets for fall and winter will rise by ¥1,000 ($7.50). Fast Retailing is reacting to surging consumer prices in Japan driven by a falling yen and spiralling energy costs. The decline in the currency, which is at a 20-year low against the dollar, shows little signs of slowing. 

Japan’s unwillingness to raise rates to restrain inflation makes it an outlier among developed economies. The Japanese benchmark yield of 0.24 per cent compares to the US 10 year’s 3 per cent.

Japan’s core consumer price index posted its biggest jump in seven years in April. This was before widespread price increases by food companies. Wages are stagnating, so consumers are spending less of their diminished discretionary budgets on clothing.

The weak yen benefits exporters. But it does not help Fast Retailing because Uniqlo outsources production to foreign companies overseas and buys fabric and other materials internationally.

Eight years ago, Uniqlo raised prices 5 per cent, following up with another increase in 2015. Two years later, it posted a big miss on net profit. This nearly halved, as did shares compared with their peak the previous year. Uniqlo reversed the price increases in 2016.

Shares are down a fifth in the past year and trade at 35 times forward earnings, a third lower than their 2015 peak.

Uniqlo’s competitive edge comes from one thing: low prices. About 30 per cent of the brand’s products cost under $10, according to retail analytics platform Edited.

Fast Retailing is making a pricing mis-step. This increases the risk it will be left with unsold inventory. US retailers such as Target have already demonstrated how easily this can occur during a cost of living crisis.

Suppose you had to balance each of your acquaintances’ pros and cons — were they generous, quick to anger, patient with children? — and choose the “best”. The idea is off-putting, and the thought of assigning individuals a “score” encompassing their every character trait is extremely off-putting.

S&P Global has run into this sort of minefield in crafting its S&P 500 ESG index. This is a selection of the best (corporations, of course, not people) in which Tesla, which has done more to reduce fossil fuel consumption than arguably any other company, was excluded, and ExxonMobil made the list.

The problem is not that S&P made the wrong choices — it is the dubious nature of any such choices. Thus we have an index purporting to respect organised labour in which Amazon and Starbucks, which are laying pipe night and day to crush union drives, are included, while companies supplying arms to Ukraine are potentially scotched.

ESG investing has, of course, taken Wall Street by storm. Well over $2tn has been invested in funds offered by a host of groups purporting to promote the environment, social good and enlightened governance.

Many ESG funds are narrowly targeted. There are funds comprised of low-carbon stocks, funds that exclude tobacco, funds adhering to Catholic values and to sharia law. They telegraph their mission plainly just as do traditional ones specialising in high-tech stocks or banking.

But this is not where the ESG industry is headed. The action now is in so-called holistic indices that attempt to assess corporations’ every attitude or behaviour and boil it down to a single metric. Call it the goodness standard.

One issue with holistic indices is the sheer number of categories. S&P Global’s Corporate Sustainability Assessment, a road map of what it assesses, runs to 253 pages, little of it reading like an Ian McEwan. “We just implemented [a new screen] in the last two months,” Reid Steadman, global head of ESG and innovation, noted. “Views of sustainability are evolving.”

The challenge is magnified by the incoherence of weighing so many disparate qualitative factors against each other. There is simply no objective way to balance an exemplary record on labour relations or gender pay equity against a high carbon footprint.

A further problem is the subjective nature of assessments. S&P determined that nuclear power was not “renewable”; some would disagree. It pays attention to human rights but did not exclude Apple, which counts China as a major supplier. It considers not just corporate deeds but reputations.

Given the malleability of such terms, there is confusion over what it is trying to measure. Steadman says, reductively, “we are trying to measure the companies that meet the minimum criteria for sustainability”. Elaborating, he says: “We look at their environmental, social and governance in a holistic way.”

The S&P 500 ESG index aims to carve out a portion of the familiar S&P 500 that represents best of breed in the same underlying industries. ExxonMobil scored higher than its Big Oil competitors. Tesla was bounced partly because of claims of racial discrimination and poor working conditions, as well as its response to autopilot-linked fatalities. Yet the process is hardly free of human judgment. S&P’s methodology “strives to account for all relevant ESG issues” and weight them according to financial import, a subjective business.

Was Tesla easy to boot because its chief executive, Elon Musk, has frequently offended progressive taste? S&P says its methodology does not allow for such prejudice. If not bias, then perhaps groupthink. S&P monitors media reports and screens for “company controversies”, suggesting that conformity is not among the traits that work against inclusion.

The group conducts scores of conversations with wealthy investors and institutions to understand how notions of sustainability are evolving. A “vigorous debate” preceded a new restriction against arms suppliers. “We are trying to reflect the market’s position,” said Steadman.

He said the shift towards holistic indices reflected an increasing sophistication among investors. To this writer it looks like laziness. If weapons offend you, avoid them. The same for oil or a failure to diversify. To outsource ethical judgments to a one-size-fits-all marketer is to settle for the appearance of sustainability, what industry critic Tariq Fancy labelled a societal placebo. It is less courage than conventionalism.

Billionaire investors are increasing their exposure to private equity in spite of concerns that the end of loose monetary policy will hurt weaker firms in the sector.

Family offices managing vast fortunes for wealthy individuals have increased their allocation to private equity from about 15 per cent in 2019 to a fifth last year — the largest gain for any asset class. Many plan to keep putting more money into private companies over the next five years, according to a report by Swiss bank UBS.

The findings, which are based on a survey of some 200 family offices that each manage more than $2bn on average, come despite worries that central banks’ effort to tame inflation by cooling the economy will expose weaker private equity firms.

“Certainly the change in monetary policy that we’re currently undergoing will have an impact on private equity. Especially what it will do is expose the funds that had principally ridden this liquidity driven rally and used leverage and fancy stories versus those who had focused on adding value,” said Max Kunkel, chief investment officer for global family and institutional wealth at UBS.

Despite these risks, Kunkel said many family offices were confident that they could still find superior returns in private markets through tighter due diligence and leveraging their longstanding relationship with top managers to gain privileged access to deals. “Nobody is being naive about this. They have been in this for too long,” he said.

Anxiety around the prospects for private equity comes as money managers, from pension to large asset managers, are pouring more money into private assets including buyout funds, real estate and private debt. Investors have been attracted by promises of higher returns and the appeal of potential inflation hedges. The private equity industry has grown to manage more than $6tn, according to McKinsey.

UBS found the gains for private equity had come as billionaires’ investment offices plan to cut back on their exposure to bonds, which have already attracted lower allocations in recent years. Faith in the traditional argument for holding bonds as a counterweight to equities has weakened, with 63 per cent of family offices saying that they believe high-quality fixed income no longer helps to diversify risks in their portfolios.

Real estate and private debt are also set to benefit as top tier investors “sacrific[e] liquidity for returns”, UBS said.

But less transparency around the performance of these typically long-term investments has drawn criticism that private equity firms are incentivised to buy and sell companies among themselves at inflated values.

Vincent Mortier, chief investment officer of Europe’s largest asset manager Amundi, last week warned that “some parts of private equity look like a pyramid scheme in a way”.

The rush of money and new players into the private equity arena, at a time when dealmakers are waiting to deploy a record cash pile amassed during the pandemic, has some investors worried that there will be more money chasing fewer good deals.

Still, Joe Stadler, head of UBS’s global family office, said its wealthy clients were confident they could select the right managers and opportunities. “The network our big clients are part of are relatively tight. Success breeds success,” he said.

As we wrote a few weeks ago, fixed income portfolio trading is becoming A Big Deal. From virtually nothing five years ago, it now accounts for 8 per cent of US credit trading volumes, according to Barclays.

Barclays today released another report exploring why portfolio trading has exploded in popularity lately. Unsurprisingly in a market where transaction costs can gobble up a lot of returns, it largely comes down to costs.

For reference, a portfolio trade is when banks or investors trade a big basket of multiple bonds in one go, rather than one at a time. These portfolios can range from 10 to 10,000 bonds, for total values well north of $1bn in some cases. It’s the fixed income equivalent to trading a chunk of the entire S&P 500.

The savings can be significant. Jeff Meli, Barclays’ global head of research, estimates that portfolio trades reduces transaction costs by 41 per cent for investment grade corporate debt and 44 per cent for junk bonds, relative to where it would cost CUSIP-by-CUSIP. The scale of the savings begs the question: why?

The first obvious answer is that the big banks doing these trades for investor clients are buying market share in a hot area by bidding too aggressively. After all, they tend to be for big valuable clients. But Barclays is sceptical of this argument:



Here’s their chart showing how the cost savings haven’t changed much over time.



Barclays reckons two other theories better explain why the execution costs of portfolio trades are more modest: easier hedging of big fixed income portfolios as opposed to individual bonds; and the explosion of the ETF ecosystem.

Although it is easier to judge the riskiness of a single bond than a large jumble of them, the dramatic decline of the single-name credit-default swap market means that they are often tricky to hedge. Meanwhile, a large diversified portfolio can be hedged with still-vibrant CDS indices, total return swaps or other derivatives. Barclays:



But the biggest driver is what we talked about in the last post. The emergence and growth of a huge fixed income ETF market has unlocked a ton of options for both asset managers, hedge funds and banks.

Here are two charts we made from EPFR Global data, showing how inflows have exploded over the past decade, and continued despite this year’s bond market wobble depressing overall assets a bit, from a peak of over $1.7tn at the end of last year to a still chunky $1.6tn today.



Trading volumes associated with ETFs have also jumped. At the end of 2021, 30 per cent of US junk bond trading and 15 per cent of investment-grade bond trading was generated by ETFs, up from 15 per cent and 7 per cent respectively in 2020, according to Barclays.

Fixed income ETFs enable portfolio trading both because of the creation-redemption process (dealers can use a broad representative basket of bonds to create new ETF shares, or redeem shares for a slice of the underlying bonds) and because they make hedging even easier.

Here’s Barclays’ summary:

Even in the late 1990s when Jack Welch was riding high, General Electric’s chief executive was a divisive figure.

He had been dubbed “Neutron Jack” for the brutal job cuts he instigated in the 1980s, the first of his two decades in charge at GE. He had turned the conglomerate, nicknamed “Generous Electric” in the 1920s for its benevolence, into a byword for ruthless techniques such as “rank and yank”, his unbending policy that the lowest-performing 10 per cent of any team should be dismissed annually.

Yet he was also on the brink of being named “Manager of the Century” by Fortune magazine. His undoubted success in adding value for shareholders was much admired. His methods were copied by his corporate peers. In the US and beyond, it was hard to understand rampant corporate capitalism and fast-spreading globalisation without knowing about, or referring to, the rise of GE under Welch, a small man with a powerful international reach.

Even so, it is a leap to hold Welch largely responsible for the evisceration of corporate America and the corruption of its body politic. David Gelles has a good try in The Man Who Broke Capitalism. He equates “Welchism”, a Darwinian creed of “downsizing, dealmaking and financialisation”, with imperialism. He describes it as a virus, whose genetic origins lay in economist Milton Friedman’s theory of shareholder primacy.

In Welch, the scrappy Boston-born outsider who was the surprise choice for GE CEO in 1981, this “insidious ideology” found a perfect host, argues Gelles. The group, founded by Thomas Edison, was then a revered but bureaucratic manufacturer of fridges, lightbulbs, motors and wiring. It was in turn the ideal incubator for a vast experiment in the sort of hard-edged cost-cutting and restructuring that has since become familiar across the global corporate landscape.

Since Welch retired in 2001, Welchism has “left a trail of destruction” over today’s corporate economy, from Amazon’s working practices to Kraft Heinz’s drastic efficiency drive, writes Gelles, a New York Times (and former FT) reporter.

At the time I first met, interviewed and wrote about Welch, in 1999, he was the dominant exemplar of the cult of the CEO, exuding a fierce charm and undoubted charisma. Business journalists certainly contributed to the hero-worshipping.

Yet Welch’s reputation started to crumble almost as soon as he handed the reins of GE to his successor Jeffrey Immelt. Beginning with the collapse of the energy group Enron, a spate of US scandals exposed chief executives’ excesses. Welch caught the backlash, having to renounce some of the previously unquestioned perks in his retirement package, which included tickets to a box at Fenway Park, where his favourite Red Sox played baseball, and an apartment at the Trump International Hotel & Tower overlooking Central Park.

Welch did not slip quietly out of the limelight. Almost until his death in 2020, he continued to be in demand for his forthright soundbites on CNBC, the business channel once controlled by GE. He added business lustre to Donald Trump’s candidacy and presidency by endorsing his fellow businessman. He set up an MBA programme in his own name.

His direct legacy at GE was tarnishing fast, however. GE Capital, the vast financial business he had built inside the conglomerate, lived on to haunt his successor Immelt into the financial crisis of 2008 and beyond. GE’s eerily smooth double-digit increases in earnings under Welch proved impossible to sustain. The group’s longstanding reputation as a hands-on school for future CEOs finally disintegrated in 2018, when the board appointed an outsider, Larry Culp, as chief executive. He is in the process of dismantling the house that Jack built.

Gelles ably chronicles this decline. But according to his account, the spread of Welchism depended less on the dwindling influence of GE than on the diaspora of Welch’s imitators and admirers, many trained by the man himself. The Man Who Broke Capitalism, which will be published in the UK next month, is good at tracing former GE executives’ trajectories after they moved on to run other companies: a sharp upward tick in the short term, as job-cutting and GE-style efficiency measures took hold, followed by a slow decline in the share price, the culture, or both.

GE alumni tried to apply Welchist management at organisations as varied as Boeing, manufacturer 3M and do-it-yourself chain Home Depot. At the last, Bob Nardelli, a runner-up in the race to succeed Welch, oversaw a decline in the retailer’s share price and a surge in his own pay, culminating in the award of a $210mn exit package.

Gelles even finds the former GE boss’s fingerprints on the chain of mistakes that led to the fatal Boeing 737 Max crashes in 2018 and 2019. Former GE executives occupied key roles at the aircraft maker. One, Dave Calhoun, took over as chief executive after the crashes. He described Welch as his “forever mentor” in an interview with Gelles the day after Welch’s death in 2020. Boeing workers, the book claims, had been put under “the same sort of pressure Welch had brought to bear inside GE’s factories”.

In laying out a prescription for curing Welch’s legacy, Gelles suggests a dose of broader stakeholder capitalism, from profit-sharing and worker representation on boards to higher taxes and executive pay caps. Some of these measures are already features of European corporate capitalism. As the recent pushback against this movement suggests, though, in the US at least, Welchism is hard to reverse.

Jack Welch held a uniquely influential position at a pivotal moment in American capitalism. But he was not alone in pushing for greater efficiency in the face of overseas competition. Even his critics admit that a shake-up was overdue at many US blue-chip companies. It seems doubtful that all the postwar collectivist virtues that Gelles extols would have survived if Welch had somehow lost out in the race to run GE.

One former GE executive interviewed here says: “If Jack jumped off a bridge, half the Fortune 500 would have been jumping off bridges.” In his absence, though, someone else would probably have led the charge. Future anthropologists will wonder why we once worshipped our bosses, Gelles writes at the beginning of this short, sharp, provocative book. But if Jack Welch had not existed, Americans might well have found it necessary to invent him.

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America — and How to Undo His Legacy by David Gelles, Simon & Schuster, £19.99/$28, 272 pages

*Andrew Hill is the FT’s senior business writer

When Ginkgo Bioworks went public last September the US biotechnology group proved as irresistible to investors as it had to the Wall Street banks that helped make the listing happen.

Propelled on to the public market after merging with a special purpose acquisition company set up by former Hollywood executives, Ginkgo shares surged in the first few weeks of trading.

The performance appeared vindication for the army of advisers who, according to regulatory filings, reaped roughly $135mn in fees from the listing of the Spac and its subsequent merger with Ginkgo.

But nine months on, the listing of the Boston-based biotech looks increasingly like one of many last hurrahs for the Spac boom, an 18-month frenzy of dealmaking that catapulted hundreds of companies on to the stock market, enriched Wall Street banks and, in some cases, left investors with heavy losses. Ginkgo shares have tumbled more than 70 per cent since their peak late last year.

Rising interest rates and a weakening stock market have only fed investors’ disillusionment with Spacs. The prospect of the Securities and Exchange Commission tightening rules has deepened the chill over the market.

“The product is dead. There’s no more Spacs,” said one lawyer at a firm that created its own Spac team to capitalise on the boom.

US regulators are proposing reforms that would limit Spacs’ ability to make far rosier performance projections than those permitted in a traditional IPO. Under the plans from the SEC, which are out for public comment, the banks underwriting and advising on deals would potentially be liable for misstatements concerning blank-cheque companies.

Banks are already stepping back. Goldman, which last year ranked as one of the market’s largest underwriters, second only to Citigroup, has paused new Spac offerings and is no longer working with many of those that it helped take public.

Citi and Bank of America are also taking a more cautious approach. BofA is doing “selective work” with those Spacs it already has a relationship with, according to a person familiar with the matter.



The retreat by banks, which do everything from helping Spacs raise cash to generating a list of targets and advising on the mergers, is the latest blow to a market that bruised investors began to desert last year.

Spacs have raised $12.7bn this year, a fraction of the $166bn they did in 2021, according to data from the London Stock Exchange Group. Just over 50 deals have been completed, down from 226 in 2021.

For some who worked on deals at the height of Spac mania, the unravelling was only a matter of time.

“I think there are a lot of people that should have not raised Spacs,” said one banker who has worked with numerous blank-cheque companies. “We knew this was a ticking time bomb but people said ‘shut your mouth and take your fees’.” 

A person familiar with Ginkgo’s listing said the fees that advisers received were in line with those they would have been paid in a traditional initial public offering.

Spacs, which raise cash by listing on the stock market before then seeking a merger with a private company, took off during the early stages of the pandemic as stimulus measures from the Federal Reserve fed the appetite of retail and institutional investors for risk.

Many Wall Street banks rapidly built teams to handle the wave of listings, which were often high-growth companies with grand promises but little in the way of revenue or profits.



According to data from the LSEG, the top five Spac underwriters, including Citi, Goldman and Credit Suisse, made roughly $1.7bn from such deals in 2020 and in 2021. For banks that also worked on the subsequent mergers there was a second payday, with the top five advisers earning $270mn in 2020 and $765mn in 2021, the data shows.

Now, as some banks adopt a far warier approach, focus is starting to shift to what the future holds for the once hot asset class.

Bob Diamond, former chief executive of Barclays who has set up his own blank-cheque companies, said the sudden plunge in activity was “very healthy for the market long term” as there would be fewer Spacs hunting private companies.

Several market participants said they believed the volume of activity would settle at levels seen before the pandemic, when Spacs were a vehicle for businesses that would struggle to go public via a conventional IPO.

Historically, blank-cheque vehicles often appealed to smaller businesses as they offered access to funding by circumventing the IPO process, which is widely regarded as more demanding. It was also a magnet for those companies too small to be on the radar of large banks.

But over the past 18 months, “there were too many Spacs and they really piled into the speculative part of the market”, said a senior banker who works in the market. “What will emerge out of that is a significantly smaller but healthy market for Spacs.” 

While the likes of Goldman, Bank of America and Citi have reined in their lucrative Spacs business — at least until there is more clarity on potential liabilities under the planned reforms — others are undeterred.



Jefferies and Credit Suisse have reassured their Spac clients that they will continue to work on new deals, according to people familiar with the matter. Last month, Cantor Fitzgerald was in touch with investors who had set up Spacs to let them know that they are open for business and looking for deals, one person familiar with the matter said.

Cantor and Credit Suisse declined to comment. Jefferies did not return a request for comment.

But even if a far smaller, less freewheeling Spac market eventually re-emerges, advisers and bankers warn that the industry faces more turmoil first.

In a sign of the strain, deals that were agreed are now crumbling. Late last month, magazine publisher Forbes abandoned plans to list via a Spac almost a year since the deal was first announced. On the same day, online ticket sales group SeatGeek pointed to “market conditions” as it called off plans to go public via a Spac set up by US baseball executive Billy Beane and Wall Street veteran Gerry Cardinale.

There are more than 600 Spacs that have listed on an exchange, raised money from investors but have yet to find a private company to merge with, according to LSEG.

That leaves the so-called sponsors of Spacs, or those who set up the blank-cheque companies, in a painful predicament.

Sponsors typically contribute 2 to 3 per cent of a Spac’s capital, but have increasingly lent on third parties for those funds. Yet both the sponsors and third parties lose that money if a Spac fails to find a target within two years.

By contrast, other investors who buy shares when a Spac lists will typically receive their money back plus some interest, if the vehicle fails to strike a deal within that period.

“It’s going to be a bloodbath for the founders,” said one Spac adviser who still works on deals. “The lion share of Spacs looking for deals are going to unwind so if someone came to me and said I want to raise a Spac now, I’d say you’re out of your mind.”

With additional reporting by Nikou Asgari

Net flows into government bond exchange traded funds hit a record high in May as deteriorating economic sentiment led investors to batten down the hatches.

Purchases of sovereign bond ETFs surged to $26bn, according to data from BlackRock, up from $15.9bn in April and far ahead of the previous monthly record of $18.5bn, set in December 2018.

The swing to the historically low-risk assets deepened investors’ defensive pivot after net inflows to ETFs as whole slumped to a two-year low in April.

“It’s a pretty big deal, a bit of a comeback [for government bond ETFs] and nearly double the figure in April,” said Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Emea region.

Nate Geraci, president of The ETF Store, an investment adviser, said “there are some meaningful risks on the equity side, particularly concerns that the Fed may thrown the US into recession. If that happens fixed income and government bonds start to look more attractive.”

“There is a flight to quality,” added Kenneth Lamont, senior fund analyst for passive strategies at Morningstar. “There is an expectation that there are economic headwinds ahead and perhaps the best store of wealth is in quality,”

The buying was focused almost exclusively on the US market, which accounted for 96 per cent of net inflows.

The pick-up in sentiment follows a sharp sell-off in the US Treasury market, with the yield of the S&P US Government Bond Index jumping from a low of 0.68 per cent in August to 2.68 per cent at the end of April. It dipped a fraction in May, but has since risen higher still to 2.8 per cent.



As in prior months, demand was largely concentrated on the short end of the maturity curve, with short duration ETFs sucking in $9.2bn. However, there were signs of a broadening of demand, with blended maturity funds attracting $7bn, nearly three times as much in April.

“We saw an increase across the board in terms of duration, with a huge pick-up in blended maturities,” Chedid said.

Geraci believed these flows may also have been supported by a technical factor. Many investors may have been “locked into expensive, underperforming mutual funds” that they were wary of selling because this would have triggered capital gains tax. The sell-off may have allowed some investors to sell and rotate to cheaper ETFs without being hit by a tax bill.

In contrast, emerging market debt, a risk-on asset class, suffered its largest outflows since the coronavirus crash of March 2020 — the $4.2bn stripped from ETFs marked the fourth consecutive monthly outflow.

High-yield debt, another procyclical sector, attracted $3.8bn in April, ending a run of four consecutive negative months. The upturn may signal that some investors believe high-yield debt is now starting to look cheap.

However, Chedid was sceptical about the case for high-yield bonds at this juncture, and believed investors’ overarching sentiment remained defensive across all asset classes.

Net inflows to equity ETFs rebounded from just $6.3bn in April to $54.3bn in May. However, Chedid said it was the April figure that was the anomaly and the May reading was simply a return to long-term norms, rather than a sign of re-risking or investors buying the dip.

Again the US led the way, vacuuming up 90 per cent of inflows. Flows in the European ETF market “fell off a cliff in May”, according to consultancy Blackwater.



“International [non-US] stocks have underperformed for such a long period of time that a lot of investors are throwing in the towel and sticking with US exposure,” Geraci said.

Investors’ continuing defensive mindset was clear at the factor level, with minimum volatility ETFs attracting $3.6bn — the fourth-highest figure on record — and “quality” ETFs also seeing demand.

