Friday 10/08/18

  1. In MACROECONOMIC NEWS TODAY, Japan’s economy revs up again, China leaves oil out of retaliatory tariffs and the Turkish lira continues its plunge
  2. In RETAILER NEWS, House of Fraser faces the brink, Topshop’s China relations sour, Poundworld gets a partial last minute reprieve and Ikea opens in India
  3. In INDIVIDUAL COMPANY NEWS, Adidas unveils strong results, Dropbox drops a bombshell and Savills is the latest UK estate agent to have a shocker
  4. In OTHER NEWS, I bring you an unusual potato. For more details, read on…



Japan gets perkier, China retaliates and the Turkish Lira continues its fall…

Japan’s economy revs up again after stalling (Wall Street Journal, Megumi Fujikawa) highlights the return to growth in the April-June quarter in the world’s third largest economy as it grew by an annualised 1.9% after a contraction of 0.9% in the first quarter, which ended Japan’s longest period of consecutive growth for 28 years. The latest figures would suggest that the first quarter was a blip and that Japan is now back on the growth track. * SO WHAT? * Prime Minister Shinzo Abe is coming up for re-election next month to win a new three-year term and this will certainly help his chances. The economy seems to be back on track with only the spectre of Trump tariffs hanging over it. Although wages are rising, consumers appear to be holding back from spending freely, which is resulting in sluggish inflation as the Bank of Japan remains well short of its 2% target.

In China’s tariff turnaround: US crude oil drops off the target list (Wall Street Journal, Chuin-Wei Yap) we see that China has indeed retaliated against the latest round of US tariffs by imposing 25% taxes on $16bn of US imports, but with one notable exception – oil. * SO WHAT? * The Chinese had threatened to put oil on the list as recently as June, so this is a noticeable omission from the latest move. Over the last couple of years, China has become the biggest buyer of US crude oil exports, accounting for 20% of capacity. Some are interpreting this omission as a sign of weakness on China’s part and that their resolve is showing cracks as its economy is slowing (but hey – not by THAT much in the scheme of things!) and its demand for foreign oil continues unabated. China relies on imports for 70% of its energy needs currently, but the International Energy Agency predicts that this could go up to 80% by 2040, so it would be cutting its nose to spite its face if it taxed oil. And if China doesn’t take any oil from America, it will be easy for the latter to find other customers in the



region. There are still many other ways for China to needle Trump – but taxing oil isn’t one of them (well not at the moment, anyway)!

I mentioned the falling Turkish lira the other day and it seems like it is continuing its downward trend in Turkey’s lira hits new low (Daily Telegraph, A Evans-Pritchard) which shows that the currency fell by another 5% yesterday against the dollar, pushing Turkey closer to a full-blown economic crisis as Turkish companies with $220bn of debt got completely hammered. Turkish president Erdogan is at loggerheads with Trump over the arrest of an American pastor being held on accusations of espionage, with Trump threatening sanctions (surprise, surprise) to emphasise his point and Lars Christensen, an emerging markets expert at Markets and Money Advisory observed that “The question for markets is figuring out whether Erdogan is turning into another version of Maduro in Venezuela – disconnected from reality and blaming everything on a global conspiracy – or whether he is more like Vladimir Putin. Putin has always understood that in the end an economic crisis could threaten his rule, and must be avoided”. Turkey’s currency has been sliding for a while now and usually the central bank steps in to raise interest rates making the currency more attractive which in theory attracts buyers and therefore arrests the fall and/or makes the currency bounce back up again. The recently re-elected Erdogan has been vociferous in his opposition to raising rates because he wants them to stay low to encourage businesses to expand etc. and he has been making moves to increase his economic influence by installing his son-in-law as finance minister. Investors don’t like the fact that Erdogan has more sway than the central bank and is getting jittery as a result – a situation that is being exacerbated by the whole Trump/pastor situation.  * SO WHAT? * Dollar exposure via debt is clearly a serious problem in Turkey but there is a wider problem. Emerging markets now have $7.2tn of dollar debt in loans, bond issues and derivatives. Turkey and Argentina are the most exposed, but with the cost of borrowing trending upwards as central banks raise rates from historic lows countries such as Indonesia, South Africa, Lebanon, Colombia and Hungary should be getting nervous as well. BTW, this is a really excellent article which goes into a lot more detail about the problems Turkey is currently facing and I really recommend you read it if you want to know more.



In retailer news, House of Fraser is close to the edge, Topshop sours on its China partner, Poundworld gets a reprieve of sorts and Ikea opens in India….

