The changing investment world
Results from Boeing, Tesla and Facebook highlight the changing nature of investment, as the new economy becomes the biggest driver of returns.
The news today gave insights into the changing world through the reports of three very different companies.
Boeing had to report losses, and sought to quantify the potential payments and losses that will result from the grounding of the 737 Max fleet. One of the world’s two leading plane makers, Boeing is caught by the tragic crashes of two of its new aircraft and the resulting withdrawal of regulatory permission to fly until all the affected planes are modified and pilots trained. Boeing has had to stop production of this plane, which was its bestseller, and spend time and money fixing the problems. Meanwhile, there are wider issues overhanging the sector. Air travel has been a good growth market, with more people wanting to take to the skies as they became better off through economic growth in the emerging world, and more people in the advanced world able to afford air travel thanks to intense price competition amongst airlines.
The green movement wants to see a reduction in air travel, and a longer-term transformation in its use of fossil fuels as the main source of energy to power flight. When Boeing emerges from the immediate crisis over its present plane, it faces a future needing to speed innovation and address concerns over the carbon footprint of its products.
Tesla continues to soar
Tesla was able to report profits for the second quarter running. This recent start-up motor manufacturer has pioneered electric cars and has established large factories in the US and China. It had to borrow extensively to put in the initial capital investments in R&D, plant and machinery and lost money in its early years.
Fans of the electric-vehicle maker say the company is the future, and that it will succeed in selling many more cars and will make good money doing so. Its critics point to the high levels of debt, the very high rating against small current profits, and the possibility that traditional motor manufacturers will fight back with good electric products of their own.
So far, markets have backed the growth story and think there is great scope for Tesla to make and sell more cars at a profit. The green revolution has considerable momentum behind it especially in Europe and China, with governments seeking to force the pace of change over how people get about by car. Consumers have been reluctant to buy electric cars in large numbers, but the pressures are on to increase the take-up rate markedly.
Social media still growing
Facebook reported good revenue growth, up by an impressive 27% over the last year. It now has 1.66 billion daily users and is part of the ever-popular US tech-led revolution in how we stay in touch with each other, how we keep ourselves informed about the world and how we receive our adverts and commercial prompts. The company also had to report a dip in earnings per share and profits despite the increase in revenues. Following criticism of its policy of allowing people to use it to communicate bad messages or promote illegal causes, the company has had to recruit a large number of additional people to provide greater self-regulation of use of the service.
The twin revolutions brought about by the technology companies and the go green movement are having a big impact on corporate and customer behaviour and on the ratings of companies in equity markets. In a world of slow growth and cheap money, investors have been tempted to chase growth where they see it. The more traditional companies and the resource sectors have been under critical scrutiny, both because of their profits performances and because they have a lot of work to do to match expectations of a greener future.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.