Friday 13/12/19

1. In MACRO & OIL NEWS, the Conservatives win the UK election, Trump agrees to a limited China trade deal and Saudi Aramco hits $2tn
2. In RETAIL-RELATED NEWS, Dixons Carphone says it’s back on track, Superdry raises margins – but also an accounting error (what is it with accountants these days??), Fuller’s chief wants business rates changed and UK property fund withdrawals hit highs
3. In INDIVIDUAL COMPANY NEWS, China car sale projections look anaemic and Waymo buys an Oxford AI firm
4. In OTHER NEWS, I bring you an unusual Christmas tree…

So the Conservatives win the UK general election, the US and China agree to a limited trade deal, and Saudi Aramco manages to get the $2bn valuation it craved…

UK election results: Boris Johnson lauds ‘day many of us dreamed of’ after Tory win (Financial Times, Philip Georgiadis, Myles McCormick, Sarah Provan, Charlotte Middlehurst and Adam Samson) heralds a big win for Boris Johnson and the Conservative party. In a speech this morning at Conservative HQ, BoJo said “The people of this country have given us tonight a huge great stonking mandate” and president Trump said that the victory leaves the US and UK “free to strike a massive new trade deal” after Brexit. Cue loads and loads and loads of comment/post mortems about the high profile losers. * SO WHAT? * This will at least give BoJo a freer hand to implement his policies but there are still massive macroeconomic challenges ahead and huge scepticism that he will be able to execute Brexit by his own deadline of December 2020. I do, however, think that this slight movement towards a bit less uncertainty will unlock a lot of pent-up investment, which should be a positive for jobs and the property market among other areas.

Trump agrees to limited trade deal with China (Wall Street Journal, Lingling Wei, Bob Davis, William Maudlin and Josh Zumbrun) heralds a breakthrough on the trade front as the US said it would reduce current tariff rates on Chinese goods and kick the threatened new tariffs into the

long grass in return for Beijing committing to buy $50bn-worth of agricultural, energy and other goods in 2020. If Beijing doesn’t follow through on its promise, the original tariffs would come back into force. This “phase one” deal is likely to lead to a “phase two” deal that would tackle trickier issues like forced-tech transfer, subsidies and the conduct of Chinese state-owned firms. * SO WHAT? * This is a positive development and it just goes to show that you can’t believe what Trump says until something is actually signed (and Tweeted??) given what he said recently about the prospect of an agreement! Still, I think that American farmers will be particularly relieved as this deal is likely to boost their exports to China. Markets rose on the news and will probably bask in a bit of a rosy glow for now.

Saudi Aramco reaches $2trillion threshold but doubts persist (The Times, Emily Gosden) highlights more share price gains for the newly-floated state-controlled oil company as it briefly broke through the $2tn valuation barrier. To put this in perspective, Apple is the next biggest listed company with a valuation of around $1.2tn. * SO WHAT? * It seems that pretty much everyone outside the region thinks that the world’s largest oil company is way overvalued. However, that does not mean to say that the share price will crater. If there is enough feelgood factor (and strong incentives NOT to sell), the “success” could continue for a while yet. The danger is that this could blow up in everyone’s faces at any moment if doubts start to creep into investors’ minds. As I have said before, there’s a LOT riding on the success of Saudi Aramco and the regime appears to have enough money and will to keep the party going. If they can keep it going long enough, they may well make another tranche of shares available – and I think that foreign investors could potentially be inclined to buy into this as a momentum investment if nothing else.

Dixons Carphone says it’s heading in the  right direction, Superdry is the latest to announce an accounting error, Fullers wants a change in business rates and UK property fund withdrawals go crazy…

Dixons Carphone ‘on track’ despite profits drop (The Times, Ashley Armstrong) highlights the electrical goods retailer’s belief that its recovery is still going to plan despite a massive 60% fall in profits. The owner of Currys, PC World and Carphone Warehouse blamed it on weaker mobile phone sales but maintained its guidance for the full year (i.e. they don’t expect things to get too much worse from here). * SO WHAT? * Chief exec Alex Baldock is trying to boost the appeal of the company’s offering by building credit capability and having more interactive gaming areas in its stores but I don’t think that things are going to start REALLY picking up again until 5G gets better coverage and 5G phones start coming out. I suspect that many are holding fire on upgrading their phones until that happens – and I wouldn’t expect that to kick in in a meaningful way until maybe the second half of next year.

