This is an audio transcript of the FT News Briefing podcast episode: ‘Say hello to the Magnificent 47’
Lulu Smyth
Good morning from the Financial Times. Today is Monday, February 17th. And this is your FT News Briefing. Ukraine’s allies gather for an emergency meeting in Paris. And Europe’s banking sector is on a hot streak. Plus, a new BP investor is making a big splash in the oil industry.
Sujeet Indap voice clip
They have become mythical, legendary and when they call on a company, everybody pays attention.
Lulu Smyth
I’m Lulu Smyth. And here’s the news you need to start your day.
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European leaders will gather in Paris today to craft a response to the situation in Ukraine. The meeting comes as the US and Russia have begun discussing ways to end the war but without input from either Ukraine or Europe. French President Emmanuel Macron will host officials from countries like the UK, Germany and Poland. They’ll talk about defence spending and how best to support Ukraine going forward. As for the US and Russia, they’ll begin formal peace negotiations in Saudi Arabia in the coming days.
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The darling of markets over the last few years has been the Magnificent Seven. It’s a group of seven tech stocks that has basically propped up the S&P 500. But what if I told you that the Mag Seven isn’t the only magnificent game around? Say hello to the Magnificent 47 in Europe. The FT’s Nicholas Megaw is here to explain what you’ve been missing. Hey, Nick!
Nicholas Megaw
Hiya!
Lulu Smyth
OK, so first, what is the Magnificent 47?
Nicholas Megaw
So the actual group we’re talking about is the Stoxx 600 banks index. The Stoxx 600 is like a Europe-wide equivalent of the S&P 500. And then there’s a sub-index of that, which is just the banks who are in that group. 47 is not a specific choice, it’s just how many banks happen to be in there. You’ve got kind of the big British ones like HSBC and then also kind of BNP Paribas in France, Deutsche Bank in Germany. And after having a very rough decade and a half after the financial crisis, they’ve actually been doing really well in the last three years. If you count dividends, the total returns since the start of 2022 have been around 100 per cent, which is even more than the Mag Seven has managed.
Lulu Smyth
But then walk me through this, If the Stoxx 600 banks index is doing so well, then why hasn’t it got more attention?
Nicholas Megaw
So this stat has been kind of doing the rounds amongst bank analysts and bank investors over the past few weeks. I think the person on the street is less likely to have noticed because we’re starting from such a terribly low base. You know, one of the reasons the Mag Seven got so famous is that they’re so big. It was moving the entire global stock market. European banks are just much smaller than that, so they have less of a wider knock-on impact.
There is also a timing factor. It’s a really cute chart to compare them since the start of 2022. But it kind of only works if you do it since the start of 2022, because that was the year when interest rates started going up and that hit tech stocks. So they dropped for a while. If you move the starting point forward to 2023, it doesn’t work so well. If you go further back in time, it really doesn’t work. So if you look since 2015, the bank’s return is still around 100 per cent, whereas tech stocks go up to 2,600 per cent.
Lulu Smyth
Right. So depending on when you track performance matters. But do you think this current rally, starting from 2020, will continue?
Nicholas Megaw
It is a good question. I mean, I would be really shocked if it managed to keep up this kind of blistering pace because as we said, it was starting from a really low base and it’s done a good chunk of the catching up now. But if you take a really long-term view or compare the European banks with American banks or companies in the rest of the world, it’s still not at crazy high levels. So there could still be some scope for it to continue for a while.
Lulu Smyth
And what sort of lessons does the performance of the Stoxx 600 banks index leave for investors who have obviously loved the Mag Seven returns?
Nicholas Megaw
So I think it’s an interesting reminder that there are other opportunities around outside of the real mega-cap companies. The issue is it is easier for me to point this out now after kind of three years of this rally. The challenge for any investor is noticing it, ideally, at the beginning. I don’t think banks will ever be quite as exciting as the big tech groups. But it is still a reminder that, like, there is more than one game in town.