It was also evident at the sector level, with the likes of healthcare funds enjoying inflows but money being withdrawn from more cyclical fields such as energy and financials. The latter lost $6.3bn and has now shipped a cumulative $23.3bn since mid February.

Chedid said these trends played to the strengths of the US stock market, which has more of a “quality tilt” than value stock-laden Europe. In particular it has a far higher weighting towards technology, a sector that may be “well positioned in terms of margin pressure” amid sticky inflation.

Despite the jump in government bond buying, Chedid believed the concept of Tina (There Is No Alternative to equities) “has been challenged but is not dead”.

“From a cross-asset perspective the gap has shrunk a little bit,” Chedid said. “Bonds are not as expensive relative to equities as they were.” As a result, “the picture is becoming more balanced across equity and bond flows”.

For Tina to be over, Chedid believed “you have to call the end of central bank support [for bond markets] and I don’t think we are there yet”.

He forecast “a dovish pivot” by central banks later this year, with the US Federal Reserve potentially raising rates to “neutral” levels (about 2.5 per cent) but not going beyond that and the European Central Bank probably not even getting that far, despite Chedid’s estimation of neutral in the eurozone being as low as 1.25 per cent.

Geraci was also unwilling to read Tina’s death rites until it was clear how far the Fed was willing to go to tackle inflation.

“I don’t think I’m ready to call Tina dead at this point. It’s maybe on life support,” he added.

When Joe Biden scrapped a permit for the huge Keystone XL pipeline just hours after entering the White House last year, a death knell seemed to be ringing for Canada’s oil sands, by far the largest supplier of foreign oil to the US.

The project, which would have carried Alberta’s heavy, bituminous crude oil to Gulf Coast refineries in Texas, had been opposed for years by environmentalists, owing to the oil sands’ associated ecological impact and high emissions (greater than those of many European countries).

Even before the cancellation, big European oil companies, insurers and some Wall Street investors had started fleeing a sector that was becoming a villain of the environmental, social and governance investing movement. Then, the Covid-19 pandemic triggered an oil crash that deepened the damage, forcing operators to sack thousands of workers, throttle production and slash capital spending.

In Alberta, a province where just about everyone is related to someone who works in the oilfield, the new US president’s decision deepened the gloom.

Yet, 18 months later, the mood is brightening as surging oil prices start to revive the economy. Alberta’s producers — forced to contend with sub-zero oil prices just a couple of years ago — are using the windfall from $100 a barrel crude to repair their balance sheets and beef up dividends. Production is rising again. So is export capacity: a pipeline system to the Midwest has been expanded and another to the west coast is due online next year. Across the province’s oil patch, business is suddenly brisk.

“Everything’s just totally switched,” says Tim Valleau, owner of 1441 Energy Services, an oilfield maintenance company in Wainwright, a town close to the Saskatchewan border. When the pandemic hit in 2020, he dismissed the 11 men who worked for him. Now he is struggling to find enough workers. “Folks are punching wells all over the place. It’s right back to where it was in 2014 — and in 2014 it was nuts,” he says, referring to the last time oil topped $100 a barrel, before prices crashed.



Alberta’s premier, Jason Kenney, says Russia’s invasion of Ukraine has triggered a new anxiety about energy security that offers “perverse vindication” for the province and its controversial oil sands sector. Political hostility is beginning to soften as leaders are “mugged by reality”, he says. “We’ve been saying all along — we cannot allow some of the world’s worst regimes to have a dominant role in global energy markets.”

Last month, Kenney testified to a US Senate committee hearing about closer co-operation on energy between Canada and its southern neighbour. “Senators, Calgary is a lot closer to Washington than Riyadh,” Kenney told the committee. “And you don’t need the US Navy’s Fifth Fleet to patrol the Great Lakes.”

Yet, even if the political winds are changing, there is a bigger test facing the oil sands: whether its operations can be greened sufficiently to remain viable in a future that may demand much less oil, and certainly a lot less carbon.

Producers say they can, and have outlined ambitious carbon capture plans to do so, with an aggressive timeline that will deliver results (or not) within the decade. Analysts are also hopeful, saying the projects, which currently produce some of the world’s dirtiest oil with a per-barrel carbon content higher than other forms of crude, could soon offer much cleaner supplies. Environmentalists remain sceptical.



The outcome will matter outside Canada too, revealing whether or not one of the world’s biggest fossil fuel producers, sitting on the planet’s third-largest trove of oil, can help soothe immediate anxieties about energy security without worsening its long-term climate problem.

Alberta should get squarely behind the effort to make its industry more sustainable, says Samir Kayande, a former energy consultant now running for the provincial assembly as a candidate for the progressive New Democratic Party: “As long as the world is using oil, I want them to be using our oil, because that’s better for the world — and it’s definitely better for us.”


Life on the oil sands

A red-tailed hawk circles above the white oil storage tanks on the south-east bank of the Battle River. Lorries cruise down Highway 13, their juddering retarder brakes piercing the calm of a prairie spring day. “You dream it, we’ll create it,” reads the sign at the florist on 51st avenue.

Until Biden cancelled the US leg of KXL’s permit last year, Hardisty, Alberta — population 456 — was where 830,000 barrels of oil a day would have entered the C$8bn ($6.3bn) pipeline for shipment to American Gulf Coast refineries with the coking facilities to handle the heavy crude. The town had expected a construction boom.

The loss of the permit was a blow to the whole province. Kenney had ploughed more than C$1bn into KXL — a move many said was a failed gamble on the re-election of Donald Trump, who had pledged to get the project built. Lobbyists said the pipeline was essential to underpin oil sands growth. Environmental campaigners wanted to stop it for the precisely the same reason.



Both sides may be wrong. Oil sands production is rising again even without KXL, as other pipeline routes are expanded to provide export capacity. One of them, the federally owned Trans Mountain expansion to Canada’s Pacific coast, is due by next year after a surge in construction costs. A project adding capacity to Enbridge’s network to the US Midwest is already complete.

Alex Pourbaix, chief executive of Cenovus Energy, one of the oil sands’ largest operators, said the new pipeline capacity had “put the industry in pretty good shape for a number of years”.

Biden’s opponents at home cite the scrapping of the KXL permit when they blame him for soaring fuel prices. Yet the oil industry itself is not clamouring to revive it. Producers are hardly rushing to plough more money into exploration and production, and investors want their companies to use this year’s oil-price windfall for beefier dividends, not more production. The era when developers plotted huge new projects seems to be over.

Even Canadian Natural Resources, the sector’s most aggressive producer, which raised its planned capital expenditure for 2022 by almost 25 per cent, is committing to invest much less than in the earlier boom years. Spending commitments from other operators are also well shy of peak years. Oil sands capex ran at about C$30bn annually before 2014, according to Alberta’s energy regulator. It was a period of high crude prices and a rush of inward investment. By 2021, though, the figure was less than C$9bn. It is not expected to rise above C$15bn a year in the next decade.

Kevin Birn, head of emissions co-ordination and chief analyst of Canadian oil markets at S&P Global Commodity Insights, reckons that existing projects, currently producing about 3.1mn barrels a day, can add about another 500,000 b/d by 2030 — a rate of growth well below that seen in the US shale sector in recent years.



“I do think we’re going to see more growth,” says Jackie Forrest, executive director at Calgary’s Arc Energy Research Institute. “But I don’t think you’re going to see another big oil sands mine.”

The industry’s critics, meanwhile, sense a deeper change afoot in the mentality of the developers — or at least their shareholders — as they begin to contend with the implications of a global energy transition.

Alberta’s government does not like to talk about the possibility that demand for the province’s oil may fall — Kenney insists oil and gas will remain the mainstay of Alberta’s economy “possibly for the next 30 or 40 years”. But Canada’s Liberal government is taking a different tack under the leadership of prime minister Justin Trudeau.

The government will be “very active in looking to drive down demand for oil in the world”, said Jonathan Wilkinson, Canada’s natural resources minister, in a recent interview. It is a stance that hews closer to that of the International Energy Agency, which has said global oil consumption must drop 75 per cent, to just 24mn barrels a day, if the world is to hit its climate goals.



That may not leave much room for Canada’s higher-cost, higher-emissions oil. While oil sands producers aren’t on the same path as European supermajors such as BP, which has talked of reducing output and forecasts sharp falls in global fossil fuel demand, their investment stance may reflect that reality, argues Jan Gorski, a director at the Pembina Institute, a clean energy think-tank in Alberta. “Nobody is going to be building new pipelines, new projects,” he says. “The future is bleak for the product.”

Greener horizons
If oil sands operators are to protect themselves and avert that bleak future, their effort will start in places like Christina Lake.

Deep in Alberta’s northern muskeg wilderness, pipes snake through groves of aspen and tamarack, carrying steam in one direction and bituminous emulsion, extracted through wellheads on drilling pads scattered through the forest, in the other. Black bears roam around the worker camps nearby.

The Christina Lake project can pump about 250,000 b/d of oil — more than the entire output of some Opec countries. It is one of several “in situ” oil sands operations, a method of production involving the injection of steam deep underground to help coax the heavy oil away from the packed pay dirt. From the surface, this looks like conventional drilling — and it is a lot easier on the eye than the huge open-pit mines around Fort McMurray, a couple of hours’ drive further north, whose scale and ecological impact have blackened the oil sands’ reputation.

Image: https://i.imgur.com/sg4xCGw.png

But even Christina Lake, one of Alberta’s most efficient projects, needs two barrels of steam for each barrel of oil it produces. Burning the natural gas to make that steam, across the oil sands’ in situ projects, emits a lot of CO₂. Total greenhouse gas emissions from the oil sands projects are running at about 80mn tonnes a year, according to the federal government — more than Austria’s annual emissions. As production rises over the next few years, so will the pollution.

The Canadian government is cracking down on emissions as part of its pledges towards international climate goals. For the country’s oil and gas sector, it is calling for a 42 per cent emissions cut from 2019 levels by 2030. An escalating carbon tax is already in place, priced at C$50 per tonne now and due to rise to C$170 by 2030.

Ottawa is also planning to establish a total emissions cap on the sector, although the constitution grants the provinces control over the resource, which may make any enforcement tricky. And oil sands producers say the federal targets are not feasible.

“We made it very clear,” says Martha Hall Findlay, a former federal Liberal party politician who is now Suncor Energy’s chief climate officer, “those numbers for our industry by 2030 — there’s no way that we’re going to make them.”

Image: https://i.imgur.com/okB27hD.png

Instead, the oil sands producers have set their own targets. Last year, several of the biggest operators formed the Oil Sands Pathways to Net Zero initiative, pledging to reach neutral emissions from their operations (though not those from the combustion of the oil they sell, which amounts to a far bigger source of CO₂) by 2050 with an initial goal of cutting 22mn tonnes a year by 2030. This target is more modest than the government’s, but meeting it would still be a significant climate breakthrough. It is a recognition that they must cut pollution quickly or lose their market, their shareholders and their social licence to operate, say analysts.

Cash in the coffers

Decarbonising Alberta’s oil industry will take some doing — and a lot of money. The first phase of the producers’ plan involves building the world’s most ambitious carbon capture and storage facility.

There are three main sources of CO₂ emissions from the oil sands — those from the production, those from upgrading the heavy sludge into synthetic crude oil, and those created from refining the crude oil into fuels. The carbon from these processes would be captured at each facility, they say, and sent through a new trunk line to be stored under Cold Lake in east-central Alberta.

But despite years of industry talk, environmentalists say carbon capture and storage is unproven and not feasible at scale and that oil companies are touting it as a way to keep pumping more fossil fuels, whether the technology works or not.

It is still expensive to install and operate. Hall Findlay says the carbon capture element of the project could cost C$14bn in capital and operating costs. Pourbaix, at Cenovus, estimates the entire plan out to 2050 will run at a cost of C$2.5bn per year.

The federal government has offered an investment tax credit worth up to 50 per cent of the capital costs for the project. But companies also want Alberta’s provincial government to help out. “This industry is in the process of putting a whack of cash into the Alberta coffers,” says Hall Findlay, “and what we’re doing here is ensuring the longer term viability of this industry, which is really important to Alberta.”

Image: https://i.imgur.com/jZ6hO1m.png

Indeed, says Arc’s Forrest, carbon capture could “extend the runway” for the oil sands, which are entering a lucrative royalty payout phase for the Alberta government. It would be of “huge economic value to the citizens of Alberta to get those royalties for longer”, she says.

But the timeline is tight — and political uncertainties make the way ahead uncertain. Regulatory approval for the carbon capture proposals could take a couple of years, says Hall Findlay. And a different future government could scrap the carbon tax. In Alberta, Kenney recently resigned after a revolt in his Conservative party against his leadership, though he remains in power for the time being, creating new doubts about future provincial energy policy.

The companies have yet to take the plunge. But if they are to meet their own 2030 target, operators need to take decisions now, says Chris Severson-Baker, a senior director at Pembina. “Every day that they don’t . . . makes it seem that they aren’t genuine,” he says.

But Pourbaix is adamant. “We’re absolutely going to do everything in our power to decarbonise,” he says, and, in doing so, to try to win back US favour.

There are signs that those efforts are not in vain. At the Senate committee hearing last month Alaska’s Republican senator Lisa Murkowski echoed the oil producers’ rationale: “Sometimes our solutions are right in our back yard. Look to your neighbours first. For some strange reason, we have not done that,” she said.

I had a note from my bank this week reminding me that I receive interest of 0.01 per cent on the cash I hold with them. I immediately resolved to paint the kitchen, buy an air fryer — people keep telling me I must have one — and top up my gold holdings.

If the bank paid me 10 per cent I would have little interest in doing either of these things. This sounds obvious. But it is worth briefly thinking about why this is the case.

It all comes down to the way in which the interest you are offered effectively represents the value attributed to your time, says Edward Chancellor in his (very good) new book The Price of Time.

The interest I am paid on my money, which I am lending to the bank for its own use, should be enough both to compensate me for the delayed gratification that comes with not being able to use my cash now and to maintain its purchasing power.

French economist Frédéric Bastiat credited Benjamin Franklin with the bons mots: “Time is precious. Time is money. Time is the stuff of which all life is made.” If that preciousness isn’t recognised — and at 0.01 per cent it most certainly is not — it makes sense to feel like the cash-on-deposit deal isn’t working for us (which it is not) — and to favour keeping the future in the present (using the money now) or looking for a place to put it that attributes a bit more value to it.

This is a totally normal reaction. It seems ridiculous now (and looking at the inflation numbers it should have seemed ridiculous then too) but let’s not forget that in March 2020 the Bank of England cut its main interest rate to an all-time low of 0.1 per cent. Over the following year the amount of cash paid into cash Isas fell substantially and the money paid into new stocks and shares Isas rose £10bn on the previous year.

Three-quarters of all Isa accounts in 2019-20 were subscribed to in cash. Last year it was down to two-thirds. Stocks and shares Isas also made up 58 per cent of the value of all Isa funds last year — up from 49 per cent.

This will be partly about people using their spare time in the pandemic to sort out their long-term finances, partly about piling into the building bubble of 2020-21 and partly about the introduction of the personal savings allowance, which can make cash Isas feel a bit pointless. But the main driver is still likely to be that 0.1 per cent, a number that valued the fortitude people expressed by saving not spending at such an insultingly low level that it made complete sense to refuse to put up with it.

The problem with this is that, irritated by our own futures being undervalued, too many of us poured cash into companies whose futures were rather overvalued. Instead of looking for companies throwing off real cash and dividends in the here and now, investors stuck their money in growth stocks. Scottish Mortgage regularly topped the leading buys of every big UK investment platform.

This maddened old-fashioned fund managers. All the way through 2020 and 2021 I received increasingly infuriated messages from a retired friend. Why would all those complaining about yield not just buy the oil companies; or Vodafone, which was trading at a five-year low in the middle of last year and even after dividend cuts was yielding 6.3 per cent; or British American Tobacco (BAT), which was regularly yielding more than 7 per cent?

This is not to suggest that dividend-paying stocks are a substitute for cash on deposit. Of course they are not. (This is a subject that could take up many columns but the short reason is that with any equity your capital is always very much at risk.) They are just a significantly better one than non dividend-paying stocks.

Still, lessons have been learnt (again — a reminder that while in all other areas learning is cumulative, in finance it is cyclical). Vodafone is up 15 per cent since the last rant I received from my old friend. Shell is up 73 per cent and BAT 27 per cent. Scottish Mortgage is down 33 per cent.

The good news for those of us looking for income is that there is still plenty of it about. And its appeal is not just for the income itself but for the knowledge it gives you about the company in question, in that its managers both attribute some value to your capital and are capable of producing the income to pay that value to you.

A new report from Stifel points to 25 equity investment trusts in the UK with a current yield of more than 4 per cent. Most have a good long-term record of delivering dividend growth and substantial dividend reserves (money they have accumulated from dividend payments made to the trust over the years and can use to pay out future dividends to their shareholders and hence smooth returns if need be). They are also regularly turning up in Scottish Mortgage’s old place at the top of the platforms’ most bought funds lists.

There are a few things to look out for. Eight trusts aim to pay out a percentage of their asset value every year, usually in the region of 4 per cent, regardless of whether they have received that percentage as income or as capital gain.

One is Montanaro UK Smaller Cos — which has a 5.9 per cent historic dividend yield, largely paid out of capital rather than income. In the year to the end of March 2021, for example, revenue per share was 1.2p and the dividend 5.5p, says Stifel.

That’s the kind of thing that — tax implications aside — matters little to anyone when capital gains are high but might matter much when they are not. In the same year the trust’s net asset value (NAV) rose 35 per cent. Since then it has fallen 5 per cent (and is 25 per cent from its highs). 

Some might be fine with that. If you are looking at your investment trust portfolio as an annuity you won’t mind running down capital to such an extent. Most will not be, I think.

Trusts to look at if you want a steady income paid out of dividends, and occasionally out of revenue reserves, include City of London (paying 4.5 per cent and jammed with the likes of BAT, Shell and Rio Tinto); Merchants (4.8 per cent with a very similar portfolio); JPM Claverhouse (4.3 per cent); and Lowland (4.8 per cent). 

For those wanting to see value outside the UK, Murray International makes the list with a yield of 4.2 per cent and now has a 17-year record of rising dividends.

A word of warning. Many of these trusts now trade on premiums to their NAV. You are paying more for the trust than for the market value of the sum of its parts. That effectively means you are attributing more value to the skills and of course the time of the fund manager than he is charging you in management fees. That may be an entirely valid thing to do at the moment — but you might as well be aware that you are doing it. After all, the price of time matters.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal. She is a non-executive director of BlackRock Throgmorton Trust and Murray Income Trust and holds Shell

Oil and gas is back in fashion — at least on the stock market. Soaring fossil fuel prices, pushed higher by Russia’s invasion of Ukraine, have helped the shares of the world’s biggest energy majors outperform every other sector since the start of the year.

After a bruising coronavirus pandemic, when oil demand collapsed and BP’s shares fell to a 27-year low, the so-called supermajors have come roaring back in 2022.

Shares in UK-listed Shell, Europe’s biggest oil company, are up 47 per cent since January, while BP’s have climbed 37 per cent. By contrast, the FTSE 100 is up less than 2 per cent, while the S&P 500 is down 14 per cent.

France’s TotalEnergies and Italy’s Eni have risen 26 per cent and 16 per cent respectively. But the biggest winners are the US supermajors. Texas-based ExxonMobil is up 71 per cent and has promised to buy back $30bn worth of stock, while Chevron is up 54 per cent.

It was not supposed to be this way.

Before Covid-19 slammed into the global economy, oil and gas companies were already finding it harder to attract investors as pressure to cut emissions increased and climate activists called on shareholders to divest. After oil prices plunged as low as $20 a barrel in April 2020, BP and Shell cut their dividends, Exxon was dropped from the Dow Jones Industrial Average, and it appeared that the old supermajors would be banished to the margins of the investing landscape forever.



But since January two things have happened: Brent crude, the global benchmark, has climbed almost 60 per cent; and a growing international boycott of Russia, the world’s biggest energy exporter, has pushed energy security back to the top of the policy agenda.

Even BlackRock — in the past a big backer of more aggressive corporate climate targets — has eased back on its demands that energy majors cut down their polluting oil and gas businesses. The disruption of global commodity flows due to Russia’s invasion of Ukraine had increased the need, in the short and medium term, for companies that invest in “both traditional and renewable sources of energy,” the world’s biggest asset manager said in May.

Both BP and Shell have pledged to cut future oil production and it would be near impossible for them to reverse course by dramatically increasing output, say analysts. Indeed, despite bumper profits in 2021 and the first quarter of 2022 the supermajors have generally left spending plans for this year unchanged.



Instead, the biggest companies are expected to continue returning more cash to shareholders through share buybacks and dividend increases. Shell, for example, will buy back $8.5bn of its own shares in the first half of 2022.

“Shell is buying 25 per cent of the daily traded volume [of its shares] every day,” says Oswald Clint, an analyst at Bernstein. “That’s huge”.

With share buybacks expected to bolster prices further and many traders forecasting oil and gas prices to remain high, it begs the question of whether retail investors should also review their attitude to the sector?

Inflation haven
To some extent investors already have. Lucas Mantle at data provider VandaTrack says retail investment flows into US oil companies Exxon, Chevron, ConocoPhillips and Marathon Oil had all increased in the past two months, with investors “likely chasing momentum” achieved in the first three months of the year.

On Freetrade, a UK-based retail trading platform, BP was the ninth most popular stock in May, up from 19th in April. Over the past three months, Shell was the 46th most popular stock, up from 108th in 2021, while Exxon rose from 316th to 119th.



Much of the relative performance of the energy majors this year can be linked to the surging oil price and the impact of inflationary fears on the rest of the stock market.

As early as November, analysts at JPMorgan were predicting that Brent crude would hit $125 a barrel in 2022 due to resurgent demand and the inability of oil producers to boost output quickly enough after years of under-investment.

Oil then touched a 14-year high of $139 a barrel in March after Russia invaded Ukraine, as traders weighed whether possible sanctions would ultimately deprive the 100mn barrel a day global oil market of the 7-8mn b/d of crude and refined products that Russia exports. The largest ever release from the US government’s emergency oil stocks have since helped calm prices. But at $123 a barrel it is still at its highest level since 2012.

At the same time, inflation and rising interest rates have weighed on the performance of those consumer-facing technology stocks, such as Apple and Alphabet, which have powered stock market gains in recent years, particularly in the US. Shares in Apple are down almost 20 per cent this year on investor fears that the rising cost of living will curb consumer spending. In a stark sign of shifting investor sentiment, the iPhone maker was overtaken in May as the world’s most valuable company by oil producer Saudi Aramco.



Record oil and gas earnings have also drawn the attention of regulators, with the UK, Italy and Spain all introducing some form of windfall tax on energy company profits. But such measures, including chancellor Rishi Sunak’s sweeping “energy profits levy” on North Sea operators, have had little or no impact on the share prices of the biggest producers.

“Investors have been looking for a different home for their money, and that’s why the FTSE 100 has done so well because it’s stacked with those old economy stocks, among them the oil companies,” says Lee Wild, head of equity strategy at retail investment platform Interactive Investor.

Investors, old and young
Ownership of the oil majors has traditionally been skewed towards older shareholders because these companies provide the regular dividend income that is particularly attractive to pension schemes.

Gemma Boothroyd, an analyst at Freetrade, says BP was consistently in the top 20 most popular stocks on its platform but added that, unusually, it had recently become more popular with younger buyers.

She attributes that shift to improved performance. “Reliable profits and consistent dividends make for an attractive offering during periods of high inflation and a cost of living crunch, irrespective of an investor’s age,” she says.

