Subscribe In print and online www.ft.com/subsusa Tel: 1 800 628 8088 For the latest news go to www.ft.com THURSDAY 24 AUGUST 2023 USA $2.50 Canada C$3.00 World Markets STOCK MARKETS $XJ 3UHY FKJ 6 3 ffiffi fl ffi 1DVGDT&RPSRVLWH fl ffi 'RZ-RQHV,QG flfl flflfl )76(XURILUVW ffi flflffi (XUR6WR[[ )76( fl )76($OO6KDUH ffiffiffi ffifl &$& flfl fl ;HWUD'D[ fl 1LNNHL fl fl +DQJ6HQJ flffi ffi 06&,:RUOG ffiffiffi ffi 06&,(0 ffiffi ffiffiffi 06&,$&:, ffi ffi )7:LOVKLUH flffi fl )7:LOVKLUH fl CURRENCIES 3DLU $XJ 3UHY é fl fl e fl eé fl fl g fl ge flffi fl 6)Ué ffi ffi 3DLU $XJ 3UHY é ffi ffi e flffi fl ée ffi gé ffiffi flffi eLQGH[ flfl flffi 6)Ue CRYPTO $XJ 3UHY FKJ %LWFRLQ fl (WKHUHXP ffifl ffi COMMODITIES $XJ 3UHY FKJ 2LO:7, ffi ffi 2LO%UHQW fl fl fl *ROG flffi flflffifl GOVERNMENT BONDS <LHOG $XJ 3UHY &KJ 86\U ffi 86\U 86\U 8.\U ffi 8.\U 8.\U fl -31\U -31\U -31\U ffi *(5\U ffi ffi *(5\U *(5\U 3ULFHVDUHODWHVWIRUHGLWLRQ 'DWDSURYLGHGE\0RUQLQJVWDU MARK VANDEVELDE AND SUJEET INDAP — NEW YORK Apollo Global Management improperly agreed to pay $570mn to cover the tax bills of its top executives as part of a shake-up aimed at distancing the priv - ate equity firm from its scandal-hit founder Leon Black, according to a shareholder lawsuit filed yesterday. The dispute casts light on a series of hasty governance reforms aimed at improving Apollo’s public image after Black’s messy departure in March 2021. Black, who was forced out over revelations that he had paid $158mn for tax advice and professional services prov - ided by late sex offender Jeffrey Epstein, is set to receive about $276mn from Apollo coffers, according to the law suit. His co-founders, Marc Rowan and Josh Harris, each stand to receive more than $100mn, the lawsuit adds, with the remainder split between other Apollo executives. The three founders allegedly “concocted a series of untenable justifications” for the more than half a billion dollar payout after realising they could face significant tax bills if they adopted an investor-friendly proposal to eliminate the dual-class share structure that gave them control of Apollo. But according to a complaint filed in Delaware Chancery Court, “there was no legitimate reason to pay the founders’ personal taxes”, and an aggrieved Apollo shareholder, the Anguilla Social Security Board, has alleged that the Apollo board breached its fiduciary duties and has demanded the money be returned to the company. The payments were approved by a three-member “conflicts committee” made up of friends and business associates of the founders, the lawsuit says. It alleges that the committee approved hundreds of pages of documents within hours of receiving them and failed to keep minutes of most of its meetings. Drawing on emails and internal documents, the lawsuit makes claims about the final days of a decades-long compact between the three men who built one of Wall Street’s most lucrative groups. Even as Rowan was elevated to chief executive of Apollo and Black was pushed out in a leadership scuffle that he later blamed on Harris, the lawsuit claims, the trio of billionaires collaborated on a series of proposals that would make them even richer. Apollo, Black and Harris did not respond to requests for comment. Firms hand assets to rivals page 5 Apollo sued by investors over $570mn tax payout to Black and top executives © THE FINANCIAL TIMES LTD 2023 No: 41,410 ★ Printed in London, Liverpool, Glasgow, Dublin, Frankfurt, Milan, Madrid, New York, Chicago, San Francisco, Tokyo, Hong Kong, Singapore, Seoul, Dubai The Federal Reserve’s yearly gathering at Jackson Hole in Wyoming this week will be dominated by the question of how to adjust policy without putting masses of Americans out of work. The worst of the global inflation shock might be over, leaving interest rates at multi-decade highs, but the labour market remains strong. Fed watchers expect chair Jay Powell to flag the fact that these conditions may result in a ‘higher-for-longer’ stance on rates. Fed summit i PAGE 4 Markets watch Wyoming for clues on Fed thinking How Gulf states built bridges to the east RISE OF THE MIDDLE POWERS, PAGE 13 Messy patent battle threatens innovation BROOKE MASTERS, PAGE 15 Briefing i Big buyout firms hand rivals distressed companies Prominent private equity firms, including KKR and Bain Capital, have been handing distressed companies to the lending arms of rivals, as they struggle with higher interest rates, inflation and supply chain issues.— PAGE 5 i Clarity call on China US national security adviser Jake Sullivan has urged Beijing to be more transparent on the state of its economy as it grapples with a slowdown that poses risks to global growth.— PAGE 4 i Orders fall in eurozone Doubts have been raised over whether the European Central Bank will increase interest rates next month after purchasing managers’ data showed a sharp fall in output and orders.— PAGE 2 i Chance for PP in Spain King Felipe has handed the conservative opposition the first chance at forming a government after the inconclusive election, despite its not having enough support to succeed.— PAGE 2 i BlackRock in ESG retreat The money manager’s backing for investor proposals on social and environmental issues has fallen for the second year as it parries US Republicans’ accusations that it is too “woke”.— PAGE 6 i Roche rides data error The Swiss pharmaceutical group has inadvertently disclosed positive results from a closely watched lung cancer drug study, sending its shares up as much as 5 per cent.— PAGE 5 i Squeeze on private funds The US securities watchdog has voted to tighten regulations with an ambitious reform package that significantly reshapes the way the $25tn industry deals with its investors.— PAGE 6 i Thoughts turn to speech Research teams in California have developed brain implants, linked to AI programs, that they say are much better than previous devices at giving a voice to people who cannot speak.— PAGE 4 A screen at mission control in Benga - luru shows a digital rendering of India’s Chandrayaan-3 spacecraft as it lands on the Moon yesterday. The craft landed near the Moon’s south pole in uncharted territory that scientists believe could hold vital res - erves of water and precious elements. India is only the fourth nation to land a craft on the Moon, after the US, China and the Soviet Union, and the first to reach its south pole. The mission’s success came days after Russia’s failure on Sunday to land a craft in the same area, in Moscow’s first lunar mission in nearly half a century. The uncrewed Luna-25 spun out of control and crashed into the Moon’s surface. India’s landing represented not just a scientific achievement but a geopolitical boost for Prime Minister Narendra Modi, who has sought to portray India — now the most populous country — as a rising superpower ahead of national elections next year. “This is the dawn of the new India,” Modi said of the landing in a broadcast from South Africa, where he is attending the annual Brics summit. India celebrates page 4 Rocketing ahead India joins space exploration elite by landing craft near Moon’s south pole Aijaz Rahi/AP MAX SEDDON — RIGA POLINA IVANOVA — BERLIN FELICIA SCHWARTZ — WASHINGTON A plane carrying notorious warlord Yevgeny Prigozhin, whose Wagner group launched a failed mutiny in June, has crashed on a flight from Moscow to St Petersburg, according to Russian officials. All 10 people on board, including three crew members, died in the crash, Russia’s emergency ministry said yesterday. Officials said a man with Prigozhin’s name was among the passengers, without elaborating further. A post by Grey Zone, a Wagnerconnected social media channel, claimed that Russian anti-aircraft defences had shot down the plane in the Tver region near the village of Kuzhenkino. It said residents heard “two bursts of characteristic air defence fire” before the fall of the plane, “and this is confirmed by inversion traces in the sky in one of the videos”. If confirmed, Prigozhin’s death would mark a spectacular end to the warlord’s meteoric career nearly a year and a half into Russian president Vladimir Putin’s invasion of Ukraine. A former Kremlin caterer known as “Putin’s chef”, Prigozhin emerged as one of the most important leaders of Russia’s war effort before souring on the military’s leadership and launching a coup against them. Though Wagner’s men in effect seized control of two main cities in southern Russia, killing at least 13 soldiers as they downed two helicopters and a plane on their march to Moscow, Putin had appeared to forgive them under an eleventh-hour deal struck to avoid further bloodshed. Under the agreement, Wagner decamped for exile in neighbouring Belarus, whose leader Alexander Lukashenko brokered the truce. Prigozhin said last month that Wagner’s men would be redeployed to Africa, where the group continues to fight as mercenaries in several conflicts. He appeared in a video on Monday saying he was in Africa to “make Russia even greater on all continents”. Though Prigozhin appeared to have been reintegrated into the Russian security establishment, US officials had said he was likely to face retribution. President Joe Biden said during a visit to Helsinki that Prighozin should be careful what he ate, while CIA chief Bill Burns said Prighozin should not fire his food taster. “Putin is someone who generally thinks that revenge is a dish best served cold,” Burns said at the Aspen Security Forum last month. “In my exp - erience Putin is the ultimate apostle of payback, so I would be surprised if Prigozhin escapes further retribution.” The plane, an Embraer Legacy, was the same type that Prigozhin regularly used to travel around Russia and to Africa, according to flight-tracking site Flightradar24. The route appeared to be the plane’s normal flight path to St Petersburg, a run it last made on July 6. Mash, a news outlet on social media app Telegram, said residents heard two loud bangs before the crash. Video posted by social media with ties to Russian security services showed the plane rapidly descending, accompanied by a plume resembling shots from antiaircraft defences, before it crashed to the ground in a ball of flame. Russian general fired page 2 Prigozhin was passenger on crashed plane, says Moscow 3Aircraft said to have been shot down 3US had warned rebel leader of peril
2 ★ † FINANCIAL TIMES Thursday 24 August 2023 FINANCIAL TIMES 330 Hudson Street, New York, NY 10013 Subscriptions and Customer Service Tel: +1 800 628 8088 [email protected], www.ft.com/subsusa Advertising Tel: +1 917 551 5040 [email protected] Letters to the editor [email protected] Executive appointments www.exec-appointments.com Published by F.T. Publications Inc. 330 Hudson St, New York, NY 10013, USA; Tel: +1 917-551-5000; Editor: Roula Khalaf Printed by Blue Island Newspaper Printing, Harvey, IL Evergreen Printing Company, Bellmawr, NJ Bay Area Production Services, Fremont, CA Published daily except Sundays, New Year’s Day, Good Friday, Independence Day, Thanksgiving, the day after Thanksgiving, Christmas Day and the day after Christmas Day. US subscription rates, 1 year $406. Periodicals postage paid at New York, NY and at additional mailing offices; Post-Master. Send address changes to F.T. 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For both services phone +44 20 7873 4816, or alternatively, email [email protected] decade ago. “I’m in the lucky less than 10 per cent of cases in which the judge decided to free me,” said Witucki. “If you get arrested and the public television talks about your case even before your family knows about it, you become a political case.” Judges’ seemingly hobbled independence was further shown by the rising number of pre-trial detentions, some rubber-stamped without questioning, said Mikołaj Małecki, president of the Krakow Institute of Criminal Law and professor at the Jagiellonian University. District court judges have only 24 hours to decide whether to approve a prosecutor’s request for detention. That is too short to study the case fully and some judges are not “bold enough to tell the prosecutor that I don’t have enough to put a person in detention”, when they should dismiss the requests based on insufficient evidence, said Małecki. About 90 per cent of detention requests are authorised, according to a study by Court Watch Poland, a nongovernmental organisation that monitors the judiciary. And while the number of crimes registered by Polish police rose 3 per cent between 2015 and 2021, the number of pre-trial detention requests surged 60 per cent in the same period, said Court Watch Poland’s cofounder Bartosz Pilitowski. Suspects are also staying longer in jail. Last year, there were 240 people who had spent between 12 months and two years in pre-trial detention, compared with 39 in 2013, according to data from the Polish bar council and the Helsinki Foundation for Human Rights. Poland’s public prosecutor’s office said the “number of persons temporarily arrested in recent years results mainly from the intensification of activities of the prosecutor’s office in the field of combating serious economic crime, including VAT mafias”. All the detention requests were examined by independent judges, it added, and changing the system “would in fact mean a demand to stop effective actions of the prosecutor’s office against the perpetrators of serious crimes”. But the issue of suspects being detained for longer was also raised by Poland’s ombudsman. Justice state secretary Marcin Warchoł told the ombudsman there was “no need to modify the regulations”. One pre-trial detainee who described his case as “purely political” is aristocrat Michał Sobański, who was arrested in 2021 at his Warsaw home and transferred to a prison in the city of Wroclaw, where he spent seven months in a windowless cell. He waded into the politically charged issue of restitutions by filing claims on behalf of other aristocrats whose assets were expropriated by the communists. He was charged with knowingly excluding family heirs from some of his claims, which he denies. After several unsuccessful applications to switch to house arrest, Sobański was eventually allowed by a judge to post bail of 10mn zlotys in cash ($2.4mn). Since then, he has not been allowed to leave Poland and must report regularly to the police. But he has still not heard about a possible trial date. The extended use of pretrial detention had made Poland an outlier in the way it fought white-collar crime, warned Michał Rams, who runs the legal compliance practice of PwC in Poland. “If you look at serious fraud cases in other countries, even Bernard Madoff was granted house arrest before he got sentenced, which would now simply be unthinkable in Poland.” See Opinion Europe. Legal process Poland in dock over white-collar crime purge RAPHAEL MINDER — WARSAW Polish business people critical of the government say they have been targeted by prosecutors, with some jailed for months without being charged in what opponents describe as a crackdown on dissent. The trend, which has accelerated after the ruling Law and Justice party (PiS) came to power in 2015, has burnished the government’s claims that it is going after fraudsters. More white-collar crime suspects have been arrested and kept in pre-trial detention than in previous decades, when this was mostly reserved for violent criminals or people deemed a flight risk, say legal experts. “The standards for detaining people have been lowered tragically,” said Przemysław Rosati, president of the Polish bar council. “People are spending a long time in prison without taking into account their basic rights, including the presumption of innocence.” He called it a “catastrophe” reminiscent of Poland’s communist-era arbitrary arrests and persecution. Among recently detained suspects were a former Treasury minister in the previous government of Donald Tusk, one of the country’s most prominent asset managers, the head of a business association and an aristocrat fighting for the restitution of assets nationalised by the communist regime. The erosion of rule of law standards has cost the country billions in frozen EU funds, which Brussels will not release unless Warsaw restores the independence of judges. PiS further alienated the EU in May when it passed what the opposition labelled a “Lex Tusk” — a law potentially barring politicians, including opposition leader Tusk, from office over alleged pro-Russia activities. High-profile arrests are often carried out in the presence of TV crews. “When somebody is detained in front of the media, it makes a very good show,” said Wojciech Kostrzewa, president of the Polish Business Roundtable, an association of corporate executives. Last October, Maciej Witucki, head of business organisation Lewiatan, was arrested at dawn during a multi-day event between government officials, Critics argue lengthy pre-trial detention is targeted at stifling opponents of ruling party Krakow: Polish judges and supporters protest last year against attacks on judicial independence. Below, aristocrat Michał Sobański Beata Zawrzel/NurPhoto/ Getty Images BARNEY JOPSON — MADRID The Spanish king has given the conservative opposition the first chance to try to form a government after an inconclusive general election, even though the party does not currently have enough support to succeed. The opposition People’s party, led by Alberto Núñez Feijóo, won the most seats in the July election but neither it nor acting Socialist prime minister Pedro Sánchez emerged with an obvious path to a parliamentary majority. Feijóo will face an investiture vote on September 26 and 27, the speaker of congress announced yesterday, but the PP leader does not yet have the majority in the 350-seat congress to take office. If he does not prevail, Sánchez will get a chance to form a government in late November. If this fails, Spain will hold repeat elections, as it did in 2015-16 and 2019, probably in January. Sánchez has vowed to lead another “progressive” government and achieve a 176-seat majority. He wants to do so by striking pacts with five smaller regional parties — including Catalan and Basque separatists — as well as Sumar, a leftwing group that is his preferred coalition partner. On Tuesday, Sánchez said he would respect the king’s decision but added: “I think everyone knows, even Mr Feijóo himself, that it would be a failed investiture” vote if the PP leader tried to become prime minister. Borja Sémper, a senior PP official, said yesterday: “We are aware that the scenario is very difficult but we are not going to stand idly by while Sanchismo [Sánchez] sweeps everything away.” The PP does not appear able to secure more than 172 parliamentary votes, including those of the hard-right Vox party and the single votes of two regional parties. But Sémper said the PP would try to woo the PNV, a pragmatic Basque proindependence party expected to back Sánchez, as well as Socialists who are uncomfortable with the prime minister’s reliance on separatists. Poll deadlock Spain’s opposition given first chance at power since election INTERNATIONAL MAX SEDDON — RIGA Russia’s army has dismissed Sergei Surovikin, a prominent general, as head of its aerospace forces amid a crackdown on potential Wagner sympathisers following the paramilitary group’s failed mutiny in June. State newswire RIA Novosti cited an “informed source” yesterday saying Surovikin had been “relieved of his post” hours before reports that an aircraft with Wagner leader Yevgeny Prigozhin aboard had crashed with no survivors. Viktor Afzalov, the aerospace forces’ chief of staff, was named as Surovikin’s successor. Known as “General Armageddon” for brutal bombardments under his command in Syria, Surovikin took over Russia’s invasion force last October after embarrassing battlefield setbacks in Ukraine. He was the most prominent figure among a number of military leaders who had good relations with Prigozhin, but he has not been seen in public since he was detained in late June. Though Russia’s military has not explained Surovikin’s absence or said whether he remains deputy commander of its invasion forces, the general’s detention came in the midst of President Vladimir Putin’s post-mutiny crackdown at the top of the security services. Hardliners known to sympathise with Wagner and criticise the army’s leadership — in particular, defence minister Sergei Shoigu and Valery Gerasimov, chief of the general staff — have been sacked or detained after giving dire assessments of the situation at the front. Prigozhin’s rivals, meanwhile, have appeared more frequently in public at high-level events, suggesting they still enjoy Putin’s patronage. Last week, Putin visited the army headquarters in Rostov for the first time since Wagner briefly seized it during the mutiny, and was given a guided tour by Gerasimov. Under Surovikin, Russia switched to defensive tactics aimed at consolidating its territorial conquests while launching devastating air strikes on Ukraine’s civilian infrastructure. He lost his position to Gerasimov after a power struggle in January but remained popular among hardliners who chafed at Shoigu and Gerasimov’s poor management, while continuing to serve as Wagner’s effective handler. In his last public appearance, a video released in the middle of the night as Prigozhin’s 24-hour mutiny began, a visibly distressed Surovikin cradled a machinegun as he urged Wagner to stand down. Andrei Kartapolov, an MP and former deputy defence minister, said in July Surovikin was “resting” and “not available right now”, without elaborating. But after the Kremlin struck an eleventh-hour deal to stop Wagner’s march on Moscow, Prigozhin appeared to have at least partially reintegrated himself into the security establishment — even as generals who shared many of his gripes with the army fell out of favour. The Wagner leader attended a roundtable with Putin at the Kremlin in July before the group left for exile in Belarus, whose leader, President Alexander Lukashenko, brokered the deal to end the mutiny. MAX SEDDON — RIGA HENRY FOY — BRUSSELS Russia is offering to swap western investors’ stranded assets in the country for some Russian assets frozen by the west following President Vladimir Putin’s invasion of Ukraine. Under the proposal, Moscow would give western investors the opportunity to buy the assets of Russian companies that have been immobilised in Europe by using their own funds held in restricted accounts in Russia that cannot be spent outside the country, the central bank said yesterday. But western officials said they were unaware of the proposal and that no talks were taking place on a potential asset swap. The proposed deal is aimed at un - blocking Rbs100bn ($1.1bn), mostly owned by retail investors, of a total Rbs1.5tn of Russian-owned holdings in the west, finance minister Anton Siluanov told Putin on Tuesday. Moscow’s offer would compensate retail investors for their investments in western securities that have been frozen under western sanctions and stranded at settlement houses such as Belgiumbased Euroclear, while allowing some western companies to retrieve stranded funds from Russia, according to a person briefed on the matter. Russia has yet to release details of the proposed swap, which Siluanov and the central bank said would be outlined in a decree to be signed by Putin. The ex change would be “voluntary”, the central bank added, appearing to rule out possible expropriation of western-held assets to compensate Russian investors. Yesterday, Russia’s finance ministry also eased restrictions on western companies’ corporate dividends. Under the new rules, they will be allowed to withdraw amounts equivalent to their investments in their Russian subsidiaries’ production and technology. But any potential agreement would be complicated by the legal and compliance difficulties for western investors in disposing of assets in Russia, according to the person briefed on the offer. There are no talks between the EU and Russia over any potential swap of financial assets, four senior European officials said. One official added they saw little possibility for detailed talks on such a deal taking place soon. Western nations are unlikely to agree to any deal that equates Russian assets frozen after Putin’s invasion of Ukraine with western assets stranded in Russia, whose confiscation they view as illegal. The proposal comes as western governments, led by the G7 group of economies, wrangle over whether and how they should seek to monetise Russia’s frozen assets to support Ukraine. Almost €200bn of Russian assets have been frozen by sanctions at Euroclear, €180bn of which are central bank reserves, the Belgian government said. Western officials are exploring ways to legally skim off the profits of those assets and offer them as aid to Kyiv. But any seizure would run the risk of Russian retaliation. The local subsidiaries of four European companies — Uniper, Fortum, Danone and Carlsberg — were nationalised by Russia this year. Ukraine invasion Russian army fires ‘General Armageddon’ Surovikin sacking comes hours before reports of Prigozhin plane crash Corporate investments Moscow offers to swap $1bn of frozen assets with the west employers and unions. The next day, Witucki was also due to open a major conference organised by Lewiatan. He spent 48 hours in jail before being released without charge. Witucki remains a suspect and may still be summoned to trial. A public prosecutor is probing whether he evaded social security payments while running a temporary work agency a ‘Standards for detention have been lowered tragically’ Poland keeps suspects in jail for longer Number of people and length of pre-trial detention Sources: Polish Bar Council; Helsinki Foundation for Human Rights 0 50 100 150 200 250 2013 14 15 16 17 18 19 20 21 22 12 months to two years More than two years MARTIN ARNOLD — FRANKFURT Eurozone businesses have been hit by sharp falls in output and new orders, according to a closely watched survey that raises doubts over whether the European Central Bank will raise interest rates next month. The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20- country bloc, fell to a 33-month low of 47 after a sudden contraction of services activity and continued decline in manufacturing in August. By falling from 48.6 in the previous month, the index sank further below the 50 mark that separates contraction from expansion and increased fears of a slowdown in the second half of this year. The flash reading was well below the slight decline to 48.5 forecast by economists in a Reuters poll. Investors bet the grim outlook made it less likely the ECB would raise interest rates again at its meeting next month. The EU’s consumer confidence index dipped to minus 16, down from minus 15.1 last month, to end almost a year of continuous improvements. Economists had expected a further improvement to minus 14.3. The index remains below its pre-pandemic average of minus 9.9. The survey also found that companies reported a reversal of recent declines in inflationary pressures. Average prices companies charge for goods and services accelerated for the first time in seven months, pushing the rate back above the long-run average. Input costs continued to fall for manufacturers, but the survey found “a slight upturn” in costs for services companies from rising wages and fuel prices. “The continuing sharp drop in the PMI data will test the ECB’s growth optimism,” said Mark Wall, chief European economist at Deutsche Bank. “We are expecting the ECB to pause in September, but it is not clear that inflation is where the ECB wants it yet. A pause should not be misinterpreted as the peak.” See Global Insight Survey Eurozone business downturn MAKE A WISE increases uncertainty on rates INVESTMENT Subscribe today at ft.com/subscribetoday
