Friday 18/01/19

1. In MACROECONOMIC NEWS, Germany raises Brexit concerns and Japan’s economic data looks dodgy
2. In TECH NEWS, Germany looks at shutting Huawei out of 5G and Apple supplier TSMC expects a slowdown
3. In CONSUMER/RETAIL NEWS, credit card borrowing looks likely to fall while retail gloom continues with a £1 shopping centre and N Brown but Primark provides some cheer
4. In INDIVIDUAL COMPANY NEWS, Hitachi shelves the Welsh nuclear plant, Netflix announces new highs for a subscriber increase, Whitbread slims down to being a hotel operator, Lotus starts production in China and Morgan Stanley misses the boat
5. In OTHER NEWS, I bring you some funky ramen. For more details, read on…

So Germany gets antsy about Brexit and there’s a flaw with Japanese economic data…

Prepare for post-Brexit trade rupture: German business leaders (Daily Telegraph, A Evans-Pritchard) signals concerns over in Germany about Brexit. Dieter Kempf, head of the German Federation of Industry (BDI), warned that “A chaotic Brexit is now getting dangerously close to happening…our companies are looking into the abyss”. Clemens Fuest, head of the respected IFO Institute in Munich said that “Both parties should now return to the negotiating table and modify the agreement so that it is acceptable to all sides”. * SO WHAT? * Given that Germany accounts for over half of the EU’s £95bn goods surplus with the UK and that our market is its most profitable market for their cars (with profit margins way above those in China), you can understand why they aren’t looking forward to the prospect of this profit tap being turned off in ten weeks. Having said that, there is no indication of a softening from the European side and neither side will want to look like they’re giving too much away.

Still, if rumblings like these spread, this may create some wiggle room for the current agreement.

Simple statistical error puts Japan economic data in doubt (Financial Times, Robin Harding) is probably a bit of a storm in a teacup but worth mentioning as errors have been found with the nation’s wage data going back to 2004. Basically, wages have been understated because 20 million people have not contributed enough to their unemployment insurance.  * SO WHAT? * This has rocked the establishment and revealed cracks in the way Japan collects data as this revelation comes shortly after a sizeable gap between GDP data sources was highlighted. The problem stems from the fact that Japan’s stats come from a variety of sources that come up with different conclusions. At the end of the day, the current shortfall is marginal, but if they get people to pay higher contributions now to make up for it, this could end up curbing individual spending power until it gets paid back depending on how quickly the government wants to get repaid. Fortunately or unfortunately, depending on how you look at it, Japanese wage growth has been incredibly sluggish in this time period so at least this means that the amounts involved should be manageable.

Germany is the latest country to give Huawei a good kicking and TSMC announces a downbeat outlook…

Germany looks to ban Huawei from 5G (Financial Times, Guy Chazan and Robert Wright) shows that Germany is joining the US and UK in making moves to stop (or at least, severely limit) China’s Huawei from supplying its next generation mobile phone network. Spectrum licences are going to auction this spring and telecoms companies will need to know who they can or can’t deal with to build the network, so this is a crucial development. * SO WHAT? * This is a significant move and represents a major U-turn for Berlin, which has thus far been more circumspect in the face of US ranting about Huawei. The main issue here is that there are increasing concerns that Chinese groups – such as Huawei – could be ordered by Beijing’s intelligence services to build back doors in their systems so that they can access sensitive information. This is turning out to be 

a major headache for the company – and it looks like it will get worse.

Apple chipmaker TSMC sees slower growth ahead (Financial Times, Edward White) continues the downbeat newsflow relating to Apple these days as the company that supplies core processor chips for the newest Apple and Huawei smartphones is projecting a major fall in revenue growth for the first quarter of 2019. TSMC’s chief exec CC Wei highlighted a sudden drop in high-end smartphone demand, a dramatic fall in demand for chips used in cryptocurrency mining and a worsening global growth outlook as factors behind the projected 22% fall in revenues versus the previous quarter. * SO WHAT? * Both Apple and Samsung Electronics have recently blamed a China economic slowdown for downbeat forecasts, but I would also add that punters are getting jaded with smartphones that are increasingly expensive whilst only offering incremental improvements as well as a broader economic slowdown in Europe. As I have said before, I don’t think 5G is really going to make much meaningful difference this year BUT if bendy phones are released by mainstream manufacturers, consumers may be tempted to upgrade once more and break out of this smartphone rut.