But BP, like most of its European peers, has sought to overhaul its image and business in the past two years and hopes more investors will come to see it as part of the solution to the climate crisis rather than the problem.

Bernard Looney, chief executive, has a regularly updated Instagram account, filled with smiling photos of the Irishman on his travels around BP’s global business.

In February he told the Financial Times he was committed to turning BP into a “one-stop shop” for clean, reliable, affordable power. “You cannot go against the grain of society and expect to be a long-term successful company,” he said.

Last month he told shareholders at the annual general meeting that by 2025, 40 per cent of BP’s capital would be spent on non-hydrocarbon parts of the business, specifically bioenergy, electric vehicle charging, retail, renewable energy and hydrogen.

Shell also insists it is changing. By the end of 2021 the company had cut emissions from its own operations by 18 per cent compared with 2016 and was committed to a 50 per cent reduction by 2030, chief executive Ben van Beurden told shareholders in May.

The ethics problem

Still, many people remain deeply sceptical of Big Oil’s promises. Shell’s annual general meeting — its first in London since switching headquarters to the UK — was delayed for almost three hours by activist shareholders protesting the group’s continued development of fossil fuels. Shell has said its oil production will fall by 1-2 per cent a year until 2030 but that it will continue to explore for new fields until 2025.

“When you scratch below the surface and look at their capital spending it doesn’t align with the rhetoric,” says Richard Brooks, climate finance director at advocacy group Stand.earth. “If they were transforming in a truthful way . . . then they would be stopping expansion projects today and there would be a lot more capital investment in renewables.”

Brooks argues that investors have a “moral responsibility” to move money out of fossil companies and support those businesses focused solely on cutting emissions. Stand.earth says that 1,508 institutions with assets totalling more than $40tn, including the endowment funds of Harvard, Oxford and Cambridge universities, have committed to divest fossil fuel stocks.



But Wild at Interactive Investor points out that the bigger energy groups offer an opportunity for retail investors to get exposure to rising commodity prices while also investing in companies that are developing green technologies.

BP has pledged to build or acquire 50GW of renewable power by 2030, equivalent to the total current renewable generation capacity in the UK. Shell is investing heavily in wind power and hydrogen, while France’s Total in May made its biggest US renewable purchase yet with a $2.4bn acquisition of the wind and solar farm developer Clearway Energy Group.

“Investing in oil does add diversification to portfolios currently and you can comfort yourself in Shell and BP that both do have climate and sustainable strategies,” Wild says.

Nick Stansbury, head of climate solutions at Legal & General Investment Management, says investors seeking to align their portfolios with the goals of the 2015 Paris climate accord should seek the companies with the strategies that will best help the world hit net zero emissions by 2050, not just those with the lowest emissions today.

“Every company has to change the way they use energy. Every company has to think about how they abate their emissions and how they position to take advantage of the opportunities,” he says. “Those companies that swing behind that and invest everything in figuring out what their role to play is in delivering that solution, I am absolutely convinced, over the long term, will turn out to be far more profitable.”



So while the fossil fuel rally may deliver bumper returns for oil and gas investors this year, the long-term question for the supermajors is whether they can successfully navigate the energy transition so that the biggest oil producers today become the biggest suppliers of green energy in 2050.

The short-term attractions are obvious, says Kingsmill Bond at the energy think-tank RMI, but he sees the recent oil and gas rally as a blip. “The artificial stimulus of Putin’s war will eventually fade, and then fossil fuel producers face a very bleak environment.”

Former BP chief executive Lord John Browne has argued that the oil and gas giants would be better served by placing their low- or zero-carbon activity and the legacy fossil fuel businesses into two different companies.

For now, all the supermajors — with the potential exception of Italy’s Eni, which is planning to list its retail and renewable power business — are pursuing a fully integrated future. Those companies that succeed will benefit from a diversified business that will be less exposed to the price of a single commodity, says Bernstein’s Oswald.

Over the next 15 years Bernstein expects the world to shift from an energy system dominated by oil to a system fed by several “almost equally weighted” inputs, including oil, gas, hydropower, nuclear, solar, wind and hydropower.

To succeed, Oswald says, “you need to be a big strong integrated [energy company] with a strong balance sheet and with fingers in every pie.”

All is not well at Disney. The US entertainment group abruptly fired Peter Rice, its top TV executive, this week. The company spin is that Rice was an ill fit with its corporate culture. But his ousting, just weeks after Disney dispensed with its top PR and lobbyist, hints at a wider malaise in the C-suite.

Disney is having a difficult 2022. Chief executive Bob Chapek is embroiled in a dispute with Florida governor Ron DeSantis over a bill restricting discussion of sexual or gender identity in primary schools.

Chapek criticised the so-called “Don’t say Gay” law after pressure from some LGBTQ+ employees. DeSantis retaliated by removing the company’s special tax status in the state, home to a huge Disney resort.

A loss measured in tens of millions looks manageable. Disney is forecast to generate more than $84bn in sales and pull in more than $7bn in profit this year.

But the political row is a distraction Chapek does not need. Shares in Disney are down more than a third this year. This represents contagion from Netflix, whose shares have been tumbling.

Netflix warned last month it would lose 2mn subscribers in the current quarter. Disney’s subscriber growth is holding up. It added 7.9mn new subscribers in the quarter to April 2, taking the total number of streaming subscribers to 205mn.

However, Disney cautioned that streaming growth was likely to slow in the second quarter. Investors would prefer to see breakneck spending on streaming content translate into profits.

Disney believes its streaming business will become profitable by the end of 2024. Until then, it needs subsidies generated by Disney’s theme parks, which have been bouncing back strongly.

Chapek may have thrown Rice under Cinderella’s pumpkin carriage because his subordinate attacked the new law more freely — or was a threat. Chapek’s contract ends early next year. He is evidently feeling the pressure. He will not be the last CEO to find themselves piggy-in-the-middle between the so-called “war on woke” and increasingly assertive employees.

As Jo scanned the floor of Frankfurt airport’s departure hall for the most comfortable place to spend the night last month, she felt the impact of the chaos gripping the aviation industry on a personal level.

A routine four-hour trip on easyJet from London to Greece had turned into a 24-hour ordeal, starting when the UK airline cancelled her flight with nearly no notice. With other direct flights sold out, she was forced to rush across London to a different airport to take an expensive and circuitous route via Germany, which included an overnight pit-stop in Frankfurt.

Jo, who did not want her full name revealed, is one of hundreds of thousands of people caught in the disruption hitting airlines and airports this year, as passengers begin flying in large numbers again after the Covid-19 pandemic. One couple was married on board a flight to Las Vegas having missed their own wedding. Others have complained of ruined holidays, lost luggage and being left out of pocket.

The problems, caused by staff shortages at airlines, airports and ground-handling companies, have made headline news in the UK following a wave of disruption that included 500 flight cancellations last weekend. But Europe and the US have also felt the effects, leaving little slack in a system struggling to deal with other operational issues, from weather to air traffic control delays.

In the US, thousands of flights were scrapped over the Memorial day holiday. In Europe, Charles de Gaulle Airport in Paris cancelled one-quarter of its flights on Thursday following a strike, and last Saturday Dutch airline KLM suspended passenger flights to Amsterdam’s Schiphol airport after bad weather and runway maintenance compounded the overcrowding caused by lack of staff.



In all, 4 per cent of global flights were cancelled last Saturday, including 11 per cent of those in the Netherlands, 4 per cent of flights in Germany and 3 per cent in the US and UK, according to industry data provider OAG.

The causes of the trouble are interrelated. Companies have been accused of cutting too many staff when the pandemic first hit and then finding themselves hopelessly unprepared for the return of passengers — even though many had predicted there would be huge pent-up demand for travel.

“Demand has been coming back . . . much faster than the ability of the industry to scale up,” John Holland-Kaye, chief executive of Heathrow airport, told the FT Global Boardroom conference this week.

The industry’s struggle to recruit replacement staff has been made harder in the tight labour markets of the recovery. But the crisis has also laid bare the way an interdependent web of companies must combine seamlessly to get a plane into the air. When a single part of the aviation ecosystem wobbles it leads to cascading disruption through the supply chain.

The industry has gone through “an existential crisis” over the past two years, said Holland-Kaye. “With no revenues [and] very high fixed costs . . . Building that capacity back again is very hard.”

The rebound

Two years ago, in the grip of Covid lockdowns, airlines were fighting for survival, focused on cutting costs as passengers disappeared and losses mounted. Perceiving a threat to their businesses, bosses slashed staff. In April 2020 Lufthansa estimated it was burning through €1mn per hour.



Passengers are facing long delays as airlines and airports struggle to rehire huge numbers of staff laid off during the pandemic © Phil Nijhuis/EPA/Shutterstock
BA cut around 10,000 of its 42,000-strong workforce, a move described as “wanton destruction” by a UK parliamentary committee. Yet many of its rivals took similar steps.

The US government estimated 100,000 jobs in the aerospace industry had been lost by September 2021, despite its having handed more than $50bn of support to airlines. Ground handler Swissport cut 20,000 of its 65,000 workers around the world. In all, there were 2.3mn fewer people employed in the aviation industry by September 2021, according to research by consultancy Oxford Economics.

“With few exceptions, union calls for staff retention programmes during the height of the crisis fell on deaf ears,” says Stephen Cotton, general secretary of the International Transport Workers’ Federation. “The result is what we see today . . . a loss of more than 2mn skilled workers across airlines, airports, aviation services and global supply chains when the industry needs them most.”

Unions have said that the impact of the job losses was compounded by the fact that many senior managers were included in the culls. The effect of this skills and knowledge gap is only now becoming clear as companies try to rebuild.

The problem has been complicated by the erratic rhythms of the pandemic. BA started rehiring late last year as border rules eased and transatlantic flights restarted in earnest. But only weeks afterwards the emergence of the Omicron variant meant new border rules were imposed.



For Willie Walsh, BA’s former boss, who now heads the International Air Transport Association, the industry is still suffering the effects of divergent government travel rules.

“With governments making U-turns and policy changes there was uncertainty until the last minute, leaving little time to restart an industry that was largely dormant for two years. It is no wonder we are seeing operational delays in some locations,” he says.

Tangled supply chains

The industry is by no means alone in struggling to find staff in today’s tight labour markets, but its unique security rules put it in a particularly difficult position. Many new hires need to pass background checks before being allowed to work. These processes can take several weeks, by which time candidates may well have found another job.

Some say the sector has become less attractive for jobseekers, following two years of cuts and negative headlines. “Many who saw it as attractive have changed their minds,” says József Váradi, chief executive of Wizz Air, a pan-European budget airline. “People have started looking at other industries and sectors to progress their careers.”

This week Váradi, faced a backlash from pilot unions after telling staff in a leaked internal briefing: “We cannot run this business when every fifth person on a base reports sickness because the person is fatigued. We are all fatigued, but sometimes it is required to take the extra mile.”



While few companies have reported problems hiring well-paid pilots, other jobs — particularly working on the ground at airports — are a harder sell. “Be honest,” says one European industry executive. “Would you rather work for a supermarket at decent times on a regular shift, or get up at 2am and stand in the cold at an airport?”

Cotton says companies need to offer better job security, working standards and the chance of career progression to make the industry more appealing to prospective workers.

Yet the scale of the disruption hitting individual airlines does not perfectly correspond to the extent of job cuts. While easyJet has been particularly badly hit this year, it has nearly the same number of staff as it did in 2019. Wizz Air expects to have 6,700 staff by the end of the summer, up from 4,000 before the pandemic, but has still been forced to cancel flights.

The problems these airlines face are instead largely related to their supply chains, which are vulnerable to disruptions beyond their immediate control. While a passenger may only have contact with two brands, the airline and airport, the flight they take is operated by a tangle of companies, from providers of subcontracted check-in staff and baggage handlers, to airport security firms and third-party caterers.



Over the years, airlines have outsourced as many parts of the business as possible. When one link in the chain fails — and each part of the industry has suffered staffing problems this year — the fine margins airlines run on tend to break down.

Several airlines have blamed disruption on ground-handlers, which provide services from plane refuelling to check-in staff, for not having enough workers. But frustrated executives in those companies say the same airlines have for years squeezed margins on the contracts they offer.

Overselling the recovery

In the attempt to restore order, some in the industry have questioned a system that offered cut-price fares by focusing on efficiency above nearly all else. One European airline board member says it is clear that the system cannot run on 2019 margins anymore, but that introducing new slack to prevent future disruption will mean passengers should prepare for higher fares.

Yet companies are still criticised for overestimating how many flights they will be able to operate this summer. Five weeks ago Lufthansa boss Carsten Spohr said his group was “mentally ticking off the crisis” as it forecast that it would carry more people this summer “than ever before”. But on Thursday the carrier said it would cancel 900 flights in July, blaming “bottlenecks and staff shortages” across the industry. In the UK transport secretary Grant Shapps accused airlines of having “seriously oversold flights and holidays” this month.

Europe’s air traffic control body has warned of problems stretching into July, while the region’s airlines expect the disruption to last well into the summer. Holland-Kaye went further, saying it could take 18 months to regain operational capacity.



Just about the only lever left for airline bosses is the hardest of all: try to fly less. Lufthansa’s decision to pare back its schedule mirrors an earlier decision by BA, which cut 10 per cent of its summer schedule to try to ensure its operations are more reliable. This has worked, for now, and the airline has been more resilient since.

Worryingly for an industry still in recovery, some travellers have already seen enough. Matthias Trost, a professor at Newcastle University, has been travelling to scientific conferences regularly again this year, but estimates that around half of his flights have been disrupted.

“We were all looking forward to going back to normality . . . but if you are travelling for 36 hours it is ridiculous,” he says. “I won’t book anything new”.

Tidjane Thiam’s investment vehicle has parted ways with Pimco, claiming to have found “a better fit” in Chinese entrepreneur Edward Zeng.

Freedom Acquisition Corp, a special purpose acquisition company led by ex-Credit Suisse chief Thiam as executive chair, floated in February 2021 and has yet to identify a private company to merge with.

The loss of the world’s largest bond manager was revealed in a regulatory filing this week, which showed that Pimco had agreed to offload its entire stake in the sponsor vehicle to Next G, an affiliate of Zeng’s advisory firm China Bridge Capital. Zeng has also been appointed as a director to replace Jamie Weinstein, Pimco’s head of corporate special situations.

Freedom’s chief executive Adam Gishen said it took the decision. “We actively managed the replacement of Pimco by Edward Zeng as our co-sponsor,” said Gishen, a former investment banker at Credit Suisse.

“We believe Zeng’s involvement — with his proven track record of creating value through Spacs — is a better fit for Freedom and its investors in the current environment. We remain focused on doing a deal — at the right price — as promised to our investors.”

Pimco declined to comment.

Spacs are shell companies that list on stock exchanges and use the proceeds to hunt for private companies they can acquire and take public through a reverse merger. Most are required to complete a deal within two years of their initial public offering or return the money raised to investors.

Freedom shares are trading at $9.81, below the $10 float price.

Freedom raised $345mn in its initial public offering on the New York Stock Exchange in early 2021. The vehicle, which focuses on fintech, counts François Pinault, the French billionaire who founded luxury group Kering, among its investors.

The Spac is Thiam’s first move in financial services since his departure from Credit Suisse in 2020. He is among a number of bank chiefs who have launched blank-cheque vehicles, including former UniCredit boss Jean Pierre Mustier.

The boom in Spacs has receded in recent months. Rising interest rates and the prospect of tougher regulation from the Securities and Exchange Commission have spooked investors and made some investment banks reluctant to work with the vehicles.

Ares Management is to hand back control of a French drugmaker it seized from the crisis-hit €1bn private equity fund that owns spyware maker NSO Group, paving the way for a sale that could return cash to investors.

The US private markets giant has reached a “mutually agreeable resolution” over Laboratoire XO with Berkeley Research Group, the US consultancy in charge of the €1bn fund, the pair told the Financial Times.

It brings an end to one part of the turmoil surrounding the fund, which was raised by now-defunct buyout group Novalpina Capital and bought LXO in 2020.

Ares took over LXO in May after refusing to extend a change-of-control waiver in relation to a €100mn loan it had made to the company through its credit business. That debt will be repaid with interest under the agreement.

The fund has been embroiled in multiple court cases since a bitter dispute between Novalpina’s co-founders Stephen Peel, Stefan Kowski and Bastian Lueken led investors to eject the trio last year. They put BRG in charge with a mandate to wind the fund down and return their cash.

LXO was the crown jewel of the Novalpina fund and its seizure was a blow to BRG. The fund owns two other companies: NSO Group, which is facing lawsuits from Meta and Apple and has been blacklisted by the US over its Pegasus hacking tool, and Olympic Entertainment Group, an eastern European casino business.

The agreement paves the way for BRG to ultimately sell the pharmaceutical company, which makes the hypertension drug Loxen. Stanley Capital Partners, a private equity firm that counts British Olympic rower Simon Cottle as a founding partner, has expressed interest in buying it, three people with knowledge of the matter said.

Cottle is a friend of Stephen Peel, one of Novalpina’s ousted co-founders, three people close to the men said, though it was not clear whether they had spoken about the deal.

BRG won injunctions against Ares in the UK and Luxembourg courts after Ares took control of LXO last month. The UK injunction temporarily stopped Ares from selling its shares in LXO.

Taking the keys can be a last resort for direct lenders because — unless negotiated with the consent of an owner that no longer wants to be involved — it sometimes opens up the risk of litigation and threatens to hamper relations with the large institutions that private capital groups seek to tap for funds.

In a joint statement BRG and Ares — which was LXO’s only lender — said the settlement was “a positive outcome for the company and all other parties involved”.

“Monetary policy normalisation” is a wonderfully reassuring phrase. It seems to hint that the mispricing of risk that has characterised markets since the financial crisis may soon be a thing of the past.

Maybe it even suggests that the curtain will come down on the misallocation of capital that has resulted from central banks’ ultra-low interest rates, a significant contributory factor in the developed world’s dismal productivity record since 2008. But think again. There are good grounds for thinking that mispricing of assets is not just down to freakish monetary policy.

For a start, the proportion of investors’ capital that is price-insensitive has never been higher. Exhibit A in support of this assertion is the UK inflation index-linked gilts market.

The government has pronounced that in 2030 the retail price index will be abandoned in favour of a link to the consumer price index including housing costs. As CPIH gives a lower rate than RPI, this will conveniently reduce government borrowing costs. Consultants Con Keating and Jon Spain estimate that over the remaining life of the existing stock of index-linked gilts, the saving could be between £90bn and £120bn at current market prices. This will come at the expense mainly of defined benefit pension schemes.

Bizarrely, there was no discernible decline in prices following the government’s announcement which can only stem from pension funds mechanistically pursuing investment strategies aimed at matching liabilities while hedging against interest rate and inflation risk.

Then, of course, there is the passive investment phenomenon. According to the Investment Company Institute, a trade body, passively managed index funds have just overtaken actively managed funds’ ownership of the US stock market.

Price insensitivity here means that capital inflows into passive funds reward yesterday’s winners and more especially the big index constituents. It is, in effect, a momentum or trend following strategy that helps ensure that prices are a poor reflection of fundamental value while reinforcing any tendency to market bubbles as fresh money pours in.

Equally important, in terms of distorting markets, is price over-sensitivity, which is another way of describing momentum investing. This is not supposed to exist in efficient markets where prices reflect fundamentals. Yet academics at the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics have found evidence of systematic mispricing arising from this approach.

The eponymous Paul Woolley points out that mispricing is exacerbated where asset managers’ performance is benchmarked to an index. If they underperform the index they are obliged to buy assets which are rising strongly but under-represented in their portfolio while selling other assets. This amplifies price shocks in both directions, as with conventional momentum trading, but mainly upwards because of a natural market asymmetry: stock prices have a finite floor but no ceiling.

It also contributes to a short-termist capital market climate while sending bad price signals to managers of quoted companies when there is a need to reverse past under-investment in old economy sectors where scarcity has led to resurgent inflation.

Nor is this a healthy backdrop to encourage the huge overhaul of the global capital stock that is necessary to secure the transition to low carbon by 2050. Share price performance-related long-term incentive schemes where the long term is usually defined as a mere three years and share prices are volatile provide the wrong motivation. And a further market distortion arises from what academics Florian Berg, Julian Kölbel and Roberto Rigobon call “aggregate confusion” over environmental, social and governance reporting.

In a recent study they found significant divergence in ESG scores from six prominent scoring agencies. Consequences include distorted security prices because investors are confused and companies failing to improve ESG performance because their managers are confused.

International standard setters are now at work on sustainability, but the work will take time. So the scope for greenwashing by asset managers seeking to cash in on what Franklin Templeton’s Ben Meng calls the ESG gold rush remains. And there are questions about the competence of auditors here. Revisions to the lives of carbon-intensive assets for depreciation purposes in company accounts are few and far between. How many auditors, one wonders, could tell the difference between a stranded asset and a beached whale?

An underlying difficulty is that accountancy captures less and less of what matters in the modern economy such as human capital and the value of data. And we are a long way from a world in which stock prices reflect fundamentals, where people invest to generate a straightforward income to pay a pension or where investors routinely try to buy low and sell high. Meantime, the goal of market efficiency appears painfully elusive.

Author's email: john.plender@ft.com

This is shaping up to be the worst year for equity hedge funds on record, in a sign they are struggling to adjust to a dramatic change in market conditions.

Equity hedge funds, which manage around $1.2tn in assets, lost 8 per cent on average in the first five months of 2022, according to data group HFR.

This outstrips losses in other years marked by crisis, on HFR data going back some 32 years, and leaves funds with a huge task to recoup losses over the rest of 2022. The opening five months of 2020, which brought a huge drop in stocks followed by a volatile recovery, left funds down 5.8 per cent.

Equity hedge funds are “generally having a really difficult time, it feels worse for that strategy than in 2008”, said Anthony Scaramucci, founder of New York-based investment firm SkyBridge Capital.

This year’s losses are milder than the 12.8 per cent fall in the benchmark S&P 500 index of US stocks, including dividends. But the supposed investment acumen of the sharpest investors in the market is still leaving holders in a hole.

Such heavy losses at hedge funds can easily become self-fulfilling. As big funds take losses, and customers ask for their money back, often they are forced to sell holdings, regardless of whether those bets are performing well. This can contribute to volatility and deepen market declines.

The losses among equity funds stand in stark contrast to the performance of much of the rest of the $4tn hedge fund industry. Computer-driven funds betting on market trends and macro managers trading interest rate and currency moves are among those reaping large gains this year.

But in equities, many funds have suffered from a vicious sell-off in high-growth tech stocks, as central banks move to tighten monetary policy. Such companies’ projected earnings were flattered by ultra-low borrowing costs, but have lost appeal as the Federal Reserve and international peers raise interest rates to curb inflation.

A Goldman Sachs “VIP” index of favourite equity positions taken by hedge funds is down 23 per cent this year.

Among those suffering losses have been Chase Coleman, a high-profile so-called “Tiger cub” and protégé of Tiger Management founder Julian Robertson. Coleman has now lost 52 per cent in his Tiger Global fund this year, said a person who had seen the numbers. Fellow Tiger cub Lee Ainslie, who now runs Maverick Capital, is down more than 34 per cent.

Dan Loeb’s $7.1bn Third Point Offshore funds have lost around 14 per cent while his leveraged $2.9bn Ultra fund has fallen 18.4 per cent, according to documents sent to investors. Boston-based Whale Rock Capital, which focuses on tech, media and telecoms, has lost 33.8 per cent in its portfolio containing both listed and private investments.

Tiger Global, Maverick and Whale Rock declined to comment. Third Point did not respond to a request for comment.

Long-short equity hedge funds take bets that individual stocks will either rise or fall in price. However, because stock markets tend to rise over the longer term, the funds often give greater weight to bets on rising prices — so-called “longs” — than on falling prices, known as “shorts”.