Thursday 24 August 2023 ★ FINANCIAL TIMES 3 mistrust of the data and arguments put forward by the plan’s proponents. The most prominent mainstream scientific organisation outside Asia that opposes the Fukushima release is the US National Association of Marine Laboratories. The organisation stands by a paper it issued last December that stated: “The supporting data provided by Tepco and the Japanese government are insufficient and in some cases incorrect, with flaws in sampling protocols, statistical analyses and assumptions, which in turn lead to flaws in the conclusion of safety, and prevent a more thorough evaluation of better alternative approaches to disposal.” “I [have become] even more concerned as I and my colleagues have been performing our due diligence and reviewing the data and answers to our queries from Tepco, the Japanese government and the IAEA,” Robert Richmond, director of Kewalo Marine Laboratory in Hawaii, said this week. Luk Bing Lam, chair of the Hong Kong Nuclear Society, a forum for people working on nuclear science and technology, said the IAEA review relied heavily on data from Tepco. “Tepco’s safety record is not very good. The Japanese government gave them some sort of boundaries and they worked around those boundaries,” he said. The Japanese government focused its defence of the release on the relatively harmless tritium, Luk said, while the waste water contained an unknown quantity of more toxic radionuclides. “No one actually knows the long-term effects of releasing such a large amount of waste water on the natural environment,” he added. But Thomas said the IAEA and others would be testing around the discharge for levels of radioactivity. “Lots of people will be taking water and fish from the sea around Fukushima and you would see other radionuclides accumulating,” she said. “I don’t think we’ll see anything much above background levels.” Additional reporting by Chan Ho-him in Hong Kong See Lex INTERNATIONAL CLIVE COOKSON — LONDON Weather permitting, Japan will today begin the controversial release of radioactive water into the Pacific Ocean from the stricken Fukushima Daiichi nuclear plant, a move opposed by some regional neighbours and fishing and environmental organisations. Most of the nuclear and radiology experts who have commented on the release support Japan’s plans, however. They accept the conclusions of a twoyear safety review by the International Atomic Energy Agency, the UN nuclear watchdog, which found “negligible radiological risk” to people or the marine environment from the plan to pump 1.3mn tonnes of treated water into the sea over the next 30 years. What is in the discharge water? Since the 2011 earthquake and tsunami wrecked the plant, operator Tokyo Electric Power Co has sprayed seawater over its damaged reactor cores to prevent them overheating. The contaminated water is stored on site in more than 1,000 tanks. Tepco says there is no space to build any more and no practical alternative to ocean discharge to get rid of the water. The radioactive liquid is prepared for disposal in a five-stage Advanced Liquid Processing System. Alps uses chemical and physical procedures to remove almost all the 64 radionuclides (radioactive isotopes) in the polluted water. Tepco says the only significant radioactive material left is tritium, an isotope of hydrogen produced in nuclear reactors, which is also generated by cosmic rays. Its half-life, the time needed for 50 per cent of its radioactive atoms to decay, is just over 12 years. It is technically impractical to separate water molecules containing tritium from those composed of non-radioactive hydrogen because they are chemically identical. Instead, the treated water containing tritium will be diluted more than 100 times with seawater before being discharged into the ocean through a pipe 1km long. Tokyo says the strength of tritium will be one-seventh of the World Health Organization drinking water standard. If the water is so clean, are there any scientific objections to the discharge? “I don’t know any scientists in the UK — or indeed worldwide — in the field of radiological protection who are against it,” said Jim Smith, professor of environmental science at the University of Portsmouth. “As a scientist I would have started the release much earlier and done it much more quickly.” Geraldine Thomas, a radiation health expert at Imperial College London who has visited Fukushima five times since the accident, agreed. “I kept asking Tepco when they would release the water,” she said. “What worried me was what would happen if there was another quake and the tanks split. How would they handle the outcry then?” By the standards of other isotopes produced in nuclear reactors, such as caesium, strontium and iodine, tritium Japan confronts outcry at release of Fukushima radioactive water Tokyo cites experts who say discharge from stricken nuclear plant is safe Risk review: storage tanks for treated water set to be released from the Fukushima nuclear power plant — Kyodo/Reuters was only weakly radioactive, she added. Proponents of the discharge also argue the amounts of tritium released annually into the Pacific from nuclear plants in China and South Korea are two to 10 times greater than for Fukushima. Why then is there so much opposition to Japan’s plans? Besides politics and anti-nuclear sentiments, some opponents have a deep N KOREA S KOREA TAIWAN JAPAN CHINA RUSSIA East China Sea NORTH PACIFIC OCEAN Beijing Seoul Tokyo Fukushima Daiichi nuclear power plant Hong Kong 300 km ©Mapcreator.io | OSM.org ‘No one actually knows the long-term effects of releasing such a large amount of waste water on the natural environment’
4 ★ FINANCIAL TIMES Thursday 24 August 2023 propriately loose stance, so only in the last few hikes have they actually brought [rates] into restrictive territory,” said Joseph Gagnon, a former senior staffer at the US central bank. “They’re really in a place where they have to feel their way forward carefully.” Officials have begun to describe the risks confronting the US economy as “two-sided”, meaning that while their fear of inflation still percolates, they are also aware of the costs for consumers and businesses if the monetary screws are tightened excessively. Those concerns have been amplified by China’s economic woes, as well as the continued pullback by US regional lenders in the aftermath of this year’s banking stress. But even with inflation receding, manufacturing slumping and financial conditions tightening, the labour market — so far — remains strong. Despite monthly jobs growth slowing, unemployment remains near 50-year lows. That has helped to fuel spending, even as more Americans fall behind on loans and savings stockpiles dwindle. Raghuram Rajan, a former governor of the Reserve Bank of India, described recent data as “a little bit problematic”. “The fact that the labour market is still so strong makes you a little worried that that last mile down to 2 per cent [inflation] may be really prolonged,” he said. Ellen Meade, who served as a senior adviser to the Fed’s board of governors until 2021, warned the central bank against overconfidence about its grip on inflation. “You don’t want to flip-flop and say we are done and are going to hold for a long time and then find out by the end of the year you have to hike a couple more times,” she said. Meade also urged the Fed to make clear that once it is done raising rates, its policy will remain “pretty restrictive”. Former policymakers and economists expect the central bank’s chair, Jay Powell, to emphasise this “higher for longer” stance on interest rates during his keenly awaited speech tomorrow. That approach hinges in part on an assumption that the so-called neutral rate of interest — a level that neither stimulates nor suppresses growth — is higher than in the past. Donald Kohn, who served as the Fed’s vice-chair during the 2008 global financial crisis, thinks loftier borrowing costs are likely to linger. Ballooning government deficits, increased spending on green energy investments and a heightened focus on domestic manufacturing coupled with stronger-than-expected growth had coalesced to tip the odds against a retreat to the ultra-low interest rates of the post-crisis period, he said. Fed officials’ own estimates of the neutral rate — also called R-star — have begun to creep up even though the median forecast still hovers at a prepandemic level of 2.5 per cent, or 0.5 per cent in real terms, once adjusted for inflation at 2 per cent. Researchers at the New York Fed surmise that R-star has risen in the short run but expect it to fall back in the longer term. That is a view also held by the IMF, which warns of secular forces such as ageing demographics again taking over to push down borrowing costs. Whether or not rates will be permanently higher, Kohn believes a soft landing, in which inflation comes down without a recession, is possible. Other ex-policymakers are more sceptical. Randall Kroszner, a Fed governor between 2006 and 2009, said he was braced for a “hardish” landing that could lift the unemployment rate to at least 5 per cent. But he added: “We’re in a world where it’s hard to see everything going right for the next year.” Jackson Hole. Monetary policy Fed summit plots route to ‘soft landing’ COLBY SMITH — WASHINGTON The worst of the global inflation shock may be behind central bankers as they descend on the Rocky Mountains for the Federal Reserve’s annual gathering this week but policymakers are wary of declaring victory. Last year, officials at the high-profile event, hosted by the Kansas City Fed in Jackson Hole, Wyoming, sought to burnish their inflation-fighting credentials after failing to identify or respond quickly enough to the most acute surge in consumer prices since the 1970s. But, after pushing interest rates up to multi-decade highs, the central bankers must grapple with another arduous task: fine-tuning policy to get inflation under control without causing undue hardship and job losses. That they have to do so when the dust is yet to settle on a global pandemic and a war in Ukraine that may have rewired the economy makes the challenge yet more difficult. The Fed, European Central Bank and Bank of England are among central banks still figuring out how much more to raise their respective benchmark interest rates, with the impact of past increases yet to take full effect. The spectre of a growth slowdown also looms, while views internally about the outlook have become more fractured. Soon, they too must confront how long to keep those rates elevated to ensure price pressures do not flare up again. At least in the US, the Fed may be near the end of the rate-rising phase of its inflation battle, having already slowed the pace of tightening as the federal funds rate has crested above 5 per cent. ECB officials are now also toying with a pause, while further increases are expected in the UK this year. But while resilience across the world’s largest economy has damped fears of an imminent recession, it has challenged expectations about when the Fed will feel comfortable cutting rates. “Most of the tightening that they have done was just recovering from an inapWyoming debate likely to centre on whether to keep interest rates higher for longer Fresh thinking: from left, John Williams, New York Fed chief, Lael Brainard, then Fed vicechair, and Jay Powell at last year’s Jackson Hole summit David Paul Morris/Bloomberg When more iPhones roll off production lines in China or a South Korean plant manufactures fewer drugs for Pfizer, it is hard to believe such shifts could seriously distort Europe’s economic data. But they do. The reason is that many of the biggest US technology and pharmaceutical companies have the headquarters of their international operations in Ireland to take advantage of a relatively low 12.5 per cent corporate tax rate. Groups such as Apple and Pfizer increasingly use contract manufacturing or merchanting arrangements to have their products made in low-cost countries, often in Asia, but they keep the intellectual property rights and income in their Irish subsidiaries. So much of the revenue these companies record in their Irish units comes from activities that provide few jobs or incomes for residents of Ireland or of anywhere else in Europe. Yet they still have a massive impact on perceptions about how the region’s economy is performing. The latest example came when eurozone industrial production figures, published this month by the EU’s statistics arm Eurostat, showed month-on-month growth of 0.5 per cent in June, confounding analysts’ expectations for a slight decline. The growth was entirely down to Ireland’s 13.1 per cent surge. Excluding “statistical quirks and distortions” in the Irish data, Mark Cus Babic, an economist at Barclays, calculated eurozone industrial production would have fallen 0.9 per cent in June. While a double-digit percentage move in industrial production is rare for most countries, Ireland has recorded 14 of them in the past 24 months. “Attracting these large industries to Ireland through the tax regime regularly causes havoc with Irish economic data,” said Stefan Gerlach, a former deputy governor of the Central Bank of Ireland who is now chief economist at Swiss bank EFG, adding that the issue “does little to enhance Ireland’s reputation”. Melanie Debono, an economist at consultants Pantheon Macroeconomics, spotted another problem with Ireland’s contribution to the latest eurozone industrial production figures: they do not add up. She said when the subsectors were added up and weighted by share of total output, the result was an overall decline of 0.6 per cent, rather than the rise of 0.5 per cent. “Something is wrong here,” she said. Eurostat said “some inconsistency” between the headline 0.5 per cent figure and the total of the subsector figures had been “caused by the data of one country”, which it refused to name. The culprit? Almost certainly Ireland’s method for seasonally adjusting its data. The country’s Central Statistics Office said that because it calculated each subsector separately to the overall industrial production figure, the total could differ from the sum of its parts. Big swings in Irish industrial production even affect gross domestic product figures, including for the eurozone. In the three months to June, more than half the region’s 0.3 per cent growth from the previous quarter was because of Ireland’s 3.3 per cent expansion. The CSO said much of that growth was “driven by increases in the multinational dominated sectors”. In other words, the activities of Apple, Pfizer and other big US groups such as Meta, Intel and Google — often in Asia — are distorting Europe’s GDP. Oliver Rakau, at Oxford Economics, has suggested Eurostat should publish some economic data excluding Ireland “where the impact of the Irish data quirks is the largest”. The country’s statisticians are considering switches to a different technique. In the meantime, they have attached a health warning to the industrial production data and suggest analysts take a “longer-term view”. Ireland does benefit from multinational companies’ operations. But as long as it keeps warping Europe’s economic data, the artificial boost coming from Ireland’s taxminimising guests will only intensify calls for action to tame the wild numbers coming out of the Emerald Isle. [email protected] GLOBAL INSIGHT FRANKFURT Martin Arnold Ireland’s wild numbers provide an artificial boost to eurozone The activities of Apple, Pfizer and other big US groups are distorting Europe’s GDP INTERNATIONAL JAMES POLITI — WASHINGTON US national security adviser Jake Sullivan has called on China to be more transparent about the state of its economy as Beijing grapples with a slowdown that poses risks to global growth. China last week halted publication of data on its soaring youth unemployment amid concerns that it would reveal new weakness in the recovery of the world’s second-biggest economy, and has cracked down on businesses’ corporate due diligence reporting. “These are not in our view responsible steps,” Sullivan said in Washington. “For global confidence, predictability and the capacity of the rest of the world to make sound economic decisions, it’s important for China to maintain a level of transparency in the publication of its data.” Sullivan said the White House had in recent months seen a “reduction in the level of transparency and openness with respect to recording basic things” as well as a crackdown on companies that offered “basic information to the world on the puts and takes in the Chinese economy”. Sullivan’s appeal came as Gina Raimondo, US commerce secretary, prepares to travel to China at the end of this month for talks with Chinese officials, in the latest push by Washington to stabilise relations with its economic rival. US president Joe Biden earlier this month signed an executive order banning some outbound US investment in Chinese tech sectors, and the administration has tried to break the dependence on Chinese supply chains central to Washington’s re-industrialisation and economic strategy. Beijing has countered with an attempt to elevate the Brics bloc of emerging markets into a rival to the G7. It has also fostered geopolitical ties with countries via its Belt and Road Initiative on infrastructure projects and investments. Sullivan ann oun ced Biden would travel to India next month for the G20 summit in New Delhi. The president would focus “his energy” on having the US and “like-minded” countries bring more economic support for the rest of the world, particularly in the “global south”, and mainly via the IMF and World Bank, he added. “We have heard loud and clear that countries want us to step up our support in the face of the overlapping challenges they face,” Sullivan said. “So as we continue to extend the critical support for Ukraine, we’re going to be delivering for the rest of the world as well. “And given both the scale of the need and frankly the scale of [China’s] coercive and unsustainable lending through the Belt and Road Initiative, we need to ensure that there are high-standard leverage solutions to the challenges countries are facing.” Sullivan noted Biden had asked for additional funding for international financial institutions in his latest supplemental budget request to Congress. The US commitments would generate $50bn in lending to middle-income nations via the IMF and World Bank, he estimated, but the figure would rise to $200bn if other allies and partners participated. He added he did not see those steps as an effort to counter the push by Brics countries to set their own global economic model, and denied Washington saw the bloc as a “geopolitical rival”. Slowdown US takes aim at China economic data White House urges Beijing to be more transparent amid recovery concerns There has been a ‘reduction in the level of openness with respect to recording basic things’ Jake Sullivan BENJAMIN PARKIN — NEW DELHI India landed an uncrewed probe near the Moon’s unexplored South Pole yesterday, a milestone in the country’s efforts to become an international power in space exploration. The successful controlled landing of the $75mn Chandrayaan-3 mission made India only the fourth country to land a craft on the Moon, after the US, China and Soviet Union, and the first to reach its South Pole. The mission came days after a Russian attempt to land at the South Pole ended in failure. The uncrewed Luna-25 spacecraft spun out of control and crashed into the surface on Sunday. Moscow and New Delhi had been racing to become the first to explore the South Pole. Scientists have said the region could contain water, which would make it crucial to any ambitions to inhabit the Moon. Yesterday’s mission was India’s second attempt to land on the Moon after a failed effort by the Chandrayaan-2 probe in 2019. A rover carried by the Indian lander is due to conduct a series of experiments on the Moon’s surface. The landing represented not just a scientific achievement but a geopolitical boost for Prime Minister Narendra Modi, who has sought to portray India — now the world’s most populous country — as a rising superpower ahead of national elections next year. “This is the dawn of the new India,” Modi said after the landing, in a broadcast from South Africa, where he is attending the annual Brics summit. He described it as a historic moment for humanity, adding: “All countries in the world, including those from the global south, are capable of achieving such feats.” The Indian Space Research Organisation (ISRO), founded in 1969, has fostered a reputation for running a lowcost but effective programme that has helped build up the country’s meteorological and telecommunications capabilities and delivered useful developmental tools. India is also home to a fastgrowing private space sector that has drawn eager investors. The landing was “a major milestone from our point of view”, said Nambi Narayanan, a former scientist with the ISRO. “If it has brought [benefits] to the United States or Russia or China, it is going to bring them to us also.” The country’s extraterrestrial ventures have acquired renewed urgency in recent years as China has rapidly developed its own space programme. In 2019, China became the first country to land on the far side of the Moon and this year sent a civilian into orbit. It is preparing for a manned lunar mission by 2030. Relations between India and China have deteriorated since deadly clashes in 2020 along their shared Himalayan border, and Indian analysts have highlighted the importance of space as a future military arena. The landing will be a boon for India’s space ambitions, Narayanan said. “We have learned from others and we have our own intelligence in making things work for us.” Space exploration India celebrates historic Moon landing ‘All countries in the world, including those from the global south, are capable of achieving such feats’ CLIVE COOKSON — LONDON Two research teams in California have developed brain implants that they say are much more effective than previous devices at giving a voice to people who cannot speak. The groups, working independently at the University of California, San Francisco and Stanford University, have used new electrode arrays and artificial intelligence programs to turn thoughts into text and speech. The UCSF scientists also designed a lifelike avatar to speak the decoded words. The details of both brain-computer interfaces were jointly published in the journal Nature yesterday. “Both studies are a big leap forward towards decoding brain activity with the speed and accuracy required to restore fluent communications to people with [voice] paralysis,” said Frank Willett, one of the Stanford team. The two implants were different in design. The UCSF team placed a paperthin rectangle with 253 electrodes on the surface of the cortex to record brain activity from an area known to be critical for speech. The Stanford device inserted two smaller arrays of 128 microelectrodes deeper into the brain. Each team worked with a single volunteer: Stanford with Pat Bennett, 68, who has amyotrophic lateral sclerosis, and UCSF with a 47-year-old stroke patient known as Ann. The results from the two studies were broadly similar. They achieved average speech rates of about 60 to 80 words per minute — almost half the speed of a normal conversation but at least three times faster than any previous braincomputer interface has achieved. Both projects used an artificial intelligence algorithm to decode electrical signals from their subject’s brain, teaching itself to distinguish the distinct pattern associated with individual phonemes, the subunits of speech that form spoken words. The systems needed long training sessions; 25 in Bennett’s case, each lasting four hours, during which she repeated in her mind different sentences chosen from a large data set of phone conversations. “These initial results have proven the concept, and eventually technology will catch up to make it easily accessible to people who cannot speak,” Bennett wrote. “For those who are non-verbal, this means they can stay connected to the bigger world, perhaps continue to work, maintain friends and family relationships.” The UCSF scientists, working with colleagues at UC Berkeley, created a personalised voice for Ann, based on a recording of her speaking at her wedding. They also created an avatar for her, using software that simulates face muscle movements from Speech Graphics, a company in Edinburgh that makes facial animation software. Signals from Ann’s brain as she tried to speak were converted into movements on the avatar. “When the subject first used this system to speak and move the avatar’s face in tandem, I knew that this was going to be something that would have a real impact,” said Kaylo Littlejohn of UC Berkeley. Science Brain implants help patients find their voice A neural data port is connected to stroke patient Ann’s head as part of the brain implant study
