Friday 10/11/23

1. In BIG PICTURE NEWS, China falls into deflation, Germany makes energy moves, sugar gets expensive, S4 Capital suffers, used EV prices weaken and Taylor Wimpey calls the low
2. In CONSUMER, RETAIL & LEISURE NEWS, US auto loan delinquency rates rise, petrol pump price falls see a delay, mortgage arrears rise (but there’s a new cheap mortgage deal), WH Smith profits almost doubled, B&M benefits from Wilko’s collapse and Flutter puts it all on the US
3. In TECH NEWS, Apple is dealt a tax blow, Nvidia develops chips for China, SoftBank takes a big hit and Arm waits for an AI boost
4. In MISCELLANEOUS NEWS, AstraZeneca moves into obesity drugs, Wizz Air cuts profit forecasts and Sony wobbles on sales targets
5. AND FINALLY, I bring you the making of an impressive advert…

So China falls back, Germany tries support, sugar prices rise, S4 Cap’s in a pickle, used EV prices fall and Taylor Wimpey calls the bottom…

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

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In China falls back into deflation despite economic stimulus (The Times, Jack Barnett) we see that China has fallen back into deflation, according to the latest figures published by the National Bureau of Statistics. Demand continues to be weak, resulting in Chinese inflation coming out at -0.2% for October, which was worse than market expectations of -0.1%. The headline number was pushed into negative territory thanks to a big reduction in pork prices, which have fallen by 30.1% over the year to October. Beijing has already implemented a stimulus to boost consumer spending and business investment but this will take time to filter through given the fragility of consumer confidence at the moment.

Meanwhile, in Europe, Germany to subsidise industrial energy costs (The Times, Oliver Moody) shows that the government announced a multi-billion Euro package to slash electricity costs for its manufacturers over the course of the next five years via a mix of tax cuts and subsidies. The idea of this is to give German manufacturers wiggle room to deal with the “higher-for-longer” interest rate environment. * SO WHAT? * This is interesting, but not surprising given the way that German manufacturers are suffering at the moment. The interesting thing will be whether this measure will be judged as giving them too much of a competitive advantage. Given that the EU is currently looking into “unfair” subsidies given to Chinese companies who will potentially be flooding the European market with cheap product, you wonder whether they will turn a blind eye to the Germans. Perhaps the Germans can argue that the subsidy is OK because the country has had more difficulties than most transitioning away from Russian gas. Even if this happens, I don’t think that the Chinese will see it in the same way…

Then in Sugar: rain pain ensures price will cane it for a while (Financial Times, Lex) we see that the price of the commodity,

which has boomed by 41% over the last year, is now eating into consumer budgets – particularly in developing economies with rising populations. El Niño is largely to blame although individual countries have their own issues. Brazil had decent output, but heavy rain and congestion at major ports has made shipping it out problematic. India and Thailand have experienced dry weather which has decimated sugarcane yields, so India has had to reduce its exports. While sugar producers such as San Martinho and Cosan have benefitted from higher sugar prices, it looks like consumers around the world are going to have to continue to pay!

In business trends news, Crisis deepens at Sorrell’s S$ as sales plummet (Daily Telegraph, James Warrington) shows that the share price of the digital advertising agency has suffered a 15% fall in sales in Q3 as the slowdown in the advertising sector continues, adding that its full-year profit margins will also take a hit. The company’s share price dropped by a whopping 24% on the news and it now has a valuation of “just” £340m, which is way down from the £5bn high it reached in 2021! * SO WHAT? * As I always say, advertising is sometimes taken as a leading indicator of the direction of the economy – and clearly things aren’t great. I must say that I would have thought “traditional” advertising (e.g. on TV, in newspapers and magazines etc.) would suffer more than digital advertising, but it seems that the ad spend slowdown from Big Tech companies is definitely taking its toll at the moment.

Then in Price of used EVs now same as petrol models (Daily Telegraph, Howard Mustoe) we see that slowing demand for EVs has depressed their prices to the extent that they are now pretty close to their petrol equivalents! A lot of this is down to high electricity prices, which has meant higher running costs. Car website Auto Trader has found that the EV prices has dropped across the board. * SO WHAT? * Although new car sales have been supported by corporates buying fleets (about 50% of new car sales in the UK come from companies), the second-hand market is almost entirely made up of individuals who are more sensitive to affordability. I would argue that the majority of early adopters have already bought in this space and that everyone else is waiting for economic conditions to improve, electricity prices to fall and/or EV prices to ease to more realistic levels.