Credit card borrowing looks set to fall while there are more retail woes (apart from Primark)…

Credit card borrowing looks likely to fall following big drop in mortgage lending (The Guardian, Richard Partington) cites Bank of England statistics which predict that borrowing on credit cards will fall to their lowest levels since 2007 as households try to cut borrowing as we head into the uncertainty of leaving the EU. The figures also point to further weakness in mortgage lending as banks prepare for a no-deal Brexit. Unfortunately, it is looking very much like this period of limbo could be extended into the middle of 2019 given the various defeats the government has suffered on Brexit-related votes. * SO WHAT? * The Bank of England has been trying to reduce debt levels over the last year or so as flexing the plastic has resulted in borrowing surpassing levels last seen before the financial crisis. However, the problem is that if the pendulum swings too far the other way that it starts to have a negative impact on economic growth as people just stop spending.

Doom and gloom continues with £1 shopping centre highlights retail crisis (The Times, Patrick Hosking and Greig Cameron) highlighting a Scottish shopping centre in Kircaldy being put up for auction for an eye-catching reserve price which some are saying is another nail in the coffin for UK retailing. As Miles Gibson, of property consultant CBRE put it, “It’s an extreme case. It’s the first time I can remember a starting price so low for a property of this type. But it is symptomatic of the difficulties facing the sector”. Lord Oakshott was even more dramatic about

it when he said “This is stark evidence that many shopping centres are obsolete in their current use. Frankly, many have a negative value”. The mall (called The Postings) has suffered from the ongoing onslaught of online retailing as well as competition from a more modern and attractive local rival called the Mercat (simples!). * SO WHAT? * I think this is just a one-off and, by the sounds of things, this place is in need of a decent revamp/complete redevelopment. Still, the price is eye-catching and may serve as a warning to other landlords of ageing shopping malls.

In other retail news bits today, Ignoring web sales helps Primark to buck high street trend (The Guardian, Sarah Butler) heralds some good news for the UK’s biggest clothing retailer (in terms of volume) as it managed to increase sales whilst reducing discounting over Christmas by focusing on its shops and continuing to stay away from the internet (it still doesn’t sell online). John Bason, FD at Primark’s owner Associated British Foods, cited a combination of low prices, good stock control and individual fashion hits as being the main factors behind its success. He added that “Not having the cost of servicing home delivery does allow us to have these lower price points. I know people love the convenience of that but the cost around it is massive”.

However, Shine comes off plus-size retailer (The Times, Deirdre Hipwell) brings retail back down to earth with N Brown (the owner of brands such as Jacamo, Simply Be and JD Williams) reporting a tough festive season. Shares in the company fell by 12% on the news as the market digested news of its particularly weak catalogue-focused business, which includes Marisota, Figleaves and High & Mighty.

Hitachi abandons its Welsh nuclear plant, Netflix announces solid subscriber growth, Whitbread slims down, Lotus starts production in China and Morgan Stanley misses the boat…

Hitachi pulls the plug on £16bn Welsh nuclear plant (Daily Telegraph, Jillian Ambrose) puts a big question mark over the future of UK energy as the Japanese conglomerate decided to abandon the £16bn Wylfa Newydd plant that would have supplied around 6% of the UK’s electricity. This comes only three months after plans to build a £15bn nuclear power station at Moorside in Cumbria collapsed. * SO WHAT? * Something drastic needs to be done here either by burning more fossil fuels in the short term and/or upping the spending considerably in terms of renewables – but I suspect that this will just get put on the backburner for the moment given Brexit…

Netflix reports paid customers rise on strength overseas (Wall Street Journal, Joe Flint and Micah Maidenburg) shows that the company managed to add 8.8 million paying subscribers in the final quarter of 2018 exceeding both their own and analyst estimates. * SO WHAT? * This is great, but investors are getting increasingly worried

about the sums of money they are spending on content and the impact on revenues and profits.

Whitbread’s stalling profit takes shine of shares payday (Daily Telegraph, Oliver Gill) highlights Whitbread’s first major announcement since selling its Costa Coffee business to Coca-Cola. Whitbread looks rather different now than it used to when it was once simultaneously a brewer, restaurant owner, gym operator, pizza franchise and coffee barista with now just the hotels business, Premier Inn, remaining. Detractors think that it is now a one-trick pony that will suffer more according to the vagaries of the wider economy as demand tends to move in line with it and that it could now be vulnerable to takeover given that it is now only in one area.

Further to what I was saying yesterday about foreign companies overexpanding into a weakening China market, Lotus to start production in China under new owner Geely (Financial Times, Sherry FEi Ju and Tom Hancock) sounds like a good move (it’s the first “prestige” brand to have production in China) with bad timing (falling vehicles sales overall) and Poor Morgan Stanley results end Wall Street winning streak (Financial Times, Robert Armstrong) shows that the US bank didn’t manage to join the banking fun bus I mentioned yesterday due to the lack of a consumer banking business and weak trading revenues.

And finally, in other news…

Although most of us can’t get to this place easily, I thought I’d share this with you because it looks really amazing: A glow-in-the-dark ramen shop makes food that looks like something out of an alien world (Insider, Lucy Yang https://tinyurl.com/y9ua8plq). I hope you have a great weekend!