Daily market update: BP, Whitbread

Investors are increasingly worried that cracks are starting to show in the AI trade.

A big sell-off in Asian semiconductor shares including SK Hynix and Samsung Electronics follows comments by Broadcom’s chief executive Hock Tan who compared investing in AI to a casino.

He reportedly said that investors don’t really know what they are investing in and have ‘very extreme’ expectations.

There are growing fears that companies are investing so much money into AI without a clear idea of the timing or scale of financial payback. High bond yields and expectations for multiple interest rate hikes over the next 12 months also create a challenging backdrop for the growth stocks that populate the AI space, as that negatively affects the present value of future cash flows. A lot of tech valuation is about the jam tomorrow, rather than the jam today.

The semiconductor industry is known for being highly cyclical, and there is a fear that certain investors have forgotten this important point. Many people think demand will stay strong forever, and they run the risk of being caught out if they are heavily exposed to semiconductor stocks in their portfolio and there is a tech-led market correction.

It may only take a pack of tech stocks to say that AI demand has eased off to trigger a market pullback. It highlights the importance of having a diversified portfolio and not being overly exposed to one area.

The UK doesn’t have a lot of tech representation, but select names were visible among the biggest losers on the market on Tuesday. Polar Capital Technology Trust, Scottish Mortgage and Raspberry Pi were among the fallers on the FTSE 350, while in mainland Europe the likes of STMicroelectronics and Technoprobe were weak.

BP

The sharp rise in oil and gas prices this year has created a major tailwind for BP’s earnings. The war in Iran has caused major disruption to the flow of refined energy products out of the Middle East, with the global supply situation exacerbated by damage to Russian refineries from Ukrainian drones.

Regular swings in energy prices since March have created the optimal backdrop for BP’s trading arm to enjoy bumper gains. Add these wins to higher selling prices for BP’s products and it’s no wonder the company has been able to rapidly pay down some of its debt.

Against a backdrop of heightened volatility in the energy markets, BP has shown remarkable resilience with its upstream production and tightened its third quarter guidance with a higher bottom end and only a marginal narrowing of the top end.

Guidance for up to $4.5 billion of impairments takes the shine off the results somewhat. This is linked to its low-carbon business, which is no longer a strategic priority for the group. BP has scaled back its low carbon and green energy strategy to focus on traditional oil and gas, so the impairment charge is unlikely to ruffle any feathers with investors.

Whitbread

Premier Inn owner Whitbread is fighting off activist investor Corvex who is trying to meddle with the composition of the board. Whitbread has told shareholders not to vote in favour of Corvex’s proposals to appoint one of its representatives as a company director.

Corvex earlier this year called for Whitbread to put itself up for sale, but the hotel operator says the activist now appears to have done a U-turn, without explaining why. In May, Corvex suggested Whitbread couldn’t justify UK and German expansion plans given market conditions and the company’s underlying performance.

Whitbread has used its half-year results to reiterate the message that the business has positive momentum. It says there is a growth plan in place and implies everything is going well. This looks like a classic situation of a company not wanting the distractions of an activist investor and being determined to show it has the right plan in place.

The financial results tell a different story. Profit is falling and there is no growth in the dividend. While revenue per available room – a key metric for the hotels sector – went up in the first half, cost inflation is an issue.

Activists typically want to shake things up for some easy wins, thereby pushing up the share price and making them some money. They rarely think about what’s best for a company in the long term. In Whitbread’s case, the leisure group is investing now to increase its foothold in two important countries. In effect, it is spending money now to make money in the future.

Market conditions aren’t currently favourable, so the financials don’t look great. But fast forward five to 10 years and Whitbread might be vindicated in its decision to have expanded its footprint. It just needs investors to think that way and not worry about a depressed share price. It’s a tough job to do when an activist is banging the drum and saying, ‘no, no, no’.