Meanwhile, Taylor Wimpey’s profit update suggests worst is over for housing sector (Financial Times, Joshua Oliver) shows that the UK housebuilder said that it expects annual operating profits to come in at the high end of its guidance, perhaps indicating a bottoming out in the housing sector. * SO WHAT? * This is particularly interesting because it comes as the Bank of England paused interest rates and Persimmon highlighted a “strong pick-up” in home sales in October while the latest figures from both the Halifax and Nationwide showed house price increases for the first time since spring. Could the housing market be getting back on track?? The CEO of Taylor Wimpey said that the real test would be how things go early next year following the traditionally quiet period at the beginning of the year.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

US auto loans go bad, petrol prices drag, mortgage arrears rise while a new product appears, WH Smith smashes it, B&M prospers and Flutter ups the stakes in America…

Consumers continue to face headwinds and Auto loans: rising delinquency means investors should buckle up (Financial Times, Lex) shows that US consumers who splashed out on cars over the pandemic are failing to pay their loans in increasing numbers. Ally Financial, Capital One, Wells Fargo and JP Morgan Chase are the main players in vehicle lending in the US and while auto loans were big business over the pandemic, they are now feeling the double-whammy of rising loan delinquencies and falling used car prices (so if they repossess the vehicles, their subsequent resale value still won’t cover the debt) – and that means that owners who took out big loans to buy cars over the last few years now owe a lot more than their cars are currently worth! Right now, the percentage of auto borrowers who are at least 90 days late on their loan payments is 2.53% in Q3, which is the highest rate for over 13 years! Not great for the lenders (and obviously not great for the consumers either).

In the UK, Petrol stations ‘not passing on fall in oil prices’ (Daily Telegraph, Chris Price) cites research from the CMA which shows that fuel retailers have been “taking advantage” of drivers by letting the pricing of petrol lag falls in the oil price. The RAC said that it was “very disappointing”, but I’m sure that consumers find it even more so. Whether something is going to be done about it is another question!!! In property, Sharp rise in landlords and homeowners in mortgage arrears, data shows (The Guardian, Rupert Jones) cites the latest data from the banking trade body UK Finance as saying that the number of buy-to-let mortgages in arrears has doubled in the space of a year while the number of homeowners falling behind on payments has also increased. That said, New mortgage deal falls below 5% in ‘watershed moment’ for UK homeowners (The Guardian, Rupert Jones) highlights the psychological breach of the 5% barrier as Nationwide has just launched a two-year fixed rate mortgage at 4.99%, a reduction of 0.25% on the previous rate, which is the first time a rate has dropped below 5% since early summer. The catch is that to get this rate you have to have a 40%+ deposit or equity stake. A 4.99% rate will also be made available to existing customers looking to switch to a new deal. For comparison, the average new two-year rate fell to 6.22% yesterday. * SO WHAT? * Consumers are having a very hard time of it at the

moment and lenders are clearly being increasingly careful about which customers they focus on. I think it’s a case of both sides having to batten down the hatches and weather the economic storm as best they can for now. It doesn’t sound particularly positive for the UK property market though, despite what I said above!

In retail news, Travel recovery still has a way to go, says WH Smith boss (The Times, Max Kendix) shows that profits at WH Smith have almost doubled over the course of one year as it has benefitted from rising numbers of travellers shopping at its airport convenience stores. Pre-tax profits were in line with market expectations while group revenues were driven largely by WH Smith’s travel business (the one that has stores at railway stations and airports) and the CEO was positive about its prospects. The UK high street business was a bit of a drag while its overseas business boomed! Will it ever sell its high street business I wonder??

Then in Wilko collapse boosts B&M profit forecasts (Daily Telegraph, Hannah Boland) we see that discounter B&M jacked up its profit forecasts for the full year following an influx of customers following the Wilko collapse. B&M bought 51 Wilko stores in the aftermath, which have now been rebranded. * SO WHAT? * This is all part of the company’s plans to expand its presence in the UK. It currently has 712 stores but plans to hit 1,200 within three years!

In leisure news, Forecast leaves Flutter with a lot riding on America (The Times, Patrick Hosking) shows that the group that owns Paddy Power and Betfair warned that its profits in non-US operations this year would come in at the bottom end of previous expectations. It also revealed that it has chosen the NYSE for an additional listing and may switch its primary listing from London to New York. That said, it posted a 13% increase in total revenues over Q3. * SO WHAT? * The NYSE  listing will probably take place in Q1 of next year, slightly later than planned, and it will cancel its listing on the Dublin Euronext exchange. FWIW, I think that it would make absolute sense for the company to change its primary listing (subject to shareholder approval) given that the growth prospects over there are way better than they are over here! Although it would become yet another British company to leave the FTSE100 to live the American Dream, it would qualify for inclusion in US indices, including the S&P500. After its major expansion in the US post its purchase of FanDuel, 42% of its shareholders are now US institutions…

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Apple is dealt a tax blow, Nvidia tries to get around sanctions, SoftBank takes a big hit and Arm hopes for an AI boost…

In Apple dealt blow at top EU court over €14.3bn tax bill in Ireland (Financial Times, Javier Espinoza and Jude Webber) we see that an advisor to the European Court of Justice said that the landmark decision quashing the EU’s order for Apple to pay a €14.3bn bill in back taxes “should be set aside”. Although this opinion isn’t binding, it does have some sway. An ECJ ruling is due next year. Will EU Competition Commissioner Margrethe Vestager get the last laugh after all??