During the protracted bull market of recent years, which was turbocharged during the pandemic as central banks and governments injected massive stimulus into markets and the economy, funds found it far easier to hold long positions than shorts.

That stance was profitable when markets were rising. But now some funds have been left badly exposed as growth stocks have entered a bear market, adding to concerns about managers’ ability to protect investors’ cash during tough times.

“Equity long-short is facing an existential crisis: stock selection has been poor, shorting doesn’t work and people jumped off the tracks after the train already hit,” said Andrew Beer, managing member at US investment firm Dynamic Beta.

“Even longtime investors are wondering why they’re paying managers high fees while bearing all the risk,” he said.

Investors pulled $9.8bn from long-short equity funds during the first three months of this year, according to data group eVestment.

Among other equity funds hit this year is New York-based Select Equity Group, which lost more than 11 per cent across two portfolios that in total manage around $10bn in assets.

New York-based North Peak Capital is down more than 28 per cent, and the Brummer & Partners Manticore fund is down around 13 per cent this year, according to numbers sent to investors. SEG, North Peak and Contour, which manages the Brummer fund, did not respond to a request for comment.

Funds betting on US equities cut the difference between their long positions and their short positions to close to its lowest since 2010 last month, according to a client note from Morgan Stanley prime brokerage, in a sign of caution, although they have been building this up again in recent weeks.

Not all equity managers are struggling. James Hanbury at London-based Odey Asset Management has gained 8.1 per cent in his LF Brook Absolute Return fund this year, despite holding positions in Russia that were written down to zero or near zero, according to investor documentation seen by the Financial Times.

Hanbury has been helped by positions in the energy sector and a bet against former meme stock favourite AMC Entertainment.

Odey declined to comment.

Author's email: laurence.fletcher@ft.com

Good morning. Yesterday we gave, with real trepidation, our best guesses about where the economy is headed over the next 12 months. We think the most likely outcome is the Federal Reserve pushes the economy into recession, but that inflation will moderate. On the same day, the FT reported the mega-hedge fund Bridgewater takes roughly the same view (though they seem to think that rates have further to rise than we do). Nice to know that if we are wrong, we’ll be wrong in good company. Email us: robert.armstrong@ft.com and ethan.wu@ft.com.

Explaining the bounce

Unhedged, its readers (the ones who write to us), and almost all of the people we talk to on Wall Street are quite bearish. This is not at all surprising: the economy is slowing, the Fed is tightening, inflation is high, there’s a war on, and China’s economy looks wobbly.

What is more interesting, given this dreary backdrop, is that a lot of people seem to think we, our readers, and our sources, are wrong. There has been a significant bounce in risk assets in the past three weeks or so. Much of the bounce took place in the last week of May, but the markets have held tight since then.

Some examples:

• The S&P 500 has returned about 8 per cent since its May 19 low. The Nasdaq has done even better.
  
• Both CCC (junk) and BBB (lowest rung of investment grade) credit spreads tightened a bit over the same period.
  
• Many wildly speculative assets (outside of crypto) have rebounded. Cathie Wood’s Ark Innovation ETF is 24 per cent above its May 11 lows. GameStop, king of the meme stocks, is up 67 per cent since then.
  
• Net investor flows into high-yield bond funds were positive last week for the first week in eight, according to Bank of America. Equity flows remain modestly positive and are up year to date.
  
• CrossBorder Capital compiles a risk exposure index which looks at a range of data on investors’ positioning in risk assets vs risk-free bonds and cash, across a range of global markets. The index is set up so zero represents long-term average positioning. The index started to move strongly back towards risk in March:
  
  
  

What is happening here?

My first guess was bad-news-is-good-news syndrome. Most recent economic data, from PMIs to housing, has been on the soggy side. Two aggregate indicators capture this pattern nicely. Here’s the Atlanta Fed’s GDPNow real-time measure of real economic growth, in a steady downtrend since the third week of May:



Citi’s Economic Surprise index confirms the story:



Slowing economic momentum might have investors thinking that inflation will cool soon, and the Fed will back off before tightening policy to the point of recession. That would be good for risk assets.

There may be some truth to this, but unfortunately it is a poor match with some other bits of market data. A month ago, the futures market was pricing in an early 2023 fed funds rate of 2.91 per cent; now the figure stands at a tighter 3.05 per cent. Nor have yield curves moved much. The Fed we thought we were getting a month ago is the Fed we think we are getting now.

A more convincing, if less tidy, argument is that inventors are jumping in selectively, in spots where the sell-off went too far. The best-performing sectors — other than energy — during the rebound have been technology and cyclicals, the stuff hit hardest earlier in the year:



Energy aside, sector performance during the late-March-to-May sell-off was more or less the exact opposite of the above. The notion that what we are seeing is investors picking through the wreckage is reinforced by looking at the individual stocks that have led the rebound in the S&P. A list of the 30 best-performing stocks in the index during the bounce is dominated by two sorts of stocks — energy companies, and companies that were very beat up, and remain so, but have recovered somewhat. A sampling of the latter category:



This rally looks more like selective opportunism than a general resurgence of risk appetite. Have a different read? Send it along.

It still pays to be big

A striking feature of the post-pandemic bull market was how much of its gains were owed to a few of the very biggest stocks. So far this year, though, the biggest 10 S&P stocks have trailed the other 490.

You can see this taking the ratio of the S&P 500 equal-weight index to the regular market cap-weighted index. An increasing ratio suggests the giants are losing out to the little guys, something we’ve seen since late November:



A lot of this, however, is down to bad performance from big tech. The presence of Facebook, Apple, Amazon, Microsoft and Google make the top slice of the market especially exposed to tech sector declines. So I built an index of the biggest non-tech S&P stocks. Featuring names like Exxon, P&G, Home Depot and JPMorgan, this group represents a broad cross-section. Here’s how they’ve done since mid-October 2021, just before the rotation to value kicked off:



Lots of this overperformance is thanks to Exxon and Chevron, whose stocks have surged with oil prices. But even excluding energy, six of eight stocks in our index (J&J, UnitedHealth, Berkshire, Visa, Mastercard and Home Depot) beat their sector average since October. When markets feel scary, investors still like buying bulk. (Ethan Wu)

One good read

“[Hedge fund] D1 has told investors who selected [its] 50-50 mix of public and private assets that the strategy lost 23 per cent through May. The firm attributed most of the damage to public investments, which fell 44 per cent. It marked down private assets only 8 per cent — including 0.05 per cent last month.” Whooo boy.

As US motorists pay record prices at the pump, Joe Biden has pleaded with the country’s oil producers to open the taps and stem the surge.

On Saturday, average US petrol prices rose above $5 per gallon, according to AAA, a national motorists’ group. It is another marker pointing to the brewing crisis in fuel costs, which is likely to spur increasingly urgent pleas for more supply from a White House battling to quell inflationary surges across the economy.

But the calls for more oil production — a stark departure for a president who vowed to crack down on fossil fuels — have largely gone unheeded as the industry insists its drilling spree days are behind it.

“When the White House started calling around in a panic, they thought shale oil production could grow sharply in the near term — like in a matter of months or quarters,” said Bob McNally, head of consultancy Rapidan Energy.

“They were shocked to learn that that’s like asking for blood from a stone. It’s almost impossible.”

US petrol prices have soared to unprecedented levels as the war in Ukraine exacerbates an already-tight global oil market. Prices this week broke through $4.95 a gallon, according to the AAA, a motoring group. In California, motorists are paying over $6 a gallon.



For consumers, prices at the pump have become one of the most visible impacts of rampant economy-wide inflation. That has created a headache for the president, who many voters blame for the rise.

“Fair or not, it’s a problem for Biden as he is seen as the maestro of the economy even though there is truthfully not much any president can do to influence gas prices in real time,” said Sasha Mackler, executive director of the energy programme at the Bipartisan Policy Center, a Washington think-tank.

The administration has scrambled to stem the rise: it has released record volumes of crude from the country‘s strategic reserves, waived certain anti-pollution rules and leaned on producers in the Middle East to pump more. But with prices continuing to climb, the White House has urged the domestic industry to raise production, which at around 11.6mn barrels a day last month remains well below its pre-pandemic peak of almost 13mn b/d.

Jennifer Granholm, the US energy secretary, told operators recently the country was on a “war footing”. “That means you producing more right now, where and if you can,” she said.



The industry is gradually expanding output, which the US Energy Information Administration expects to hit 11.9mn b/d before the year is out. But this has not been quick enough for the administration, which wants a rapid ramp-up to douse the price rise.

Producers say they cannot flip the switch and return overnight to the “drill, baby, drill” era of rampant growth that drove the shale boom of the last decade.

One factor behind this reticence is Wall Street, which was burnt by huge losses as domestic oil companies consistently poured revenues into ever-greater growth. Today shareholders are demanding returns.

Investor demands are being heeded over those of the White House: the amount of cash generated by operators this year is set to be greater than the total earned over the past two decades, according to S&P Global Commodity Insights.

Still, the number of rigs and frac fleets in the field has climbed since the depths of the pandemic, when negative US oil prices forced operators to slam on the breaks. The growth has largely been attributed to smaller private operators, which do not face the same shareholder pressure as their larger public counterparts.



Moody’s reckons private operators will boost capital spending by 49 per cent this year, growing output by 12 per cent. By contrast, public companies will increase their capital outlay by half that rate for a meagre 3 per cent production boost.

Producers also say that soaring input costs and supply chain constraints prevent them from ramping back up overnight, even if they wanted to.

The price of frac sand, used by operators in the hydraulic fracturing process to blast open fissures in the rock, has rocketed as mines shuttered during the pandemic take time to crank back into gear. The cost of drilling rigs too has shot upwards, due to the general shortage in the market. Labour costs have also risen as many skilled workers have left the industry and are demanding premiums to return.



With American drillers ignoring his rallying cry and midterm elections looming, the president has few levers at his disposal to affect the price of fuel.

“In the near-term there are few tools,” said Mackler. “We need to take action now to ensure the US is better prepared in the future. That includes ambitious measures to increase supplies, diversify supply chains, reduce demand through electrification and decarbonise the sector.”

Data visualisation by Steven Bernard and Patrick Mathurin

JPMorgan’s chief executive Jamie Dimon thinks oil prices could surge to $175 a barrel later this year. Jeremy Weir, the head of commodity trader Trafigura, says oil could go “parabolic”.

Energy Aspects, a consultancy with clients stretching from hedge funds to state energy companies, says we are facing “perhaps the most bullish oil market there ever has been”. Goldman Sachs thinks oil prices will “average” $140 a barrel in the third quarter of this year.

It is tempting to dismiss this mass outbreak of bullishness as book-talking by banks and traders positioned for a short-term rise in crude, which has already reached $120 a barrel.

Those with long memories recall the surge in oil to $147 a barrel on the eve of the financial crisis, when Goldman was among the chief cheerleaders for a rally that quickly reversed as the economy went south. Oil was at $40 a barrel by Christmas 2008, yet some of the bonuses earned by Wall Street energy traders that year went down in market lore.

But while a healthy dash of scepticism is usually warranted with price forecasts, you only need to scratch the surface of the oil market to see that these bullish calls are, this time, well-founded.

The energy crisis, which started with Russia squeezing natural gas supplies to Europe before spreading across the commodity complex after the invasion of Ukraine, is far from over. It is likely to get worse before it gets better, with grave ramifications for a world economy already riddled with inflation.

The key issue is a simple one: there is barely enough oil to go round. And with Russia’s sanctions-hit oil output facing an increasingly difficult route to market there are legitimate fears supply could fall much further.

The EU has just banned seaborne cargoes of Russian oil, forcing Russia to ship its crude ever further distances to buyers willing to turn a blind eye to its actions in Ukraine. India and China have snapped up heavily discounted cargoes after many buyers in Europe self-sanctioned.

But as the volumes of displaced Russian oil rise, there are questions over the ability and willingness of refiners in Asia to keep absorbing them.



The big challenge is a looming ban on insurance in the EU and UK for ships carrying Russian oil. It would effectively shut Russia out of mainstream tanker markets, leaving them with vastly reduced options for shipping their oil. Oil tankers do not just need to insure expensive cargoes but against liabilities such as Exxon Valdez-style spills with multibillion-dollar clean-up costs.

Rory Johnston, a commodity strategist, argues that most major ports simply will not accept tankers without protection and indemnity insurance — a market the UK and EU dominate — and conservatively estimates that Russian production declines will double to about 20 per cent from pre-invasion levels — or 2mn barrels a day — by the end of the year.

Russian output could fall much further, with the International Energy Agency predicting a decline of 3mn b/d — the equivalent of losing almost all Kuwait’s production.

This potential shortfall will not be easy to replace. Western governments have already tapped into strategic reserves, releasing about 1mn b/d since the invasion. But that has only tempered the price rise, not reversed it, and cannot continue indefinitely.

The only countries with significant spare production capacity are Saudi Arabia and the United Arab Emirates, but their ability to pump is not unlimited. Saudi Arabia’s production is approaching 11mn b/d after agreeing to slightly accelerate output increases. But to add another 1mn b/d would push their output towards uncharted territory, straining their oilfields if they need to hold production there for more than a few months.

Other Opec members are struggling to boost production even back to pre-pandemic levels after years of mismanagement and under-investment. A potential US nuclear deal with Iran that could free more of their barrels is stuttering.



Spiralling food prices risk unrest in many oil-producing countries, further threatening supplies.

Western oil majors remain hesitant to invest. Even if they ignored pressure to go green, large developments outside the US shale patch take years to come on stream.

If supply is deeply troubled, that leaves demand to balance the market. But governments have made short-sighted cuts to fuel taxes that support consumption, while people frustrated by two years of Covid-19 disruption have been willing to pay up at the pump.

China is reopening. People are flying again. Demand is going in the wrong direction.

All these factors point to rising oil prices until a level is reached that reduces consumption, probably by triggering an economic slowdown large enough to curtail demand. In other words, a recession for many economies.

Policymakers could encourage conservation, from lowering speed limits to reinstating taxes. But the evidence to date suggests they are happier stumbling into disaster than upsetting motorists. They must hope that when oil gets cheaper again, voters will still have a job to drive to.

Author's email: david.sheppard@ft.com

There are few statues of heroes in downtown Zurich. But of those that exist, by far the grandest is that of Credit Suisse’s founder, Alfred Escher.

It is hard to imagine a foreign acquirer buying such a national institution, though Credit Suisse’s shares rose sharply on Wednesday after a post on the Inside Paradeplatz blog suggested US-based State Street was planning a takeover bid. State Street later denied the story.

On paper, a foreign acquisition of the embattled bank should be possible. “The current set-up is an open market with very limited restrictions and regulatory reviews regarding foreign investments,” said Astrid Waser, a partner at Swiss law firm Lenz & Staehelin. “There is sector-specific legislation that limits foreign participation in key sectors, for example in the electricity sector, but otherwise there is very little investment control compared to other European jurisdictions.”

An approach on Credit Suisse, however, would attract special scrutiny. Not only is the bank of systemic importance in Switzerland and Europe, but it helped build Switzerland’s railways, bored the Gotthard tunnel and created the Swiss pension and insurance market,

“Credit Suisse is definitely not just another bank,” said Vera Eichenauer, senior researcher at the KOF Swiss Economic Institute at ETH Zurich. “It has lost a lot of popularity with all the scandals and so on, but most people blame that on it having become too international.”

One political consultant who works closely with Switzerland’s biggest banks warns that the legacy of the 2008 crisis, when Bern was forced to intervene in the financial sector, still looms large for many politicians. “There’s no one in government or in parliament who would want to save another bank. So they [would] want their say, you can be sure of that,” the person said.

A potential end to the Credit Suisse’s independence would also play straight into the middle of a continuing legislative discussion in Bern: at the end of March, Swiss parliamentarians voted in favour of the “Motion Rieder”, mandating the Swiss government to create a new law allowing for political intervention in takeovers of Swiss businesses by foreigners.

There is little prospect of the mooted legislation coming into effect before 2024. But a foreign bid for Credit Suisse could supercharge the topic.

Under the outlined legislation, a bid for Credit Suisse would almost certainly end up being decided upon in secret by the seven-person Federal Council. A deciding factor could be the degree to which a bidder abides by the same culture of banking secrecy as Switzerland.

Others in the world of Swiss mergers and acquisitions are more sanguine.

“Our expectation is that the draft legislation . . . will enter into force . . . but it will not alter the traditional openness of the Swiss market for foreign investments,” said Tino Gaberthüel, partner at Lenz & Staehelin.

Existing sector legislation — in the case of a financial transaction, Switzerland’s Banking Act — was likely to continue to be the most important consideration in dealmaking, Gaberthüel said.

Under that, the market regulator Finma would play a crucial role. Though how it would adjudicate a takeover of the country’s second-largest lender would be highly dependent on the nature of the transaction: there is no precedent.

Finma’s principles are broadly in line with fellow western regulators, but it takes a stringent approach. A bidder, or even a co-bidder, from somewhere like the United Arab Emirates, China or Russia, might struggle to meet its requirements.

Finma would not seek to obstruct any deal on principle, one Swiss economic official said, but it would take an extremely conservative stance. And it could take months, to decide: “It would be an extremely technocratic process . . . there will not be many prepared for that.”

For the past few days, people in chat rooms across Japan have been grasping for a neat rendering of “boutto suru”: the state of sitting at a desk, staring off into space, unengaged, unproductive and, in this particular context, unsackable.

The term is currently circling in the ether because of a survey published by Shikigaku, a Tokyo-based consultancy, on the phenomenon of the hatarakanai ojisan, the old geezer (or, less commonly, his female equivalent) in the office who manages to get away with doing no work.

When asked if such a person existed in their workplace, 49.2 per cent of workers in their 20s and 30s at Japanese companies with over 300 employees affirmed that he did. Collectively, that’s an awful lot of paid daydreaming, but might it possibly be money well spent?

For many of those who took to social media to discuss the survey, the mild surprise was that the figure was so low. This zoned-out villain, in all his irredeemable indolence, felt universally recognisable and, often, easily nameable. “Staring into space”, along with “chatting about nothing” and “taking back-to-back snack, cigarette and toilet breaks” were by far the most common answers as to how his hours were skived away.

The survey, which polled 300 people across different industries, also showed strong agreement among younger workers on why hatarakanai ojisan exists: seniority-based pay structures and protective labour laws simultaneously erode his motivation, remove fear of dismissal and absolve him of the need to produce results. Incompetence may also mean nobody asks him to do any real work.

The tone of the Shikigaku research (versions of which could probably be conducted elsewhere in the world without wildly dissimilar results) was predictably negative and flavoured with plenty of intergenerational friction — most especially around hatarakanai ojisan’s dependence on juniors to pick up his slack.

But it does have a special resonance in Japan, where the working age population is now shrinking fast, and where investors see persistently low productivity gains at the heart of the country’s economic woes. For those extrapolating hatarakanai ojisan into a bigger corporate picture, he is symbolic of much that has held back governance reform — an immovable anchor to the old ways of doing things. The structures that keep him in place have a powerful bearing on how Japan takes its next steps.

The harm done by hatarakanai ojisan, according to the survey, is that he is demoralising: the pay structures of many Japanese companies mean that the non-working older colleague is reliably paid more for that status. What, for a younger worker, is the point in busting a gut if that effort stands no chance of reward? Deeper into the survey, respondents expressed a yearning for results-based pay increases and promotion — a change that would shift the measurement of white-collar labour from “hours seen to be working” to “actual output” and transform Japan’s workplace landscape.

In all of this, though, the anti-hatarakanai ojisan lobby must be careful what it wishes for. However frustrating this torpid time-server may be for his immediate colleagues, his days of inactivity are underwritten by the private sector rather than the taxpayer. Shareholders may hate it, but at least when Japanese companies talk about concern for “other stakeholders” there is a streak of honesty.

Also, despite the optimistic narrative that young Japanese attitudes towards work are changing, job-hopping remains relatively low and the desire for stable employment core. A visible smattering of surplus-to-requirement staff, in times of tight labour markets and economic ferocity, are like feathers on a peacock: a needlessly extravagant, and thus alluring, encumbrance.

And, on the flip side, hatarakanai ojisan may be a secret shield against takeover. Increasingly, say analysts, domestic M&A in Japan will be driven by labour shortages as the job market reaches what CLSA strategist Nicholas Smith calls a “singularity” in which there are no more people outside the job market for companies to target — and when the best option for some may be to buy staff wholesale through hostile M&A. Hatarakanai ojisan’s unsackable uselessness, when the due diligence survey catches him coming back from his sixth smoking break, makes a fine poison pill.

These twinkles of benefit aside, however, the Shikigaku report paints a dark picture. Towards the end, young respondents were asked if they thought they themselves could become a hatarakanai ojisan in the future. An unsettling 30.3 per cent said that they might if salaries continued to be based on seniority rather than results. The bamboo that bends, as the Japanese saying goes, is stronger than the oak that resists.

Author's email: leo.lewis@ft.com

Soaring food prices caused by the war in Ukraine have increased the risk of famine, raising pressure on producers of low-carbon fuels derived from crops and sparking a “food versus biofuel” debate.

Before Russia’s invasion, global biofuel production was at a record high. In the US, the leading biofuels producer, 36 per cent of total corn production went into biofuels last year, while biodiesel accounted for 40 per cent of soyabean oil supplies.

But some food companies and policymakers are calling for an easing of mandates for blending biofuels into petrol and diesel to increase global grain and vegetable oil supplies.

“Now is not the time [for governments] to be encouraging the conversion of food crops to energy through artificial policy incentives or mandatory blending targets,” said the Washington-based International Food Policy Research Institute.

Between them, Russia and Ukraine produce nearly a fifth of the world’s corn and more than half its sunflower oil, but crop exports from the countries are at a fraction of prewar levels. Hundreds of millions of people are at risk of “hunger and destitution” because of food shortages caused by the war, the UN’s secretary-general warned last week.

The total amount of crops used annually for biofuels is equal to the calorie consumption of 1.9bn people, according to data firm Gro Intelligence, highlighting the volume of agricultural commodities that could be diverted from energy use if the food security crisis worsened.

Do biofuels cause problems in food markets?

Biofuels — ethanol made from corn and sugarcane and biodiesel made from vegetable oils including soyabean oil and palm oil — have been blended into motor fuel since the early 2000s to boost energy supplies and reduce the environmental impact of fossil fuels.

Biofuels were blamed in part for the last food crisis in 2007-08. Studies, including from the World Bank and IMF, suggested that the growth of biofuels contributed 20-50 per cent to the price increase of corn during the crisis. Their rising use was described as “a crime against humanity” by the UN’s then-food rights rapporteur.



But biofuel producers argue they have played a minimal role this time around. “Biofuels didn’t cause this crisis — either the price or the contraction in supply,” said James Cogan of Ethanol Europe, an industry lobby group.

High prices are not about demand but reflect “erratic trading conditions and high energy prices”, he added. Reducing biofuel production “wouldn’t materially ease the price crisis”.

Would limits on biofuels reduce world hunger?

A 50 per cent reduction in the grain used for biofuels in Europe and the US would compensate for all the lost exports of Ukrainian wheat, corn, barley and rye, according to the World Resources Institute, a Washington think-tank.

Although crop production has risen along with biofuel output, meaning the amount available for food supplies has not decreased, biofuel usage cannot rise exponentially without damage to the environment, campaigners said.

“In a world that is food insecure, we need to be thinking really critically about these limited resources as we try to feed the world and solve the climate crisis,” said Oliver James, a researcher at Princeton University who helped compile the WRI data.



Maik Marahrens, of Brussels-based environmental campaign group Transport & Environment, said that in the EU, about 10,000 tonnes of wheat, equal to 15mn loaves of bread, are burnt daily as ethanol in cars.

