The Lex Newsletter: Apple at $3tn and why jackboots are bad for business

Dear reader,

Happy New Year. This is the first Lex Newsletter of 2022. I’m the head of the team and I’m planning to write our Friday round-up regularly this year, spinning broader themes from the week’s coverage. If you have thoughts or suggestions, please email me at lexfeedback@ft.com.

This week reminded me of George Orwell’s gloomy prediction that the future would consist of “a boot stamping on a human face forever”. Russian president Vladimir Putin sent troops to help client state Kazakhstan violently stifle public unrest. The move adds to a combustible mix of volatile energy prices and east-west tensions also reflected in Ukraine’s military stand-off with Russia.

At such times, newspapers sometimes print diagrams of nations’ relative strength dotted with symbols for armies, missiles and warplanes. They are missing a trick in failing to include the fruits of capitalism in democratic countries: for example, millions of smartphones produced by Apple, a business that was this week briefly valued at $3tn.

The economies of Russia and its authoritarian satellites have failed to advance much beyond natural resource exploitation. Kazakhstan, a vast Central Asian nation of rugged steppe and mountains, is a case in point. It produces about 40 per cent of the world’s uranium. It is a big supplier of oil, copper, nickel and zinc. Western groups such as Glencore own important assets there.

Russian intervention helped calm commodity prices. Lex warned western traders and consumers to be careful what they wish for. President Kassym-Jomart Tokayev has invited The Bear into his parlour because Kazakh forces were unable or unwilling to quell unrest. The Bear may not leave with the same alacrity. If that outrages Kazakhs, peace and price lulls may be temporary.

Soldiers are visible evidence of state power. Spies and propagandists operate in the shadows. China’s army of spooks should be happy with the latest tech crackdown. Lex judged that new scrutiny of foreign listings mattered less than a requirement for tech groups to disclose recommendation algorithms and user search histories.

China, unlike Russia, has advanced from commodities into low-cost manufacturing and then higher technology. That progress has depended partly on acquiring key western technologies. The national security law introduced by the UK this week is part of a wider western backlash. Lex believes the main consequence will be more preconditions on inbound UK takeovers.

China has also demonstrated ingenuity and organisation lacking in Russia. Lex was therefore a bull on China tech stocks until the Chinese government began clamping down on the sector a couple of years ago. Politicised shares bear too many unpredictable risks. China Mobile, a big telecoms operator that just listed in Shanghai, is a good defensive bet. It appears too dull to annoy politicians.

In contrast, if Apple were Chinese you could bet jealous politicians would be taking a swing at it. Lex has a beef with the anti-competitive behaviour of US tech giants. But we also see Apple as a shining example of a progressive business that has given people what they want and changed the world in the process.

We remain fans, even at a valuation of almost eight times revenues. The group’s market capitalisation had slipped to $2.8tn at pixel time. But we reckon the $4tn threshold will fall sooner or later.

Dictators believe they can successfully combine authoritarianism with modern capitalism. They are wrong because modern capitalism, best exemplified by the US, depends on principles that also sustain free, plural societies. These include:

Democracy. Shareholders can challenge managements in the same way that voters can pressure and even unseat governments. For example, activist 3D is calling for a vote against self-serving plans by the unimpressive management of Toshiba to split the Japanese conglomerate into three separately listed businesses. Lex backs that call.

The freedom to fail — or simply miss an opportunity. This key advantage of free markets eludes many people, particularly in the judgmental UK. Free markets are sandpits where entrepreneurs try out ideas, many of which do not make the grade.

We think Lime, the US electric scooter start-up, may never make a buck. Too bad. Beyond Meat, which produces vegetarian food, is flagging because its products are easily copied. Never mind. TPG is great at buyouts but has been surpassed by Blackstone, which has diversified. TPG can still float for $9bn, amid a slew of other US IPOs scheduled this year.

Hands-off politicians. Knee-jerk intervention is frequent in China, where a party boss’s irritation at his son’s obsession with computer games can trigger national policy changes. Milder ministerial tinkering is one of the reasons Europe and the UK are economically sluggish. Windfall taxes — proposed by the UK’s Liberal Democrats to bash energy companies — are one manifestation of that bad habit. What better way to deter investment than to continually fiddle with market structures?

The rule of law. Tech entrepreneur Elizabeth Holmes made powerful friends in the US establishment. She has nevertheless been convicted of fraud, making the likes of Henry Kissinger and George Shultz look suitably foolish. Her blood-testing machines simply could not complete the difficult tasks she claimed they could. Beware entrepreneurs whose charisma exceeds their capabilities, Lex concluded. Apply scientific scepticism to scientific claims.

The UK is indulging in a little chest-beating over a valuation for Apple surpassing its entire FTSE 100 index. That has given new currency to the description of the London stock market as “Jurassic Park” from hedgie Paul Marshall.

Lex concluded he was wrong to blame income funds — just 6 per cent of the market by one narrow measure. But he was right to decry London’s hidebound risk aversion. See items two and three in bold above. In the US, freedom to fail has helped spawn the tech mammals and birds that are superseding business dinosaurs.

Top quartile regards,

Jonathan Guthrie
Head of Lex