In Superdry rings up £4.2m loss – and reveals accounts error (Daily Telegraph, Laura Onita and Simon Foy) we see that Superdry fell into loss, partly because of an “isolated” accounting error linked to the costs of importing stock and moving items between its warehouses last year. It also expressed concerns about its Christmas sales if high street rivals decided to discount prices heavily to shift product. Its share price fell by 3.5%. * SO WHAT? * What’s going on with accountants at the moment?? Clearly Ted Baker’s problem is more serious, but you do wonder why this is happening. If there aren’t any more incidents like this then it’ll all disappear no doubt, but you do wonder if this is the start of a worrying trend. It’s one thing to have badly-performing companies reveal something like this – but it would arguably be even more damaging if a more successful retailer had similar issues.

Fuller’s chief calls for shake-up of business rates (Financial Times, Alice Hancock) shows chief exec Simon Emeny of UK pub group Fuller, Smith & Turner has called for the incoming government to cut business rates and sort out the immigration system. The industry’s trade body, UK Hospitality, has also been pushing for changes to business rates saying that the industry as a whole overpays by over £2bn per annum versus its combined turnover. * SO WHAT? * Join the queue, buddy! Everyone and their dog is begging for business rates to change – with retailers being the main ones to voice their complaints. The Conservatives said in their election manifesto that they will be cutting business rates – so they may be in luck.

Now UK property funds suffer worst week since Brexit referendum (The Guardian, Patrick Collinson) doesn’t look like a retail story at first glance but the fact is that the poorly performing retail sector is giving retail property valuations a real kicking, which has had a hugely damaging effect on UK property funds. The recent move by M&G, one of the UK’s biggest asset managers, to block withdrawals from the fund to give them time to sell assets to raise money, caused a massive spike in demand for redemptions for property funds in general. Data from Calastone, a global fund transaction network, showed that in the week since M&G’s “gating”, investors have taken out an additional £193m out of UK property funds – £60m of which was withdrawn within the first 24 hours! Aberdeen Standard’s £1.3bn property fund is thought to be one of the worst affected by the redemptions as it has the most exposure to retail property assets, such as shopping centres and malls. * SO WHAT? * Although M&G’s move was clearly a shocker, I do wonder whether there will be some investment opportunities here as there will no doubt be funds that aren’t quite so exposed to retail property but got sold off nevertheless. Also, in Aberdeen’s case, it was already in the throes of selling off its Moor shopping centre in Sheffield (which could go for £89.4m) that could give them a useful cash buffer to help cover redemptions. In addition to this, retailers could get a boost if Boris Johnson follows through on business rate cuts – but I don’t think that will kick in immediately. Still, there may be value here for those who are prepared to do their homework and find out where the assets of these funds actually are.

China car sales are projected to weaken and Waymo buys into Oxford…

In direct contrast to the slightly optimistic tone of what French car parts maker Valeo said the other day, Further drop in Chinese car sales alarms makers worldwide (Daily Telegraph) cites the latest forecasts from the China Association of Automobile Manufacturers which show that sales in the world’s biggest car market could fall by 2% in 2020 after an 8% fall this year and a 3% fall in 2018. * SO WHAT? * Clearly, this is bad news for auto makers who are craving any good news about car sales as global activity 

continues to be sluggish. OK, so maybe Valeo is sort of on the right track in that the rate of decline may be falling – but it’s still falling nonetheless!

Waymo buys Oxford AI firm in drive for research hub (Daily Telegraph, Matthew Field) highlights the acquisition of Latent Logic, an AI firm that was set up by Oxford academics, which builds extremely realistic road and car simulations that can be used to train AI software for driverless vehicles. There were no details about how much was paid, but the company had been valued at £8m at a fund raising round earlier this year. * SO WHAT? * Nice for the academics and early investors and is obviously a big endorsement by a major player in the filed. I think this is quite tiny in the scheme of things but shows that there is continued appetite in improving tech capabilities in driverless cars.

And finally, in other news…

Not many sleeps now till Christmas! Given that, I thought you might find this rather unusual Christmas tree quite interesting: Airport builds Christmas tree out of confiscated items (UPI, Ben Hooper https://tinyurl.com/r7d2pvd). This would be quite the conversation piece I think…