The ethanol industry says such comparisons are unfair. Most of the grain used to produce fuel is feed wheat, which goes into animal food, rather than milling wheat, which is made into bread, the industry has argued.

Biofuel sector executives said the amount of wheat used for biofuels was negligible — about 2 per cent of the total crop, according to industry association UFOP.

“In that context, it’s a bit surreal to be elevating wheat ethanol even to a topic of conversation in the current crisis about bread,” said Eric Sievers, director of investments at ClonBio, which owns Europe’s largest grain biorefinery, located in Hungary, as well as at Ethanol Europe.



Would it be more harmful to limit biofuels?

Industry executives argue that biofuels create efficiencies that nourish animals and, indirectly, humans.

The industry is a significant producer of animal feed since the process of turning grains into ethanol creates protein and fat by-products that are fed to chickens, cows and pigs.

Citing the impact on the EU alone, Cogan said limits on biofuel production “would result in lost renewable energy, lost energy independence, lost jobs, lost farm income security, increased fossil fuel imports, increased carbon emissions and increased soy meal imports [for animal feed] from the Americas”. 

Are biofuel policies changing?

In the EU, Belgium and Germany are considering easing biofuel blending mandates to address food security.

The International Energy Agency cut its biofuels growth forecast for this year by 20 per cent, forecasting global demand to increase 5 per cent from 2021 to 8.5bn litres.



In the US, where cheaper corn-based ethanol is the main biofuel, Washington has tried to tamp down rising gasoline prices by allowing the higher blending level, normally cut during the summer months because of polluting concerns, to temporarily continue.

But government incentives for biodiesel and the decline in global exports from Ukraine have added to competition for soyabean oil, squeezing supplies for US food groups.

“[Soyabean oil suppliers] can’t give me a [price] quote because they can’t take my business. There’s not enough oil to go around,” said Ed Cinco, purchasing director at Schwebel’s, a bakery in Ohio.

While China has warned ethanol producers that it will “strictly control processing of fuel ethanol from corn”, India is pushing ahead with targets to raise blending quotas. Prices for sugar, the country’s main bioethanol feedstock, have increased less than other crops.

Although co-ordinated action on food security has moved swiftly up the agenda, there has been little debate on limits to biofuels at an international level.

Instead, countries using biofuels must balance food security and sustainability with energy costs and independence, said Nicolas Denis, a partner at McKinsey. Governments need to decide “what sustainable use of land looks like, given the different priorities”, he added.

As one contagion ends, another begins. The symptoms of a stagflationary slowdown are pronounced. About two-thirds of economists polled by the Financial Times expect a US recession. UK gross domestic product fell unexpectedly in April. Cryptocurrencies, a prime indicator of speculative exuberance, are slumping.

As equities and bonds lurch downward, investors are rushing for safety. The MSCI All-Country index (ACWI) has already lost 18 per cent in dollar terms this year. Lex is holding to its expectation of a long, grinding market correction amid extempore monetary policymaking. Here are some defensive strategies for the months ahead.

Bonds deserve attention, especially those denominated in the strong US dollar. Any bet on fixed income is dependent on where you think inflation will peak. In corporate credit, favour businesses with strong balance sheets and cash flows. A zero weighting to high-yield bonds makes sense.

As for stocks, defensive choices depend on how protected companies are from inflation, higher rates and slower growth, as Rob Buckland of Citi points out.

In the 1970s, energy and mining shares outpaced inflation. The same bet has worked this year. Two of the top three sectors within the MSCI ACWI include those groups. Currently, the value of all commodity consumption as a proportion of global GDP — nearly 11 per cent — approaches that of the second Opec oil shock in 1979.

Rising rates require the typical investor to tilt away from expensive growth. These are companies whose valuations depend on low, long-term discount rates, in sectors such as tech and renewables. Instead, buy defensive stocks with less “earnings beta” or sensitivity to broader profits volatility. Aim for telecoms and other utilities, consumer staples and healthcare shares.

Momentum-following algos tend to perform well in extended market corrections. Shares in Man Group, whose AHL product group meets that description, are up 11 per cent over six months.

Pundits do not unanimously predict a recession. Full employment and high bank capital ratios make RBC Wealth strategists optimistic about financials this year. But even they accept risks are mounting. They tip the UK stock market for its relative cheapness.

At 17.25 times, the forward earnings multiple for the S&P 500 index is just above its 10-year average. Shiller’s cyclically adjusted price/earnings ratio, which aims to smooth out economic peaks and troughs, remains relatively high. There is plenty of room for markets to fall further, so be prepared.

BlackRock clients are taking more control of the way their shares are voted on hot topics such as climate change and executive pay, as pressure mounts on the largest asset managers over their outsized power at US companies.

BlackRock said on Monday that the owners of more than $530bn invested in its index tracking funds are now instructing the firm how they want their voting power exercised. While some large clients have had this ability for years, the holders of $120bn more have signed up in the five months since BlackRock rolled out a new Voting Choice programme.

All US pension funds and most other institutional investors can now opt to have BlackRock vote for them, tell it to follow recommendations from a third-party proxy adviser or vote directly on shareholder proposals, director elections and takeovers.

BlackRock made the figures public ahead of a Senate hearing this week on the voting power of index tracking funds, which manage more than $11tn. BlackRock, State Street and Vanguard, the largest providers, are the biggest shareholders in most US companies.

Conservatives criticise the managers’ votes in favour of shareholder proposals on environmental, social and governance issues at company annual meetings. Some liberal scholars, meanwhile, argue that their cross-ownership of multiple companies is exacerbating oligopolistic tendencies within sectors.

Tuesday’s hearing is focused on Alaska senator Dan Sullivan’s bill that would bar index fund managers from voting on shareholder proposals and director elections unless they have specific approval from large institutional investors.

Republican co-sponsors of Sullivan’s bill said it would empower individual investors. But critics pointed out that US law vests the voting rights for retail mutual funds and exchange traded funds with fund boards, not investors.

Preventing large passive fund managers from voting would “disenfranchise index investors and disproportionately amplify the influence of other investors and advisers”, warned Ben Colton, State Street’s head of stewardship.

Activists, hedge funds and overseas investors, in particular, would gain power because they would not be affected by the requirements. Industry executives also noted that the big investment groups have a long record of voting with company managers most of the time, and investors who take direct control are more likely to do so when they want to change corporate policy.

BlackRock said half of the clients who are participating in its voting programme have opted to let BlackRock continue to vote their shares, 5 per cent are voting themselves and 45 per cent have asked for more information. The programme covers $2.3tn in index assets but retail funds are excluded because of the legal constraints.

“We see [this] as just a beginning. Our ambition is to make voting choice convenient and efficient for all investors,” said Salim Ramji, BlackRock’s global head of index investments.

At Vanguard, its internal stewardship team votes the shares held by passive index funds, while the external managers of its active funds vote those shares. “As we explore how to give investors more of a voice in proxy voting, we are listening to our clients and their preferences on the matter,” Vanguard said in a statement.

Large State Street clients who put their assets in separately managed accounts can already vote their own shares, and the firm is exploring ways to expand that to institutional investors who put money in pooled funds, Colton said.

The UK financial regulator has put Credit Suisse on its watchlist of institutions requiring tougher supervision, the latest blow to a bank that is struggling to draw a line under a series of crises.

The Financial Conduct Authority told Credit Suisse last month that it was taking the step because of its concern that the bank had not done enough to improve its culture, governance and risk controls.

In a letter sent in the middle of May, and seen by the Financial Times, regulators asked the bank’s senior management to provide evidence of the steps it would take to prevent misconduct and improve accountability.

Officials also urged the bank to address “persistent” cultural issues, including a lack of internal challenges to risky transactions and said they had not yet seen “sufficient evidence of effective remediation.”

Being added to the watchlist signals that the FCA has serious concerns, according to a person familiar with how the list operates. Only 20 or so institutions are on the list at any one point out of the roughly 60,000 the FCA regulates, the person added.

Groups on the list are closely monitored by top-level officials at the regulator, required to show progress and address the root causes of issues that are of concern.

Among the companies that have been on the list are Lendy, the now defunct UK peer-to-peer lender, and Provident Financial, the subprime lender that has been investigated by the regulator over its assessment of loans.

Rolling scandals over the past 24 months at Credit Suisse have exposed weak risk controls, forced the bank to issue a succession of profit warnings and battered its share price.

Among the highest-profile was the implosion of Greensill Capital in March 2021, which forced the bank to shut $10bn of funds tied to the supply chain group. Weeks later Credit Suisse suffered a $5.5bn trading loss — the largest in its 166-year history — following the collapse of family office Archegos.

Last October, the bank agreed to pay a £147mn FCA fine as part of a package of settlements with four regulators in three countries for its role in the long-running Mozambique ‘tuna bonds’ scandal.

The FCA has put the bank’s international division and UK operations on the watchlist because it regulates those.

In the May letter, the watchdog asked the bank to take a number of steps, including to conduct a review in the second half of the year on the effectiveness of Credit Suisse International’s board, risk and audit committees.

The FCA said it had made the requests for the reviews after consulting with Finma, the Swiss regulator. Finma declined to comment.

The FCA also has concerns over whether the bank adequately reported breaches of conduct rules for a number of years, according to the letter, which also noted a lack of curiosity from the bank about the root causes of its failings.

In late April, Credit Suisse said that David Mathers, the bank’s chief financial officer and chief executive of Credit Suisse International, a role he has held since 2016, would be stepping down from both positions once a successor had been found.

Several people with direct knowledge of internal discussions said Mathers had been in talks with group chief executive Thomas Gottstein about his departure for at least two years and it is not linked to any regulatory matters.

In a statement to the Financial Times, Credit Suisse said: “We do not comment on our discussions with regulators, nor would it be appropriate for us to do so. As we have summarised before, we are now well advanced in executing the plan to strengthen our businesses and our risk culture.”

The FCA declined to comment.

“I think LBOs are very ugly. I think they are harmful to individual working people. I think they honestly stink,” Carl Adkins told the Wall Street Journal in 1990. Adkins was an employee of Safeway, the US grocer who, at the time, was owned by the private equity titan, KKR.

KKR’s 1986 buyout would become perhaps its finest deal ever after it turned a few hundred million dollars of equity invested into about $7bn in profits eventually split among investors in KKR funds, Safeway senior management and KKR executives.

For the grocer’s workers, the story turned out differently. That Wall Street Journal feature would go on to win the Pulitzer Prize for its searing portrait of how Safeway employees were treated by private equity; a business model that, while making fortunes for a select few, had led to mass lay-offs, family upheaval and, in some instances, suicide.

Last month, KKR announced it had sold an Illinois-based portfolio company, CHI Overhead Doors, for $3bn. That locked in a return of 10 times its 2015 investment, a stunning percentage return the firm had not seen since the go-go 1980s. But in this instance, the company’s employees appear to have met a much rosier fate under the firm’s ownership. For years, KKR has touted a programme under which it awarded equity, that supplements regular pay, to ordinary employees at its industrial portfolio companies.

Since taking over CHI, ordinary workers had received a few thousand dollars in dividends. However, upon the recent sale, KKR said that about 625 CHI line workers, including those who drive trucks and stand on the assembly line, would net $175,000 in average profits. Cameras for a subsequent publicity blitz were rolling at CHI’s rural Illinois plant when they were told of their windfalls, instantly changing the lives of working-class employees.

KKR itself has helped start an entire non-profit group to evangelise employee ownership. Its ranks include the likes of McKinsey, Apollo and others not previously celebrated for their humanity. KKR insists share grants are not about charity but rather have boosted employee engagement and then ultimately profits and cash flow.

The popular employer review website, Glassdoor, shows the poles of that ownership orientation. One anonymous poster wrote: “The [CHI] CEO does not care about anything but the EBITDA . . . He just wants to milk this place of every dime they can for the private equity owners.” 

Another departed worker, however, missed the ownership benefits, writing, “great pay and profit sharing for plant employees. I randomly receive a check for a couple grand because of [CHI’s] performance and I never get that at my current plant. Never should have left these guys.”

The enormous operating leverage in private equity has created an enormous pot of wealth to share with labour. KKR itself has cited widening wealth inequality as a reason to encourage labour to share in the bounty of ownership. KKR has a market capitalisation of roughly $50bn but only about 3,000 employees. It reported 2021 median employee pay of $320,000, a figure twice that of median employee pay at Goldman Sachs.

KKR paid an aggregate price of about $700mn for CHI in 2015. Its equity investment of $250mn is now worth an estimated $2.5bn. Of the more than $2bn in gross deal profits, $115mn is flowing to 650 CHI hourly workers and drivers. A total of 800 employees will collectively net $350mn.

David Webber, a professor of law at Boston University, notes that private equity’s interest in wellbeing and fairness comes amid pressure over the industry’s labour policies, preferential tax treatment and business practices. He says the sector’s poor reputation over how it treats workers is finally catching up with it. “This new initiative is a response to changing demands of the marketplace and of at least some investors. It should be welcomed, though I think some vigilance is in order to make sure it persists,” he says.

At the very least, the shift in tone remains remarkable. The 1990 Wall Street Journal article concluded with KKR co-founder George Roberts saying that Safeway employees “are now being held accountable”. “They have to produce up to plan if they are going to be competitive with the rest of the world. It’s high time we did that,” he said.

Pete Stavros, the current KKR executive responsible for the CHI investment, has struck a more magnanimous tone. “It’s a huge collection of a lot of little things the workforce did; again they did it, they earned it, they made this company more than triple, almost four times their profits, and so shouldn’t everyone participate? That’s the simple philosophy,” he says.

Author's email: sujeet.indap@ft.com

Eileen Drake previously owned two mobile phones — one for work and one for personal use — but the former US Army pilot was recently forced to purchase a third device to wage an unusual boardroom battle.

The longtime chief executive of Aerojet Rocketdyne, Drake is using her new phone to persuade shareholders to keep her in place, ahead of a vote in late June.

Incumbent bosses usually feature on the official company slate of nominees for a board election and their administrative expenses are paid by the company. No one objects when they use the trappings of their office, including work-issued mobile phones, to lobby shareholders.

However, in one of the most unusual corporate battles in recent memory, there will be no Aerojet slate at a June 30 meeting as two rival factions, each with four members of the eight-person board, square off for control of the company.

The strange state of affairs stems from a dispute between Aerojet’s chief executive and its executive chair, over a failed sale of the company to Lockheed Martin. The acrimonious spat has even seen Drake allege that her adversary offered her expensive handbags as an inducement to alter the terms of the deal.

Drake is still running operations at Aerojet, the last US independent maker of missile propulsion systems. Yet she must refrain from using company resources in the election campaign, according to a Delaware court order from February.

“It’s tough. It’s not how I’m used to doing business. You know, I mentioned being the CEO is a pretty busy job,” she recently testified in court. “Any time I talk to a shareholder, I start the conversation with, ‘I’m talking to you now as Eileen Drake, a shareholder, and not Eileen Drake, the CEO of Aerojet Rocketdyne’,” adding that she had been careful to filter her investor lobbying through her new, third phone along with a distinct Gmail account.

Drake’s adversary in the board election is Aerojet’s executive chair, Warren Lichtenstein, who through his listed holding company, Steel Partners, owns 5 per cent of the company. Drake has insisted that her group is the plucky underdog that lacks the deep pockets of its tycoon opponent. 

Lichtenstein, however, has sued Drake, accusing her of violating the court’s neutrality order and quietly using the advantages of her office to wage her proxy fight. A Delaware ruling is due this week and the findings in the decision may sway Aerojet shareholders for one or the other. 

Lichtenstein, who has already found a replacement for Drake should he triumph, was once her biggest fan. In 2015 he tapped Drake, formerly an executive at Ford Motor and United Technologies, for a role at Steel Partners. Within months, he moved her to Aerojet where Steel had been an investor since 2000 and Lichtenstein had been executive chair since 2016. The company manufactures rockets that power the projectiles that fly into the atmosphere or space including various missiles as well as satellites and other spacecraft and it counts the Pentagon and Nasa as key customers.

In 2019, Lichtenstein said that Drake “led the transformation of Aerojet Rocketdyne as CEO and as a member of the board, building a culture of continuous improvement and operational excellence”. 

Both have said in recent court testimony that their once productive working relationship unravelled over the company’s attempted $4.4bn sale to Lockheed Martin. Announced in December of 2020, the deal collapsed earlier this year after US regulators sued to block it and prevent Lockheed from vertically integrating missile production. 

Drake wrote in court filings that Lichtenstein “pushed to abandon discussions with Lockheed and advocated for a financial re-engineering strategy — a strategy to boost temporarily the company’s stock price, while dissipating cash” followed by threatening her job. 

She testified that as the Lockheed discussions progressed, Lichtenstein pressed her to push for an all-stock transaction rather than a cash buyout, even promising that he would buy her a Birkin handbag, a luxury accessory from Hermes whose price tag can exceed $100,000. “And I kind of chuckled it off, but it was a bit inappropriate,” she said in court. Lichtenstein testified he had indeed offered Drake expensive handbags but as a proper incentive to secure a higher deal price.



Lichtenstein ultimately joined the board in unanimously approving the all-cash terms of the acquisition. But Drake’s grievances would only compound during 2021. She wrote three separate memos to the board through the course of the year expressing concerns that Lichtenstein in interactions with other defence company executives was undermining Drake while sharing his scepticism that the Lockheed buyout of Aerojet would close. 

Drake would go on to accuse Lichtenstein of other objectionable behaviour including bullying the company’s investment bankers and inundating Aerojet’s management with data requests. She also later shared that she stopped meeting with Lichtenstein in person as he often insisted that they meet at a restaurant or at his seaside home in southern California on weekends. 

“I had absolutely no problem, and I don’t today, if Mr Lichtenstein wants to have a professional meeting in the office, in one of our locations, but I did not at this time, with everything that was going on, want to meet with him in his house, which I typically had to sit on the couch with him.”

Lichtenstein in his testimony said he often conducted meetings at his homes. He has accused Drake of threatening to resign in 2021 if he did not co-operate with her strategy, adding that Drake was no longer fit to be chief executive since she had not prepared for the possible termination of the Lockheed deal.

The simmering conflict between the chief executive and executive chair boiled over publicly early this year. On January 25, the US Federal Trade Commission announced it would sue to block the closing of the Lockheed transaction. Around then, Lichtenstein proposed to his fellow directors that the existing board should shrink from eight to seven after one director indicated he planned to retire after the upcoming May annual meeting. Drake and her allies were suspicious. Lichtenstein would control four votes, allowing him to jettison the chief executive even as a company investigation into his conduct remained ongoing. 

Attempts at compromise between the two factions failed and on February 1, Lichtenstein launched his campaign for a full slate of seven directors — his four existing loyalists and three newcomers. And in what would become the flashpoint for the legal dispute between Drake and Lichtenstein, later on February 1, Aerojet distributed an official company press release that said Aerojet was “disappointed” by Lichtenstein’s gambit while it also disclosed publicly for the first time that his 2021 conduct was facing board investigation. 



Lichenstein quickly sought a temporary restraining order from a Delaware court arguing that Drake and the company could not speak on behalf of Aerojet against him without board authorisation.

Later in February, the Delaware Court of Chancery granted the restraining order, writing in its opinion that “[w]hile the board remains split on the question of who should serve on the company’s slate of director nominees, the company must continue to stand neutral”.

Drake has argued in her court papers that the company’s management was at liberty to act against the threat that they say Lichtenstein posed to seize control of the company. Still, Drake has also maintained that she has abided by the restraining order and denies Lichtenstein’s accusations that she had relied upon company employees and resources to battle her challenger. 

“It is the board’s decision to nominate a slate and if it doesn’t, I’m not sure that there can be an official company slate,” said Jill Fisch, a corporate governance scholar at the University of Pennsylvania law school. “Day-to-day operating decisions even with respect to SEC filings and shareholder communications are typically delegated to management. However, the board is still the ultimate authority on director elections.” 

The upcoming June 30 shareholder meeting was only scheduled because Drake requested and received consents from more than 25 per cent of shareholders as the paralysed board itself did not set a date.

In May, Aerojet released the results of the investigation of Lichtenstein, deciding it would formally reprimand him for inappropriately “expressing scepticism concerning the likelihood of the merger being approved, and approach[ing] two parties to inquire regarding their interest in becoming CEO if the merger did not close and criticising Ms Drake’s performance”. Lichtenstein was, however, cleared of “harassment” and “retaliation” related to his numerous information requests to Aerojet management. 

Despite the bitterness of the dispute, there is a chance that Drake and Lichtenstein settle the proxy fight before the late June vote. A person close to Lichtenstein maintained that Drake had been willing to leave Aerojet for a package of almost $50mn. Drake, in a statement, called that figure “false” and said that “the members of her slate are committed to continue the fight for the election of a board not controlled by Steel Partners”.

Drake had once estimated that the proxy fight could cost her group $10mn in expenses. However, in a recent securities filing, she wrote her expenses would only total $750,000, in part because Aerojet’s company legal and financial advisers quit those roles to join her team either without charge or on a contingency basis. Should the referendum happen and Drake prevail, the new board could then decide to reimburse all of her expenses — including those for her latest phone.

The financial fortunes of eurozone members are diverging. The European Central Bank worries about such fragmentation. It reversed its long-held permissive stance on interest rates to a hawkish position last week. Rates are certain to rise next month, as widening sovereign bond spreads forewarn.

Central banks desperately wish to stifle rising inflation, yet avoid the loss of jobs and economic growth that could well follow. Solving that conundrum is complicated for the ECB by a European commitment to prevent financial conditions diverging across the currency bloc.

Already, spreads (versus German Bunds) in Italy and Spain have soared back to levels last seen during the pandemic — nearly 240 basis points for Italian 10-year bonds — hinting at fragmentation. Bank investors will need to pay close attention. At these heights in the past, the ECB started buying government bonds to help reduce spreads.



This year, European banks have waited hopefully for rate rises and the extra loan income these should generate. However, all is not that simple. In Italy, banks remain vulnerable to the falling values of their holdings of sovereign bonds.

The good news is that these institutions are fitter and leaner today than a decade ago. Non-performing loans as a proportion of the total are in line with other European peers. Profitability and importantly capital buffers — up by half — are both higher than at that time.



That is not to say risks have evaporated. Elevated spreads during the previous sovereign wobbles knocked about half a point from Intesa Sanpaolo’s common equity tier one ratio, notes Andrea Filtri at Mediobanca. Intesa alone holds €46bn of Italian and Spanish sovereign bonds. Meanwhile, the bank still plans to return €3.5bn of capital to shareholders this year. That raises a risk it would not meet its 12 per cent CET1 ratio target.

The upshot is that taming EU-wide inflation and avoiding fragmentation may be irreconcilable aims for the ECB. The former matters more than the latter. A deterioration in the capital position of some Mediterranean banks may therefore be an inevitability investors will simply have to live with.

The writer is chief US economist at Morgan Stanley

A big economic trend since 2000 has been the sharp drop in labour’s share of corporate income in the US.

This unprecedented decline has marked a break in the fundamental relationship between real pay after inflation and productivity. While productivity growth continued, real wages flatlined for more than a decade, from 2000 to 2014, spawning a divergence never before seen in the recorded data.

The beneficiaries of the fall in the labour share have been corporations and their owners, with nearly a 50 per cent increase in profit margins relative to their 1990s level. But the tide is turning and investors need to take note.

Economists as far back as Keynes have commented on the stability of the labour share in historical data. This aligns with the theory that labour compensation should rise one-for-one with productivity gains. Otherwise competitive markets would lead to labour being bid away by a company willing to pay higher wages in order to capture the productivity surplus.

Academics have proposed a range of explanations for the shift in income away from labour in the US, including globalisation, technological change, market concentration and the rise of superstar firms, and diminished worker bargaining power.