In Nvidia develops AI chips for China in latest bid to avoid US restrictions (Financial Times, Qianer Liu, Eleanor Olcott and Tim Bradshaw) we see that Nvidia has produced three new China-specific chips that meet its growing demand for advanced chips on the one hand but satisfy US sanctions on the other. This comes just three weeks after the US restricted sales to China of advanced chips that can be used to make AI systems. * SO WHAT? * You can’t blame Nvidia for doing this given the restrictions being imposed by the American government! Nvidia still needs to make money! There’s a real danger here that US restrictions will blow up in its face later as China increases efforts to make its own

advanced chips so that it doesn’t have to rely on anyone else! Then it will have built a robust Chinese champion that will then no doubt take on the Americans – and could win! The drama continues…

Then in SoftBank posts unexpected $6.2bn loss after WeWork bankruptcy (Financial Times, David Keohane and Kana Inagaki) we see that SoftBank Group posted a massive – and unexpected – loss in its Q2 results shortly after one of its biggest ever bets, WeWork, filed for bankruptcy earlier this week. It was the fourth quarter in a row of loss and the gains from Arm’s IPO did not make up for the pain. Analysts had expected a small profit. * SO WHAT? * The company continues to look out for AI targets and get its performance back on track! No doubt everyone is hoping that this will draw a line under the whole debacle. That said, Arm: newly listed chip designer waits for AI revolution (Financial Times, Lex) shows that it could be some time before Arm brings home the bacon for SoftBank (which still has a 90.6% stake in the company) as Arm announced downbeat forecasts yesterday. Arm has tried to tout itself as being part of the AI revolution as it is moving more into cloud computing, self-driving cars and AI infrastructure – but the fact of the matter is that its bread-and-butter is smartphones, which aren’t doing that well at the moment!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

AstraZeneca joins the obesity race, Wizz Air cuts forecasts and Sony wobbles…

In a quick scoot around some of today’s other interesting stories, AstraZeneca makes big push into weight-loss market with obesity pill deal (The Guardian, Julia Kollewe) shows that the pharmaceuticals giant is wading into the weight-loss drug market, signing an exclusive licence agreement with Chinese company Eccogene, based in Shanghai, for an obesity and type 2 diabetes pill that is in the early stages of development. Eccogene’s drugs are still in the testing phase but if successful, the new drug could be taken once a day as a pill – which is pretty attractive given that current treatments on the market are injected, usually once a week! * SO WHAT? * This is a potentially amazing development – but it’s still a way off hitting the market (we’re talking years here). However, it’s good that the company is doing something positive to ride the wave of anti-obesity drugs, which are a huge market now. There will, I’m sure, be other purchases like this to come in the sector as everyone tries to get a piece of the, ahem, pie. Great news for investment bankers in the pharmaceuticals space…

Wizz Air cuts profit forecast as groundings threaten growth plans (Financial Times, Phillip Georgiadis and Simeon Kerr) shows that

the budget airline had to cut its annual profit forecasts due to an “unprecedented operational challenge” (there’s an engine problem with a lot of their planes which could affect things for 18 months) and ongoing geopolitical uncertainties. That aside, the company reported strong trading over the summer period and the current quarter is shaping up well. * SO WHAT? * It’s not ideal but there’s not a lot Wizz Air can do about this situation. On the plus side, it does seem to confirm what other budget carriers, like Ryanair, are saying about the robust nature of leisure travel at the moment.

Then in Challenging goal for PlayStation owner Sony (The Times, Ben Martin) we see that Sony admitted that it might not hit its console sales target this financial year. The company reported weaker-than-expected Q3 results yesterday thanks to the poor performance of its image sensor business, which is a key division for the company, but it still lifted its overall guidance for annual sales in the year to next March. Console sales could be boosted, however, by a the launch last month of the new slimmer version of the console in its first major update to the PS5 since it was launched in November 2020.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

It’s always fun to see behind the scenes – and this is really impressive! It’s amazing how much thought and effort goes into this ad!