Commercial Awareness Update – W/C 21st February 2022

ESG Funds Flourish Whilst Big Tech Topples

Big-Tech’s Market Performance

With the Dow Jones showing three consecutive weeks of market decline and the tech-heavy Nasdaq had its worst month in over three years, January 2022 was a rocky ride for investors.

As a result of geopolitical tensions, monetary policies such as interest rate rises and the labour shortage, investors have experienced an uncomfortable period coming into the new year.

However, whilst the S&P 500 showed some correction last week, where it closed at its highest point in 2022, investors with portfolios highly geared toward Big Tech have also seen turbulence. For example, Facebook’s parent company ‘Meta’ announced a worrying outlook for the future because of increasing competition, namely TikTok, which could slow revenue and lose an additional $10bn of revenue following changes in privacy made by Apple. Other examples include Netflix reporting an 85% decline in new subscriber growth as we come out of the pandemic and PayPal seeing a $220bn loss of its market value.

That said, Amazon’s announcement of increased Prime membership saw a 15% surge in stock price despite not meeting its revenue targets for the first quarter. Additionally, Microsoft saw its cloud revenue jump by 32%, whilst Google’s revenues jumped by 45%. Therefore, while some analysts believe that the tech growth boom will slow as we withdraw from the pandemic, the majority believe that growth will continue the same trajectory despite recent turbulence.

ESG Funds and Outlook

The dominance of Big Tech stocks has been rivalled by investors flocking to Environmental Social and Government (ESG) funds as the globe transitions toward a low-carbon and sustainable economy. Data has shown that ESG stock funds took in a net of $622.28million in January 2022 compared to $543.56million for non-ESG stock funds.

Additionally, according to Morningstar, more than 500 funds changed their investment mandates and were re-purposed in 2021 to allow for funds to be re-classified as sustainable. As investors seek out more sustainable investments, predictions suggest that, according to Laith Khalaf, head of investment analysis at AJ Bell, “The sheer number of funds which are assuming the ESG tag, combined with a huge amount of funds industry marketing, and a genuine groundswell of investor interest, are all likely to continue to prop up ESG fund sales irrespective of performance.”

However, with the second increase of interest rates by the Bank of England in three months, investors will likely move away from risky stock investments such as Big Tech and ESG and consider bond investing, which will test the appetite for ESG funds as the volatility continues.

Article written by Andrew Dewey

Self-Flying Taxi

This week’s essential

According to a Morgan Stanley Research analysis, the market for flying cars, also known as electric air taxis, will continue to grow this decade, reaching $1.5 trillion globally by 2040. A convergence of technology, including autonomous vehicles like drones and self-driving automobiles, more efficient batteries, and sophisticated manufacturing processes, is driving this trend. They are being developed by start-ups and established brands like Boeing, Hyundai, Airbus, Toyota, and Uber.

Boeing, the world’s biggest aircraft corporation and major maker of commercial jetliners, defence, space, and security systems, is investing an additional $450 million in Wisk Aero as part of an existing joint venture initiative. The US aerospace powerhouse will build the country’s first autonomous passenger-carrying vehicle. Wisk Aero is one of the hundreds of companies that make electric vertical take-off and landing aircraft, but it stands out because it focuses on autonomous flight.

Boeing’s latest investment demonstrates that prominent aerospace companies diversify their portfolios by expanding into alternative, high-growth sub-industries. This technique might be an attempt to offset risks associated with an over-reliance on conventional income streams, such as manufacturing commercial airliners, which was decimated by the pandemic’s beginning.

The autonomous aircraft business is still in its infancy, with plenty of possibilities for growth. According to McKinsey & Co., investors have invested over $7 billion in start-ups focused on future air transportation solutions. This industry has received more than twice as much assistance as it had in the previous ten years. Boeing isn’t the only one in this line of work. For example, Airbus and Embraer are developing their own electric air taxis.

How is this topic relevant to law firms?

To support a large number of self-driving aircraft, the industry needs to build the necessary infrastructure. On the other hand, maintenance and installation are both costly and time-consuming. Advising governments on how to improve their country’s infrastructure to accommodate autonomous cars may come as a benefit to law firms. Furthermore, private clients may also generate work for law firms to construct airports and runways, for example.

Written by Tajinder Kaur

Unilever’s Rocky Start To 2022

Unilever’s bid for GlaxoSmithKline (GSK) health care division has pushed Unilever off to a shaky start to the year. Unilever owns a plethora of well known household brands, from Marmite to Magnum.

In January, GSK announced it had rejected three bids from Unilever, the latest of which comprised £41.7 billion in cash and £8.3 billion in shares. GSK said the proposal was ‘fundamentally undervalued’ and subsequently rejected. GSK had been under pressure from an activist investor Elliot Management (an American investment management firm), to pursue a sale of the consumer business.

In early February, Unilever announced that it would not increase the offer for GSK’s health care division above £50 billion after investors and analysts squirmed at the risk of pulling off the significant merger. GSK is thought to want £60 billion, but the deal was quickly dropped owing to the firm stance taken by investors.

Unilever has struggled under the leadership of its current Chief Executive, Mr Alan Jope. Its shares remain nearly 30% below their 2019 high. Many analysts argue Unilever had been wise not to be drawn into increasing their bid. One Barclays analyst called it a ‘smart move’, suggesting the decision shows Unilever is keen on acquiring the asset but demonstrates discipline.

However, many other analysts argue the failed bid has raised questions of Unilever’s plans under their current Chief Executive. Mr Jope’s new focus on sustainability has proven controversial. Last year, Unilever announced plans to reduce the carbon emissions of their operations by 2030, with a goal of becoming net zero by 2039. Although 99% of their shareholders approved this plan in 2021, its 7th largest active investor, Fundsmith, recently criticised the company for being ‘obsessed’ with promoting its sustainable approach over performance. In a scathing letter to investors, Fundsmith lambasted Unilever’s untactile bid and accused the company of not engaging with shareholders.

In February, Unilever announced it was offering €3 billion share buyback in an attempt to draw a line under the failed bid, and it will be taking any discussion of takeovers ‘off the agenda’. It is clear there is no appetite for any transformational M&A with investors. A reshuffle at Unilever is on the horizon, with plans to cut 1,500 management positions, reorganising the company into five new divisions.

The failed bid unsettled investors and shareholders alike. The consequence of the whole debacle wiped £1 billion off the stock market value of Unilever. If it went ahead, this deal would have been one of the largest ever on the London market. Most recently, Fundsmith labelled the proposed bid ‘a near-death experience’. Unilever will likely hold back from any M&A in the near future and instead remain focused on climate action and delivering on the promise to reduce emissions and become net zero by 2039.

Article written by Maddy Preedy