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Breakfast Briefing: Flawed Chips, VW’s Plan and Edotco’s IPO

Glenn Hutchins Speaks on BTC

The Silver Lake Partners co-founder says that bitcoin masks the underlying innovation in blockchain.

Editor’s Remarks: The bitcoin rollercoaster was perhaps the biggest story of 2017 but for Hutchins it is a distraction from what is going on in the wider cryptocurrency world. Although several famous “establishment” names such as Mike Novogratz and the Winklevoss twins have spoken out publicly in favour of cryptocurrencies, Hutchins is probably the biggest finance player to back the burgeoning sector. Through his family office, North Island, Hutchins has made $5m worth of investments in cryptocurrency companies but so far says he has not bought a single bitcoin.

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Fears About Flawed Chips

Tech experts have described a design flaw in nearly all PC and smartphone chips in the last 10 ten years. 

Editor’s Remarks: The world’s leading chip experts say that there is a common flaw in the world’s current computer chips that might expose users to cyber attacks. The problem is deemed to be an architectural one and not something that is the responsibility of individual manufacturers. Intel and ARM Holdings have so far said they are working to solve the issue, while AMD also said that its designs were impacted too. The problem is likely to be solved through an industry-wide effort that will utilise a combined software and hardware solution.

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Volkswagen Joins Aurora

The famous carmaker has joined forces with the self-driving startup to herald the autonomous era.

Editor’s Remarks: The German automaker announced the Aurora partnership in a move that reflects a wider trend of similar joint ventures within the industry. Volkswagen aims to have a fleet of self-driving taxis on the road by 2021 and will launch dozens of test vehicles this year with Aurora. Aurora was started in 2017 by Chris Urmson, who formerly headed Google’s self-driving team, Sterling Anderson, the previous head of Tesla’s autopilot, and Drew Bagnell, who founded Uber’s self-driving unit. In all, Volkswagen aims to spend €34bn to scale up its efforts in self-driving and electric vehicle research in the next five years.

Read more on Carmakers: Opens a Supermarket

The Chinese e-commerce giant opened its first chain of high-tech supermarkets in Beijing. 

Editor’s Remarks: JD’s move follows Alibaba’s recent foray into physical supermarkets last year, as China’s tech giants diversify their revenue streams. JD’s new chain, 7Fresh, enables customers to use a mobile app while browsing the store, alongside robotic trolleys and screens that display information about the items people pick up. The chain is very much catered to China’s middle class and leverages JD’s exceptional supply chain dynamics, which benefits hugely from the company’s partnership with US giant Wal-Mart. Alibaba, meanwhile, is scheduled to open a further 30 of its Hema stores in Beijing this year.

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Axiata’s Planned $500m IPO

The Malaysian wireless carrier is considering an IPO of its tower unit, Edotco, as early as this year.

Editor’s Remarks: Axiata is Malaysia’s largest wireless carrier and is contemplating inviting banks to pitch for the deal this quarter, according to sources in the company. Edotco’s potential float would be a huge lift to the Malaysian market, which last year hosted $1.7bn worth of IPOs. Alongside Edotco, Malaysia’s Edra Power Holdings is also looking to list on the Kuala Lumpur stock exchange this year. Edotco raised $700m last year in a private placement, which reduced Axiata’s stake to 62.4%. Company insiders also stress that the deal is still being deliberated and the plug could be pulled at any time.

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Alibaba AI Beats Humans

Alibaba AI

The Chinese company has developed an AI system that beat humans in a reading test.

Editor’s Remarks: The AI model was required to provide exact answers to around 100,000 questions for the Stanford Question Answering Dataset (SQuAD). The SQuAD is considered to be the most definitive and rigorous test for measuring AI capabilities, and Alibaba’s AI certainly rose to the challenge. The program scored 82.44, which superseded the 82.304 scored by a group of humans taking the same test. Alibaba was quick to announce that it was the first AI system to beat humans at such a test. However, Microsoft’s own AI system scored 82.650 on the same test, but its results were finalised a day later.

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Facebook Execs Sold $4bn in Stock Last Year

 2 min read / 

Facebook exec shares

Facebook’s top executives sold company shares worth more than $4bn in 2017, over double the amount of other execs at some of the largest technology firms in the US.

The total value was boosted by a 52% surge in the company’s stock price last year which also saw Mark Zuckerberg, Chief Executive Officer (CEO) and Sheryl Sandberg, Chief Operating Officer (COO), selling $942.5m and $316m, respectively.

