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Bull and bear: ARM’s Google boost

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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: ARM’s Google boost. What will emerging markets do next?  What about the Gulf region? GSK looks at UK boost. What are the UK’s top investment choices? Here is a clue: they ain’t equities 


ARM’s Google boost

The rumour mill has churned out yet another idea to make shareholders in ARM smile.

According to Bloomberg, Google is considering making its own server processor.  If this one goes ahead, it will be a major blow for Intel.

So what technology will it use in these new processors? Well here is a clue: it ain’t ‘armless.

According to Bloomberg, it is considering employing ARM technology.

If this one proves right it will be a major boost to the UK chip designer. Up to now, ARM technology has been largely applied to mobile devices because of the energy efficiency of its chips. If it can also be employed in server technology then this will be a major new revenue stream to the Cambridge based company, and open up new opportunities.

Bear:      However, the Bloomberg report said that it may just be a negotiating ploy by Google. If it can demonstrate to Intel that it is considering moving its business, it may be able to obtain a better price.

Bull:       According to Cisco, there were eight to ten billion devices that were connected to the internet at the end of 2012. It forecasts that by 2015 this number will grow to between 15 and 25 billion, and be between 40 and 50 billion by 2020. And, by the way, it expects the growth rate to continue from then on, saying that even in 2020 only 4 per cent of objects that will one day be connected to the internet will be within the so-called Internet of Things. Even if Cisco is only partially right, this means an awful lot of things carrying low energy intensive chips, which some might say is a rather a big opportunity for ARM.

Really Bull:         What is especially interesting about ARM is that its model may be the perfect one for avoiding obsolescence. Because it focuses on design, and lets other companies do manufacturing, it can change its approach more easily. Kodak went bust because, despite seeing the digital revolution, it had a business model that was too reliant on doing things the old way. It could not change without radically changing the business and slashing its overheads, and indeed its revenue. The big change to occur in the world of chips and processors will be the evolution away from Silicon to other materials such as Graphene, Graphyne or Silocene. Graphene is in pole position, but its position as the world’s premier super-material is not assured.

When the changeover from Silicon occurs, there is no guarantee that any of the current incumbents will survive, but ARM, because of its in-built nimbleness, stands a better chance than most. And by the way, other companies in other industries could do a lot worse than adopt an ARM type business model.

What will emerging markets do next?

Allan Conway, who is the head of emerging market equities at Schroders, and James Barrineau the co-head of emerging markets debt relative returns, have been providing the world with their thoughts on emerging markets.

Bear:     They started on a bearish note, saying: “Global emerging markets (GEMs) have underperformed developed markets for the past three years due to a combination of weaker-than-expected economic growth and earnings, a strong dollar and more recently, concerns over the potential ramifications of policy stimulus tapering in the US. These factors have led some commentators to suggest that the positive structural story for emerging markets is over.”

Bull:       “We would strongly disagree with this view,” they said.

First, they reminded us that the economic fundamentals of global emerging markets are strong while in the developed world they are not. Of course, Brazil and India have proved disappointing of late, Russia appears to have been greatly overhyped, but the fact is that the real economic growth over the next decade or so is likely to reside in emerging markets.

But there is more. This is how the dynamic duo of Conway and Barrineau put it: “Valuations are very attractive and appear to be pricing in a lot of bad news; for example, the 12- month forward price-earnings (PE) of the MSCI Emerging Markets index is 10.3 times, based on 11.4 per cent earnings-per-share growth. This compares to a long run average of over 12 times. It is also at a significant discount, around 30 per cent, to the PE of the MSCI World index. Furthermore, the GEM price-book ratio is 1.5 times. This is also at a large discount to the long-run average despite a return-on-equity of 12.3 per cent. Although these valuations are not at rock-bottom levels, they are not far from trough levels in some cases. Furthermore, GEMs have historically delivered strong absolute returns over the medium and long term from such levels. As noted above, GEM margins have been under pressure, unlike in the US where profits as a share of GDP are at a record high, so there is also clear upside to GEM profit growth.

“In addition, anecdotal evidence indicates that investors have become extremely bearish. Indeed recent data suggests that global fund managers have been reducing their GEMs exposure to such an extent that the net percentage of overweight to underweight managers is now at its lowest level for many years.”

Short-term versus long-term      It is clear that things will not be easy in the short term. There is the effect of QE tapering, for example political instability in some regions, and a spate of elections due in 2024. But they said: “Even though we would not rule out further weakness in the near term, a strong GEM rally at some point in 2014 is quite possible. Moreover, we are confident that returns over the next three years or so will be substantial, both in absolute terms and relative to developed markets.”

What about the Gulf region?

Meanwhile, PwC has produced a newsletter which said some pretty bullish stuff about the Gulf region or in particular the Gulf Cooperation Council (GCC) – that is to say the United Arab Emirates, Saudi Arabia, Bahrain, Oman, Qatar and Kuwait.

So here is why it was so busy being bullish.

Firstly, the GCC is as big as the Indian economy – so it’s important.

Secondly, the GCC has grown faster than most E7 countries (that’s the BRICs, plus Indonesia, Mexico and Turkey) since 2000.

Thirdly, and this point is the key, the region, according to PwC, maintains a very pro-business environment and is reducing its reliance on oil and gas. According to a recent World Bank report on ease of doing business, all but one GCC economy ranks higher for ease of doing business than all E7 countries. PwC said: “This has encouraged non-oil related business.”

PwC said that the work force is due to grow by an almost a third between now and 2015, and: “We think this…could provide the Gulf with a golden opportunity to push thought reforms needed to diversify away from oil and gas based productions and create jobs for the future,” It says the Gulf has the potential to transform into the international Islamic finance hub and become a staging post for South to South investment.

GSK looks at UK boost

We keep hearing about re-shoring, indeed the idea that companies may start moving manufacturing back to the UK provides one of the more positive pieces of news on the UK economy at the moment. Sure the UK is too reliant on indebted households’ spending, and needs re-balancing, but re-shoring could do it.

GSK has announced plans to invest £200 million into plants in Ware in Hertfordshire, and Worthing in West Sussex.

Actually, the specifics get more interesting.

The GSK investment relates to equipment upgrades and is not expected to lead to more jobs at the plants.

But this is what’s good about this one.

Firstly, jobs will be created externally to GSK in the form of local construction.

More to the point, is this move not dealing with the very problem that has been besetting the UK for so long – lack of investment, leading to poor productivity, and weak wage growth?

A £200 million investment from GSK is hardly going to transform the UK economy – it may not even transform the Worthing economy. But it is evidence of much needed re-balancing.

What are the UK’s top investment choices? Here is a clue: they ain’t equities

According to Abundance, renewable energy is the British public’s top investment choice after property.

It conducted a survey among Brits.

This is what Abundance had to say:

“When asked about their preferred investment areas, 43 per cent chose property; 33 per cent renewable energy; 23 per cent traditional energy (oil, coal, gas); 19 per cent manufacturing; 15 per cent consumer goods; 14 per cent hospitality; 12 per cent transport and 3 per cent ‘other’. The survey also showed that Brits place most importance on financial return; risk; transparency; environmental and ethical impacts when deciding their investments.”

Looking at this from a macro point of view, investment by Brits in renewables does score over property investment in one key respect. Investment in property when it leads to construction is good for UK plc, but when the investment just boosts buy-to-let, it does not create any new value. To use the jargon there is no value added. Investment in renewables, on the other hand, does.

Seeing the spare equity in your property as its value goes up as a way of funding your retirement is a risky long-term strategy. Investing, so as to reduce the cost of future energy bills, well that makes sense.

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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