It is the last of these theories that is most convincing, given that the US is the only developed economy to experience a sharp decline in the labour share of corporate income over this time period.

An acceleration in the decline of labour market institutions such as unionisation, together with long-term erosion in real minimum wages, weakened labour’s hand in negotiations with capital owners. But around 2015, well before the pandemic, things began to change.

The labour share bottomed in 2014-15, followed by a slow reversal, before experiencing a sharp jump higher during the pandemic. Policy support and the rapid recovery from the pandemic have accelerated the return to old norms.

For both fiscal and monetary policymakers, labour market strength has become an overarching policy goal. For example, provisions in the Coronavirus Aid, Relief, and Economic Security Act (also known as the “Cares Act”) are aimed at boosting labour force participation by alleviating the cost burden of childcare. Moves by the Biden administration to curtail market concentration and strengthen workers’ rights will also be supportive.

Up until August 2020, the US Federal Reserve’s mandate to achieve maximum employment had revolved around the unemployment rate. It has been redefined as a “broad-based and inclusive goal” designed to drive tightness in the labour market that reaches the most underserved segments of the working population.

A strong and inclusive labour market is likely to strengthen labour’s bargaining power. History may ultimately attribute upward wage pressure during the pandemic to the Great Renegotiation rather than the Great Resignation.

The Census Bureau projects that population growth will continue to fall through 2050, which should help keep labour markets tight. The rise of prime-age workers as a share of the overall workforce should also support the workers’ economy as companies are forced to align core values with those of their employees. These fundamental changes support the view that the labour share will continue to reverse its long structural decline.

Evidence of this structural shift is increasing. In April, Amazon workers in Staten Island, New York voted in favour of a union. Workers at Apple are expected to hold union votes this year. The number of unionised Starbucks stores has increased and the company has announced it is investing $1bn in its employees and stores, including pay raises.

A full reversal in the labour share of income would reduce pre-tax margins significantly, with outsized effects on smaller-sized businesses.

Larger firms tend to have more pricing power, and firms with less labour exposure and more international earnings could also sustain higher profit margins. Domestically focused and highly discretionary sectors such as hotels, retail, restaurants and leisure stand out as particularly vulnerable.

The outlook for a continued reversion in the labour share toward its historical level implies that wage pressures are not just a temporary phenomenon. Wage growth powered by the rapid recovery from the Covid-19 shock may ease as the economy and labour market loses some steam, but higher wages are here to stay.

A senior Credit Suisse investment banker was removed from his position earlier this year after he was found to have used unapproved messaging applications with clients, according to people with knowledge of the matter.

Anthony Kontoleon, known as “AK” to colleagues, was Credit Suisse’s global head of equity capital markets syndicate in New York and left his position in April. He is set to depart the bank, where he has worked for 28 years.

The action taken by Credit Suisse comes amid a US government investigation of record-keeping practices across Wall Street.

Credit Suisse decided to remove Kontoleon from his role after an audit of several dozen of its bankers found that he had used personal messaging applications to communicate with clients, the people added. The audit did not find that Kontoleon had shared any inappropriate information.

In a memo to staff in April, Credit Suisse’s global head of equity and debt capital markets, David Hermer, said Kontoleon had informed him that he would be leaving “to pursue other opportunities”.

Kontoleon declined to comment and referred any questions to the bank. Credit Suisse declined to comment.

Kontoleon’s exit follows a string of scandals at Credit Suisse in the past two years, including a $5.5bn trading loss from lending to family office Archegos Capital Management and the bank’s recommendation that clients invest in funds tied to Greensill Capital, a supply chain finance company that later collapsed.

Credit Suisse in March disclosed that it was co-operating with a Securities and Exchange Commission investigation into its US subsidiary’s compliance with record-keeping requirements related to business communications sent over unapproved messaging channels.

Credit Suisse’s management hoped that a high-profile departure such as that of Kontoleon would be seen by US regulators as a sign that the bank was taking the matter seriously, said one of the people with knowledge of the matter.

JPMorgan Chase in December agreed to pay $200mn in fines to the SEC and the Commodity Futures Trading Commission for failing to keep records of staff communications on personal devices, in an action that spooked many Wall Street banks.

At Credit Suisse, Kontoleon connected private companies with public market investors, and worked with public companies when they wanted to do block trades or secondary transactions. He worked on some of the bank’s biggest stock market listings, including initial public offerings for US ride-hailing company Lyft, Chinese ecommerce giant Alibaba and Google.

His departure underscores the extent to which a record-keeping investigation on Wall Street is creating anxiety inside large banks, where text messaging apps such as WhatsApp have become commonplace.

Following the JPMorgan fine, other lenders including HSBC and Goldman Sachs disclosed that US regulators were looking into whether their bankers improperly used personal messaging apps to do business.

Syndicate desks, such as the one where Kontoleon worked, are attracted to text messaging for quick and easy communication because they are in constant dialogue with hedge fund and asset management clients about stock sales and market activity.

The practice became more common when bankers started working from home during the Covid-19 crisis.

“During the pandemic, people got so accustomed to just texting outside of the controlled environment,” said one senior Wall Street banker.

Bankers at companies including JPMorgan and UBS have started to use an app called Movius on their phones, which records all calls and logs text messaging.

In a further sign of Credit Suisse’s worries over the record-keeping issue, the bank in December asked its employees to let it access their personal mobile phones and other devices if they used them to communicate with clients or colleagues.

Additional reporting by Arash Massoudi in London

Uğur Şahin arrives at BioNTech’s headquarters in the German city of Mainz on the same battered bicycle he has been riding for 20 years. Developing the best-selling Covid-19 vaccine may have transformed BioNTech’s founders into billionaires, but the chief executive of the biotech business has resisted making changes in his personal life.

Şahin and his wife, chief medical officer Özlem Türeci, set up BioNTech in 2008 to create a toolbox to transform the treatment of cancer. Since finding fame, their vision has not shifted. When practising as doctors, the pair had become frustrated at the gap between the cancer drugs available on the wards — and what they believed was scientifically possible.

So, while the mRNA vaccine they developed with the American pharmaceuticals company Pfizer has saved millions of lives and brought economies around the world back to life, it was also, in some ways, a side hustle. BioNTech “is a cancer company that was able to drop everything they were doing to create a Covid vaccine,” says Akash Tewari, an analyst at Jefferies.

The decision to do so has brought an unprecedented windfall of cash to the company, which is now sitting on assets of €19bn, with billions more in revenue expected. That amount equates to “a lifetime of funding”, says Suzanne van Voorthuizen, co-head of life sciences securities at Dutch bank Kempen & Co.



While some billionaires use their wealth to buy newspapers or fund extraterrestrial adventures, Şahin and Türeci will use theirs to fuel their ambitious — though still nascent — plans in oncology. They are doubling down on a hope that Şahin admits once sounded like science fiction: to be able to tailor drugs to each patient’s cancer.

The company recently took steps in the right direction with two early stage trials showing promising data, one in pancreatic cancer and the other targeting solid tumours including ovarian and testicular cancer.

Success would mean a new journey: reimagining the whole pharmaceutical industry.

“We had this idea to develop technologies dedicated to really saving every single individual patient,” says Şahin. “Because every patient is different, and you can’t just take something off the shelf.”

The Covid cash

Şahin wheels his bike around the perimeter of a huge hole on the plot of the company’s site — the foundation for a new 20,000 square foot building. Across from his office, a three-storey temporary lab in portacabins has popped up to press on with the mission right away: this year research and development spending at BioNTech is doubling to €1.5bn.

Dropping his helmet in his office and donning a white coat, Şahin heads to the lab. Inside, a machine synthesises the DNA templates used to create messengerRNA, the technology BioNTech has helped to pioneer.

The mRNA acts as a set of instructions to cells, telling them to build certain proteins. The response to the pandemic proved for the first time that the technology could be used to create a highly effective vaccine: mRNA was deployed in a vaccine to help the immune system recognise and fight intruders such as the coronavirus Sars CoV-2. Next, BioNTech wants to use the code to prompt the body’s defences to tackle a tumour.

Yet, unlike its American rival Moderna, which is focused on how to deploy mRNA across a range of infectious diseases and other conditions, BioNTech wants to use mRNA to tackle cancer, working in combination with other therapies. Şahin and Türeci believe the best hopes of a cure will come from combining different treatments, including cell therapies, antibodies and other ways of modulating the immune system.



Before the pandemic, the company was a little known player in the $1.2tn global pharmaceuticals market that is dominated by long-established companies pursuing many disease areas at once. In its 2019 initial public offering, BioNTech struggled to get investors excited, raising just $150mn; two years later it had become the most promising biotech in Europe.

Matthias Kromayer, a managing partner at MiG Capital, who was a founding investor in BioNTech, says when he invested he didn’t even believe in the potential of mRNA. He gave the baby BioNTech money because the founders seemed to understand how technology would change healthcare, he says. “BioNTech isn’t just a biotech company. It is a multi-tech company and has been from the beginning . . . Ugur is always thinking 10 years ahead.”

In April, BioNTech unveiled results of a study that combined mRNA with CAR-T-cell therapy to reprogramme a patient’s immune system. CAR-T is a complex treatment that involves collecting and modifying a patient’s immune cells to fight their cancer. So far, it has only worked in blood cancers. But BioNTech scientists created an mRNA booster that expanded the number of immune cells and improved their ability to kill a solid tumour, making it useful in a far larger range of cancers.

Brad Loncar, a biotech investor who runs a fund focused on cancer, declared it “borderline revolutionary”. “It is so interesting that it has the entire field rethinking how to go after solid tumours,” he says.

BioNTech’s strategy is to invest in many different technologies at once. Şahin uses the analogy of a smartphone that becomes more useful as you discover its many functions. “You understand it is not just a smartphone, it is a calculator, it allows you to do anything,” he said. “Based on the powerful platforms that we are developing, we believe that we will be able to provide a lot of different solutions for many diseases.”

Broadly speaking, the BioNTech founders see themselves as engineers of the immune system. Beyond cancer and infectious diseases, where the company continues to partner with Pfizer on vaccines, they also plan to tackle autoimmune conditions and regenerative medicine, which restores damaged or diseased cells. In total, the company is already running 19 early stage trials and 12 pre-clinical programmes.



Their newly bulging pockets permit such largesse, says one healthcare banker. A more cash-strapped company would have to be more selective and risk “throwing a great technology in the bin”. At the end of March, BioNTech’s assets were more than €19bn, surpassing even Moderna’s €16bn, and more than half that of large European pharma companies GlaxoSmithKline, AstraZeneca and Novartis.

Cancer trials are expensive, especially if a company has to first buy the drug it wishes to combine with its treatment. And personalised products such as CAR-T have proven difficult to market in a global healthcare system that is more familiar with buying drugs off the shelf like consumer goods.

With valuations of biotech companies dropping this year, Gareth Powell, a healthcare fund manager at Polar Capital, says BioNTech is lucky it can fund so many programmes. “If they didn’t have the Covid cash . . . I would imagine they would be under severe pressure,” he says. “The capital markets just wouldn’t be there for them to do this stuff.” 

‘Money doesn’t grow on trees’

Bryan Garnier & Co was part of a team of banks that helped take first Moderna and then BioNTech, public. Pierre Kiecolt-Wahl, co-head of equity capital markets at the French bank, says Moderna took a more incremental approach than BioNTech’s, focusing first on infectious diseases, where it hoped to show signs of success quickly that could persuade investors to put in more funds.

“Moderna knew money doesn’t grow on trees,” he says. By contrast, he says Şahin and Türeci were more confident that they had data to fight cancer.

But even though it now has substantial financial resources, long-term success is not guaranteed. Loncar says it may yet turn out that mRNA doesn’t really work for cancer. “There’s a non-zero per cent chance that mRNA may completely strike out in cancer,” he says. “If that happens, BioNTech is going to feel it a lot harder than Moderna will.”

Oncology is far trickier than creating vaccines — Tewari, the Jefferies analyst, describes it as “scientifically byzantine” — and it is a hypercompetitive field, with almost every major pharmaceutical company scouring for treatments for the same conditions.



BioNTech’s most advanced clinical oncology programme is for cancer vaccines. Unlike regular vaccines, they do not prevent the recipient from developing cancer, but are used as treatments to prompt the immune system to destroy mutated cells. In phase 2 trials, it has two FixVac programmes, where the vaccines are not personalised, and two where they are.

Hopes for creating cancer vaccines have been dashed many times before. “It is a concept that has been around for decades. But there has been failure, after failure, after failure,” says Loncar.

He says one problem could be that therapies are being deployed too late. New therapies are usually tried first in patients who have not responded to previous drugs and usually have later stage cancer, but he believes they might work better at an earlier stage, when the patient’s immune system is more robust.

Şahin counters that BioNTech has overcome a number of “critical hurdles” and that its early data shows its mRNA cancer vaccines are eliciting immune responses several hundred times stronger than were previously reported for conventional cancer vaccines.



The company is also doing trials in earlier stage cancers, and is particularly interested in giving the vaccines just after patients have had surgery to remove the primary tumour. In a phase 1 trial presented this month, the company showed positive results treating pancreatic cancer patients shortly after surgery.

But as well as the scientific uncertainty, BioNTech will face practical challenges as it tries to disrupt the pharmaceutical business. The company will have to push regulators to adapt to individualised therapies that break the mould of conventional clinical trials. While such trials usually take several years and lead to an approved product that never changes, the founders want to be able to update their medicines — like an iPhone — as new data improves algorithms that predict the best way to target a tumour.

Türeci says the company has to take the “smallest steps” with “conservative” regulators whenever they enter new territory. “The problem with the way medicines are developed is that, at that time when you have something you can approve for patients and bring it to the market, the technology is already outdated [by] several years,” she says.

The ‘smallest steps’

While BioNTech’s has no need to beg investors for more capital, the company will still have to navigate expectations of shareholders who bought it as a Covid stock. Shares in BioNTech have fallen by about 20 per cent in the past year, after some investors sold in anticipation that sales of the Covid vaccine would slow. But the stock is still up more than fourfold since March 2020, when the company first announced it was developing a shot with Pfizer.

Loncar, the cancer-specialist investor, does not own BioNTech primarily because it still trades as a Covid stock. He believes shareholders may be in for a surprise. “Investors have been really spoiled by how quickly the Covid-19 vaccines succeeded and how well they did. That’s not normally how drug development goes,” he says. “One thing I worry about is they have a shareholder base today that expects them to succeed in non-Covid things tomorrow.”



Şahin tries to be sanguine about the company’s stock — he says he looks the price up about once a week, far less often than he checks medical journal sites. And he stresses that the company has always been clear with investors about its true vision: “We can’t guarantee to them what is going to happen in the next Covid season. This is more dependent on what’s happening in the world and how the virus is evolving, and less dependent on our competencies.”

Still he was surprised recently when the share price rose as investors anticipated the company would create a vaccine for monkeypox. (BioNTech has not started work on a jab for the spreading disease. Şahin says they are “preparing ourselves to be prepared” to do so, but it does not look like a global challenge yet.)

Some investors are asking whether BioNTech can handle quite so much cash — and take on so many challenges at once.



While the company has decided to use the vast majority of its vaccine proceeds for internal investment, with just a couple of small bolt-on acquisitions, it did announce plans to return almost €2bn to shareholders in a buyback and dividend. This also divided shareholder opinion, because it is so unusual for a biotech with many programmes in early stage development to cough up cash. “It was a terrible idea,” says Powell at Polar Capital. “It’s such a waste of money.” 

But analysts say that most long-term investors trust the founders who delivered the Covid vaccine at such scale and speed. Van Voorthuizen at Kempen says they are particularly “diligent” about structuring their trials so that they give solid answers to specific questions. “They will stop [a trial] if it doesn’t work. They are not depending on one or other programmes to make or break the company,” she says.

The healthcare banker believes BioNTech is “by far the most exciting biotech in Europe”, adding that there are no founders more inspirational than Şahin and Türeci. “They are so insanely smart and they work so damn hard,” he says.

Türeci describes how Şahin can suck up information, rapidly reading dozens of papers on a new condition. “It’s sort of something like machine learning what he does,” she jokes. “In a weekend, the entire history of science on this specific topic.” 

Governments from around the world are calling for advice for birthing their own versions of BioNTech, Türeci says. But, just as the company surprised the world in 2020 by navigating the uncharted waters of mRNA vaccine development, Türeci says they are once again heading into “unknown territory”. And this time, success is not likely to happen at lightspeed.

At Shiseido’s grand unveiling of its new plant in the southern port of Fukuoka last month, its chief executive Masahiko Uotani flaunted the branding power of its “Made in Japan” products for its consumers in Asia. 

Since 2019, the cosmetics giant has spent ¥145bn ($1bn) on the construction of three new plants in Japan, sparking debate over whether the yen’s drop to a 24-year-low against the dollar has triggered “reshoring”.

The narrative is an alluring one. Prime Minister Fumio Kishida has positioned economic security at the heart of his economic agenda, pushing for the return of production from overseas with an explicit intention to reduce the country’s reliance on Chinese supply chains.

Skincare products are certainly not vital to national security, but the economic impact of boosting domestic manufacturing is still significant. Shiseido has said it plans to create as many as 900 jobs at the Fukuoka plant. That could, in theory, drive a virtuous cycle of increased production, income and spending for the local economy. 

But unfortunately, Shiseido’s move does not signal the return of Japanese manufacturing — at least not in a meaningful way. Uotani’s decision was taken long before the recent bout of yen weakening, and Shiseido has not cut back on any of its global manufacturing capacity to boost production at home. 

Others are also unlikely to unwind the global production bases they have spent decades finessing to reduce their exposure to currency volatility. With a tight labour market, there are simply not enough workers in Japan even if companies wanted to bring back production.

There could be a trickle of “reshoring” among Japanese companies, but that is likely to be limited to production of higher end products on a smaller scale. And analysts say the yen’s fall is unlikely to ignite the jump in export volume Japan’s economy experienced in the past when its currency was weak. This is because many businesses no longer manufacture high-volume commodity products at home.

The weaker yen and the rising cost of imported goods pose an awkward dilemma for the Kishida administration ahead of elections for Japan’s upper house of parliament in July. 

Government and central bank officials have argued that the weaker yen remains broadly positive for Asia’s most advanced nation. But it will be mainly the big corporations with overseas operations and their network of suppliers that will reap the immediate benefits as profits earned overseas are boosted by the yen’s fall.

Without a gradual increase in wages, the weaker yen will bring short-term pain for households and small and medium-sized businesses in the form of soaring costs of food, energy, materials and logistics. This explains the public uproar last week that forced Haruhiko Kuroda, Bank of Japan governor, to retract his claim that consumers had become more “tolerant” of price rises. 

In a recent poll conducted by Kyodo News, 64 per cent of those surveyed said they did not think highly of Kishida’s efforts to address rising prices, while 58 per cent responded that Kuroda, who plans to step down next year, was not suited for the role of BoJ governor. 

As was the case in recent elections in Australia and France, higher living costs will be a key issue in the upper house elections in Japan next month. For Kishida, his response to rising prices will also be a test case for his “new capitalism” programme, which is designed to address the exact challenges posed by the weaker yen.

Since being appointed last year, the prime minister has argued that past forms of capitalism have not been “inclusive” enough, with their benefits not shared by the wider segment of the population. According to a draft of his economic agenda released earlier this month, Kishida places some of that blame on companies’s failure to invest in their employees.

Government figures show that Japan spends only 0.1 per cent of its gross domestic product on corporate human resources, compared with 2.1 per cent in the US and 1.1 per cent in the UK. 

Japan had a decade of Abenomics defined by aggressive monetary easing, economic stimulus and government pressure on companies to invest more. But this failed to achieve faster growth in pay to boost consumption and drive a virtuous cycle of demand and inflation. If Kishida does not move fast, the biggest risk is that the momentum for wage growth could be lost if global inflation leads to a worldwide recession. 

Author's email: kana.inagaki@ft.com

Japan’s second-largest oil wholesaler is following a nascent trend with plans to shut a key refinery. Idemitsu Kosan anticipates a global switchover to electric vehicles and hybrids. It needs to find a new métier to compensate for falling demand in its core business. Making hydrogen and ammonia is one possibility.

The Yamaguchi refinery, accounting for more than a tenth of Idemitsu’s total refining capacity, will stop making hydrocarbon fuels by the end of March 2024. Eneos Holdings, the country’s largest oil group, has already closed several of its own plants.

Idemitsu and Eneos are making the right move. Domestic demand for fuel oil is down more a than third in the past two decades. Operating margins are slim. They turned negative for both groups three times on an annual basis in the past decade.

Idemitsu may repurpose the plant to make cleaner energy sources. Eneos has bet on EVs, taking over rights to operate a network of electric chargers from tech group NEC earlier this month.

Yet electric cars accounted for just 1 per cent of overall car sales in Japan last year. Demand for charging time will not compensate for slim margins in refining. These were sliding well before EVs entered mass production.

Blame a longer-standing trend: Japan’s ageing population is driving less. Car ownership has continued to fall over the past two decades. A quarter of households do not own a car.

Japan’s refiners lag behind regional rivals. For example, South Korean peers S-Oil and SK Innovation operate plants with the latest crude oil processing technologies that produce cleaner petroleum products. A significant chunk of their sales comes from global exports.

Shares in Idemitsu are up more than a third in the past year, and Eneos’s have risen a fifth. Those gains reflect higher oil prices rather than clean energy evangelism. At the current tentative rate of transition, it would be a long time before batteries, hydrogen and ammonia became viable substitutes for refining.

The writer is founder of the hedge fund advisory Totem Macro and former head of emerging markets at Bridgewater Associates

We’re at the sort of inflection that only strikes once or twice a century. That’s what makes it tricky.

Most people alive today grew up alongside a simply historic rise in financial wealth. We know nothing but relentless asset appreciation, propelled by disinflation and falling rates. Liquidity outpaced the economy. So did asset prices. But violent financial and geopolitical regime change is upending that status quo and the bubbly valuations that hinge on it.

Disinflationary, liquidity-dependent assets are of course the opposite of what you want under opposite macro conditions. But after 40 years of hyperfinancialisation and the recent orgy of money-funded speculation, these assets are most of global market capitalisation.

What good is financial wealth, if not to ultimately spend it? The period of building “paper claims on real things” is over, and these claims are being called in. So assets deflate and “real things” inflate. Aggregate measures like market cap-to-GDP and wealth-to-income are down, but barely off extremes. In this new era, a lot of the “financial wealth” we built will prove illusory.

These arcs of history are bigger than any man, but Richard Nixon’s gold and China policies set the parameters of the world we’re now leaving. More money was printed since the US abandoned the gold standard than during any other peacetime period. We spent more than we made. But globalisation simultaneously supplied us with output from the world’s cheap labour, and a privileged ability to import the world’s savings.

Global integration kept prices down and the dollar supported, funding twin imbalances by supplying ample buyers for US paper, which of course only went up in that regime just like all assets. This was turbocharged by a unique global peace under a unipolar dollar standard. The point is that it was a virtuous cycle, and it was a fluke.

We bookended secular US exceptionalism with cyclical US exceptionalism. The old-economy boom gave way to a new-economy bubble. Winners naturally rotate across cycles, and that rotation was overdue before the Covid-19 pandemic. Then our great leaders seized the excuse to take printing-and-spending to an unsustainable extreme. So what’s now happening is the inevitable cyclical baton-pass, secular regime change and a monetary contraction of untested size (always bad) — all from bubble levels.

There is no immaculate disinflationary force to counteract the demand shock this time. This isn’t a supply crunch — volumes of almost everything are at highs. But immaculate disinflation is what is priced in. Markets expect inflation and interest rates to converge at around 3 per cent, with negative real rates the entire time. Seasoned watchers of emerging markets know a Brazilian policy mix gets you a Brazilian growth/inflation mix.