Thursday 24 August 2023 ★ FINANCIAL TIMES 5 HANNAH KUCHLER — LONDON Roche has inadvertently disclosed positive results from a closely watched lung cancer drug study, sending shares in the Swiss pharma group up as much as 5 per cent. An interim analysis published accidentally on the company’s website showed that the immunotherapy drug tiragolumab, when taken with the commonly used antibody medicine Tecentriq, increased overall survival time for patients. The data, discovered by an equity analyst, gave investors hope for the drug even though Roche warned that it was not yet “mature”. The late-stage trial involves 534 patients with advanced non-small cell lung cancer, a prevalent type of the disease. The accidentally published data showed patients who took the new drug in conjunction with Tecentriq survived 22.9 months on average — substantially longer than 16.7 months for those who took only Tecentriq. Umer Raffat, the Evercore analyst who found the presentation, said the data was “very good”. Shares in Roche increased 5.1 per cent to SFr265.95. Analysts at the life sciences-focused investment bank Leerink said that the improvement was “clinically meaningful”. Roche had hinted at positive results but no detailed data had been in the public domain, they added. Immunoncology — harnessing the power of the immune system to tackle cancer — has transformed the prospects of many patients over the past decade. But patents on some of the biggest immunoncology drugs are set to expire before 2030 and drugmakers are searching for more effective drugs to provide new sources of revenue. The Leerink analysts said the results could be positive for other companies developing drugs with similar mechanisms, which are known as anti-TIGITs. The drugs target a receptor that suppresses the immune system’s response to cancer. Researchers believe they will improve the effectiveness of other immunoncology drugs when both medicines are used together. Shares in large pharma companies developing anti-TIGITs rose. GSK was up 0.6 per cent yesterday in London, while Merck and Gilead added 1.2 per cent and 0.9 per cent respectively in pre-market trading in New York. Smaller biotech companies developing similar drugs also rallied strongly. Roche rallies after leak of strong data for cancer drug Arm muscle Chip designer exhibits a near-monopoly in mobile but this is a challenge as much as an asset ahead of IPO y PAGE 7 STEFF CHÁVEZ — CHICAGO LAURA ONITA AND GEORGE STEER LONDON Foot Locker has warned that a rise in theft will weigh on its results this year, with the US sneaker store chain one of several retailers to flag the problem as they also grapple with a slowdown in consumer spending on discretionary items. The retailer’s shares were down more than 30 per cent by lunchtime yesterday, putting them on course for a record one-day drop, after the company slashed its earnings forecast and paused its dividend. The sell-off dragged shares of Nike about 3 per cent lower, adding to losses on Tuesday when US retailer Dick’s Sporting Goods cut its full-year guidance and also warned that a rising trend of thefts could worsen in the second half of this year. US and UK stores have suffered increased rates of “shrink” — a catchall term for theft and organised retail crime — this year, though it is not a new issue. In the past week, several US companies including discount retailer Kohl’s, Foot Locker, Home Depot, Walmart and Target have raised the issue of shrink or fielded analyst questions on it. Walmart took a relatively measured line, observing that shrink was “uneven across the country”. But chief executive Doug McMillon added: “We do think that in some jurisdictions here in the US, there needs to be action taken to help protect people from crime, including theft. The other part of shrink is more controllable,” he continued, in a hint that a portion of theft can be internal. In the UK, John Lewis has offered free hot drinks and discounted snacks to police officers “to tackle retail crime” in its Waitrose and John Lewis stores. Chair Sharon White has written to the government calling for “tougher enforcement” against “repeat and violent” offenders. Shop thefts have risen 27 per cent in the past year across the UK’s 10 largest cities, the British Retail Consortium said in July. With regard to the wider economic pressures, Foot Locker chief executive Mary Dillon said the consumer response to challenging factors, such as higher inflation and mortgage rates, “became much more evident through the second quarter, including [in] a weaker start to back-to-school”. Consumers are reining in spending on discretionary items as their budgets are squeezed. When they can splurge, there has been a shift “towards travel and experiences”, according to Peloton. Its shares fell almost 25 per cent yesterday after a sharper than expected slowdown in demand for its exercise equipment. Tripped up Foot Locker joins retailers in fight to stop rising theft eating into profits J ust mention the words Italy and price cap and the blood pressure at Ryanair’s head office shoots off the scale. That happened last week when I tried to talk to Eddie Wilson, the budget airline’s chief executive, about Italy’s recent proposal to cap fares from the mainland to Sicily and Sardinia at 200 per cent above the annual average, and to limit the use of “profiling algorithms” to set prices. “They think we have algorithms that mean I can tell which people have iPhones and we charge them more. Rubbish,” said Wilson in one of his calmer moments. Air fares “are built on demand. If flights aren’t moving we lower fares.” The implication was that, obviously, the reverse must be true if demand exceeds supply. Air fares have risen substantially in the post-coronavirus era, up 30 per cent this summer in Europe compared with last year. Airlines complain of a scarcity of aircraft and labour, as well as higher fuel costs, even as they report bumper profits on the back of increased fares. But the industry’s net margins this year are still forecast to hit only 1.2 per cent. So if Giorgia Meloni, Italy’s prime minister, thinks that a cap on prices is the way to lower the fares for trips to the summer hotspots of Sicily and Sardinia, she is mistaken — and not just because Meloni’s air fare price cap idea won’t fly but will pull in some votes having the intelligence required to personalise pricing for those passengers who are not members of their loyalty programmes. Nor is artificial intelligence the answer. “Even if [the airlines] could dynamically create a price point for you, their revenue management, accounting and invoicing systems cannot cope with anything close to the complexity required,” Krishnan adds. Instead, airlines have resorted to unbundling the fare into its constituent parts — the seats, luggage, boarding priority, etc — asking passengers to pay for what suits their needs. They are also trying to sell a host of extra services, from cars to insurance to holidays, forcing travellers to wade through page after page of marketing. “It’s a dilemma because you have to maximise revenues in a competitive arena,” says Andrea Giuricin, a transport economist. “But it means that you are making it more difficult for the customer.” That strategy has driven suspicion that airlines are charging more and delivering less. According to a recent survey by Which?, the UK consumer rights group, bankers are more trusted than airlines. In the US, a Gallup poll last year found that for the first time in a decade that more passengers had a negative view of the industry than positive. Meloni’s government may be cynically tapping into this general discontent to win a few headlines with measures that ministers know are impossible to implement. But the initiative would not feel like a vote winner if airlines understood their passengers in the first place — and were able to deliver a better service. [email protected] INSIDE BUSINESS EUROPE Peggy Hollinger such a move could contravene EU law. Any price cap will almost certainly lead to higher fares across the year. Why would any airline offer rock-bottom prices out of season — when locals may be the main passengers — if they only drag down the average and, by extension, their ability to price according to demand in peak season? Yes, they want to fill their aircraft during the winter months. But the frequency of flights can be scaled back and extra aircraft used on other routes to drive those prices higher. Italy’s move to impose limits on profiling algorithms also presumes that the aviation industry is more technologically sophisticated than it really is. “Most airlines run on systems that were designed in the stone age of technology,” says Anand Krishnan, chief executive of IBS Software, a leading supplier to airlines. Essentially, carriers divide a flight into “buckets” of seats with different fares, based on expected demand and what the competition is doing. When one bucket sells out, customers are directed to the next one. But as many airlines sell a many of their tickets through global distribution systems, they do not usually know who a passenger is, what their spending power might be, and what might push them to buy. As a result, the carriers are often left with empty seats. “Your biggest opportunity to maximise revenue is to sell all the seats and then sell things beyond the seat,” says Krishnan. “The right call might have been to make that sale at $150 instead of $200.” Very few airlines are remotely close to ‘Your biggest opportunity to maximise revenue is to sell all the seats and then sell things beyond the seat’ Foot Locker was one of several retailers to flag a problem with theft and organised retail crime — Victor J. Blue/Bloomberg COSTAS MOURSELAS, WILL LOUCH AND IVAN LEVINGSTON Private equity’s biggest names, including KKR and Bain Capital, are handing over distressed companies to the lending arms of rivals as they struggle with tough economic conditions. The rash of handovers to creditors underscores the problems many private equity firms face as their portfolio companies contend with higher interest rates, stubborn inflation and supply chain issues. It also shows the growing influence of credit provided by the lending arms of the same large private equity firms. In recent years, private credit has been a faster-growing business than buyouts for many of the sector’s biggest names, including Apollo, Carlyle and KKR. Bain Capital has recently ceded ownership of German manufacturer Wittur to KKR’s credit arm, according to people familiar with the deal. Goldman-backed ink supplier Flint is also in talks with creditors about handing over control, according to several people familiar with the details. Carlyle is expected to hand over the keys at security company Praesidiad to a group of lenders, including Bain Capital’s credit business. KKR’s private equity arm has lost control of German payments company Unzer to a group of creditors, including Goldman Sachs, Swiss private equity firm Partners Group and European credit manager Alcentra. In the US, KKR’s investment in healthcare company Envision was wiped out in a deal for a group of senior lenders, including Blackstone, to take over the company, the Financial Times reported in May. “We had many years of easy money and low interest rates where companies owned by private equity took advantage,” said Jeanine Arnold, an executive at rating agency Moody’s. “[Private equity] continued to push the boundary on the debt those companies were taking on. That’s OK when you have earnings growth but then we’ve had Covid, Ukraine and interest rate increases.” Private equity-owned businesses are struggling partly because some of the debt used to finance buyouts was not hedged against interest rate rises. As rates have risen, loan repayments have increased and companies have had to spend more money servicing their debt. A problem for lenders is that many of the loans that were used to finance the deals do not have strong covenants — contractual protections for creditors — which can help them identify issues with a company’s balance sheet before it runs into serious problems. “The key difference we see between now and the last cycle is that the trigger event now tends to be liquidity, given the lack of covenants during the past few years,” said Manuel Martinez-Fidalgo, co-head of restructuring at Houlihan Lokey. “In 2008 or 2010, you would sit down and have an early seat at the table. That isn’t the case now.” A rise in the number of company defaults risks leaving creditors with losses and the headache of having to own assets they did not intend to. “For now, there is an alignment in incentives between private equity and private credit,” said Allan Schweitzer, portfolio manager at credit hedge fund Beach Point. “Private equity firms want their portfolio companies to keep going, and private credit firms don’t have the infrastructure to take the keys of multiple companies simultaneously.” Private equity firms hand distressed assets to rivals 3Transfers show heft of credit arms 3Poor hedging for rate rises plays role ‘The trigger event now tends to be liquidity, given the lack of covenants during the past few years’
6 ★ FINANCIAL TIMES Thursday 24 August 2023 JOSHUA FRANKLIN AND ORTENCA ALIAJ NEW YORK Better, the SoftBank-backed online lender whose chief executive made headlines after firing 900 employees over Zoom, is set to make its public market debut today in a long-delayed deal with a blank-cheque company. The company has, since May 2021, been attempting to cement a merger with a special purpose acquisition company. Interest in Spacs and demand for mortgages have faltered since the deal was announced, slowing its progress. “The process of going public has been as arduous as the process of buying a home in America, perhaps more,” Vishal Garg, who founded Better in 2016, told the Financial Times. “It’s taken, instead of two months, two years.” The transaction with Aurora Acquisition Corporation is backed by SoftBank, the Japanese conglomerate, and Icelandic billionaire Thor Björgólfsson. Better said it expected to start trading on New York’s Nasdaq exchange today. Better competes with companies such as Rocket Mortgage that have capitalised on the pullback by banks from mortgage lending due to regulations imposed after the 2008 financial crisis. The company promises quicker and cheaper mortgage approvals, in part by scrapping common industry practices such as commissions for loan officers. Better’s business boomed as interest rates hit rock bottom in the pandemic. It funded $58bn of loans in 2021, a 1,000 per cent increase from two years before. But loan volumes dropped to $11.4bn last year as the Federal Reserve aggressively lifted rates to fight inflation, dampening demand from homebuyers and owners seeking to refinance. For Garg, the past two years have been marked by highs and lows. Negative publicity stemming from his mass firing of employees on Zoom in December 2021 was cited in the filing as a risk factor to Better’s business, as was an incident where he accused employees of “stealing” from their colleagues and the company’s customers. “Over the past two years, I’ve spent a lot of time getting leadership training, learning to become a more empathetic leader,” Garg said. “Our foot faults have made us stronger, and have actually enabled us to become more ready for being a public company.” Better also faced an investigation by the Securities and Exchange Commission into whether it had violated securities laws after allegations by its former head of sales and operations Sarah Pierce that the company misled investors in its pursuit of going public. Better denied the allegations and the SEC opted not to recommend enforcement action, but the investigation slowed the The company is merging with Aurora at the enterprise value of nearly $7bn it agreed in 2021, despite now being a fraction of the size it was at the time. The deal will help Better raise a further $550mn by issuing convertible bonds to SoftBank that will mature in five years. Garg has personally guaranteed any losses SoftBank may suffer if it chooses to sell the debt. Meeting the terms of the guarantee could force Garg to sell his Better shares and drive down the stock price, a filing warned. SoftBank, a large tech investor, has already provided $750mn in financing to Better, and its Vision Fund 2 invested $500mn in April 2021. Spacs raise money through a public listing and hunt for a private company to take public. The target company expects to receive the money, which is held in a trust account by the Spac, but as the asset class has fallen out of favour, investors have redeemed their cash. Aurora held $282mn in its trust account as of December 2022 but more than 90 per cent of Aurora’s shareholders opted to redeem their investment when they granted a six-month extension for the two companies to complete the deal, and just above $20mn remains. Aurora’s sponsor NaMa Capital, formerly Novator Capital, is backed by Björgólfsson, a self-defined “deal junkie” with an “unusual tolerance for risk”. NaMa opted to redeem the majority of its private shares. In 2022, Better recruited former Goldman Sachs partner Harit Talwar as non-executive chair to help steady the business and prepare for the listing. Asked about how Better would use the cash infusion, Talwar told the FT it would expand its offerings to customers but remain diligent about spending. “We are not going to be drunk sailors at all,” he added. See Lex Technology Better finally goes public in listing delayed by Zoom sacking controversy secret side deals that give better terms to some investors. The package, approved by a 3-2 vote, marks the most significant change in more than a decade for a lightly regulated and rapidly growing global industry that serves pension funds and universities, and is increasingly looking to work with wealthy individuals. “Today’s final rules will promote private fund advisers’ efficiency, competition, integrity and transparency. That benefits investors, issuers and the markets alike,” said Gary Gensler, SEC chair. Industry groups have been lobbying furiously against the proposals since they were put forward in 2022, saying institutional investors should be free to make their own deals. They contend that tighter regulation will stifle innovation, raise costs and force investors and fund managers to tear up tens of thousands of existing contracts. The rule “is unnecessary government interference [that] will squelch competition in the name of enhancing it,” said Hester Peirce, a Republican commissioner who laid out many of the objections to the rule changes cited by the industry, before voting against them. “The market has not failed.” The final package dropped or modified some of the proposals the industry was most concerned about. Most notably, it cut changes to liability rules that would have allowed investors to sue for “negligence” rather than “gross negligence”. It also substituted disclosure requirements for outright bans on some preferential treatment and fees. The SEC also added an element of “grandfathering” that will mean some contracts can stay intact, with most of the other requirements phased in over a one- to two-year period. The commission pushed ahead with requiring quarterly performance reports with standardised metrics that will make it easier to compare funds. It also went forward with a ban on the practice of giving some investors favourable redemption rights and additional information about fund holdings, unless they are offered to everyone. The BROOKE MASTERS — NEW YORK US securities regulators have adopted a reform package that significantly reshapes the way the $25tn private funds industry deals with its investors. The Securities and Exchange Commission voted yesterday to require private equity, venture capital and hedge funds to provide investors with detailed quarterly reports on performance and increased disclosure on expenses. The regulator also put new limits on Rapidly growing industry must report performance and expenses to investors ANNA NICOLAOU — NEW YORK Barring a last-minute change of heart, Donald Trump is set to snub Fox News this week in a sign of how deeply the relationship has fractured between the former US president and the television channel that helped propel his ascent to the White House seven years ago. Rupert Murdoch’s cable powerhouse hosted the first Republican primary debate on primetime last night, unofficially kicking off a frenetic US presidential election media cycle that is a crucial period for the Fox News profit machine. But Trump skipped the event in Milwaukee, reportedly planning to upstage the network by giving an interview to Tucker Carlson, the former Fox star fired this year. Carlson is expected to stream the pre-recorded interview on Elon Musk’s X, formerly Twitter, The Wall Street Journal reported. The rejection came even after Fox News executives Suzanne Scott and Jay Wallace visited Trump at his New Jersey golf course this month to try to persuade him to take part in the debate, according to a person familiar with the matter. In a reflection of his discontent, Trump last week complained on his social media network that Fox News was airing unattractive photos of him, “especially the big ‘orange’ one with my chin pulled way back”. These were the latest barbs in a yearslong psychodrama between Trump and Rupert Murdoch, who has had for decades an unmatched ability to shape US politics through his media outlets. At 92, Murdoch faces one of his biggest quandaries, with repercussions for financial