Lulu Smyth
Nicholas Megaw writes about financial markets for the FT’s Lex column. Thanks, Nick.
Nicholas Megaw
Thanks.
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Lulu Smyth
The hedge fund Elliott Management has been making some splashy moves lately. It’s built stakes in BP and Phillips 66, and is playing the role of activist investor. So what are these investments tell us about Elliott’s strategy? Here to explain is the FT’s Wall Street editor Sujeet Indap. Hi, Sujeet.
Sujeet Indap
Hi. Good to be here.
Lulu Smyth
Tell me a little bit about Elliot’s involvement in BP and Phillips. How much of a stake has the hedge fund built and what is it looking to change?
Sujeet Indap
Sure. So Phillips 66, and BP are obviously energy companies, although in different parts of the energy ecosystem. Elliott’s taken roughly a 5 per cent stake in each — in BP, it’s about £4bn, in Phillips, it’s about $2.5bn. And in both instances, they are seeking the management board to make operational changes, which they think will boost the stock price. In the case of BP, it’s obviously the national champion oil company in the UK. It has sprawling operations across the world. A few years ago, with the advent of ESG investing, firms like BP tried to expand into green energy. That’s been relatively expensive. It’s hurt at least short-term investment returns. And Elliott simply wants BP to be much more disciplined about that. Phillips at a high level is very similar, they want more streamlined operations. So that is the conceit of activist investors like Elliott. They take a small-ish stake but try to enact big change by being loud and public and rallying support from other investors.
Lulu Smyth
Right. So what does this tell us about Elliott’s investment strategy?
Sujeet Indap
Elliott is a very big firm now. And what that means is for it to actually generate returns for its own investors, it is going after large targets like BP, like Philips, like Starbucks, like Southwest Airlines, where they can take relatively large stakes and make — in dollar amounts — relatively high returns that ultimately move the needle for their investors.
And they have such a fearsome, if not respected image now, that when they take a stake in a company, the company has to take them seriously. Other investors have to take them seriously. They seem to be able to effect change in a way most other activist investors cannot. So they are the giant of this industry. They have become mythical, legendary and when they call on a company, everybody pays attention.
Lulu Smyth
OK. But hedge funds do this sort of thing all the time, right? So what’s Elliott doing differently?
Sujeet Indap
Elliott is increasingly going after blue chips in all the companies we’ve heard of. And what that means is those big companies typically which could repel or even ignore an activist investor who can only get a 1 or 2 per cent stake and were not particularly influential, Elliott can go after any company in the world. And when they put out a paper or a press release or a website, it forces all other investors to take them seriously. And they are for sure will able to effect change. So there is no company that is safe from an Elliott campaign, no matter how big you may think they are. And that is relatively unprecedented. And one of the biggest stories in capital markets today.
Lulu Smyth
How a company is handling this idea that they could be subject to an activist move from Elliott no matter how big they are?
Sujeet Indap
So because of Elliott and some other firms like it, there are corporate lawyers and investment bankers who have a whole practice around activist defence and shareholder engagement. And what they do is they go to companies and CEOs and boards of directors and say, hey, on these five dimensions or ten dimensions, you could be subject to an attack from Elliott. And by the way, if you are not prepared for that and the first time you start to do any work on this is after you get their letter or their phone call, then you’re already dead.
So there’s a whole set of work that advisers do with companies to be prepared for when Elliott shows up. Certainly, any firm that has CEO transition or has underperformed its peers or has done a bad acquisition or has wasted money and capital expenditures, they are absolutely ripe for an Elliott engagement. And Elliott is constantly screening for targets.
Lulu Smyth
Sujeet Indap is the FT’s Wall Street editor. Thanks, Sujeet.
Sujeet Indap
Thank you for having me.
Lulu Smyth
Before we go, now’s your chance to snag a deal on a subscription from the Financial Times. You can save 40 per cent on an annual digital subscription by going to FT.com/briefingsale. Again, that’s FT.com/briefingsale. You can read more on all of these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.
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