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This morning Rotork, a £4bn UK engineering business, agreed to be taken private by ABB at a 65% premium. It is joining Easyjet, Intertek, Tate and Lyle and DCC as recent UK M&A targets. As a proud Brit, I have mixed feelings about UK businesses being taken over by international buyers. But as a UK investor, this is good news. The ratio of de-equitisation to new equity issuance sits at 27 to 1 today for the UK. As UK assets become scarcer they also become more valuable. It is only a few weeks, but the UK’s FTSE 250 index is one of the better performing equity markets this quarter.
This is helpful as it provides some diversification against the ongoing ups and downs of the AI investment cycle. Here are a couple of my favourite charts on that theme. The chart on the left shows the change in cashflow for the tech giants making the AI investments and semiconductor businesses receiving (some of) the cash. And on the right is just how large an impact this windfall can be for some of these businesses. There are some bubbly looking charts out here. But plenty of these aren’t speculative bubbles. Instead you are looking at real profit and cashflow growth.
This does, however, make these businesses very sensitive to any slowdown in the AI investment story. And I think the market is currently sniffing out just such a slowdown. This is, I think, partly because businesses are thinking harder about where their AI spend actually generates value. And it is partly because cheaper Chinese open-weight models are diverting spend away from US model and data centre providers. Here is a model performance table for example for the latest AI models. Kimi and Deepseek are both Chinese. The obvious point is that for plenty of tasks you do not need the absolute top of the range model, so why not use the (often cheaper) Chinese one?
And if you do make that decision, there will be less cash flowing to US AI model providers. And it is this cash that provides the revenues for all the AI infrastructure investment that is currently being made. This is naturally causing some disruption in the AI infrastructure space. SK Hynix (the Korean semiconductor manufacturer) is down 40% from its peak for example. I was worried this would cause a broader market sell-off. But I suppose I have been pleasantly surprised at the strength in non-AI markets (like the UK) in the last few weeks. There is plenty going on under the surface, but at the index level equity markets look business as usual to me.
One core tailwind for equities is that GDP growth remains steady and inflation is not accelerating (yet) in the face of the Iran war energy price shock. Quarterly UK GDP growth came in at over 2% annualised this week and core US inflation was actually negative in June. Those are a couple of good economic data points! This is helping support traditional old economy businesses even as the new economy has a wobble. The global economy has been able to withstand inflation, tariff and oil shocks in recent years. It is still very early days, but if it can also deal with a slowdown in AI infrastructure spend that would be pretty reassuring for me.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