powerhouse Fox News and his enduring influence on conservative America — what to do about Trump? Once a financial and political boon to Murdoch’s empire, Trump has become a headache for Fox News. A defamation lawsuit brought by Dominion Voting Systems against Fox, related to claims that its ballot devices fraudulently awarded votes to Joe Biden in the 2020 presidential election, uncovered embarrassing text messages and led to a $787mn payout to the company. After the US Capitol riots in 2021, Murdoch told a former aide that he wanted to “make Trump a non-person”. Now, as the former president holds a commanding lead over other potential Republican candidates in the polls, Murdoch faces quandary over supporting former president as network’s audience shrinks name, first through The Apprentice reality show and later through fiery tirades on Fox and CNN — comes as the industry is in a more vulnerable position than it was two election cycles ago. Among US households who have a television, fewer than 40 per cent subscribed to a cable or satellite service this year, down from more than 70 per cent in 2016, according to S&P Global Market Intelligence. In July, traditional television made up less than half of US viewership for the first time, Nielsen said. So it is unlikely that Fox News will be able to match the 24mn people who tuned in for 2015’s first primary debate, regardless of whether Trump attends. While Fox News has fared better than CNN, all the big US cable news channels have suffered shrinking audiences. About 1.7mn people watched Fox News during the “primetime” 8pm to 11pm hours in the second quarter of 2023, down from 2.3mn a year before, and well behind 3.6mn in the same quarter of 2020, according to Nielsen. Fox News said that since revamping its programming line-up in July, the network’s primetime ratings had climbed back up to 2.2mn on average per night. Fox News is the financial juggernaut within a cable division that makes almost $3bn in underlying annual profit and operating profit margins of more than 40 per cent, making it a valuable piece of Murdoch’s portfolio. But it Murdoch might have to cosy up to him, say former aides. “Rupert has an uncanny sense of who is likely to win and he gets on board early so he can play a role in them winning and gets the power and influence that comes from that. That’s been his playbook,” said a former News Corp executive who worked closely with Murdoch. “[Trump] is so clearly going to win the Republican nomination . . . that he’s letting Murdoch know he’s not soliciting their good graces,” the person added. “He’s demanding it in a dominant way.” Trump’s shunning of television — the medium that made him a household Cable news viewership’s slide since 2020 Total primetime viewers (mn), by quarter Sources: Nielsen; Adweek 0 1 2 3 4 21 22 23 Fox News MSNBC CNN Election year 2020 Workers make preparations at an arena in Milwaukee for Republican candidates to gather for their first primary debate of the presidential campaign Jonathan Ernst/Reuters Trump ‘is so clearly going to win the Republican nomination . . . that he’s letting Murdoch know he’s not soliciting their good graces’ COMPANIES & MARKETS SEC also required disclosure or explicit investor consent when funds want to pass on compliance costs. “This is industrial policy. The SEC wants to be much more involved in the oversight of these institutions,” said Brian Daly, partner at law firm Akin Gump. Industry groups, which had threatened legal action to stop the draft rules from going into effect, said they were reviewing the final version. “We will be focusing on its potential to stifle innovation and harm the economic environment for venture and start-ups,” said Bobby Franklin, chief executive of the National Venture Capital Association. SEC toughens rules for private funds makes most of its money from fees cable providers pay to air the channel. These “affiliate” fees, typically on multiyear contracts, have kept Fox News’s finances relatively protected from ratings shifts or advertising fluctuations. Some observers were sceptical of whether Trump’s snub this week would move the needle in Fox’s command over rightwing media. “There is a decades-long entanglement of Fox and conservative media, and more broadly cable [television] with the Republican party. Can Trump break that?” said Kathryn Brownell, a professor at Purdue University. “That remains to be seen. It’s a deep connection. Things don’t change overnight.” For Murdoch-watchers seeking clues to his thinking, his News Corp media outlets are often the best tell. The Wall Street Journal editorial board last week urged Republicans to “give former President Trump a challenge that the party and the country deserve”. The New York Post, after depicting “Trumpty Dumpty” as a delusional election loser last year, has largely held back. A pundit on Fox News on Monday argued that the Republican primary race remained competitive, despite Trump’s 20-plus percentage point lead in the polls. “This is way open,” Marc Thiessen, a Fox News contributor, said. “We haven’t had the first debate yet. The players haven’t taken the field.” PATRICK TEMPLE-WEST AND BROOKE MASTERS — NEW YORK BlackRock’s support for shareholder proposals on environmental and social issues fell sharply for the second year in a row as it refused to back resolutions it deemed too didactic or pointless. The largest money manager voted in favour of 26 such proposals at companies’ annual meetings in the 12 months to June, equivalent to about 7 per cent of the total. That represented a decline from last year, when it backed 22 per cent, and the 2021 proxy season, when it voted in favour of 47 per cent. Its scepticism comes as the $9.4tn asset manager contends with sustained attacks from Republicans in the US accusing it of being too “woke”. Larry Fink, chief executive, said that this year he had stopped using the abbreviation ESG — the catchall term for such proposals — because it had been “weaponised” by political figures on right and left. But BlackRock’s pullback also coincides with a jump in the number of ESG shareholder proposals made possible by a change in the Securities and Exchange Commission’s policies, which means it is harder for companies to block them. This year, a record 340 ESG proposals have already been voted on in the US, up from 300 in all of 2022, according to Institutional Shareholder Services, the proxy voting group. In a report on its voting record published yesterday, BlackRock said its support had fallen “because so many shareholder proposals were overreaching, lacking economic merit, or simply redundant”. For example, BlackRock in 2022 voted in favour of Amazon having to produce a report on its use of plastic packaging. However, it voted against a similar proposal this year because it said the ecommerce group had started to disclose this information. Other shareholders followed suit, with this year’s plastic packaging proposal gaining less than a third of shareholder support versus nearly half in 2022. BlackRock argued that its declining support for ESG proposals was reflective of a broader pullback among investors. The median support for these resolutions fell to 15 per cent in 2023 from 25 per cent in 2022 and 32 per cent in 2021, according to BlackRock and ISS data. However, while rival State Street also refused to back as many proposals, the decline was not as pronounced. The Boston-based asset manager, which publishes its voting record using a different timeline, backed 32 per cent of ESG resolutions in the first half of this year, down from 44 per cent in the same period of 2022 and 49 per cent in 2021. State Street also cited the SEC’s policy change as a factor behind the decline. Along with Vanguard, BlackRock and State Street control between 15 and 20 per cent of most large US public companies because of their huge index trackers and investment funds. Vanguard, which has not yet published figures on its 2023 proxy votes, declined to comment. BlackRock’s support for shareholder resolutions on ESG falls again Media. Election coverage Trump debate snub rings alarm bells for Fox ‘So many proposals were overreaching, lacking economic merit, or simply redundant’ Financials Financials Spac deal. Better has also continued to bleed cash, with almost $1.2bn in reported losses for 2021 and 2022. It recently disclosed in regulatory filings that if the merger deal failed or it could not find other sources of funding it “may not be able to continue as an operating company”. It has laid off 91 per cent of its workforce over the past 18 months. Better founder Vishal Garg is known for dismissing 900 staff on Zoom
Thursday 24 August 2023 ★ FINANCIAL TIMES 7 TIM BRADSHAW — LONDON Few companies preparing for a blockbuster stock market debut can claim a 99 per cent market share at the heart of the world’s most lucrative and ubiquitous consumer product. But for Arm, the SoftBank-owned chip designer, its overwhelming dominance of smartphone processors is both its biggest asset and the greatest challenge to achieving a putative $60bnplus valuation in next month’s initial public offering. Arm’s “substantial existing market share” in the mobile and consumer electronics markets “may limit opportunities for future growth”, the company warned in its IPO prospectus published this week. While other markets, such as automotive chips and processors for cloud computing, hold promise for Arm, analysts say it can never hope to recreate its near monopoly in mobile. At the same time, Arm is largely excluded from the hottest corner of the semiconductor market this year: creating chips for processing vast artificial intelligence models such as OpenAI’s GPT 4, a market dominated by Nvidia. “It’s hard to see that Arm is going to see any significant growth in [mobile] beyond where they are today,” said Geoff Blaber, chief executive of CCS Insight, a tech research group. “Nothing is going to be as large as the iPhone, so Arm is a bit of a victim of its own success, in the same way that Apple is.” Arm and Apple’s fortunes have been intertwined for three decades. The UK chip designer was founded in 1990 as a joint venture between Apple and Acorn Computers, a British PC maker, alongside VLSI, a Silicon Valley-based chip manufacturer. The Cambridge-based start-up had pioneered a novel kind of chip architecture that prioritised speed and simplicity over raw processing power. Its blueprints for low-power chips proved ideal for battery-powered mobile phones, first in the Nokia era, and then when the iPhone ignited an even bigger wave of growth starting in 2007. Even though Apple helped finance its creation, Arm’s relationship with the iPhone maker today is complicated. Despite being one of the most successful developers of Arm-based chips, Apple receives only a couple of passing references in Arm’s IPO filing and the iPhone is mentioned just once. Arm has several models for licensing its technology. At one extreme is unlimited access to its entire portfolio of intellectual property under what it calls “Total Access Agreements”. At the other is a much more narrow architecture licence, giving customers the basic building blocks they need to develop highly customised chips but typically yielding lower revenues for Arm. Apple holds a longstanding architecture licence, pouring billions of dollars into developing its breakthrough Arm-based processors for iPhones and now Macs. “The thing that shot Arm in the foot is they gave away some sweetheart deals,” said Dylan Patel, chief analyst at Semi - Analysis, a consulting firm. Arm argues that it can grow by selling more technology into each smartphone. The company extracts only a “small share from the value it contributes”, said Jay Goldberg, founder of chip consultancy D2D Advisory, in a research note on Tuesday. He pointed to Arm’s 2.7 per cent royalty rate from the 30bn Arm-powered chips that its customers shopped in the last fiscal year, or $0.11 per chip. Deals such as the one it has with Apple, and the smartphone industry’s concentration on a handful of big handset makers, limit Arm’s pricing power despite the lack of alternatives to its technology, Patel said. Those customers are not going anywhere. Arm estimates that 46 per cent of its royalty revenue for the past fiscal year came from products it released between 1990 and 2012, showing the underlying endurance of its business model. But that may not be enough to entice investors to value a business that had revenues fall 1 per cent to $2.7bn last year at more than $60bn. “They’ve got to go into new markets,” said Malcolm Penn, chief executive of Future Horizons, a chip consultancy. “They are not in the same position as they were back in mobile. It’s not as easy a run as it was back then because there isn’t one major end customer driving it.” When SoftBank in 2016 bought Arm, until then a public company listed in London and New York, Masayoshi Son, Arm reaches for growth beyond smartphones SoftBank-owned chip designer’s dominance is its biggest asset and greatest challenge as it targets $60bn float valuation Arm’s growth slows ahead of IPO $bn Arm’s headcount jumped under SoftBank before staff cut last year Number of employees (’000) Sources: Arm F-1 filing; SoftBank 2017 annual report 0 0.5 1.0 1.5 2.0 2.5 3.0 2021 2022 2023 Total revenue Net income 0 1 2 3 4 5 6 7 2015 2016 2021 2022 2023 MERCEDES RUEHL — SINGAPORE Singapore authorities have requested documents from at least 10 banks as they extend a S$1bn (US$737mn) money laundering investigation. Public prosecutors told a court yesterday they were seeking documents from financial institutions used by 10 people arrested last week and charged in one of the city-state’s biggest money laundering and fraud cases. Prosecutors asked the court to extend the remand for the 10 for eight days. The suspects were detained in an operation that spanned the city-state and led to the seizure of luxury homes, cars, gold, cash and designer handbags. The names of Citigroup’s Singapore subsidiary and Malaysia’s CIMB emer - ged when charges against those arrested were published last week. Other banks have not been named and none of the fin ancial institutions has been charged. Citigroup said it was “committed to the fight against money laundering and ensuring the highest standard of governance controls”. CIMB did not reply. Singapore police declined to comment. The probe. which authorities said was at an early stage, has cast in harsh light the Asian business hub’s embrace of foreign wealth and its clean reputation. The 10 individuals, who were detained in simultaneous raids involving 400 officers, are suspected of laundering the proceeds of overseas criminal activities, including scams and online gambling, as well as forging documents. Authorities raided apartments and mansions and seized assets including wine, jewellery and Bentley and RollsRoyce cars valued collectively at S$1bn. The 10, including nationals from China, Cyprus, Turkey and Vanuatu, had China-issued passports, police said. Singapore’s political opposition has seized on the case to accuse the government of being too open to foreign money and overseas entities. “If we provide a warm welcome to very dirty businesses . . . then we can’t expect to escape without a stain on our ‘squeaky clean’ reputation,” said Kenneth Jeyaretnam, secretary-general of the opposition Reform party. Laundering activity “pushes up asset prices and makes prop erty unaffordable for Singaporeans”, he said, accusing the ruling People’s Action party of initiating the probe under foreign pressure, and noting that the raid followed a visit by Wang Yi, China’s foreign minister. The Monetary Authority of Singapore said bank reports of suspicious fund flows and inconsistencies with documentation led to the investigation. “MAS takes this case seriously and has been in touch with the financial institutions where the potentially tainted funds have been identified,” it said. Supervisory engagements with these financial institutions are ongoing.” Singapore has welcomed a rapid influx of money and rich Chinese, many of them fleeing the strict coronavirus regime and crackdown on sectors including real estate and technology. Financials Singapore asks banks for papers after arrests The city-state is extending a S$1bn investigation into money-laundering COMPANIES & MARKETS the Japanese group’s chief executive, declared it would propel the company to the heart of the “internet of things”. Seven years later, analysts say that initiative failed to produce the desired new growth. Arm’s prospectus says it has a 65 per cent share of the market for industrial IoT and embedded semi - conductors, but the small and lowervalue nature of products in that area have made it less lucrative than Son envisaged. The billionaire investor’s latest obsession is AI, where Arm is making some headway. It works with self-driving car companies such as GM’s Cruise. Nvidia uses an Arm CPU in its Grace Hopper “super chip”, used for processing AI models in data centres. But instead of sitting at the centre of these devices, Arm’s technology is in more of a supporting role to more powerful chips, such as Nvidia’s H100 when it comes to AI. Nonetheless, Arm stands to be a beneficiary of a wider shift in how data centres are designed around AI workloads, Patel said. Cloud computing companies Amazon, Google and Microsoft are all working on Arm-based CPUs for their data centres. Arm estimates it has a 10 per cent share of the $18bn market for cloud processors, up from 7 per cent in 2020, and the sector is predicted to grow by a double-digit percentage over the next few years. Another key growth area is the automotive market, as carmakers keep on increasing the computing power within their vehicles, from engine management to assisted-driving technology. Arm claims a 41 per cent share of the automotive market and its royalty revenue grew by 36 per cent last year. However, in a $200bn total addressable market of “all chips that can contain a processor”, Arm estimates that it has captured almost half of its potential. After conquering the mobile market, Arm may find the second $100bn is the hardest. ‘The thing that shot Arm in the foot is they gave away some sweetheart deals’ While other markets such as automotive chips and processors for cloud computing hold promise for Arm, analysts say it can never hope to recreate its near monopoly in mobile — Sam Mellish/ In Pictures/Getty Images
8 ★ FINANCIAL TIMES Thursday 24 August 2023 COMPANIES & MARKETS CHLOE CORNISH — MUMBAI Qatar’s sovereign wealth fund is set to invest $1bn in Indian billionaire Mukesh Ambani’s retail unit, valuing the shopping company at $100bn, in the latest sign of Gulf investors’ deepening exposure to India’s fast-growing economy. The $450bn Qatar Investment Authority would take a 0.99 per cent stake in Reliance Retail Ventures Limited, the Reliance Industries subsidiary announced yesterday. “QIA is committed to supporting innovative companies with high growth potential in India’s fast growing retail market,” QIA chief executive Mansoor Ebrahim al-Mahmoud said. He added that Reliance Retail joined the fund’s “growing and diverse portfolio of investments in India”. The investment will be one of the biggest bets made on Indian retail by the gas-rich Gulf state’s sovereign wealth fund, which has also invested in Indian start-ups including online restaurant company Rebel Foods and delivery group Swiggy. The Financial Times reported Qatar was considering the investment last month. The deal follows a series of other transactions in India by the QIA. This month, a wholly-owned subsidiary of the fund spent $474mn on a nearly 3 per cent stake in Adani Green Energy, the renewables unit of tycoon Gautam Adani, market data has revealed. Ambani has used equity sales to deep-pocketed global investors to help fund ambitious plans for Reliance Industries, whose activities range from petrochemicals to mobile data. The parcalled AI “really an important part of our . . . revenue growth journey”. Restaurant chains such as KFC owner Yum Brands and Chipotle have touted AI-powered technology to improve the efficiency of ingredient orders or help making tortilla chips. Several tourism-related businesses such as Marriott and Norwegian Cruise Line said they are working on AI-powered systems to make processes such as reservation booking more efficient. None of the examples above referenced AI in their most recent quarterly filings, though Ralph Lauren did note some initiatives in broad terms in its annual report in May. The fact that companies have yet to see concrete financial impacts from their AI experiments does not mean they have simply been jumping on a bandwagon for attention. But it highlights the challenge for investors of separating hype from real potential. Rob Arnott, chair of asset manager Research Affiliates, said: “Do I believe the hype about AI? Yes I do. I think it’s absolutely going to rock our world. Do I believe it will happen overnight? Heavens no.” ent group is India’s biggest by market valuation. Reliance Retail Ventures last raised roughly $6bn from investors, which included Gulf sovereign wealth funds and international private equity firm KKR in 2020, at about half its new valuation. Led by Mukesh Ambani’s daughter, Isha Ambani, Reliance Retail has used acquisitions to fuel its aggressive expansion across shopping categories as it bets on India’s middle class growing more prosperous. Isha Ambani said the QIA’s investment signalled “a positive outlook” on Reliance’s retail business and India’s economy. The IMF forecasts that the country’s gross domestic product will grow 6.1 per cent this year. In May, Reliance Retail struck a deal to bring Chinese fast-fashion company Shein back to India. Investors in Reliance Industries will be hoping for an update on Mukesh Ambani’s plans to spin out major business units, including Reliance Retail, at the company’s annual meeting on Monday. Reliance this week listed Jio Financial Services, its fledgling lending company, on Mumbai’s BSE exchange. Equities Qatari sovereign wealth fund to invest $1bn in India’s Reliance Retail Ventures NICHOLAS MEGAW AND SILIN CHEN NEW YORK The rapid rise of artificial intelligence has sparked excitement in industries from fast food to theme parks, with chief executives rushing to show how they will be among beneficiaries of the new technology. Analysis of their regulatory filings, however, suggests much of the talk is only talk. Almost 40 per cent of companies in the blue-chip S&P 500 index have mentioned AI or related terms in earnings calls in the latest financial quarter, according to data from Alphasense. But fewer than one in six — 16 per cent — mentioned it in their corresponding regulatory filings, highlighting how AI has yet to make a material impact for the vast majority of companies. “The joke out there was that all you had to do last quarter was say ‘AI’ and your stock would pop immediately,” said Bryant VanCronkhite, a senior portfolio manager at Allspring Global Investments, the $550bn asset manager. “Some companies are saying they’re doing AI when they’re really just trying to figure out the basics of automation. Technology Chief executives extol benefits of AI on earnings calls but not in official filings The pretenders will be shown up for that at some point,” he added. The motivation for executives to join the AI conversation is clear. The seven largest AI-linked tech groups have been responsible for the majority of the US stock market’s rise this year. Nvidia, the chipmaker due to report its latest results yesterday, has led the way with a gain of more than 200 per cent. At the same time, investors are on the lookout for business models that could be disrupted by the technology. Chegg sparked a sell-off across the education industry in May after the maker of online study guides warned that the growth of AI chatbots such as ChatGPT was hurting its sales. The trends have sparked discussion even in industries not known for technological innovation. Ralph Lauren, the fashion and apparel group, this month ‘Do I believe the hype about AI? Yes I do. Do I believe it will happen overnight? Heavens no’ Reliance Retail head Isha Ambani hailed the 'positive outlook’ on India losses on its investments, then the prime broker or its investors can be left footing the bill. “It is a very risky investment to make,” said Andrew Urquhart, professor of finance and financial technology at Henley Business School, adding: “If my pension fund said we’re going to get into crypto, I’d be very worried about that.” Cyrus Pocha, partner at Freshfields, said raising finance from outside investors is not a typical set-up. A prime broker operating in this way may mean “they don’t have a proprietary interest in the repayment”, he added. Hidden