The economy is overheating, external dependencies are growing, real rates are negative and policymakers are just waking up. Next step, your currency falls and inflation persists until you give your foreign creditors the positive real returns they demand, crushing the economy at the same time. What EM investors have never seen is how this macro volatility looks on overleveraged DM balance sheets. Volatility and leverage are antithetical concepts. So, inflation must remain above interest rates to first eat through the debt. The base case must therefore be a repeat of the inadequate tightenings and chronic inflation of the 1970s.

There are countless strategies, but only two ways to make money in the markets. You can bet that something’s going to happen that’s not priced in, earning alpha. Or you can position yourself along the spectrum of “zero-to-max risk” and earn the prevailing rate. This gets you returns on cash or a positive risk premium, beta. Cash pays below inflation, while risk premiums are historically small.

Assets quite simply extrapolate what were always fundamentally unsustainable cyclical and secular conditions. So you’ll need to get real returns from alpha. The “thing that’s not priced in” is that both inflation and interest rates will be much higher, for much longer, than the markets are willing to price. Both are, independently, a death knell for assets, at least in real terms. Higher rates won’t bring down inflation if they remain below nominal growth, because in that world cash flows are rising faster than the cost of acquiring and servicing them. But the end of abundant liquidity can certainly crush assets trading at many multiples of sales.

When one complaint is the complexity of the status quo, it’s a good sign if the proposed solution is obviously clear and simple.

The latest ideas to overhaul the listing regime for the London market fail that test.

The UK markets regulator wants to crunch together the existing “premium” segment that requires the highest levels of corporate governance standards with the more lightly regulated “standard” segment — a response to concerns that a two-tier market creates a stigma that deters companies from listing in London.

In reality, it isn’t that straightforward. The proposals are convoluted, could achieve little and suggest faltering confidence in the efforts to reinvigorate London as a listing venue.

The problem, as laid out by the regulator, is this: the UK’s share of global initial public offerings fell from a tenth in 2006 to half that by 2018, according to New Financial.

These proposals are part of a package of measures that started with the Hill report last year, which introduced dual-class share structures into the premium segment, established a UK regime for special purpose acquisition companies and dropped the required free float to list. There are also likely to be changes to prospectus rules, and reforms to ease and speed up raising money after listing.

For a project that is aiming to simplify, what’s on offer is rather complicated. The idea is that there would be a single segment, with a mandatory set of regulatory requirements: those would include adherence to the “comply or explain” corporate governance code, for example, which currently attaches to premium listings.

But companies could opt to meet a “supplementary” set of obligations, that includes rules around controlling shareholders and approval for significant deals. To confuse matters further, the standard segment would also remain — but only for secondary listings, global depositary receipts or debt issuers. (A separate proposal changing the reporting and accounts required to be eligible to list does actually seem helpful for high-growth or acquisitive companies.)

This feels suspiciously like replacing one two-tier system with another — in a way that, impressively, manages to leave both gung-ho IPO advisers and buyside governance purists underwhelmed.

“I’m not sure what problem they’re trying to solve,” said one. Some suspect a covert exercise to level down standards across the market. Nobody wants endless haggling over which of a menu of regulatory standards are in or out.

It may, in any case, prove academic: index inclusion currently attaches to the premium segment. Were FTSE Russell — which resolutely makes its own decisions — to decide that it still wants the full suite of investor protections in the index, then precious little would change.

Meanwhile, the overall push to reinvigorate London listings risks looking incoherent.

The rationale of the Hill review was that London’s buttoned-up approach to corporate governance had pushed business to go elsewhere. If you believe that (which presumably the government and regulators do), then these proposals row back on changes made only last year.

Dual-class share structures would be restricted to the slimline Hill version, used only on certain types of votes, rather than the full-fat version that companies like Wise and Deliveroo plumped for in their standard listings last year. The new single segment could therefore mean less flexibility for the tech start-ups and their entrepreneurial founders that the London market’s rebirth was supposedly designed to attract.

It wouldn’t be surprising if faith in the whole endeavour is waning. The implosion of the US Spac phenomenon has shown the dubious wisdom of chasing after elements of its market euphoria. The cheerleaders for fast-growing, pre-profit “spec-tech” have gone quiet. The high-profile tech listings that opted for London in the last couple of years, many with non-standard governance provisions, have mostly performed badly.

It is probably impossible to reconcile the concerns of reformers fretting about London’s dwindling global pull and the governance guardians who value the all-in protection of the premium badge. But this is starting to feel less like an ambitious overhaul of the London market and more like a bit of US FOMO accompanied by a slightly confused tidying-up exercise.

Author's email: helen.thomas@ft.com

There was a time when qualification as a chartered financial analyst was much more of a door-opener to a new career, changing lives around the world.

Gary Brinson, who sold his asset management business to Swiss Bank Corp in 1995, was among those to hire almost exclusively from candidates who’d made it through “Wall Street’s toughest exams”. “If we hired someone who didn’t have a CFA, we made it mandatory that they complete the CFA process,” he says.

Mike Mayo, a renowned Wall Street analyst, was one of those who saw it as a golden ticket. “I had everything riding on it,” he said of a qualification he earned aged 27. “I was going to get a CFA and go to Wall Street. I had perfect grades and an MBA, and no one cared . . . my university didn’t open any doors,” he adds. With his CFA, he went on to work for major investment banks and become a top-rated US banks analyst.

I trod the same path some 40 years after Brinson and 20 after Mayo, spending the final years of my twenties ditching friends, family, parties and common sense in pursuit of the charter.

I wanted those three letters on my business card mainly because as a young female reporter covering Ireland’s banking crisis, I wanted a shortcut to credibility. I thought the CFA would prove I was a grown-up, and would help me find my finance tribe. And, at the margins, I thought a broad grounding in finance could be a useful complement to my journalism degree.

Many of my peers had far more riding on it, especially in places like China and India, where demand skyrocketed as candidates looked to the charter for their passage to a world of high finance thousands of miles away.

But soon there would be fewer bosses like Brinson, who hired charterholders for “the discipline [they had shown] of going through that type of process and the rigour associated” with succeeding in a programme that makes a virtue of failing most of its candidates. And there would be fewer success stories like Mayo.

These days, finance bosses are ambivalent about the CFA’s benefits. “Nice to have but won’t help you get a job,” is the general verdict from a straw poll of contacts. And demand for the programme is “falling off a cliff”, according to a staff member at the CFA Institute that oversees it. In the year to August 2019, 160,900 candidates registered for the first stage of the exam. In the year to August 2021, that number was just 125,775.



The institute mostly blames the pandemic for the recent fall in demand, with China’s lockdowns prompting cancellations in the exams’ biggest market. Finance insiders say the exams have become less relevant as the curriculum struggles to keep pace with an industry where new technologies, business models and regulations appear almost daily.

Logic says pandemic lockdowns will eventually end. And the CFA Institute’s Chris Wiese says the curriculum “must” and will evolve faster. DeFi, coding and the retirement of Libor are among the more than 20 additions to the 2022-23 textbooks. But solving those issues isn’t going to arrest the underlying decline in the CFA’s stature.

Even Brinson, the most strident CFA supporter you could meet, says the knowledge that charterholders picked in the programme was just “25-33 per cent” of the reason he hired them.

The truth is, what’s in the textbooks never really mattered that much; what mattered was the stamina and character that passing the exams demonstrated. Until quite recently, 20-hour days of work and study were feats to be celebrated, and an easy fraternity was forged between those who bore matching battle scars.

But the world is changing. That kind of endurance is less likely to be openly celebrated, and is far less likely to attract the millennials who are pushing their employers for protected weekends and guaranteed vacation days.

“If you take our print books and put them in front of them [millennials], it’s daunting and overwhelming,” Wiese admits, adding that the institute is trying to make the curriculum more “bitesized” without losing rigour or comprehensiveness.

Future demand will be further sapped by the demise of traditional portfolio managers and investment analysts, the two roles that traditionally employed the most charterholders. And Wall Street’s strategy of recruiting from a wider network of schools means the CFA is becoming less likely to be needed to open doors that “non-target” schools can’t.

I’ve already made my bet. Ten years ago, I plastered every surface in my kitchen with Post It notes of formulas and definitions. I had vivid, inexplicable, dreams of being trapped in an Excel cell. That’s how much the CFA got inside my head, how much getting those three little letters meant to me. A few years ago, I decided the annual $275 fee wasn’t worth it, and gave up using the letters altogether.

Author's email: laura.noonan@ft.com

Switzerland is becoming the destination of choice for mainland Chinese companies seeking a foreign listing. Drugmaker Joincare Pharmaceutical Group is the latest to announce plans to float on the Swiss stock exchange.

Beijing hopes the alpine nation will be the new New York for companies seeking foreign funding. It may be disappointed

The SIX Swiss Exchange has recently been the choice for businesses including equipment maker Sany Heavy Industry, pharma group Lepu Medical and two electric car battery manufacturers, Gotion High-Tech and Ningbo Shanshan.

Chinese companies have dwindling options for overseas financings. Beijing tightened regulations for overseas share sales last year and Didi’s spectacular delisting has prompted local companies to rule out US floats. The Swiss market has a forward price/earnings ratio of 16 times, attractive compared with a Hang Seng valuation roughly half that.

China expanded the Shanghai-London Stock Connect programme late last year to include Switzerland. Stock Connect has hardly been a runaway success, but the move gave the country an official stamp of approval. Switzerland’s audit requirements are more relaxed than those of the US, helping Chinese companies get past a big hurdle in listing overseas while complying with Chinese law.

Pipeline deals are big by Swiss standards. Gotion High-Tech is reported to be raising $1.6bn and peer Ningbo Shanshan up to $1bn. The biggest Swiss listing last year was PolyPeptide at SwFr848mn. Swiss companies raised just SwFr3.7bn ($3.8bn) through public offerings in 2021.

There are just around 200 listed companies in Switzerland, less than a tenth of New York. Only four Chinese companies have listed on the Shanghai-London Stock Connect which went live in 2019. Trading volume remains negligible compared with China.

You might wonder what attracts Chinese issuers and underwriters such as Citic Securities, to Switzerland, given its relatively shallow market. Branding is the answer. Switzerland has a reputation for financial sophistication, if not financial transparency. A foreign listing creates a halo effect that gives confidence to customers, suppliers, lenders and insurers. All five companies mentioned above also hope to grow European businesses strongly.

Switzerland’s central bank on Thursday raised interest rates for the first time in 15 years, as it became the latest rate-setter to shift away from ultra-loose monetary policy.

The Swiss National Bank said its benchmark rate would rise by 50 basis points from minus 0.75 per cent to minus 0.25 per cent, catching markets off guard. The Swiss franc surged following the surprise decision, gaining 1.7 per cent to trade at 1.02 to the euro, the strongest level in nearly two months.

The move came just hours after the US Federal Reserve announced it would raise rates by 75 basis points, but ahead of a likely rise in rates from the European Central Bank in July.

As a big exporter, Switzerland closely watches the exchange rate with the euro and has, in the past, waited to follow a lead from Frankfurt. But expectations that inflation will remain uncomfortably high in the coming quarters led the central bank to go first.

“The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland. It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future,” the bank said in a short statement.

Inflation hit 2.9 per cent in Switzerland in May, its highest level in about 14 years.

The central bank also removed a reference to a “highly valued” franc in its statement, indicating it is backing away from a longstanding policy of trying to curb the currency’s strength.

“If we take the SNB by its word, it now seems as if it would like currency strength, to take the sting out of imported price inflation,” said Melanie Debono of Pantheon Macroeconomics.

The SNB’s shift is the first indication its governors are taking the rising global commodity prices seriously enough to consider reining in their expansive monetary policy. The central bank has aggressively used its balance sheet to try and anchor the entire Swiss economy over the past decade.

Switzerland’s status as a haven economy has meant the SNB has had to battle to suppress serious and sustained upward pressure on the currency over the past decade and a half of international crises and low rates elsewhere in the developed world. The franc’s strength was hindering the competitiveness of the country’s exports.

The SNB said it would continue to monitor the rising value of the franc, and was still prepared to conduct controversial interventions in the foreign exchange market.

Thanks to quantitative easing, the money from which the SNB invests abroad to depress the franc, the SNB now holds assets worth more than SFr1.056tn ($1.076tn), equivalent to just over 140 per cent of Switzerland’s entire annual gross domestic product, and making the bank’s portfolio even larger than the sovereign wealth funds of many petrostates.

The bank said the overall economic outlook for Switzerland remained positive. It forecasts low unemployment and a 2.5 per cent rise in GDP this year. The war in Ukraine has had “comparatively little adverse impact”, it said, other than in creating supply bottlenecks in a limited number of markets.

The global outlook was volatile, the bank said, but it believes inflation will be curbed in the medium term by rising interest rates around the world.

In the gleaming new Chipperfield extension of the Zurich Kunsthaus, all polished limestone and gold, is a room dedicated to expiating the moral debits of economic neutrality. The Bührle collection is one of the greatest privately-amassed troves of modern European art, and the pride of the new building.

It was assembled by Emil Bührle, the Swiss industrialist and arms maker who coined his millions selling weapons. To the Nazis. And to the Allies. Now, of course, the Bührle legacy needs some deft explaining. A museum within the museum — that room — does so.

Four months into the biggest war waged on European soil since Bührle’s shells rolled east and west, Switzerland is no longer the kind of place for a businessman to profit so easily from a warring world beyond the 26 cantons. But there is still some explaining to do.

In a move that has surprised many allies — and indeed, many Swiss — Bern has mirrored almost all of the EU’s sanctions against Russia.

This is no small matter: it entails asset freezes on more than 1,100 individuals with close ties to the Putin regime, hundreds of whom do business with Switzerland’s banks. And far more significantly, it involves curbs on the trading of Russian natural resources — the bulk of which are handled through the great commodity houses of Zug and Geneva. Bern insists this does not mean there has been any change to Switzerland’s long-cherished neutrality.

Others, particularly the country’s largest political bloc, the populist Swiss People’s party (SVP), disagree. Neutrality, in the SVP book, is also synonymous with trade free from political interference. Bern’s willingness to saddle up to Brussels and Washington is a betrayal of Swiss values, the SVP argues. And as faction leader Thomas Aeschi thundered in parliament earlier this month, there is no evidence sanctions are doing anything to change Russia’s course, only damage Swiss economic interests. In the words often attributed to the 19th century diplomat Talleyrand: they are worse than a crime, they are a mistake.

Aeschi has a point. Switzerland stands to lose more than western peers by imposing sanctions on Russia. There are, of course, many reasons to do business in Switzerland. But put aside the highly-educated workforce, the tax regime, the stability and the rule of law, and there is also, for a lot of people who come to the country, the appeal of Switzerland’s staunch independence. Its neutrality.

Many businesses base themselves in Switzerland precisely because they perceive the country to be a haven from regulatory, judicial and political over-reach from the US and EU.

Bankers now fret about what Chinese clients may think of conducting their business with a Swiss bank so recently ordered to freeze the assets of Russian clients. What would happen in Switzerland if tensions rise over Taiwan?

And what of a company like Syngenta, Chinese-owned, based here, and a repository of highly valuable IP? If the US imposed sanctions on the Chinese economy, would Bern move against one of its biggest corporate success stories?

Much has been made of the political Zeitenwende, a turning point, that has rocked Germany — how the war in Ukraine has forced a rethink of the country’s long-held commitment to pacifism. One might venture that Switzerland is, on a smaller scale, beginning to confront a similar shift, but in economic terms. Or at least, to contemplate its outlines.

The question is, can any western economy, so deeply integrated now with the economies that surround it and the western financial system, afford to stand apart in the multiplying geopolitical crises that are confronting the west?

It is not a new issue. The crisis in Ukraine has simply brought it into focus. For years Switzerland has been in agonising negotiations with the EU over the limits to its economic freedoms.

For Thomas Borer, a former Swiss diplomat who not only drafted much of the current official policy on neutrality but also presided over the landmark Swiss inquiry into assets looted by the Nazis and stashed in Swiss banks, the whole debate over business or economic “neutrality” is a facile one.

Neutrality, he says, is an instrument of foreign policy, not the goal of it. The goal is to defend Switzerland’s national interests as strongly as possible.

The time when Switzerland could economically bury its head in the sand, he says, is over. “We have to understand who our friends are and who shares our values. Switzerland has to make choices.” Swiss businesses — and those who do business here — will have to as well.

Author's email: sam.jones@ft.com

Heaven knows we’ve been through enough acronyms in this market cycle.

FOMO — the Fear Of Missing Out, drove lots of investors, professional and amateur, in to spicy asset classes. No one wanted to be the last person to get in to the next big thing while excess money was sloshing around the global financial system.

TINA — There Is No Alternative — went a little further. It encapsulated the notion that fund managers had no choice but to buy risky stocks because boring old bonds were yielding so little, or indeed were costing money to hold even before you take inflation in to account. It’s “the market made me buy this rubbish”, but with a slightly sassier name.

But it seems we have not yet reached peak acronym. With bond yields now much higher, TINA is no more (RIP), and the market mood has turned. “We went from Fear of Missing Out to Fear Of Holding On,” as Peter Tchir, head of macro strategy at Academy Securities, put it this week. For my sins, I read a lot of research from banks and investors. But “from FOMO to FOHO” is a new one on me.

Tchir is referring here to the dreaded bitcoin — an “asset” for want of a better word that is maturing like a fine glass of full-fat milk on a summer’s day. If you have managed to avoid this week’s crypto drama (well done you), then the bits you need to know are that its collapse in price has morphed from the stage where prices are falling, which began in November, to the point where they are dropping double-digit per cent a day and the platforms that offer trading in them start to seize up and struggle to hand back cash to the people who have gambled on the coins.

One platform, Bybit, is offering “risk averse traders” products it describes as “low-risk savings” for up to “999 per cent annualised interest”. Terms and conditions apply. That is not a typo but is a sign that everything is definitely fine in this very serious market that is not at all desperate for new cash, honest.



The stage after this is when you start to worry about whether a full-blown price collapse will affect other markets (the jury is out on that one) and the ripple effects when the venture capital, private equity or even typically staid pension fund investors that backed these intermediaries start wearing losses. That will be fun. But I digress.

The point is that crypto has finally demonstrated a useful function.

Currency for buying, you know, stuff? No. Store of value? Not really. Inflation hedge? Definitely not. But as the most speculative asset on the planet, possibly even the most speculative of all time, it looks like a handy warning of calamities to come. The crypto canary in the coal mine. The big question is whether the FOHO haunting crypto will start to afflict stocks.

It does not feel like we are there yet. Yes, stock markets have suffered so far in 2022. This year is shaping up to be a real stinker in equities. The S&P 500 index is in a bear market, down more than 20 per cent from its recent peak and even the FTSE 100, generally shielded from strife thanks to its large commodities weighting, is off more than 4 per cent this year.



Buying the dip remains an extreme sport. “US stocks have suffered the biggest year-to-date losses since at least the 1960s,” as the BlackRock Investment Institute pointed out this week. “That’s ignited calls to ‘buy the dip’. We pass, for now.” Profit margins are at risk from energy and labour costs, valuations have not fallen far enough, and the US Federal Reserve could tighten policy too hard for its liking, BlackRock said. After raising the benchmark rate by a historic three-quarters of a percentage point this week, the Fed itself acknowledged that slamming on the brakes will inflict “some pain”.

But even if few are brave enough to top up equity allocations on the (relative) cheap, many appear unwilling to really give up just yet.

Jeroen Blokland, formerly at Robeco Asset Management and now running research house True Insights, points out that the S&P dropped by almost 4 per cent in a particularly ugly day at the start of this week. That’s a lot. But he says it is only the 39th worst one-day drop since 2005. His sentiment indicator is still in neutral territory, not yet in the fear zone. His conclusion: no capitulation.

One banker noted a curiosity to me this week: when you ask investors if they are miserable and terrified, as Bank of America frequently does in its monthly survey, they say yes. “Wall St sentiment is dire,” the bank observed this week. But when you ask about their holdings, most have not binned their favourite riskier assets. “People are going to have to start selling the things they really really like,” the banker says. “There’s still capitulation to come.”

The nerves are showing. “I’ve never had such good access to chief investment officers and CEOs,” he says. “They want to talk.”

That suggests investors are desperate for ideas and insights in to what might happen next and, unusually, in to what their peers are doing. If FOHO hits stocks, no one wants to be the last to get out.

Author's email: katie.martin@ft.com

It was a decision to send a chill straight from the freezer cabinet to the boardroom. Which was probably the point.

The Advertising Standards Authority said this month that Tesco had failed to show that buying its Plant Chef burger was an environmentally-friendly choice, barring the supermarket chain from repeating its adverts for its range of plant protein-based foods.

This was odd. We all vaguely understand that eating less meat is a win for the planet. The regulator accepted that as well. But, it said, Tesco “did not hold any evidence in relation to the full lifecycle of any products in the Plant Chef range”. In other words, it’s not enough to be right. You’d better be able to prove it.

That’s surely the correct standard. But given the clouds of green guff emanating from all corners of the business world, it feels a tough result. It is “inconceivable”, in the words of one sustainability expert, that a plant burger would be near to the emissions of an equivalent beef burger.

Geraint Lloyd-Taylor, a partner at Lewis Silkin, argues that it is difficult to get robust, cradle-to-grave data including transport, packaging and retail, particularly when making comparisons with competitor products, and worries that this sets an “unrealistically high bar for environmental claims”. The decision should certainly have sent others scurrying to check their evidence (or indeed whether they have any). 

The assault on greenwashing is only really just getting going. Lawsuits are being filed against heavy-emitting sectors from groups such as ClientEarth, financial regulators are cracking down on the lack of investment rigour in ESG-badged funds and UK consumer regulators, the ASA and the Competition and Markets Authority, are divvying up the economy to pick off poor practice sector by sector.

It’s overdue. Even in 2014, the European Union found that three-quarters of non-food consumer products had an environmental claim or label. Research from NYU Stern finds products marketed as sustainable are growing at more than 2.5 times the rate of their unsustainable peers, and command a premium. There are a baffling array of labels and pseudo-Kitemarks used, with more than 200 in the EU alone. The CMA reckons 40 per cent of green claims made online could be misleading.

Ensuring that customers aren’t being wooed with dodgy claims or empty rhetoric could itself cause some confusion. Regulators are still trying to pin down definitions. The ASA has said it will look into consumer understanding of terms including carbon neutral, net zero or hybrid. The CMA suggested the government come up with legislative definitions of some terms, including “recyclable”, which may be true under ideal conditions but not for the average household.

There will also be mixed messages. You could conclude from the Tesco case that staying big picture and broad brush would be safer (especially as a similar Sainsbury’s advert advising using half chicken, half chickpeas in a curry got the nod). But the regulators are also cracking down on generic marketing or vague terms such as eco-friendly, in favour of specific, evidence-based claims: the ASA this year objected to Alpro’s “Good for the Planet” marketing on those grounds.

Everyone has an interest in getting this right. Regulators see a protection issue. Campaigners — although there are vested interests sniping from all sides — generally want consumers making genuinely-beneficial purchases.

And companies should be wary of losing the younger, higher-growth customers they’re chasing to cynicism. Research to be published later this month from Brodie and Public First found more concern about the threat of climate change across the age groups, but with rising scepticism that businesses are trying to solve rather than causing society’s challenges.

That was particularly pronounced among 18 to 24-year-olds, half of whom saw business as a cause not a solution to problems. More than a third of those younger than 35 agreed with the statement that “businesses who say they’re better for the environment are lying.”

When Morningstar did a detailed review of funds marketed to investors as sustainable in Europe, it slashed the number it recognised by more than 1,200, cutting the assets in its universe of approved funds by 40 per cent.