Data has been collected from filings with the Securities and Exchange Commission over the year.

The social network giant’s stock outperformed the other technology shares by a wide margin.

Most of Zuckerberg’s proceeds went towards funding the Chan Zuckerberg Initiative, a philanthropy founded by Zuckerberg and his wife Priscilla following the birth of their daughter in 2015.

WhatsApp co-founder and Facebook board member Jan Koum made 16 sales throughout the year, selling a whopping $2.8bn, the most of any top tech firm executive.

Following closely behind was Amazon CEO, Jeff Bezos, who sold $2bn worth of stock. Back in April, Bezos said that he sells around $1bn worth of stocks a year to fund his Blue Origin space exploration project.

Other sellers in the big five tech firms included Google CEO Sundar Pichai and Apple CEO Tim Cook who sold $84.3m and $60m worth of shares, respectively.

The chart below shows the top-selling Facebook executives for 2017, the majority of which were made via trading plans filed with the US Securities and Exchange Commission.

Top-selling Facebook execs 2017

Microsoft CEO Satya Nadella and Alphabet CEO Larry Page sold no shares during 2017.

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Quick Reads

The US Banks Rally: Here’s What It’s All About

 4 min read / 

US Banks Rally

US banks have not just shown a stellar performance this week, but have also performed well throughout the entirety of this year. The ‘Direxion Daily Financial Bull 3x shares’ is an ETF which tracks the performance of the Russell 1000 financial services index. Its biggest holdings include Berkshire Hathaway, JPMorgan Chase & Co, Bank of America, Wells Fargo, and Citigroup. The ETF has returned 47.56% YTD. So what is causing such a high performance in the financial services sector? There appear to be three fundamental factors driving the performance of financial equities: interest rates, tax reform and regulation.

Source: Yahoo Finance

Interest Rates

The US benchmark lending rate has been hiked twice already this year, and a third rise is quite firmly priced in for December. The hikes have been supported despite inflation running below the central bank’s target of 2%. Furthermore, Jerome Powell, the new Fed chairman, has publicly said: “We expect interest rates to rise somewhat further.”

Interest rates are not just rising in the US, but also globally due to the strong growth in the global economy. A large proportion of banks’ profits come from the interest that they charge on loans to customers. Therefore, it is only logical that as interest rates rise, banks will start to become more profitable and hence their stock prices are rising.

Trump’s Tax Cut

The proposed tax cut which hopes to slash the corporate tax rate from 35% to 20% could hand banks a $6.4bn profit boost and increase net income by 7%. The biggest six US banks would benefit disproportionately to institutions in other sectors as banks do not claim as much in deductions as other sectors do. Additionally, the extra cash that corporations will have due to paying lower taxes will likely flow into banks in the form of higher deposits, especially in the asset management and trading departments.

Easier Regulation

Following the global financial crisis, there were, of course, necessary regulations imposed that would theoretically make the financial system more crisis-proof in the future. However, the former investment banker Jerome Powell is keen to look after his own and hopes to ease the burden for banks and aims to have differing regulations for financial institutions of differing sizes and attributes. He proclaimed that the Fed must ensure the financial system remains “stable and efficient” and his opinion on financial regulation is firmly supported by Trump and Republicans in Congress. Trump is openly critical of the post-2008 regulations, suggesting they go as far as stunting lending and hence economic growth.

Overall, there are two main avenues that will allow banks to be more profitable. Firstly, lax regulation allows banks to take on more risk, which can potentially open up the gates for higher returns. Secondly, the administrative costs of complying with regulation are surprisingly large – one can ask any finance department of a European banking institution about how they feel in regards to the costs of Mifid II.

US vs Europe

Now is undoubtedly the time for US banks to make hay whilst the sun is shining, especially as when that stops, they are often the ones to feel the chill the most. For now, it seems like investing in the US financial sector is the best option by far. Unfortunately, the European banks will have to gaze across the pond in envy as they painstakingly wait for the ECB to start its own hiking cycle.

Furthermore, as mentioned above, the costs of the EU’s newest piece of regulation are likely to hurt banks’ balance sheets at the beginning. However, as better compliance technology is created, these costs will likely abate. But with another former investment banker leading France and the EU to greater things, perhaps European banks can also expect a leg up in the coming years.

Keep reading |  4 min read


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