Road declined to comment. Crypto markets have faced a bruising year following the collapse of exchange FTX and a series of US enforcement actions against Coinbase and Binance. Spot crypto trading volumes have more than halved — dropping to $515bn in July compared with $1.2tn in the same period a year ago, according to CCdata. The move by Lockheed Martin’s plan and others marks the latest venture into crypto by pension funds, many of which are seeking ways to improve their own returns. Lockheed Martin declined to comment. A number have been burnt, highlighting the risks of digital assets markets. Canada’s $190bn Ontario Teachers’ Pension Plan and $300bn CDPQ lost their investments in crypto exchange FTX and lender Celsius, respectively. A person familiar with Hidden Road’s thinking said the company sees itself more similar to a private equity or investment firm that raises outside capital to fund activities rather than like a bank prime broker. Founded in 2018 by Marc Asch, who worked previously at Steven Cohen’s hedge funds SAC Capital and Point72, the company is named after the Massachusetts street where he grew up. Hidden Road began as a foreign exchange prime brokerage before expanding into digital assets. Large market makers including Flow Traders and Virtu Financial already use Hidden Road, which has secured regulatory licences from countries including the UK and the Netherlands and has applied for another in Singapore. Its crypto services are not offered to US investors. Hidden Road also does not trade any assets itself, easing worries about potential conflicts of interest in having one company act simultaneously as exchange, broker and trader. Venues including Coinbase and Gemini offer prime broking — raising these concerns. Prime brokerage is an inherently risky business, even for the biggest banks. Credit Suisse took a $5.5bn loss on its balance sheet after the collapse of family office Archegos — a hole that contributed to the bank’s eventual demise. “It’s a very tough business,” said Harry Jho, founder of law firm Harry Jho LLC, which specialises in prime brokerage, adding that “if you’re providing full financing, you have to be able to assess the credit risk”. One investor who met Hidden Road described it as “prime broking on steroids” and said there were risks of relying on someone else’s capital. Some executives also worry about Hidden Road’s size. Its balance sheet is in the hundreds of millions rather than billions of dollars that banks typically have, according to people familiar with the matter. While Hidden Road would be on the hook for any losses, some fear its balance sheet would not withstand a large market event and the investors providing capital may need to stump up more at short notice. “I have to look at it from an arm’s length distance to be comfortable — they’re intermediating credit with a pretty thinly capitalised balance sheet,” said the head of one crypto exchange, adding: “To be taken seriously, they need to have a significant degree more balance sheet behind them.” Hidden Road charges an “exchange risk spread” to protect against the potential failure of a venue. Customers who paid this and traded on FTX through Hidden Road were made whole when the exchange collapsed, people with knowledge of the matter said. Customers said its due diligence was stringent. “They put us through the wringer,” said the head of one market maker. But the crypto industry has learned the hard way that prime broking can be a precarious service. In the last year, Digital Currency Group’s Tradeblock closed while the lending unit of Genesis, another prime broker, filed for bankruptcy. “It’s completely empty, the whole [crypto] prime brokerage, institutional broking space is wide open,” said Gautam Chhugani, senior analyst of global digital assets at Bernstein. But he said the volatility of bitcoin and other tokens made it a particularly tough asset to manage. Others “have attempted the prime broking models in different ways and some blew up”. NIKOU ASGARI — LONDON Traditional investors such as pension funds are providing the financing to a broker that is helping hedge funds take bigger bets on volatile cryptocurrency assets. Retirement plans including that of US defence contractor Lockheed Martin are among the backers of crypto prime broker Hidden Road, according to people with knowledge of the matter, providing the financing that in traditional markets typically comes from banks. London-based Hidden Road, which last year raised a $50mn equity investment from Ken Griffin’s Citadel Securities and exchange Coinbase among others, has emerged as a crucial player in bridging the gap between traditional investors and digital assets. The group also serves as a potential lifeline for the crypto market, which is facing a deep squeeze on leverage and dwindling trading activity after a series of scandals, including the collapse of exchange FTX. Prime brokerage is a common way for traders in mature markets such as stocks to get leverage, as a way of juicing their bets. Traditional prime brokers typically sit within Wall Street banks and use the lenders’ vast balance sheets to extend credit to hedge funds, family offices and high-speed traders. If a hedge fund borrowing money from the prime broker suffers large Retirement plans try to juice returns but observers still see dangers in digital asset sector An investor who met Hidden Road described it as ‘prime broking on steroids’ Taking credit: Hidden Road has emerged as a crucial intermediary in bridging the gap between traditional investors and digital assets Charlie Bibby Crypto. Leveraged bets Pension funds shrug off risks to back broker Hidden Road NICHOLAS MEGAW — NEW YORK NIKOU ASGARI — LONDON A contentious form of derivatives trading that has swept US markets is spreading to Europe with the launch of “zeroday” options tracking an index of the continent’s largest companies. Eurex, the derivatives exchange run by Deutsche Börse, will offer daily options that track the Euro Stoxx 50 equity index from Monday. Demand for similar contracts that track the S&P 500 has rocketed since the coronavirus pandemic and they now account for more than 40 per cent of the 2.8mn a day of options that follow the US equity benchmark. So-called zero-day options refer to contracts that expire on the day they are purchased and allow traders to take targeted positions in stock markets around events such as economic data, corporate earnings or monetary policy meetings. Their rapid emergence has prompted concern that they trigger daily bursts of activity that could cause sharp sell-offs in equities late in the trading day. Eurex said the launch of its contracts, which expire at the end of every working day in Germany, was in response to customer demand. The clamour for zero-day contracts has also boosted the corporate profits of rival Cboe Global Markets, the largest US options exchanges operator. “The US market for daily options is already established and we saw the strong volume growth there,” said Zubin Ramdarshan, head of equity and index product design at Eurex. Monday’s launch marks the first daily options products tracking a Europewide stock index. The nearest equivalent, Eurex’s weekly options, expire only on Fridays. The Euro Stoxx 50 options are Eurex’s most popular traded products and Ramdarshan said the exchange was also considering similar contracts for other indices, starting with Germany’s benchmark Xetra Dax. Lotte de Vos, head of European market structure at trading firm Optiver, said she was hopeful the new options “could provide a much-needed boost” to the European options market, which has struggled for growth in recent years. “An important observation we’ve made from similar products is that they don’t just shift volume from monthly and weekly expiries but are additive to overall volumes,” she added. The rapid growth in the US has stoked worries among some analysts and regulators, who fear the way dealers hedge the contracts they sell could increase market volatility. In the US, contracts with less than a day to expiry now account for 43 per cent of overall S&P 500 options trading volume, compared with just 6 per cent in 2017, according to data from Cboe. Derivatives Europe poised for arrival of ‘zero-day’ options trading ‘The US market for daily options is already established and we saw strong volume growth’ Our global team gives you market-moving news and views, 24 hours a day ft.com/markets
Thursday 24 August 2023 ★ FINANCIAL TIMES 9 COMPANIES & MARKETS Sport retailer Foot Locker tumbled after cutting it full-year outlook, forecasting earnings of $1.30 to $1.50 per share, down from an earlier range of $2 to $2.25. Mary Dillon, chief executive, said that the revision reflected efforts to “best compete for price-sensitive consumers”, having seen “a softening in trends in July”. The update weighed on sports-related groups such as Nike and Under Armour and came a day after sector peer Dick’s Sporting Goods also lowered its guidance. Heading the S&P 500 index was streaming platform Netflix, buoyed by data from research group Antenna, which suggested that its crackdown on password sharing was starting to pay off. Netflix added 2.6mn US subscribers in July, which was “overall elevated compared with normal”, said Antenna. A weaker than expected sales forecast sent Peloton plummeting, with the fitness bikes and treadmills group expecting revenue for the current quarter of between $580mn and $600mn, below the $646mn projected by analysts polled by Refinitiv. During its fiscal fourth quarter, subscribers declined by 29,000 “due to the seasonal slowdown in hardware sales and higher than anticipated” churn in its connected fitness subscription, it said. Ray Douglas Wall Street Europe London Biotech group Bavarian Nordic jumped after swinging to a second-quarter profit of DKr690mn ($100mn) against a loss of DKr118mn from a year earlier. Citi said stronger smallpox and mpox vaccines sales underpinned this performance alongside the first contribution from its May acquisition of Emergent’s travel vaccine portfolio. The broker was bullish on Bavarian, arguing that its travel vaccines will “continue to surprise to the upside” while revenues from its smallpox/mpox jabs will be larger than markets expect. A chunky earnings miss weighed on Alfen, a provider of electricity-grid equipment, which reported adjusted core profits of €8.4mn in the second quarter — 48 per cent below the consensus estimate, noted Jefferies. This was due to a weaker performance in its electric-vehicle charging business, which had revenue of €79.6mn for the first half of 2023, down from €125mn for the same period last year. Destocking and “challenging market conditions” in the UK and Germany were to blame, said Alfen. Switzerland’s Roche rallied after the healthcare group said that it had made an “inadvertent disclosure” of interim analysis that was evaluating its experimental treatment for lung cancer. The results were positive but not “mature”, warned Roche. Ray Douglas Retailer JD Sports sank to the bottom of the FTSE 100 index for the second consecutive session. Yesterday’s fall was linked to its US peer, Foot Locker, trimming its full-year guidance. Disappointing results from another US chain, Dick’s Sporting Goods, weighed on JD a day earlier, a read across that was “unwarranted”, said Eleonora Dani, an analyst at Shore Capital. She flagged several areas where the US group’s update was less applicable to JD, such as the markdowns in the US retailer’s outdoor unit, which was of “less . . . concern for JD as it is typically less exposed to apparel in the US”. Sinking to the bottom of the FTSE 250 mid-cap index was energy explorer Ithaca, which warned that its production in 2024 was “expected to be lower than 2023 levels”, because of the UK government’s energy profits levy. Broker SP Angel said that management during an analyst call voiced concern over the levy, which had resulted in “lowered returns and restricted liquidity, causing several partners deciding to minimise UK investment”. Costain, the construction engineering group, rallied after posting a 7 per cent rise in adjusted operating profit to £15mn for the half year and noting a resumption in dividend payments was under consideration. Ray Douglas 3Stocks rise and debt yields tumble as surveys spark hopes of rates rethink 3Chipmaker Nvidia rises ahead of eagerly awaited earnings 3Weak data may lead to questioning of bearish outlook for bonds, says analyst Global stocks rose and government bond yields fell yesterday after surveys of US and European business activity pointed to an economic slowdown, raising hopes that central banks would limit further interest rate rises to curb inflation. The benchmark S&P 500 rose 0.9 per cent by midday in New and the Nasdaq Composite was up 1.6 per cent, aided by gains for Nvidia. The US chipmaker, whose blowout earnings forecasts helped propel this year’s rally in artificial intelligence-related technology stocks, will release earnings after the market close. Yields on the two-year US Treasury fell 8 basis points to 4.95 per cent after the S&P Global’s flash US Composite PMI index, a measure of manufacturing and service activity, fell to a 50.4 in August from 52 in July — its largest decline since November — while those on benchmark 10-year bonds fell 11bp to 4.22 per cent as investors bought the debt. A reading below the neutral 50 mark indicates that the majority of businesses responding to the survey reported an overall contraction in their activity. The weaker numbers mirrored similarly weak reports on business activity in the UK and eurozone yesterday. German and UK bond yields fell as traders bet that slowing economies would force central banks to cap interest rate rises. Investors had feared that a succession of robust economic data over the summer would persuade the US Federal Reserve to keep interest rates higher for longer as it tries to tame persistent price increases. Long-term Treasury yields soared to a 16-year high earlier this month. William O’Donnell, head of US rates strategy at Citi, said markets had begun to rule out the prospect of rate cuts. “But I think the early morning data that we got from the UK and the EU — Germany in particular — were super weak and suggested almost recessionary-like conditions over there . . . I think people financial system and erode policy space. To cut the debt overhang, the eurozone needs more efficient and robust debt-resolution frameworks, including simplified insolvency procedures for SMEs, hybrid restructuring mechanisms and out-of-court debt workouts. Ultimately, the best defence would be to complete the EU’s banking union with a truly bloc-wide market for bank services, common regulation and a European safety net for depositors. Without this, times of stress will always raise fragmentation risks. Progress has stalled on closing important gaps such as the design and implementation of the European Deposit Insurance Scheme safety net. This needs a new push to reach consensus and encourage more cross-border banking. While the European Commission has adopted a proposal to adjust and strengthen the EU’s existing bank crisis management and deposit insurance framework, it ignores the role of effective national institutional protection systems and the importance of EDIS (also in resolution) for completing the banking union. Policymakers should consider new ways to work more with the private sector to restructure public sector exposures to distressed, yet viable, firms. This requires a new policy mindset, shifting away from thinking like a creditor collecting principal or rolling over loans to that of an equity investor looking to maximise recovery value, such as by incentivising debt restructuring via tax credits and injecting new equity. Taking no action at all could leave the eurozone dangerously close to a déjà-vu crisis that would be hard to recover from. Ludovic Subran is Allianz’s chief economist sudden realisation of losses would jolt capital markets, precipitating a systemic crisis that reverberates through corporate, financial and sovereign feedback loops — where price falls trigger further weakness in related areas. If it is anything like previous crises, this extreme scenario could result in a cumulative default rate of 10 per cent over the next two years. This would imply a steep increase in insolvencies, based on a current annual default probability of less than 1 per cent. The resulting losses in the corporate sector would wipe out about three years of profits for banks, which would respond by cutting back on their riskiest lending to preserve capital — typically to the small and medium enterprises that need it most. For eurozone governments, direct losses and forgone corporate tax revenues could add up to 5 per cent of GDP on average, which would cut deeply into what little policy space is left. In this situation, the eurozone would find itself in a prolonged recession but this time with more debt and minimal policy space for yet another fight. In this context, financial sector policies in the eurozone need to be more forward-looking when it comes to corporate sector risks, especially in countries where lower-for-longer insolvencies and lower asset recovery rates amplify economic scarring, undermine the Europe would find itself in a prolonged recession but this time with more debt and minimal policy space are questioning the veracity of their bond bearish outlook.” Yields on the policy-sensitive two-year German Bunds fell 12bp to 2.97 per cent, their lowest level since early June, while those on 10-year Bunds, a regional benchmark, slipped 13bp to 2.52 per cent. Yields on 10-year gilt yields fell 20bp to 4.46 per cent, its largest one-day fall since the March collapse of Silicon Valley Bank. The region-wide Stoxx Europe 600 equities index rose 0.4 per cent while Paris’s CAC 40 added 0.1 per cent and Frankfurt’s Xetra Dax was up 0.2 per cent. Daria Mosolova and Harriet Clarfelt What you need to know Source: Refinitiv German Bund yields hit two-month low after weak PMI data Jan Aug The day in the markets Markets update US Eurozone Japan UK China Brazil Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa Level 4429.94 1796.47 32010.26 7320.53 3078.40 117887.66 % change on day 0.97 0.42 0.48 0.68 -1.34 1.49 Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $ Level 103.939 1.085 144.745 1.268 7.292 4.889 % change on day 0.363 0.000 -0.761 -0.393 -0.007 -0.827 Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond Yield 4.218 2.517 0.672 4.564 2.552 10.809 Basis point change on day -10.170 -12.900 0.580 -17.400 0.300 -16.900 World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX) Level 445.36 83.33 79.03 1892.75 23.39 3688.80 % change on day 0.87 -0.83 -0.77 0.15 2.23 1.20 Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon. Main equity markets S&P 500 index Eurofirst 300 index FTSE 100 index | | ||||||| | |||||||| | | Jun 2023 Aug 4320 4480 4640 | | ||||||| | |||||||| | | Jun 2023 Aug 1760 1800 1840 1880 | | ||||||| | |||||||| | | Jun 2023 Aug 7200 7360 7520 7680 7840 Biggest movers % US Eurozone UK Ups Netflix 5.48 Carnival 3.93 Ross Stores 3.83 Cadence Design Systems 3.52 Monolithic Power Systems 3.41 Novo Nordisk 2.66 Edp 2.52 Snam 2.30 Terna 2.15 Kerry Grp 1.90 Endeavour Mining 4.18 Unite 3.19 Segro 2.95 Fresnillo 2.79 Flutter Entertainment 2.64 % Downs Eqt -3.73 Nike -3.47 Cf Industries Holding -2.96 Insulet -2.54 Mosaic (the) -2.30 Prices taken at 17:00 GMT Adidas -5.09 Galp Energia -2.76 Kbc -2.74 Oci -2.62 Heidelbergcement -2.36 Based on the constituents of the FTSE Eurofirst 300 Eurozone Jd Sports Fashion -5.40 Bp -1.41 Centrica -1.33 Frasers -1.32 B&m Eur Value Retail S.a. -1.02 All data provided by Morningstar unless otherwise noted. Ludovic Subran Markets Insight Are eurozone governments getting too close for comfort to a new danger zone? The signs are there with sovereign exposure to the corporate sector crossing 20 per cent of gross domestic product. This comes from the European Central Bank’s asset purchases and generous policy support to shield companies from the effects of back-to-back crises. Government credit guarantees and liquidity support certainly hit the mark, helping to keep vulnerable firms afloat. But they mask considerable economic scarring. Some sectors and firms have yet to fully recover and some may never recover — especially those hit the hardest by pandemic-related containment measures and consequent changes in consumer behaviour. At the same time, delayed insolvency proceedings and the (so far) shallow recession have helped keep corporate defaults low. But these suppressed bankruptcies are hiding sizeable losses, which could emerge quickly as the effects of strong policy support fade, given the build-up of corporate leverage and still weak fundamentals. In fact, many small businesses are still barely afloat and will need to be wound up or restructured. Unless addressed early, worsening corporate profitability could quickly turn into losses — and these liabilities would become real losses for the sovereign. In a worst-case scenario, the complex system of interlinkages between real activity, banks and sovereigns means an incipient corporate necrosis would spread rapidly, triggering a fundamental repricing of risk in a new doom loop. A trickle of defaults in some critical sectors could grow into a torrent and the Eurozone must avoid creating a new doom loop