As far as non-chirpy headlines go, House of Fraser is just 10 days away from collapse (Daily Telegraph, Ben Woods) must be right up there as the company has admitted that it only has until August 20th to secure new funding – or face collapse, potentially taking 17,000 jobs with it. An announcement is expected to be made today regarding any bids. Four bidders table House of Fraser rescue proposal (Financial Times, Jonathan Eley and Javier Espinoza) identifies those in the running who include Sports Director founder Mike Ashley and the billionaire owner of the Edinburgh Woollen Mill Philip Day as well as turnaround specialists Alteri and Endless. At this stage, it seems like Ashley and Day are the more likely contenders, although Ashley seemed to cool in his interest most recently (although maybe this was just a negotiating tactic). * SO WHAT? * House of Fraser is clearly floating towards that troublesome creak and is in danger of losing its paddle, but it seems that Debenhams isn’t that far behind – the latter’s share price is now just a measly 11p, having fallen 74% over the last year. Surely there is a limit to how many cr*p retailers you want exposure to. Ashley already has 11% of HoF and 29% of Debenhams and is danger of being the meat in a sh*t sandwich. Mikey boy certainly likes a challenge! *** STOP PRESS – I’ve just seen a story on Bloomberg that says that the rescue talks have failed and HoF is going into administration. However, I’ve not seen it confirmed on other sources and I’m always wary of the accuracy of Bloomberg’s news as it can get a bit over-excited at times***

There’s more gloom in Green’s rift with Chinese hits Topshop’s global ambitions (The Guardian, Zoe Wood) as it turns out that Sir Philip Green, that fine selfless

gentleman who cares so much about his employees, has parted company with his Chinese franchise partner, putting a bit of a spanner in the works for his Chinese ambitions. Topshop’s parent company Arcadia partnered up with online retailer Shangpin in 2014 that made its merchandise available to Chinese shoppers. * SO WHAT? * In 2016, the two talked about plans to open 80 stores together, but that never materialised and Arcadia is back to the drawing board. China is still a key market for Arcadia, but it is going to have to get its thinking cap on about what to do next.

Irish family saves Poundworld at last minute (The Times, Tabby Kinder) is an interesting story as it tells of an Irish family that agreed to buy 50 Poundworld stores on the last day of trading for the collapsed business. Poundworld had 335 stores in the UK but it went into administration in June after revealing losses of £17m last year. The Dublin-based Henderson family has agreed a deal with the administrators Deloitte to buy the best stores, but we don’t know how much was paid. An agreement has been made in principle and the transaction is likely to go ahead next week. * SO WHAT? * This is a tiny smidgen of good news for the troubled UK retail sector, but it’ll be interesting to see what the new owners do with it.

Yesterday marked a momentous day for flat-pack supremo Ikea as Ikea unpacks first store in India after 12-year struggle (Financial Times, Amy Kazmin) shows the culmination of a $1.5bn investment in developing a retail business in the country as it opened its first store in Hyperabad’s Hitec City. * SO WHAT? * This is a great move strategically, but Ikea faces the challenge of catering for a customer base that is simultaneously demanding and thin of wallet. Still, it aims to expand into other cities, with work already under way on three stores on the outskirts of Mumbai, Delhi and Bangalore as well as launching smaller format stores in more central locations. I think this is great in theory, but success is all in the execution and I think they will have their work cut out. Mind you, if Ikea succeeds, this could be massive, especially if it manages to source more locally. If it does that successfully, I would have thought it could buy more stuff from India generally and supply its stores in other countries as well, thus increasing margins elsewhere.



In individual company news, Adidas races away, Dropbox drops a ball and Savills has a ‘mare…

Adidas investors shrug off €475m Reebok charge (Financial Times, Olaf Storbeck) highlights the group’s 4% sales uptick and profits boost of 17% against a backdrop of a chunky impairment charge relating to its 2016 acquisition of Reebok. Its shares rose by 8.5% on the news as it said that it was on target to meet its full-year guidance of 10% revenue growth. Adidas is the world’s second biggest sportswear maker.

Dropbox investors spooked as pivotal executive steps down (Daily Telegraph, Hannah Boland) says on the one hand that Dropbox announced revenues shooting up by 27% in the most recent quarter – ahead of analyst expectations – but on the other said that its COO Dennis Woodside, seen by many as being instrumental in its successful IPO in March, would be leaving by the end of the year. Shares were down by 10.5% in after-hours trading. Dropbox’s shares have risen a healthy 64% since it floated in March.

Savills’ profits plunge as home sales stall (The Times, Tabby Kinder) is worth mentioning as it is the latest UK estate agent after Foxtons and Countrywide to say that it’s having a ‘mare as profits at the company fell by 18% in the first six months. The figures represented a broad slowdown in the property market as prices have been rising “at their slowest annual rate for five years, which is discouraging homeowners from moving”.



…And finally, in other news…

I thought I’d leave you today with the unusual vegetable in Mutant eight-kilogramme potato that has grown into the shape of a human foot (The Mirror, Laura Forsyth ). Impressive!

As always, thank you for reading Watson’s Daily!