The same process may need to happen on the shop shelves, for everyone’s sake.

Author's email: helen.thomas@ft.com

Deutsche Bank has begun installing an application on bankers’ phones to track all their communications with clients amid regulatory probes into inappropriate messaging that have rattled the industry.

The German lender has started requiring certain bankers to download Movius, a US mobile app that allows compliance staff to monitor calls, text messages and WhatsApp conversations, according to people with knowledge of the policy.

Movius, which has partnerships with telecoms companies such as Sprint, BlackBerry, Telstra and Telefónica, was adopted by several banks during the pandemic to allow remote working for staff in heavily regulated roles such as trading.

JPMorgan Chase, UBS, Julius Baer, Jefferies and Cantor Fitzgerald have all made use of the software in recent years.

Banks are increasingly looking for tools to help them monitor employees’ contact with clients following several regulatory investigations that have resulted in the departure of bankers.

The US government is investigating record-keeping practices across Wall Street, while the UK’s Financial Conduct Authority and BaFin in Germany have requested information from banks over how they monitor their staff’s personal communications.

Deutsche has been installing Movius on employees’ phones for several weeks, though the exercise has been focused on work phones rather than private devices, according to people with knowledge of the approach. The company’s code of conduct prohibits work-related electronic communications with clients and business partners via channels it does not monitor.

The bank declined to comment on its use of Movius.

A former executive of Deutsche’s asset management arm, DWS, has flagged the alleged extensive use of WhatsApp by outgoing chief executive Asoka Wöhrmann and other DWS executives in a whistleblower complaint to Germany’s financial watchdog BaFin, the Financial Times has reported.

The FT also reported this year that Deutsche chief executive Christian Sewing exchanged friendly WhatsApp messages with a German businessman who the bank had ditched as a client after a number of potentially suspicious payments.

Deutsche has been approached by BaFin this year to provide information about how staff use messaging apps, people close to the bank said. Bloomberg has previously reported the bank has been trialling a technical fix to improve monitoring of communications.

The regulatory probes have led to serious repercussions for individual employees. Credit Suisse removed a prominent investment banker from his role this year after he was found to have used unapproved messaging apps with clients, the FT reported this week.

HSBC’s London-based compliance team carried out an investigation of personal messaging this year, which resulted in an unnamed foreign exchange trader being dismissed. The probe unveiled messages on the individual’s phone that revealed a broker buying the trader tickets to a sporting event

In December, JPMorgan Chase agreed to pay $200mn in fines to the SEC and the Commodity Futures Trading Commission for failing to keep records of staff communications on personal devices, in an action that spooked many Wall Street banks.

Most banks have policies in place that dictate communication with clients should be conducted through official channels, such as company email or recorded phone lines, which can be monitored by the compliance department.

But bankers often find their clients prefer to communicate on apps on their personal mobiles.

Air Force One is a flying symbol of American power. But for its maker, the presidential aircraft is becoming an albatross.

Boeing has recorded more than $1.1bn in costs due to production delays for the two modified 747-800 jumbo jets, which were ordered to replace the 1980s-era versions currently used by the US president, including a $660mn charge in the first quarter of 2022. Since 2018 Boeing has recorded roughly $4.4bn in charges across an array of defence contracts, according to Financial Times calculations.

Company executives now acknowledge the trouble began when Donald Trump took to Twitter as US president-elect in 2016 to claim that Air Force One “costs are out of control”, vowing to “cancel order!”.

That pushed company executives into a new $3.9bn deal to build the aircraft, which even after a subsequent revision to $4.3bn was well below the original $5bn cost estimate.

The deal was “a very unique moment, a very unique negotiation, a very unique set of risks that Boeing probably shouldn’t have taken”, Dave Calhoun, chief executive since 2020, said during an April earnings call. “But we are where we are.”

Air Force One is not the only military aircraft programme facing cost overruns, however, suggesting Trump is not the sole culprit for Boeing’s woes.

The company’s $4.4bn in defence charges since 2018 span an array of defence contracts including the KC-46A refuelling tanker, the T-7A Red Hawk pilot trainer, the MQ-25 unmanned aircraft and the Starliner space capsule.

Like Air Force One, all are fixed-term development contracts, meaning that any cost overruns are Boeing’s to shoulder.

Calhoun, whose predecessor Dennis Muilenburg negotiated the Air Force One deal, has said fixed-price contracts have been disproportionately vulnerable to supply chain bottlenecks, personnel losses tied to Covid-19 and inflation. He has told investors that he “will have a very different philosophy with respect to fixed-price development”. 

He cannot immediately change course. Boeing’s defence arm, which brings in more revenue than its more visible commercial aircraft business, generated 68 per cent of its 2021 sales from fixed-price contracts.

The risks of fixed-price contracts are particularly acute for Air Force One. The aircraft are highly customised, with a 4,000 square feet interior that features a presidential suite; cabins for senior staff, Secret Service personnel and press; a medical suite equipped to be an operating theatre; and sophisticated electronics and communications equipment. The planes must also be able to refuel in mid-air.



Originally expected to be delivered in 2024, the aircraft are now forecast to be completed at the end of 2026, according to the Air Force. There was “obviously quite a significant delay”, Andrew Hunter, the Air Force’s top civilian acquisition official, told Congress in May.

While taxpayers will not be on the hook for additional costs for the new planes, Hunter said the Air Force would request additional funding “to sustain the existing aircraft” which were delivered in 1990. The Air Current, an industry publication, has reported quiet dissatisfaction with Boeing among Pentagon officials.

“We continue to make steady progress on the [Air Force One] programme, while navigating through some challenges,” Boeing said. “It’s an honour to be entrusted with this responsibility and we take particular pride in this work. Our focus is on delivering two exceptional Air Force One aeroplanes for the country.”

The setbacks for Air Force One are part of a company-wide spate of production delays. Deliveries of non-military planes such as the wide-body 777X and 787 Dreamliner have been held back, while the 737 Max has a backlog of orders after two fatal crashes led to its grounding.

But Air Force One remains a special case. Requests from the Air Force can change over time. Working on the project requires a high security clearance, meaning the pool of available staff is smaller than for a typical defence contract. Much was outside of Boeing’s control when the pandemic hit and workers got sick, said Nicolas Chaillan, a former Air Force chief software officer who helped oversee the Air Force One programme.

Boeing also terminated subcontractor GDC Technics, which was hired to install the jets’ interiors, in April 2021 for “failure to meet contractual obligations”. This accounted for about one year of delays. GDC Technics filed for bankruptcy protection soon after, and the companies have sued one another.

The Air Force has not blamed Boeing. In a statement, it said the delays were due to “impacts from the Covid-19 pandemic, interiors supplier transition, manpower limitations, wiring design timelines, and test execution rates”.

Prestige projects like Air Force One are generally not expected to generate a profit — their value is an enhanced reputation for the producing company. Defence contractors regularly submit bids below actual costs needed to complete a contract to secure the tender, Chaillan said.



Delays were “very common” for defence contracts, said Cynthia Cook, director of the Defense-Industrial Initiatives Group at the Center for International and Strategic Studies. But Boeing has had more delays than its defence contractor rivals, said Cai von Rumohr, an analyst at Cowen.

In the past 15 years, Boeing has received $324.5bn in Pentagon contracts, second only to Lockheed Martin, which won $547.7bn, according to the CSIS. But even though Lockheed contracts were worth far more, Boeing has taken more charges in recent years: since 2018, Lockheed has reported about $400mn in charges, 11 times less than Boeing.

“I think they did feel a sense of desperation” after losing “lots” of money on the KC-46A tanker and getting beat on “other, bigger contracts” such as the Pentagon’s two most important fighter programmes, the F-22 and F-35, which both went to Lockheed, said von Rumohr. The Air Force One bid became “a must win”. 

Sitting exams is unpleasant at the best of times, but my daughter believes she has extra cause to complain. Two of her A-level papers are scheduled for the same time, so she must take a break between them with only an invigilator for company. “I can’t even have my phone,” she protests.

Because I am the worst parent in the world, I opine that it would be very good for her mental health to be without her phone for a couple of hours. She could challenge me to prove it, but more sensibly, she rolls her eyes and walks away.

Ernest Hemingway once declared that “what is moral is what you feel good after and what is immoral is what you feel bad after”. I’m not sure if that stands up to philosophical scrutiny, but I do think it’s worth asking ourselves how often we feel bad after spending time on social media. I usually feel disheartened and a little self-loathing after doomscrolling on Twitter in a way that I never feel after reading a book or a decent magazine.

That’s the experience of a middle-aged man on Twitter. What about the experience of a teenage girl on Instagram? A few months ago the psychologist Jonathan Haidt published an essay in The Atlantic arguing that Instagram was toxic to the mental health of adolescent girls. It is, after all, “a platform that girls use to post photographs of themselves and await the public judgments of others”.

That echoes research by Facebook, which owns Instagram. An internal presentation, leaked last year by Frances Haugen, said: “Thirty-two per cent of teen girls said that when they felt bad about their bodies, Instagram made them feel worse.” In the UK between 2003 and 2018, there was a sharp increase in anxiety, depression and self-harm, and a more modest increase in eating disorders, in people under the age of 21. In absolute terms, anxiety, depression, self-harm and eating disorders were higher in girls than boys. Similar trends can be found in the US and elsewhere in the English-speaking world. And a team of psychologists including Haidt and Jean Twenge has found increases in loneliness reported by 15 and 16-year-olds in most parts of the world. The data often seem to show these problems taking a turn for the worse after 2010.

There are other explanations for an increase in teen anxiety (the 2008 banking crisis; Covid-19 and lockdowns; school shootings; climate change; Donald Trump) but none of them quite fits the broad pattern we observe, in which life started to get worse for teenagers around 2010 in many parts of the world. What does fit the pattern is the widening availability of smartphones.

This sort of broad correlational data is suggestive of a problem, but hardly conclusive. And a large and detailed study by Amy Orben and Andrew Przybylski of the University of Oxford found very little correlation between the amount of time spent on screens and the wellbeing of adolescents. This study seems to me more robust and rigorous than most, with one major weakness: it lumps together all forms of screen time — from Disney+ to Minecraft, TikTok to Wikipedia.

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Three recent pieces of analysis approach the subject quite differently. One from Luca Braghieri and two fellow economists looks at the campus-by-campus rollout of Facebook across US colleges between early 2004, when it was launched at Harvard, and late 2006, when it was made available to the general public. Because this rollout is sharply staggered, it creates a quasi-randomised trial, which is a better source of data than broad correlations. The researchers find a large negative effect of the launch of Facebook on mental health — somewhere between one-quarter and one-fifth as bad as the effect of losing one’s job. The Facebook of around 2005 is not the same as the social media of today: it was probably less addictive and less intrusive, and was not available on smartphones. If it was bad then, one wonders about the impact of social media now.

The other two studies were charmingly simple: they asked experimental participants, chosen at random, to switch off social media for a while — while a control group continued as before. The larger study by Hunt Allcott, Braghieri and others asked people to quit Facebook for four weeks during the 2018 midterm US elections. A smaller but more recent study by researchers at the University of Bath had people eschewing all social media for a week.

The results in both cases were striking, with clear improvements in a variety of measures of happiness, wellbeing, anxiety and depression. It seems that a break from social media is good for your soul. Intriguingly, the largest effect of all in the Allcott and Braghieri study is that people who had temporarily left Facebook for the experiment were much less likely to use it afterwards.

I don’t know whether a two-hour break from her phone really would be good for my daughter’s mental health. Nor do I think the wellbeing case against social media is proven beyond doubt. But that should not be a surprise. It took time to demonstrate that cigarettes caused lung cancer. If social media causes depression and anxiety, it will take time to demonstrate that, too. But at this stage, one has to wonder.

Tim Harford’s new book is “How to Make the World Add Up”

The hum of Formula One cars had barely faded from the streets of Monaco following the grand prix when competitors began to arrive in Monte Carlo for EY’s annual World Entrepreneur of the Year.

The Big Four firm no longer offers helicopter transfers from Nice airport, but attendees at last week’s event were treated to a party at the Monaco Yacht Club, a black-tie gala at the Salle des Étoiles and an “insights” talk hosted by EY’s global boss Carmine Di Sibio and U2 frontman Bono.

The gathering took place days after EY showed a flash of its own entrepreneurial spirit by considering a break-up of its audit and advisory arms in the biggest shake-up in decades of one of the Big Four accounting firms.

A split would liberate the advisory business, which offers services including consulting and deals advice, from the shackles of the audit division. EY audit clients such as Amazon and Google, currently off limits because of the risk of a conflict of interest, would suddenly be compelling targets for lucrative consulting work.

But if EY’s global leaders decide to push ahead with a break-up, they will need to win the backing of the group’s member firms, spanning about 150 countries.

Aligning the interests of the nearly 13,000 partners worldwide is a task a former employee of a rival likened to managing a feudal economy: “You’ve got to keep the barons onside.”

Winning over the auditors

The first cohort to convince is the auditors. A split would create “a low growth boring [audit] business next to a high growth consulting business”, said a senior partner at a rival Big Four firm. Revenues in EY’s audit arm grew 27 per cent between 2012 and 2021, dwarfed by 93 per cent growth for the rest of its business.

EY’s consulting, tax and deals advice operations reported combined annual revenues of $26.4bn last year, while its audit business had $13.6bn.



“We [the Big Four firms] don’t generate partners on low growth,” the senior partner explained. “And if we don’t generate partners, we have no people model,” as the incentive for talented people to stay is reduced.

Auditors’ profit margins are rising but EY’s rivals suggest the firm may struggle to lift its market share even if a split unlocks new clients.

Many audit firms are already struggling to hire enough staff, in part because regulatory, political and media scrutiny have eroded the profession’s allure. Executives say a split risks making recruitment more difficult still for EY compared with Big Four rivals Deloitte, KPMG and PwC.

Graduates and apprentices value the so-called “three course meal” offered by the Big Four in which they can switch between audit, tax and advisory work, says another senior partner at a rival.

A person with knowledge of EY’s planning counters that any split would be structured so that some advisory experts remained to support the audit business and that these specialists could still advise non-audit clients as part of a scaled back consulting operation.

Audit partners would also need assurance that regulators and clients were confident a slimmed-down practice would pocket enough cash in the separation to match rivals’ investment in audit technology, which Big Four partners say has been largely funded by the advisory business.

What about the advisory business?

As well as allowing it to target current audit clients, a rupture would allow EY’s consulting business to win more long-term managed services or outsourcing contracts under which it provides companies with day-to-day services in areas such as IT and data management.

It would also be able to offer these services through alliances with technology providers such as Amazon, Google, Oracle and Salesforce, currently made tricky by EY’s role as the auditor of the tech groups.

“The consulting business in the long term will benefit, I believe, but in the short term it will suffer,” said Kevin McCarty, chief executive of West Monroe, a 2,200-person US digital consultancy.

A renamed EY consulting business would need investment to promote a new brand and overcome the loss of the “incumbency” status that comes from being attached to a large audit practice, he added.



A public listing or sale of a stake in the advisory business would deliver a windfall for EY’s partners, echoing the IPO of Goldman Sachs in 1999. But one challenge would be convincing junior colleagues that such a move would not amount to “shutting the door and pulling up the ladder” on the chance for them to win promotion and share in the profits, said a partner at a rival Big Four firm.

Some competitors reckon EY’s deliberations already present an opportunity. Antonio Alvarez III, head of Europe, Middle East and Africa at consultancy Alvarez & Marsal, this month declared that EY’s break-up planning was “an important development for our firm”.

A&M would continue to hire Big Four partners and staff who want to “personally share in the value creation”, he said, underlining the risk for EY that rivals could capitalise on the uncertainty created by examining a split.

Nor have previous sales of Big Four consulting divisions always proved resounding successes. EY’s advisory business today is larger than Capgemini, the Paris-based group to which it sold its consulting business in 2000 before going on to build a new one.

EY says it has not decided whether to recommend a break-up or what form this would take. An IPO of the advisory business is seen as the likely outcome if the firm’s leaders opt for a split, but selling a stake to an external investor has not been ruled out, says another person familiar with EY’s plans.

An IPO would probably be a two-stage process with the advisory business first being hived off into a new corporate entity before being listed.

The size of the newly independent operation would make a private sale of a stake difficult because it would probably only be viable if a consortium of private equity investors could be lined up, according to people familiar with the plans.

A typical multiple of one to two times revenue for a professional services firm would value it at up to $53bn. Accenture, a more technology-focused business listed in New York, is valued at more than 3.5 times its $50.5bn annual revenue.

Big Four rivals must stick or twist

Despite the risk of handing EY a first-mover advantage, the rest of the Big Four say they are not following its lead.

Deloitte’s consultants have been examining the effect an EY split would have on the industry, according to people familiar with the matter, adding that a conversation took place between the firm and Goldman Sachs after EY’s break-up planning became public.

But following a media report last week, Deloitte denied it was exploring a separation of its audit and non-audit businesses, calling the claim “categorically untrue” and saying it was committed to its business model.

KPMG says it has not spoken to bankers about the option and has no plans to because it believes the combination of the advisory and audit businesses is “the best way to serve our clients, meet quality standards and provide opportunities for our people”. PwC has said it has “no plans to change course”.

As rivals watch on, EY’s national member firms will be required to hold votes to decide whether to ratify any break-up.

Whatever the competing arguments, for partners the decision will be shaped by the realpolitik of operating in a global network of firms dominated by its largest practices, notably the US and the UK.

A member firm voting against a split could not be forced to go along with the plan, says EY, adding that it was “premature” to say how many member firms would have to back a plan because a separation has not yet been decided on.

But partners at rival firms say EY may be able to press ahead if most or all of the member firms in G7 countries back the plan, which would leave any holdouts in smaller economies at risk of being ejected from the network.

According to one EY partner, who is not involved in its break-up planning, the decisions of the partners in the largest member firms generally “sets the direction for the remainder”.

Cartoon loser Wile E Coyote only started falling after he realised he had run off a precipice. European businesses are already experiencing that cruel awakening. The European Central Bank is expected to raise rates for the first time in more than a decade in July. A Lex data screening shows this trajectory could be awkward for companies such as Ocado and Just Eat Takeaway.

Ultra-loose monetary conditions have represented normality for years. During the pandemic they helped anxious companies to raise substantial sums. Much of this has been finding its way into shareholders’ pockets. Rising rates mean a bigger chunk of corporate cash will now go to creditors.

That will make highly indebted businesses much less attractive. Investors tend to fret when operating profits (ebit) cover interest charges by less than two times. Stagflation is the worst-case scenario. Even as central bankers jack up interest rates, earnings would fall. Both components of interest cover would be moving in the wrong direction.



Companies at the lower end of the credit spectrum already have volatile earnings and high interest costs. Our screening of S&P data on the largest non-financial UK and European equities found 39 out of 660 or 6 per cent currently have interest coverage below two times. Lossmaking meal delivery groups Delivery Hero and Just Eat Takeaway topped the list. Ocado, a UK-listed groceries delivery business, has a similar profile.

If interest costs increase by a half, the number of companies with thin cover would rise to 10 per cent. If interest costs double, that would push businesses in the danger zone to 16 per cent. Add in a recession where earnings collapsed by 25 per cent from the current consensus and the proportion would increase to 20 per cent. Big blue-chip names such as BT, Orange and Anheuser Busch would then have less than two times ebit cover.

In fairness, the food delivery companies would have no immediate liquidity problem, thanks to decent cash piles. Telecoms groups, meanwhile, boast steady, defensive cash flows. But expect investors to become increasingly picky about credit quality and dividend prospects as rates rise and earnings falter.

Credit Suisse is set to pay nearly double-digit interest rates for its latest bond offering as investors demand high compensation from the crisis-ridden bank.

The Swiss lender is due to pay 9.75 per cent in interest on its new debt that is being sold late on Thursday, according to people familiar with the matter.

The bank will raise at least $1.5bn and its bond offering comes amid a sell-off in financial markets as major central banks raise interest rates in an effort to tame spiralling inflation.

“It’s the first time in ages that we’ve seen a coupon that’s almost double digits,” said a bond investor. “We’d forgotten what double digit looks like but this one is really near.”

Credit Suisse has lurched from crisis to crisis over the past two years, exposing poor risk management and controls at the Zurich-based lender. The implosion of Greensill Capital forced the bank to shut $10bn of funds linked to the stricken group and weeks later it suffered a record $5.5bn trading loss following the collapse of Bill Hwang’s family office Archegos.

Last month the UK’s financial regulator put the bank on a watchlist of groups needing stricter supervision.

The problems have hit Credit Suisse’s share price and contributed to three profit warnings. Credit rating agencies Fitch and S&P both downgraded the bank last month.

Credit Suisse is raising the funds via new additional tier 1 (AT1) bonds. AT1 bonds are sometimes called “contingent convertibles” or cocos because they can be converted into equity in times of stress. In 2011, the Zurich-based bank became the first to issue such debt and Thursday’s offering is set to replace the last of those bonds, which pay 7.125 per cent interest and are callable next month.

“They decided they wanted to redeem even if it was a bit more expensive . . . With all the negative news flow and anger they might have got from investors, they want to show they are an investor-friendly bank,” the investor added. Credit Suisse’s new AT1 bonds will not convert to equity if the bank’s capital ratio falls below regulatory standards but instead be written down.

Private Swiss bank Julius Baer and Sweden’s SEB have both raised dollar-denominated AT1 debt in recent weeks at interest rates of 6.875 per cent, well below that of Credit Suisse.

Wall Street’s top watchdog is examining whether to impose stricter rules on providers of financial indices that now guide trillions of dollars of investments globally.

The Securities and Exchange Commission on Wednesday formally requested information from the market on whether to impose tougher standards on companies such as S&P Global, MSCI and FTSE Russell, which are considered data publishers at present.

The changes proposed by the SEC could mean that index providers, which have developed into some of the most influential power brokers in modern financial markets, would be treated as investment advisers and held to the same standards as fund managers.

“The role of [index providers] in today’s markets raises important questions under the securities laws as to if they are providing investment advice rather than merely information,” said SEC chair Gary Gensler.

These companies have quietly grown into some of the most powerful and profitable companies on Wall Street. They calculate more than 3mn performance benchmarks worldwide for stocks, bonds and other securities that are followed by thousands of low-cost tracker funds. Exchange traded funds and other index tracking vehicles own at least one-fifth of all US public companies, according to the SEC.

Some academics have criticised the lack of specific US regulations covering index providers, arguing they were effectively unregulated investment advisers, given their critical role in designing portfolios of securities.

Adriana Robertson, a professor at the University of Toronto, said it was “excellent news that the SEC will now consider whether the classification of index providers is consistent with the current regulatory regime”.

The SEC indicated last year it would revisit the rules after it settled charges with S&P that the index provider published incorrect or stale data that had contributed to a tumultuous trading session in February 2018, when volatility surged higher as US stocks fell sharply.

SEC commissioner Hester Peirce last year said the enforcement action against S&P hinted at a “deeper, unspoken concern” that there was no US regulatory framework tailored to index providers.

The SEC has also asked for feedback regarding whether providers of model portfolios and suppliers of other pricing services should also be classified as investment advisers. Model portfolios, which use ETFs and index trackers as their main building blocks, are widely used by US wealth managers and financial advisers.

S&P Global’s share price fell 5.3 per cent in early trading in New York on Thursday while MSCI’s stock was up 1.6 per cent.

Decisions by index providers also have a meaningful impact on capital flows around the world depending on which companies and countries are included or deleted from their benchmarks.

Following the invasion of Ukraine, Russian stocks and bonds were removed by MSCI and JPMorgan from all their emerging market benchmarks that had helped to funnel billions of dollars into Russia’s economy.

European rules covering transparency and disclosure standards for index providers were introduced in 2016 and have since been adopted as global standards.