10 ★ FINANCIAL TIMES Thursday 24 August 2023 WORLD MARKETS AT A GLANCE FT.COM/MARKETSDATA Change during previous day’s trading (%) S&P 500 0.97% Nasdaq Composite 1.59% Dow Jones Ind 0.42% FTSE 100 0.68% FTSE Eurofirst 300 0.42% Nikkei 0.48% Hang Seng 0.31% FTSE All World $ 0.87% $ per € No change $ per £ -0.393% ¥ per $ -0.761% £ per € 0.352% Oil Brent $ Sep -1.57% Gold $ 0.15% Stock Market movements over last 30 days, with the FTSE All-World in the same currency as a comparison AMERICAS EUROPE ASIA Jul 24 - - Index All World Jul 24 - Aug 23 Index All World Jul 24 - Aug 23 Index All World Jul 24 - Aug 23 Index All World Jul 24 - Aug 23 Index All World Jul 24 - Aug 23 Index All World S&P 500 New York 4,567.46 4,429.91 Day 0.97% Month -2.35% Year 7.29% Nasdaq Composite New York 14,144.56 13,720.36 Day 1.59% Month -2.24% Year 10.80% Dow Jones Industrial New York 35,438.07 34,433.88 Day 0.42% Month -2.23% Year 4.66% S&P/TSX COMP Toronto 20,582.12 19,747.49 Day 0.97% Month -3.24% Year -0.52% IPC Mexico City 54,013.58 53,306.64 Day 0.80% Month -0.26% Year 11.65% Bovespa São Paulo 122,007.77 117,005.14 Day 1.49% Month -1.94% Year 4.46% FTSE 100 London 7,691.80 7,320.53 Day 0.68% Month -4.44% Year -2.20% FTSE Eurofirst 300 Europe 1,850.60 1,796.47 Day 0.42% Month -2.39% Year 5.64% CAC 40 Paris 7,415.45 7,248.04 Day 0.08% Month -2.50% Year 13.61% Xetra Dax Frankfurt 16,211.59 15,707.36 Day 0.15% Month -0.25% Year NaN% Ibex 35 Madrid 9,519.20 9,315.60 Day 0.02% Month -2.67% Year 12.44% FTSE MIB Milan 28,908.42 28,233.80 Day 0.24% Month -2.15% Year 27.38% Nikkei 225 Tokyo 32,700.94 32,010.26 Day 0.48% Month -0.85% Year 11.23% Hang Seng Hong Kong 19,434.40 17,845.92 Day 0.31% Month -6.37% Year -9.14% Shanghai Composite Shanghai 3,231.52 3,078.40 Day -1.34% Month -2.82% Year -6.08% Kospi Seoul 2,636.46 2,505.50 Day -0.41% Month -4.00% Year 1.75% FTSE Straits Times Singapore 3,265.14 3,174.18 Day 0.45% Month -3.06% Year -2.59% BSE Sensex Mumbai 66,384.78 65,433.30 Day 0.33% 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12 ★ FINANCIAL TIMES Thursday 24 August 2023 ‘Bomb Rush Cyberfunk’ is a blazingly bright riff on the cyberpunk genre Lewis Gordon The city of New Amsterdam is at once strikingly beautiful and strangely familiar. With its colourful, cel-shaded architecture emblazoned with punk graffiti, and a pristine blue sky above, the world of Bomb Rush Cyberfunk self-consciously evokes that of the 2000 cult classic Jet Set Radio. Still, overfamiliarity with the aesthetic does little to diminish its appeal — a blazingly bright, vivacious riff on the cyberpunk genre. New Amsterdam is pretty to gaze upon from a quiet vantage spot, but comes to life at high speed. Bomb Rush Cyberfunk, like Jet Set Radio, is a game that casts you as a member of a skating graffiti gang duking it out with rival gangs for the city’s turf. As you run, bike, skate and dance your way through the game’s vivid surroundings, new conSuzi Feay Bipolar disorder is not the most obvious subject for a musical. But as a genre of heightened emotions, forever toggling between euphoria and despair, perhaps it’s the perfect vehicle. Mostly sung through, accompanied by an excellent six-piece band on balcony level, this Tony award-winning show stirringly depicts a woman’s steeply deteriorating condition and the havoc it wreaks on her family. There are even a few laughs. It opens on a kitchen set — clean lines, light wood, a tall fridge and a Bauhaus poster — where Diana (Caissie Levy) chats to her teenage son and surprises Dan (Jamie Parker), her husband of many years, with an offer of sex, thereby grossing out her grumpy 16-year-old daughter. The prospect of a quick fumble delights Dan rather than alerting him to Diana’s upswing into a manic phase. Next thing she’s hurling ham and cheese slices into an army’s worth of sandwiches, which would be fine except the bread’s lying all over the floor. A pleasing air of domestic realism pervades, with bin bags, the scraping of plates and mopping of spills, and there’s a working tap on the island unit, placed on the revolve that echoes Diana’s spinning mental state. Up to now, histrionic soft rock has been the pervading soundtrack (scored by Tom Kitt), but with the arrival of the professionals comes the razzmatazz, as the cast don white medical coats and use pill bottles as maracas. It’s a welcome light moment. Trevor Dion Nicholas entertainingly plays both Dr Fine and Dr Madden, not really differentiated, but perhaps that’s the point. With their pixie features and huge eyes, Jack Wolfe and Eleanor Worthington-Cox make plausible siblings as Gabe and Natalie, their mother’s predicament impacting them in different ways. Wolfe electrifies with the Nirvanaesque rock-out “I’m Alive”, counterpointed by Worthington-Cox’s spirited “Superboy and the Invisible Girl”, Natalie’s plea not to take second place to her brother. Natalie’s burgeoning romance with sweet, silly Henry (Jack Ofrecio) may even be the trigger for Diana’s decline as she contemplates her own stale emotional life. The lyrics (book by Brian Yorkey) are effective rather than inspired, with rhymes you can spot a mile off, especially coming after dramatic pauses: something up your sleeve, make you Despair meets razzmatazz THEATRE Next to Normal Donmar Warehouse, London aaaae Andrew Mellor Charlotte Perkins Gilman blew a piercing whistle on the patriarchy in 1892 with her slim but trenchant novella The Yellow Wallpaper. The story of a new mother’s mental tailspin following confinement to a room packs punches both allegorical and autobiographical. It would send shivers even without its original social context. Ripe for rediscovery, The Yellow Wallpaper also offers fertile ground for composers. Through a series of diary entries, the isolated protagonist unknowingly charts the hijacking of her consciousness by the garish wallpaper plastered around the bedroom where she lies deprived of external stimuli. There are rhythmic repetitions and lyrical descriptions all over Gilman’s prose, and a tantalising ambiguity to her climax. Dani Howard’s operatic take on the story was given its world premiere as part of a blossoming Copenhagen Opera Festival, before its transfer to London’s Sadler’s Wells next month. It offers its audience fittingly little company on stage while matching the wallpaper’s ability to ensnare. The British composer is known for well-upholstered, postminimalist orchestral works with a lyrical impulse. Here she writes for a piano, a cello and a mezzosoprano whose few words are deftly mined from Gilman’s original by Joseph Spence; they are joined by dancer Valerie Ebuwa. The music is rooted in tonal harmony and melody but stoked by churning rhythms and earpricking detail. It launches with something like an overture: all pulsating, florid movement that dizzies like the recurring patterns Gilman describes. This gambit repeats and develops but the lines sung by the protagonist tend towards the hesitant or quietly determined and are given plenty of space. Clare Presland sings the role with delicious clarity, velvety low down and steely high up. She cannily underplays the woman’s mental decline, leaving us to oscillate between sharing her delusion and seeing it for what it is. The same might be said for Howard’s entire score and Amy Lane’s production at the intimate Aveny-T theatre. Neither attempts to chart the unravelling of the woman’s mind with overt gestures. The nearest we get to the latter is the dance by Ebuwa, who embodies both the wallpaper and the figure the woman comes to believe is trapped inside it. A still, tense drama is given moments of big physical power by Ebuwa but she is at her most resonant when on the sidelines, adding the physical punctuation of a sudden smile or sharp inhalation. Ebuwa’s final gesture comes closest to telling us how Howard and Lane interpret Gilman’s opaque ending (surely, a tragic surrender to psychosis). Perhaps the strongest characterisation is not that of the woman but of her illness. It starts with Gilman, whose tellingly authentic text could only have been written by someone who had been to the brink. Howard’s less-is-more opera creates the space for that truth to peer unsettlingly through. September 14-15, Sadler’s Wells, London, sadlerswells.com OPERA The Yellow Wallpaper Copenhagen Opera Festival aaaae ARTS figurations of buildings and municipal spaces reveal themselves — hitherto unseen lines for tricks and movement, soundtracked by an expertly curated selection of cutting-edge club music. The skating doesn’t possess the depth of the skateboarding simulator franchise Skate, or even the comparatively casual Tony Hawk’s Pro Skater games. Rather, it has a straightforward, somewhat throwback “pick up and play” quality that seems designed to make the player feel cool. They can move through the virtual space as an anarchic blur of light and sound. Bomb Rush Cyberfunk delights in challenging authority, often violently. Tagging New Amsterdam’s prime graffiti real estate, you accrue “heat”: the game’s militarised police force ratchet up the ferocity of its response. A big part of the game involves engaging the law in combat, using your board and fists to take them down or, if you’re feeling particularly audacious, coating them in a plume of yellow spray paint. But such action is curiously under-explained, and it’s hard not to wonder if this amounts to an oversight from Dutch developer Team Reptile or it pulling its punches. In a game of otherwise impressive clarity — visually, thematically, mechanically — it’s a rare instance of opacity. Perhaps the studio didn’t wish to show the flagrant beating-up of the police. Elsewhere, Bomb Rush Cyberfunk follows the structure laid down by Jet Set Radio 23 years earlier. Each new area brings a new gang to take down, like the Dot Exe crew — said to be “cyberhead B-boys” who “upgrade their bodies to win breakdance battles”. Yet while the characters and camera in Jet Set Radio exuded a certain floatiness, Team Reptile’s effortfeels snappy and thoroughly modern. It’s a subtle but not insignificant update that makes it even easier to slip into the “zone” — to find yourself transfixed by the game’s breathless forward motion. Oscar Wilde wrote that “imitation is the sincerest form of flattery that mediocrity can pay to greatness”. Bomb Rush Cyberfunk is not mediocre — it is too spirited and exuberant — but the extent of its mimicry of Jet Set Radio does dilute its impact. A love letter, then, to a true original, and about as great as one could expect such homage to be. Exuberant love letter to a cult classic GAMING Bomb Rush Cyberfunk On PC and Nintendo Switch now and PlayStation and Xbox from September 1 aaaae Unsettling new opera takes on motherhood Clare Presland, left, and dancer Valerie Ebuwa Ida Guldbæk Arentsen believe and so on. Electro-convulsive therapy is quite the opener for the second half — the island unit forms the operating table — after which Diana forgets she ever had a son, while Wolfe lurks spectre-like on the margins. Director Michael Longhurst has the family scampering and whirling around the set as they try to scramble together the bare elements of normality. Levy has the hardest task, delivering emotional exposition Joni Mitchell-style, but her portrayal of the scariness of Diana’s condition is impressive, with physical nimbleness expressing mental confusion and restlessness. As the whole cast bellows rock tunes over Diana’s head it makes a fit metaphor for her interior din — whatever your taste in music. To October 7, donmarwarehouse.com The family whirl around the set as they try to scramble together the elements of normality Main: Caissie Levy, centre, as Diana. Below: Jack Wolfe electrifies as Diana’s son — Marc Brenner
Thursday 24 August 2023 ★ † FINANCIAL TIMES 13 FT BIG READ. RISE OF THE MIDDLE POWERS FT series Buoyed by oil-rich confidence, Saudi Arabia and the UAE are manoeuvring for greater influence — forging new alliances in Asia and redefining their longstanding relationships with the US. By Andrew England funds find it much easier to invest in the US than less liberalised Asian markets, particularly at the scale required to meet their ambitions. There is also acknowledgment that much of the state-of-art tech the Gulf wants is being developed by American companies. Yet Gulf trade with Asia is only heading in one direction, and sovereign funds across the region are ramping up their exposure to Asian markets. In 2021, Saudi Arabia’s $81.7bn total trade with China briefly exceeded Riyadh’s with the US, the UK and the euro area combined, according to a report by London-based Asia House. The report, released last year, added that it expected the UAE to follow a similar pattern, with the difference between Gulf’s state trade with China and with the US, the UK and the eurozone narrowing to a few billion dollars compared with $28bn in 2010. And as the world transitions away from fossil fuels, the Gulf states know it is likely to be China and India that buy their last barrels of oil. China has not sought to challenge or displace the US’s security role in the Middle East, but there are hints that it wants to move beyond traditional commercial partnerships. Its success in brokering an agreement in March for the arch rivals Saudi Arabia and Iran to restore relations was interpreted by many as a sign of Beijing’s willingness to adopt a more political role in the region. However, Gulf officials also recognise the dangers of getting caught in the crossfire of US-China rivalry, as the two global powers aim to “decouple” their economies. “This risk is in all this decoupling conversation [in Washington] because suddenly if we are looking at two competing technologies, the world is turning into VHS and Betamax,” a UAE official says, a reference to home video format war in the 1980s. Still, the Gulf states are willing to rankle Washington by tapping into Chinese technology, such as 5G telecommunications networks. Two years ago, the UAE was forced to address US suspicions that China was building a military base at an Abu Dhabi port. The UAE is this month conducting its first joint air exercise with China, according to Chinese state media. It was also reported that Saudi Arabia bought $4bn of weapons from China after the Zhuhai Airshow in November, one far larger than previous Saudi-Chinese arms deals. The message to the US from Riyadh and Abu Dhabi is, “We will come to you first, but if you don’t deliver we will go elsewhere,” analysts say, be it weapons or technology. They add that the Gulf states are not averse to playing one country off against another. But it is a fine balance. “The fundamental strategic dilemma for them remains that their security is in the west, their energy politics is with Russia and their prosperity is increasingly with China and the rest of Asia,” Hokayem says. “It requires careful footwork and constant engagement to manage these complex relationships. They have to massively invest in all those capitals, in political, economic and geoeconomic terms. It’s a delicate game.” Additional reporting by Sarah White in Paris and James Kynge in London Building bridges out of the Gulf By the time dozens of top security officials from across the globe touched down in Saudi Arabia to attend a conference on Ukraine this month, Crown Prince Mohammed bin Salman’s main task was complete. At a similar but smaller gathering in Copenhagen in June, France had asked Riyadh to help pull together a follow-up in the belief that some nations from the so-called global south, including China, would be more comfortable attending if it were organised outside of Europe. Prince Mohammed duly delivered — personally intervening to help convince Beijing to send a representative, according to diplomats. In all, officials from 42 states, including many that have resisted western pressure to take sides on Russia’s war in Ukraine, attended the gathering in Jeddah. By the talks’ end, there were few discernible developments beyond China hinting that it may be willing to take part in future discussions. But for Prince Mohammed the two-day gathering was an undoubted success. It gave the young Saudi royal the perfect stage to project his worldview — one that envisages the kingdom as a rising power whose influence stretches from east to west. It is a mindset that reflects the lofty ambitions and soaring confidence of oil-rich Gulf states — buoyed by petrodollar windfalls after last year’s surge in energy prices — that are determined to chart their own courses in an era of polarising, shifting global dynamics. At the forefront are the Gulf’s two powerhouses: Saudi Arabia, the world’s top oil exporter, and the United Arab Emirates, the region’s dominant trade hub, both of whose focus has been increasingly turning eastwards. Where others view the shifting global currents through the lens of risk, Riyadh and Abu Dhabi see opportunities as they leverage their financial muscle and abundant oil resources to strategically hedge against their traditional relations with the west. The Gulf is no longer willing to accept binary “with us or against us” US demands. The UAE’s leader Sheikh Mohammed bin Zayed al-Nahyan has for years deployed his small state’s military prowess and financial firepower to ensure it punches above its weight. Prince Mohammed has deployed hundreds of billions of dollars in pursuit of grandiose plans to develop his nation, and wants it to be seen as a top G20 power, economically and diplomatically. Allies, but also increasingly economic competitors, Riyadh and Abu Dhabi are bent on projecting their standing on the international stage through broader networks as so-called friends with all, and pursuing their own self-interest. Partly driven by shifting trade patterns but also the result of geopolitics, it is manifesting itself in the diversification of ties with the US — long the dominant foreign power in the Gulf — and deepening relationships with Asian powers, particularly China and India. “Saudi Arabia and the UAE see more opportunities than risks in this changing world order, and they think they have the policies and instruments to become poles of the emerging multipolar world,” says Emile Hokayem, join Brics, the economies that include China, India, Brazil, Russia and South Africa. Gulf officials say it is a logical move given global trade patterns, but one that puts them with an important and welcoming diplomatic network. “Any country wants to be consequential, wants to have a seat at the table,” says Anwar Gargash, an adviser to Sheikh Mohammed, speaking about the UAE’s wider ambitions. “We want to build bridges with everyone.” The trend has complicated US relations with traditional Arab allies. Like Turkey and Brazil, “they don’t want to have to choose between the United States and China, they don’t want to have to choose a side in the Ukraine war,” says former US diplomat Jeffrey Feltman. “They, in fact, have some benefits to not making a choice, in the same way the United States liked having China and the Soviet Union to be able to leverage one against the other during the cold war.” At the Ukraine war’s outset, the UAE rattled the Biden administration by using its temporary seat on the UN Security Council to join China and India in abstaining on a US resolution condemning Moscow, in an extraordinary show of frustration with US policies. Both Abu Dhabi and Riyadh have rebuffed western efforts to cajole them into abandoning Vladimir Putin, with whom they co-operate on oil through Opec+ and consider an important player in the Middle East. A month before Modi’s visit to Abu Dhabi, Sheikh Mohammed was telling the Russian president that he wished to build on the relationship with Moscow. He was one of the few global leaders to attend the St Petersburg International Economic Forum, which his adviser Gargash describes as a “calculated risk”. The UAE, like Saudi Arabia, offers itself as a mediator between Moscow and the west. “A lot of people would criticise him [for making] the trip,” he adds. “But Sheikh Mohammed was saying, ‘I’m here to help in whatever way.’” The US and them For decades, the Gulf was firmly in the US’s orbit with relationships founded on the unwritten compact that Washington would be their security guarantor while Arab oil producers ensured stable global energy supplies. The UAE in particular actively carved out a role as arguably Washington’s closest Arab ally, taking part in every US-led military coalition since the 1991 Gulf war, bar the 2003 invasion of Iraq. Both countries spent tens of billions of dollars on American military hardware, while investing much of their petrodollar surpluses in US assets. Yet relations grew fractious after President Barack Obama was perceived to have ignored Saudi and Emirati interests after the 2011 Arab uprisings. Ties were further strained by Obama’s decision to sign the 2015 nuclear agreement with their rival, Iran. The mood improved after Donald Trump entered the White House and pursued transactional relationships, paid zero attention to rights abuses in the autocratic Gulf and abandoned the nuclear deal. But Arab officials became frustrated by what they considered to be limp responses to attacks on tankers in the Gulf and Saudi oil infrastructure that were blamed on Iran. His successor Joe Biden’s decision to shun Prince Mohammed and condemn abuses in the kingdom, particularly the 2018 murder of Jamal Khashoggi by Saudi agents, then pushed relations with Riyadh to new lows. Last year, Washington’s sluggish response to missile and drone attacks on Abu Dhabi by Iranian-aligned Yemeni rebels infuriated Sheikh Mohammed, who has not visited the US since 2017. It exposed the lack of personal relationships that were traditionally core to US-Gulf alliances. Tensions have since eased, but there remain points of friction. In May, the UAE pulled out of a US-led maritime task force over frustrations about its rules of engagement after Iranian forces seized two tankers in the Gulf. Still, all sides acknowledge they need each other. The Biden administration set aside its repugnance for the kingdom’s human rights record to engage Riyadh on issues, such as energy security, culminating in a frosty trip by the president to Jeddah last year. Washington has reassured Abu Dhabi of its commitment to the region’s security after the UAE suspended its participation in the naval task force by dispatching extra warships and fighter jets to the Gulf. Saudi and Emirati officials have no illusions about their dependence on the US for their main defence needs. Indeed, their demand is more not less: both Riyadh and Abu Dhabi are pushing Washington to agree to more institutionalised security partnerships. Discussions with the UAE picked up after last year’s attacks on Abu Dhabi. US talks with Saudi Arabia are part of efforts to cajole the kingdom into normalising relations with Israel and, if successful, could be used by Washington to try to curb elements of Riyadh’s relationship with Beijing, such as military co-operation and technology transfers. But Ali Shihabi, a Saudi commentator close to the royal court, says that while there could be “adjustments” if the US agrees to a security alliance with the kingdom, Riyadh would resist pressure to dilute ties with China. “There’s no going back. Saudi Arabia will not give up the bridges it has built with the global south, with Russia or China, because those are integral to the functioning of the Saudi economy and to the kingdom’s long-term market needs,” he says. The war in Ukraine has underscored to the Gulf what the US is capable of when committed to a cause. But the question at the core of Emirati and Saudi concerns is the extent of Washington’s commitment to their objectives. ‘A delicate game’ It is not just American military hardware that binds the Gulf to the US. The Gulf states peg their currencies to the dollar and continue to view the US as a key investment market. More than 40 per cent of Abu Dhabi’s investment fund wealth is deployed in the US. Many of Saudi Arabia’s $650bn Public Investment Fund’s high-profile investments have been in American assets, including stakes in Uber and electric vehicle maker Lucid. Officials point out that Gulf’s state director of regional security at the International Institute for Strategic Studies. “They have a very opportunistic, flexible and transactional approach. The time when one could expect full alignment from them is over.” ‘New historical era’ The shift in the Gulf has been driven most visibly by trade. China — the region’s biggest trading partner — India and Japan have become the prime buyers of Gulf crude, while US oil imports from the region have declined over the past 15 years following the shale gas boom in North America. Yet relationships with Asian powers have also developed far beyond oil, with the Gulf states thirsty for new technologies across artificial intelligence, energy, logistics and life sciences to support domestic development plans and diversify oil-dependent economies. “Our ties to established markets are unshakeable,” says a senior Emirati official. “[But] where is new growth coming from if we look at the next 10, 20 years? It’s coming from big markets in Asia, some in South America, and potentially some African markets.” Both the Gulf states have sealed “comprehensive strategic” partnerships with China. When Prince Mohammed hosted Chinese president Xi Jinping in Jeddah for a series of Arab summits in December, he said the gatherings launched a “new historical era”, adding that the kingdom was “enhancing co-operation to serve international stability”. A Chinese official tells the FT that Beijing’s relations with the Gulf “are a model for the developing world”. Describing deepening co-operation on energy, infrastructure, finance and technology, the official says the Gulf and China “can help to build a fairer multilateral order in the Middle East that respects sovereign rights and resists the hegemony of certain powers”. It is not just China that the Gulf nations are focusing on. The UAE, home to sovereign investment funds that manage more than $1.3tn, has signed free trade agreements with six nations, including India and Indonesia, in the past 18 months. When Indian prime minister Narendra Modi visited the UAE in July — his fifth visit to the Gulf state in eight years — it was announced that the $850bn Abu Dhabi Investment Authority would soon establish a presence in Gujarat. The only overseas office for Adia is in Hong Kong. The two Gulf states are also seeking to FT montage/Getty Images/Dreamstime ‘Saudi Arabia and the UAE have a flexible approach. The time when one could expect full alignment from them is over’ ‘Where is new growth coming from? It’s coming from big markets in Asia, some in South America, and potentially Africa’ Saudi trade with China now rivals that with the US, eurozone and UK combined Saudi Arabia total trade (12-month rolling sum, $bn) Source: IMF 0 50 100 150 2013 14 15 16 17 18 19 20 21 22 23 With China With US, UK and eurozone Next Part four of the series On the world pages: the fight to dethrone the dollar as the global currency Read the series online at ft.com/ middlepowers
14 ★ FINANCIAL TIMES Thursday 24 August 2023 Opinion Society The west is suffering from a crisis of courage to show up to the vote on whether Boris Johnson had deliberately misled parliament over “partygate” (Sunak apparently had “longstanding engagements” that day). And the problem is much broader than politics. Society itself seems to be suffering from a crisis of courage. This is clear when corporations succumb to social pressures by firing employees to protect their brands, or when they use the Pride flag in their social media avatars but not in the Middle East. Virtue signalling might be endemic, but courage, like honour, is not deemed a virtue worth signalling. Indeed all the incentives are stacked on the opposite side: there is little to lose from going along with what everyone is saying, even if you don’t believe it yourself, and much to gain from proving that you are on the “right” side. Moral or intellectual courage — sticking your head above the parapet and saying what you really think — can, conversely, get you into a huge amount of trouble, and, usually, you are not rewarded for it. The mere mention of courage has been in decline for a long time. A 2012 paper in the Journal of Positive Psychology that tracked how frequently words related to moral excellence appeared in American books — both fiction and non-fiction — over the 20th century, found that the use of the words courage, bravery and fortitude (which were grouped together) had fallen by two-thirds over the period. During the years that the US was involved in the second world war, the average frequency of these words was almost 19 per cent higher than the four years before and after its involvement. Selin Kesebir, associate professor of organisational behaviour at the London Business School and co-author of the paper, tells me one reason why we in the west now speak less of courage is, at present, we live in relatively safe times. Our lack of need for physical courage precludes a focus on moral courage in the public conversation. “If there is a real threat, then courage becomes necessary,” Kesebir says. “But in environments where there aren’t any very real threats, we don’t need to invoke it as a virtue.” Moral courage does not equate to recklessness, and neither does it mean being a provocateur for the sake of it. According to Aristotle, courage should be thought of as a kind of mediator between cowardice and recklessness. But if we want our societies to thrive, we must be courageous enough to think for ourselves and stand up for what we believe in. The late writer Maya Angelou was right when she said: “Courage is the most important of all the virtues, because without courage you can’t practise any other virtue consistently.” [email protected] The first Republican primary debate, held in Milwaukee last night, was an unusual one: it featured no one who currently stands a chance of being the party’s candidate in next year’s presidential elections. The only man who does, Donald Trump, decided it wasn’t worth the hassle. “I am leading the runner up, whoever that may now be, by more than 50 Points,” the four-times indicted former president wrote on his social media platform, Truth Social, on Friday. “People know my Record, one of the BEST EVER, so why would I Debate?” Trump added on Sunday he would “NOT BE DOING THE DEBATES!”. Instead, he decided to sit down for an interview with Tucker Carlson, the former Fox News anchor who said in private messages in 2021 that Trump was a “demonic force”, but who has since backtracked, telling a conservative radio host: “I love Trump.” A meeting of cowards, no doubt. And yet one can see Trump has a point in asking why he should bother with the debate. Despite mounting legal problems, the former president continues to be streets ahead of the competition: he is at 55.4 per cent in RealClearPolitics’ polling average, while Ron DeSantis is at 14.3 and none of the other Republican candidates have broken out of the single digits. Furthermore, Trump knows he would have to square up to opponents such as Chris Christie, who has spent his campaign bragging that he would beat Trump in a real fight and making it his explicit mission to bring him down. Showing up would only really have one clear benefit for the former president, and it’s not the kind that he tends to be terribly interested in. It would show that he is in possession of an important moral virtue: courage. Courage, though, seems to have fallen out of fashion. And not just for Trump or Carlson, or those in the Republican party who repeatedly refuse to call out the former president for any wrongdoing. A similar lack of backbone was on display when UK prime minister Rishi Sunak chose not Sticking your head above the parapet and saying what you really think can get you into trouble Ben Hickey Jemima Kelly ft.com/opinion The FT View Investing in modern infrastructure, developing an effective training system and designing immigration rules that attract global talent is important Principles for good industrial policy A focus on competitive and open business environments creates agile economies A year after the US Inflation Reduction Act was passed, the British government is developing an “advanced manufacturing plan”. The details are sketchy, but it is just the latest in a new wave of industrial policies following America’s multibillion-dollar package of incentives affecting sectors from electric vehicles to green hydrogen production. New factories are already sprouting across the US. But the scale of government intervention combined with provisions that favour domestic production leaves most economists sceptical about its long-term impact. Trying to replicate global green, tech and battery supplychains at home is a tall order. Pulling production away from where it can be done most efficiently is wasteful and raises costs. It also invites retaliation. Developing an industrial policy, particularly in a time of geopolitical fragmentation, is fraught with complexity. But as more governments seek to emulate and respond to the IRA, there are some principles worth heeding. First, any economic strategy should place emphasis on creating a welcoming business environment that fosters competition. This enables existing strengths to flourish. Investing in modern infrastructure, developing an effective training system and designing an immigration policy that attracts global talent is important. Meanwhile, an openness to trade, a stable long-term policy environment and minimal red tape will support investment decisions and help industries achieve scale. As it is, the IRA is facing shortages of skilled workers and lengthy planning delays. Beyond this, targeted support should be considered in a few cases. First, to build capabilities that are integral to national security, such as defence, and for securing supplies of critical materials. And second, to tackle market failures. For instance, renewable infrastructure may need a jump-start when the private sector is unclear about future demand but long lead times mean preparation needs to happen in the present. Targeted interventions should not aim to recreate entire global supply chains at home, but rather develop a foothold in these clearly and narrowly defined strategic sectors. This helps to limit wasteful spending and accusations of unfair trading practices. Time-limited support is important too. Indeed, the latest forecasts show the IRA’s openended tax credits could exceed $1tn. The type of policy tool used should match the issue it is trying to tackle. For instance, green energy projects obtain certainty from a guaranteed market price and public-private partnerships help de-risk otherwise unviable projects for battery or semiconductor plants. Financial incentives, such as tax credits, can play an important role in encouraging the shift of resources to higher productivity industries. Indeed, they are most cost effective and less distortionary when applied across sectors to encourage investment in training, R&D, and machinery and the adoption of existing technologies. Above all, industrial policy should not exclude competition. For decades, globalisation based on international supply chains connected by national specialisms has driven productivity growth. But protectionist measures, including local content rules in the IRA, undermine this by coddling domestic manufacturing and sparking tit-for-tat measures. Friendshoring, or free trade between allies, offers an alternative to trading with malign states. Rising to the challenges of the climate transition, technological change and unstable geopolitics requires targeted and well-designed interventions from national governments. But if leaders decide increasingly to override free markets and open trade, they will find it even harder to reach their goals. December 2019, generating huge amounts of new petrodollars. One must wonder how the Public Investment Fund, Riyadh’s sovereign wealth fund, will invest them. On renewable energy sources perhaps? J Paul Horne Alexandria, VA US Rest assured, your pepper dish is on one Turin menu As a British expat living in Turin, I’ve enjoyed for over 25 years the stunning bell peppers cultivated in the nearby town of Carmagnola. And I do agree with Rowley Leigh (“Pick a Piedmont pepper”, FT Magazine, Life and Arts, August 5) that in all my years here I don’t recall seeing his Piedmont pepper dish on any restaurant menu. The Piedmontese adore their Carmagnola peppers and one can sometimes find on menus a number of oven-roasted versions, some smothered in a bagna càuda sauce, others stuffed with a variety of fillings including tuna and minced meat. I myself began preparing Piedmont peppers a long time ago in London following a book entitled The Love of Italian Cooking by Mary Reynolds. Not surprisingly, her recipe, peperoni alla piemontese, is virtually identical to Rowley Leigh’s. So, he can be reassured that at least one person in Turin is following his authentic recipe! John Machin Turin, Italy Time to flag up the merits of investing in Britain I completely agree with the departing Legal & General chief executive Sir Nigel Wilson that we need to sell ourselves better internationally if we want to make the case that the UK is a great place to invest (Interview, August 16). However we also have to ensure that we can retain that investment and those businesses, that they create jobs in the UK, and that they grow here in the UK. I’ve heard a few grumbles coming out of government and other institutions and it sometimes seems they’re waving a white flag rather than a Union Jack. As if to say: “Over here raiders — please, save us from our misery.” Mel Sutton Glasgow, UK Economics seen through both ends of the telescope I was intrigued to see two pieces addressing the same issue from opposite ends of the economic telescope (“Japan’s high standards of service face ‘shrinkflation’”, Opinion; and “Britain needs a modern system of motoring taxes”, FT View, August 21). So on the one hand, profit margins are being maintained in Japan by shrinking the quantity of consumables on offer and the quality of services, while on the other, profits on vehicles are being driven by bloating their size in dimension, weight and complexity. Clearly, the greater the weight of the vehicle, the greater the use of primary energy and wear and tear on roads. So my suggestion would be to add a tonne/km metric into the taxation mix. And as a green aside, encouraging recycling with a returnable upfront deposit would be no bad thing. Chris Cook Linlithgow, West Lothian, UK ownership, none of which are affected by the transition to electric propulsion. Congestion occurs in areas of population density and high car ownership, where there is insufficient road space for all the trips that might be made. Some potential road users are deterred by the prospect of unacceptable delays and so make other decisions — to change the route or timing of the journey, to switch mode of travel or destination where that is feasible, or not to travel at all, ordering goods online for instance. Interventions such as road pricing that are intended to deter some road users serve to reduce delays, so attracting back on to the network other previously deterred users. Not only can we not build our way out of congestion, which we know from experience to be generally true, but we cannot price our way out either, at least at charges that would likely be acceptable to the public. David Metz Honorary Professor, Centre for Transport Studies, University College London, UK Surprising how the Saudis spend their petrodollars The recycling of Saudi petrodollars is being updated in surprising new ways, as your account (“Saudi Arabia cuts holdings of Treasuries to six-year low”, Report, August 18) makes clear. In previous cycles, Saudi Arabia parked massive amounts of dollars earned with oil exports in boring but safe short-term US Treasury bills which the US did not disclose publicly until 2016. Today, Saudi Arabia, still the world’s biggest oil exporter, has reduced its US Treasuries to only $108bn while spending billions on the creation of the LIV Golf league and takeover of the US-based PGA Tour, previously the premier golf league; hiring the world’s leading football players; building a 170km-long city called “The Line” across the desert; and investing in Uber to improve transportation at home, although drivers must be Saudis (“Saudi Arabia’s Uber problem is of the government’s own making”, Opinion, July 7). Ironic then, that Saudi Aramco has become the world’s largest and most profitable oil company since its IPO in Your leader is right to propose the gradual adoption of road pricing for electric vehicles, as this is necessary to give the authorities time to replace the loss of revenue from fuel duty paid by conventional vehicles (FT View, August 21). But this should not raise expectations that road traffic congestion would be significantly affected. The average distance travelled by car depends mainly on three factors: speed of travel, time available for travel and household car Road pricing will not relieve traffic congestion Letters Email: [email protected] Include daytime telephone number and full address Corrections: [email protected] If you are not satisfied with the FT’s response to your complaint, you can appeal to the FT Editorial Complaints Commissioner: [email protected] New York’s elected officials rejoiced when the state’s long-delayed plan to introduce congestion pricing in Manhattan — à la London and Singapore — at last won federal approval in late June. Across the Hudson River in New Jersey, everyone is still raging. The New York plan, which could begin next May, would charge drivers who cross below 60th Street in Manhattan, perhaps as much as $23 a trip. The objective is to reduce traffic and air pollution in the city while delivering $1bn a year to the Metropolitan Transportation Authority to upgrade the city’s subways and buses. A win-win-win, it would seem. Except that to many New Jersey residents, congestion pricing feels like a New York mugging. Most New Jerseyans already pay about $15 to enter the city via the Holland and Lincoln tunnels or the George Washington Bridge. No New Jersey politician has ever suffered by attacking New York, which might explain the fervour of governor Phil Murphy’s response. First came a lawsuit to halt the plan. Then came legislation that encourages New Jerseyans who work remotely for New York companies to challenge their out-of-state income taxes. Murphy insisted he was combating “unfair taxation and discriminatory treatment of New Jerseyans”. His colleague Josh Gottheimer, a Democratic representative, sounded like a Bostonian on the eve of the Tea Party as he praised Murphy “for punching back at a state that decided to use Jersey as their piggy bank”, adding: “I don’t know how the MTA chair looks at himself in the mirror.” It may all be histrionics before a negotiated settlement. Still, there is historic tension on the border. Like all neighbours, the Empire and Garden states have their ups and downs. They are capable of co-operation, as with the establishment in 1921 of the Port Authority to jointly manage the region’s bridges, tunnels and ports. But recent times have brought a clash over New Jersey’s demand to withdraw from a decades-old joint agency that was created to police the mafia at their shared port. In April, the Supreme Court sided with New Jersey, which now handles most of the port’s cargo. By and large, New Yorkers tend to look down on New Jersey. Ed Koch, the former New York City mayor, captured this sentiment when expressing his relief on buying a burial plot in the city. “I don’t want to leave Manhattan, even when I’m gone,” he said in an interview. “The thought of having to go to New Jersey was so distressing to me.” During a recent electoral campaign, it was suspected that New York City’s current mayor, Eric Adams, lived across the border in Fort Lee, New Jersey. Absolutely not, he insisted. Beneath the stereotypes, the economic relationship between the two has been variable. In the 1980s, when New York City was still digging out from its fiscal crisis and corporations were fleeing, New Jersey enjoyed a suburban office boom. That flipped in 2001, when New York City entered a post-9/11 golden era. Now, some observers believe we may be on the cusp of another shift. “With working from home, I would argue we’re entering a new phase,” says Tom Wright, president of the Regional Plan Association, a not-for-profit that advocates sound development in the tri-state area. As the congestion pricing fight plays out, New York looks strangely vulnerable. Many of its offices are half empty, and its population is shrinking. There is talk of the need to reimagine the city — and mounting dread about declining tax revenues. In New Jersey, on the other hand, things are looking up. Remote working has made the state even more appealing since many commuters only have to trek into New York a few days a week. Meanwhile, its residents are increasingly the source of Manhattan’s workforce because of its affordable housing — something New York’s suburbs lack. “The dynamic has changed,” says Micah Rasmussen, director of the Rebovich Institute for New Jersey Politics. “I think New Jersey wants an understanding that it brings a lot to the table.” Perhaps. Just don’t expect New Yorkers to say so. [email protected] New York and New Jersey have opened a new front in their eternal war by Joshua Chaffin OUTLOOK AMERICA
Thursday 24 August 2023 ★ FINANCIAL TIMES 15 do, rather than micromanaging decline. Given that whenever Sunak has governed well, whether as prime minister or previously as chancellor of the exchequer, he has not been thanked for it, you can see why he has started to default to drift. He raised taxes to keep Boris Johnson’s high-spending promises and was attacked as some kind of socialist sleeper agent. He — and Jeremy Hunt, his chancellor — dispelled some of the UK’s reputation for incompetence and worse following the Liz Truss experiment. But the faintest hint of economic good news triggered calls from the Tory backbenches for him to return to the low-tax approach that led the UK and the party into disaster in the first place. The Conservatives’ shellacking in the local elections in May showed that a return to competence alone is not going to keep the party in office, either. A good attack has to be grounded not just in your opponent’s weaknesses but in your strengths. Attacking Starmer over his record at the Crown Prosecudelivered a speech about requiring all pupils in England to study mathematics to 18, a worthy and sensible policy, but his Downing Street operation has since shown little sign of gripping the issue or driving it up the Whitehall agenda. As it stands, if Sunak loses the next election, the UK will be no closer to improving the quality or availability of maths teaching in schools — let alone in further education, where it is just as badly needed if the country is to conquer the scourge of innumeracy. Meanwhile, the prime minister tends to focus on the minutiae of local government, whether in reviewing low-traffic neighbourhood schemes or a £1mn plan to put chess sets in public spaces. What he should be doing is focusing on big things that only central government can Nasty or nice? That’s the debate raging at the top of the Conservative party: should UK prime minister Rishi Sunak “go negative”, majoring heavily on attacks on the personality of Keir Starmer, the Labour leader, and his record as director of public prosecutions, or should he run a positive, upbeat campaign? All workplaces have their in-house myths, and one of Westminster’s is that “negative campaigning” is some kind of mis-step or optional extra. Every halfdecent political operation has, at one time or another, been accused of going “too far” by politicos, only to be richly rewarded for it come election time. Just as it’s a good rule of thumb that if politicians are not bored with a line, then no one else has heard it at all, if an attack line doesn’t cause people in SW1 to wince, there is no chance that it has registered even in the next postcode. There is a glimmer of truth in the anxieties some of Sunak’s allies have about going negative: a good attack line almost always hurts the person delivering it. It is why most party leaders have someone to act as an attack dog for them. This is the theory behind the appointment of Lee Anderson as deputy chair of the Conservative party — and it is a good one. The problem in practice, however, is that Anderson is an attack dog who is as likely to bite his master as his opponents, as he showed this summer when he castigated the Tory party for “failure” on the small boats issue. In reality, Downing Street’s internal discussion of the prime minister’s preferred direction is mostly displacement activity. The difficult truth for Sunak is that most of the things that will determine whether he manages to turn around his party’s fortunes are outside his control. Talking about whether he fights the next election as Nice Rishi or Nasty Rishi is a comforting distraction from all that. His bigger problem is not whether he campaigns as Nice Rishi or Nasty Rishi, but that all too often he governs as Rubbish Rishi. Rubbish Rishi signed off on a Tory summer campaign focusing on two platforms: stopping asylum seekers crossing the English Channel in small boats — a rash promise to end an issue that he should have known is intractable; and the NHS, an area of policy that may be fixable, but not by the time of the next election, and on which in any case voters trust Labour more than the Tories. Rubbish Rishi appointed Anderson, despite there being a 50/50 chance that the deputy chair’s verbal broadsides would be at Tory failures rather than Labour vulnerabilities. Rubbish Rishi The real problem of Rubbish Rishi Talking about whether he fights the next poll as nice or nasty is a comforting distraction A bare-knuckle fight has broken out over the technology behind our smartphones, connected cars and the internet of things. On one side: Apple, BMW and other big manufacturers. On the other, the telecoms groups that invented and control the “standard essential patents”, which allow all kinds of gadgets to access the 5G and WiFi networks that they need to work. Western competitiveness, as well as billions of dollars in annual licensing fees, is at stake in the EU’s radical proposals to fix what patent users describe as a “broken market”. There are fears that Brussels’s proposed revamp, which the parliament is due to take up when it gets back next month, of the way Qualcomm, Nokia and other SEP holders are paid for their intellectual property may end up slowing development of the next generation of connectivity technology. Innovation could be discouraged and research budgets starved. The increasingly widespread use of connectivity patents has exposed massive strains in a process that has been defined by vicious litigation between corporate giants. Carmaker Mercedes-Benz spend years fighting infringement claims from Nokia; Ford was briefly banned from selling connected cars in Germany last year before it reached a deal with IP Bridge. Meanwhile, Apple and Qualcomm duked it out in court before reaching a giant settlement in 2019, and even then Apple tried again before being rebuffed by the US Supreme Court. It all stems from a worthy effort to avoid incompatible technical standards. Rival companies agree to use a particular method for solving important problems, which then becomes an SEP. That designer is guaranteed customers but must agree to license its product impose injunctions — and use the threat of lawsuits to pressure each other on price. Some entrepreneurs and small businesses have struggled to innovate without falling foul of the rules. An EU analysis put the cost of litigation alone at €164mn a year. “If you have a patent that is essential, you are being given a monopoly. The trade-off is a bigger market at a lower price . . . [but] the royalty rate has become untethered from the underlying value,” explains Kent Baker, who has been on both sides of the debate, first at Qualcomm and now at u-blox. Brussels is trying to make the process more predictable and easier to navigate, particularly for small businesses. Its proposed solution, unveiled in April, favours users over patent owners, who are mostly based outside the bloc. It would create a centralised SEP register and process, force negotiation before litigation and use outside experts to determine fair prices and royalty rates. Qualcomm, Nokia and other patent holders describe the plans as “profoundly unbalanced” and “not fit for purpose”, saying it will primarily cut to anyone at a “fair, reasonable and non-discriminatory” rate. When the products involved were mostly computers and smartphones, the brawls were vicious but relatively straightforward. Now that the universe of connected products has exploded into a $4.8tn sector covering gas meters, baggage tags and industrial equipment, they are anything but. Consider automobiles: patent owners prefer to negotiate only with the big carmakers and charge a share of the final sales price. Auto suppliers say that limits their ability to innovate and leaves them exposed to being forced to shoulder an unfair share of the patent cost. The current system also allows global companies to shop around for friendly courts — German judges are quick to Entrepreneurs and small companies have struggled to innovate without falling foul of the rules BUSINESS Brooke Masters Aleks Szczerbiak Poland’s forthcoming parliamentary elections will take place against the backdrop of a highly polarised political scene. The rightwing Law and Justice (PiS) party came to power in 2015 promising a decisive break with the settlement that followed the collapse of communism in 1989. PiS argued that the institutions and elites that emerged during the postcommunist transition, especially the judiciary, needed to be overhauled and replaced. It accused previous governments of being insufficiently robust in standing up for Poland’s interests in the EU. It broke with their approach of trying to align closely with the “European mainstream” led by France and Germany. As a result, PiS came under fire from the opposition, much of the country’s cultural and judicial establishment and the western opinion-forming media. The government’s opponents accused it of isolating Poland internationally and undermining democracy and the rule of law. The EU establishment agreed: a string of European Court of Justice rulings call upon Warsaw to reverse its judicial reforms, and the European Commission is withholding Poland’s share of the EU’s coronavirus recovery fund. PiS, which accuses the EU institutions of double standards and exceeding their treaty powers, secured re-election in 2019. Its generous social welfare programmes had benefited its electoral base of less well-off voters in rural areas and smaller towns. Whatever misgivings they may have had about other government policies, Poles appeared to trust PiS on the socio-economic issues they cared most about. However, during the past three years PiS has lost support, mainly due to economic insecurity and falling living standards. Opinion polls suggest the party will emerge as the largest after the election but fall short of a parliamentary majority. The main opposition is the liberalsecurity — not surprisingly given high inflation and the war in Ukraine, Poland’s neighbour. But in a closely fought election even a relatively minor issue, such as immigration, could determine the outcome, especially if it blends with one of the voters’ dominant concerns. The key to victory will be which side can most effectively mobilise its supporters to vote. If it secures a third term, PiS will push on with more radical reforms, particularly in the judiciary and possibly the media. An opposition-led government would aim to rebuild relations with the EU. But it would almost certainly lack the three-fifths parliamentary majority needed to overturn a veto by the PiSbacked president, Andrzej Duda, with whom it would have to cohabit until 2025. It would also face a constitutional tribunal that can strike down its laws. All the tribunal’s members have been appointed since PiS took office. The opposition comprises parties from socially conservative agrarians to the radical left. Agreement on even a minimum governing programme, beyond simply reversing PiS’s reforms, centrist Civic Platform, Poland’s ruling party from 2007 2015, led by Donald Tusk, a former prime minister and European Council president. He has been running an energetic campaign, but is a polarising figure. Such gains in support as Civic Platform has made have come largely at the expense of other opposition parties. At the moment, these parties’ combined vote share would not secure a parliamentary majority. The eclectic Third Way, comprising an agrarian party and a liberal-centrist formation led by TV personality-turned-politician Szymon Hołownia, may even struggle to reach the 8 per cent required for electoral coalitions to win seats. Polls suggest that the most important issues for voters are the economy and Agreement on a governing programme, beyond reversing PiS’s reforms, would be problematic POLITICS Stephen Bush Opinion tion Service would be a great strategy if the government had a good story to tell on crime — but at present it doesn’t. Going after Labour over their plans to build on the greenbelt would likewise be a good wedge issue if the Conservatives had another plausible path to improving the UK’s infrastructure and planning system. As it is, they don’t, so any victory there would be entirely pyrrhic. Sunak’s hopes of securing a fifth Tory term in power rest on three things: something very good has to happen to the British economy; something bad has to happen to Starmer; and the stench of drift and decay needs to be lifted from his government. He can’t control the first, and his ability to shape the second is contingent on his ability to deliver the third. Even if Sunak is re-elected, he will be so with a sharply reduced majority. His best hope of achieving even a slender victory, and his best hope of leaving any legacy, lies in governing well in what remains of this parliament. [email protected] costs for Apple and big carmakers at their expense. They argue that EU-set prices will quickly become the global norm, depriving them of revenue they need to fund research. In addition, Europe is not acting in a vacuum. Patent holders and some US policymakers have expressed concerns that the EU’s plans will embolden Beijing to use a similar ratesetting process to help its national champions. China’s antitrust regulators last month put out a proposal about “unfairly high” prices for SEPs. That could hurt companies on both sides because Chinese companies not only buy western licences but control an increasing share of SEPs themselves. Western governments need to address the constant litigation and complex rules. They slow down progress. But heavy-handed intervention from Brussels could be counterproductive. Government price-setting rarely works as intended. Let’s make sure that much-needed reforms do not make things worse. [email protected] What the great EU patent fight means for global competition Election battle offers no easy path to power for Poland’s opposition would be problematic. Replacing PiS appointees in public administration, state-owned companies and supervisory bodies might be fairly easy, but removing officials whose terms are constitutionally protected or where legislation may be required would be harder. These include the thousands of new judges appointed by a revamped national judicial council that the present opposition does not recognise as legitimate. In fact, the balance of power in the new parliament may be held by a radical-right free-market party, the Confederation, nominally closer ideologically to PiS but for which reducing state intervention and welfare programmes is a core element of its appeal. Rather than a formal coalition agreement with either PiS or the opposition, the most likely scenario is that the Confederation will prop up a minority government through an informal pact. This will almost certainly pave the way for another, early parliamentary election. The writer is professor of politics at the University of Sussex I t is welcome that a spotlight is being shone on exclusion from vital financial services. But the furore over Coutts’ treatment of Nigel Farage must also focus minds on the needs of those in financially vulnerable circumstances, even though their individual cases do not command newspaper headlines. The scale of their problems dwarfs the “debanked” in more financially privileged situations. There are 17.5mn people in the UK with challenging personal finances, for whom lack of access to fair and affordable financial products and services can be a trap that keeps them in a vulnerable position. And far too many end up caught. We know that if people have access to the right products and services when they need help, it can provide them with both a safety net and a stepping stone to financial resilience — enabling them to participate fully in society and contribute to a prosperous economy. The problem arises because financial services are largely designed to serve people with predictable lives and incomes, yet this is not the reality for many in the UK today. With shareholders to answer to, large financial institutions focus on the customers and products that deliver the best return, not on access. These factors contribute to a situation that leaves many simply unable to obtain the products they need. The action taken by government to require provision of no-fee, no-overdraft basic bank accounts recognised this market failure. As of last year, the nine designated banks had more than 7mn basic bank accounts open. But more can be done. There are still 1.1mn people who are unbanked and over the year to June 2022 more than 90,000 applicants for a basic bank account were refused. HSBC has shown what is possible; its innovative work on providing bank accounts for people with no fixed abode resulted in no one who applied for a basic bank account with them being refused. Nationwide achieved a higher market share of basic bank accounts (15 per cent) than their current account market share (10 per cent). Affordable credit is another example of market failure. For the 14mn Britons with less than £100 in savings, access to small amounts of unsecured credit is vital to managing life’s ups and downs. Banks rarely provide this service. With the costs of providing a £5,000 loan being little different from providing a £500 loan — alongside the additional checks to ensure someone can afford to borrow, the regulatory capital requirements and reputational concerns over lending in the “subprime” space — one can understand why. While there are some great community finance providers and credit unions serving excluded customers, they alone cannot fill the gap in provision: an estimated 8mn or more adults are unable to access small amounts of unsecured credit. Some will say that saving up to cover unexpected bills or necessary items is better than borrowing. Ideally, supporting everyone to build a savings buffer is absolutely right. But life throws up the unexpected, which is when access to decent choices becomes important. It makes more economic sense for people on low incomes to borrow for some items such as white goods than it does to scrimp and save and go without essentials for months or years — the recurrent time and money spent on trips to the launderette, for example, outweigh the costs of borrowing to buy a family washing machine. We know other countries have mechanisms in place to ensure that everyone has access to these vital financial services. We need to level the playing field. Financial exclusion is a massive drag on growth and opportunity, and we are missing the real prize if we only focus on a few high-profile cases, ignoring the millions of others locked out of the system. The writer is chief executive of Fair4All Finance and a previous CEO of Grant Thornton UK Why ‘unbanked’ deserve as much attention as the ‘debanked’ Furore over Coutts’ treatment of Farage must focus minds on the needs of the financially vulnerable Sacha Romanovitch Ellie Foreman-Peck
16 ★ FINANCIAL TIMES Thursday 24 August 2023 CROSSWORD fl ffi fl ffi fl ffi No 17,503 Set by GURNEY JOTTER PAD ACROSS 1 Unusual accent associated with Cape gets favourable reception (10) 6 Passion in preliminary contest (4) 9 Victor, on top, too much for City? (7) 10 16, maybe, needing support on course, horse ultimately feeble (7) 12 Showing little interest in news clan oath is to be revised? (10) 13 Pressure leading dog (3) 15 Measure large English article, not quite finished (6) 16 So wonderful nothing can match it, like House of Commons? (8) 18 Strong argument against including wine ration initially (4-4) 20 Man in charge inside showing spite (6) 23 On way back arrest outlaw (3) 24 Scottish town’s temporary enthusiasm about new normal? (10) 26 Come to agreement about artist’s return before class (7) 27 Silly upper-class echo meeting resistance in building (7) 28 Cleric finding answer in quiet room (4) 29 One who saw European tree — exactly what’s needed by headland (10) DOWN 1 Against drawing from Roman times selectively (4) 2 About right — love performing in something humorous (7) 3 Very fearful, criticise circus regularly missing joke in French (5-8) 4 Frank acknowledgement a letter’s to be read out (6) 5 Company target troubled this rural labourer (8) 7 Typical specimen in past, more than sufficient (7) 8 Very French? I don’t know — I hesitate to say one’s doing wrong (10) 11 What I hope to provide intern team, ten, at work (13) 14 Education aid making chess player fed up, we hear (10) 17 Mine facility dog rarely abandoned (8) 19 Rings AA about drink (7) 21 Popular Conservative policy slant (7) 22 Fruit producer asking why people are wary first of all (6) 25 What might follow contact in French industrial town (4) Solution 17,502 & : 0 6 3 / + 0$1 , )(6 7 2/ , 9(5 6 7 2 $ 5 . 1 7 + ( + 2:$ 1 ' 7 + (:+ < 8 & ' $ 7 2 63 /27&+ , (5 +285 0 + 1 7 ( 6 12635 , 1*&+ , &.(1 9 / 1 2 8 / '(/ , $79$5 , $1&( 5 0 3 $ 3 2 7+5(( / , 77 /(3 , *6 ( 1 $ , 2 ( 1 3$67 , 7 287%5($. ' 6 ( 1 6 6 & You can now solve our crosswords in the FT crossword app at ft.com/crosswordapp Among Japan’s exports, cars and game consoles get the most attention, but seafood makes its contribution. Demand for Hokkaido’s scallops has been high. That is at risk. Japan will start releasing treated radioactive water from its Fukushima Daiichi nuclear plant into the Pacific Ocean today. Since the tsunami hit the plant, more than 1.3mn tonnes of water has sat in holding tanks. The Japanese government and the International Atomic Energy Agency insist the release of waste water is safe. But opposition remains vociferous, especially from fishermen. They have seen catch sizes drop since the disaster. The hostility of neighbouring countries, notably China, will have a bigger impact. It has accused Japan of using the sea as its “private sewer”. Tokyo Electric Power Company is filtering the water to remove some radioactive substances. But not all can be eliminated, including tritium. This emits ionising radiation that can damage DNA. China has questioned the safety of Japan’s plan and the accuracy of its testing. It has banned seafood imports from some Japanese prefectures. Officials vowed to take further action to safeguard food safety yesterday. Hong Kong said it would “immediately activate” import curbs on some Japanese food products. China, including Hong Kong, is by far Japan’s biggest customer when it comes to seafood, accounting for 42 per cent of Japan’s seafood exports. For some products, the reliance on China is much higher. For example, more than two-thirds of sea cucumber exports go to China. Agricultural and seafood purchases from China accounted for more than $3.3bn last year. Shares of seafood companies Maruha Nichiro and Daisui have fallen since May. Costs are rising amid a supply shortage of fishmeal. This is pushing up prices. Norway’s seafood exports hit a record during the first half. Japan has much to lose from the release of treated radioactive water. Rivals have as much to gain. Seafood/Fukushima: nuked cukes has had to step in. It has already provided $750mn in bridge financing to Better, and its Vision Fund 2 invested $500mn in April 2021. Postmerger, Better will receive $565mn of fresh capital. Ironically shrinking loan volumes are not necessarily bad news for big nonbank mortgage lenders. Some now have improved pricing power. That has been reflected in the shares of Rocket Company, which owns Quicken Loans, America’s largest non-bank mortgage lender. These have rallied 48 per cent this year. Those of rival UWM, the parent company of United Wholesale Mortgage, have risen by two-thirds. Better has a very small market share (less than 1 per cent). Do not expect it to receive the same boost when the shares start trading today. the heels of a 50 per cent collapse in volume in 2022. None of this will deter Better. The SoftBank-backed online mortgage lender is set to go public today. It will do so via a merger with a special purpose acquisition company. Yet the timing of Better’s public debut is the least unusual aspect of the deal. This deal values Better at a pretransaction equity value of $6.9bn. The implied enterprise value is unchanged from what was agreed in 2021 despite a sharp deterioration in Better’s profits. The company reported $1.2bn in losses for 2021 and 2022 after making $184.9mn in net profit in 2020. It is also a long way off from the $1bn profit it said it would make in 2023, as per its investor slideshow from May 2021. Given these profit drains, SoftBank Kapoor’s stint was marred by the overpriced $18bn purchase of US baby milk producer Mead Johnson in 2017. This is not great timing for a US mortgage company to go public. The 30-year fixed rate on home loans rose to 7.31 per cent last week — the highest since December 2000. A lack of inventory has persistently propped up house prices, making it tough for Americans to buy a home. Mortgage origination volume is expected to drop by a third this year, according to the Mortgage Bankers Association. The fall would come on Better: ripe for hype Retailers regularly move cleaning products around on their shelves to stimulate sales. Reckitt Benckiser has also done some shuffling — of its executive team. It is hoped it will have the same galvanising effect. Yesterday, the FTSE 100 consumer goods company appointed a new chief financial officer, Shannon Eisenhardt. She and incoming chief executive Kris Licht, formerly of PepsiCo, have work to do to get Reckitt growing again. Reckitt specialises in cleaning products. Good thing. Dust has settled on the company’s share price. Over one year, Reckitt has fallen 12 per cent. MSCI’s consumer staples benchmark has only fallen a little. Even at a decade-low forward price/ earnings ratio of some 16 times, investors show little interest. It can’t help that Reckitt has already rearranged its team a couple of times since Rakesh Kapoor retired in 2019. Licht is the third chief in that time. Eisenhardt’s experience at Nike and before at Procter & Gamble includes work on emerging markets. This is 40 per cent of Reckitt sales. She inherits a fit group. Reckitt has plenty of free cash flow. Visible Alpha analysts expect £2.5bn annually to the end of 2025. More than half will go to the dividend. Licht wants to increase this and buy back stock. Net debt is relatively low. Eisenhardt needs to squeeze more from revenues. Over the past five years, the top line has compounded at 3.6 per cent annually, according to S&P Capital. Operating profit has hardly shifted. True, after some innovative product launches, its disinfectant brand Lysol generates 50 per cent more sales than in 2019. Yet clever tinkering will not suffice. Reckitt should consider spending some cash on acquiring growth brands. Neither PepsiCo nor Nike are noted for M&A programmes. Licht and Eisenhardt may need to brush up their skills before striking any big deals. Reckitt Benckiser: sterile quarters Mallinckrodt was supposed to be the best-practice “mass tort” bankruptcy case. It has not worked out that way. Instead a trust charged with helping victims of America’s drugs epidemic could end up $1.1bn worse off. Purdue Pharma, Johnson & Johnson and 3M made deft use of quirks in the US’s Chapter 11 bankruptcy process. This kept members of the founding family — the Sacklers in the case of drugs company Purdue — or the company out of court. Instead, a subsidiary figured as the means to pay off victims of alleged product liability. The bankruptcy process won legal releases at its conclusion for everyone across both the bankrupt and nonbankrupt entities. That trick is now for the US Supreme Court to review. No such shell game for Mallinckrodt, a producer of opioids that filed for bankruptcy in 2020. It re-emerged in the summer of 2022 with $1.725bn in payments earmarked for an opioid trust to help victims of America’s drugs crisis. Now the business is in the bankruptcy court again. The opioid trust is set to take a 60 per cent haircut after Mallinckrodt reorganised its excessive debt. Experts are obsessed with the theory behind the bankruptcy process. The Mallinckrodt debacle shows that execution matters too. Payments to the opioid trust — which is in charge of disbursements — totalled $450mn last year. Now, the trust is set to get a final $250mn payment and a long-shot sliver of equity in the rejigged Mallinckrodt. The company has $3.5bn in total debts with lenders and bondholders expected to become owners. The 2022 deal gave those hedge funds and institutional investors priority over the opioid trust. Mallinckrodt’s prospects are poor enough that its reset enterprise value is just $3bn. The trust has agreed to the latest terms. Perhaps that was the risk implicit in the $1.725bn commitment. Legal releases for executives featured in the first deal will probably be a condition of the new restructuring. A sceptic would say that companies and savvy creditors are finding legal ways of short changing unsophisticated victims of corporate wrongdoing. A more nuanced view is that Mallinckrodt/opioids: trust buster compensation is not just a question of ethics. Corporate valuations and capital structures are also involved. But whichever way you look at it, the hopes of some of the US’s most vulnerable people are being crushed. Twitter: @FTLex The pandemic-era personal finance reprieve is coming to an end. For more than three years, tens of millions of Americans have benefited from a student-debt hiatus. On September 1, loans will start accruing interest once again. Payments will resume in October. On Wednesday morning, Foot Locker said sales were soft partly because the debt resumption was curbing consumer spending. The shares dropped by a third. Macy’s stock took a hit on Tuesday. More than 43mn Americans collectively owe $1.6tn in student debt. Before the pandemic, borrowers paid on average $200- $299 each month on their loans, the Federal Reserve says. Barclays reckons the resumption of payments could deliver a $9bn-amonth hit to US consumer spending. Millennials and Generation X Americans owe some 70 per cent of federal student debt. These two groups tend to eat out more often than older cohorts. That suggests less money through the tills at McDonald’s and KFC, which is owned by Yum Brands. Retailers that have a high proportion of shoppers with student loans to pay off include Academy Sports + Outdoors (37 per cent) and Foot Locker (36 per cent), estimates calculated by TD Cowen say. Among the biggest retailers, Ulta has 26 per cent while Target has 20 per cent. More than half of active users of buy now, pay later companies like Affirm, Klarna and PayPal have student loans, a sample survey conducted by Mizuho shows. Credit card groups could also take a modest hit. More than half of student-loan borrowers took on debt via their credit cards in the pandemic, TransUnion says. Streaming services, personal-care products and travel are exposed to spending cuts, a separate survey from TD Cowen shows. An analysis by CB Insights of earnings-call transcripts says mentions of “student loan” and associated keywords have more than doubled this earnings season compared to previous quarters. While well-paid CEOs complain about student debts, it is middleincome, early to mid-career people who are most burdened with it. FT graphic Sources: New York Fed Consumer Credit Panel/Equifax; TD Cowen US Internet Consumer Tracker, June 2023 0 6 5040302010 0 Home improvement Electronics Cable/internet/ telephone Alcohol Media services Luxury goods Personal care Takeaway food Clothing Travel Groceries Dining out Where student loan borrowers are cutting spending % of respondents 2003 2005 2010 2015 2020 2023 0 1.0 0.5 1.5 0 10 8 6 4 2 12 Student loan delinquency rate plummets after payment freeze US student loan debt ($tn) Delinquency rate (%)* *Per cent of balance 90+ days delinquent by loan type Payment freeze introduced March 2020 US consumers/debt: mortar boarded US student debts have risen steeply in the past two decades. Delinquency was reduced by a pandemic-era moratorium that is ending. Borrowers can be expected to cut spending on evenings out, groceries and travel. Lex on the web For notes on today’s stories go to www.ft.com/lex *