Friday 21/07/23

1. In CONSUMER, RETAIL & LEISURE NEWS, UK consumer confidence drops but Premier Foods thinks price rises have peaked while the CMA looks into it. We look at house prices, mortgages and rents, M&S gets rebuffed while consumers’ desire for holidays powers EasyJet, AMC ditches higher premium prices and Fuller’s satisfies
2. In BUSINESS & EMPLOYMENT TRENDS, America’s IRA attracts foreign firms, grain price rises look set to boost input costs, UK businesses still struggle to recruit and Legal & General positions for a recession while, in the US, jobless claims drop
3. In M&A NEWS, Blackstone sees an end to the deal drought but an investor throws a spanner in the Lookers/Alpha deal
4. In INDIVIDUAL COMPANY NEWS, we look at what’s next for Netflix and a British renewables blow
5. AND FINALLY, I bring you a cheesy (yes, you read that correctly!) espresso martini…

So UK consumer confidence falls, we look at the challenges they face and spending trends…

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Confidence takes a hit as consumers suffer reality check (Daily Telegraph) cites the latest reading of the GfK’s consumer confidence index which showed a sudden collapse in July as households digest the cumulative effects of interest rate rises. In addition, GfK’s major purchase index – which reflects confidence in buying big ticket items – also dropped sharply. However, there is some good news for consumers in Premier Foods says no more price rises planned this year (Financial Times, Madeleine Speed) as the company that owns brands including Mr Kipling and Bisto says that it doesn’t plan to increase prices, which confirms recent newsflow from many other sources – both from companies and other surveys and indicators. However, just in case, CMA targets big food brand owners after pricing concerns (Daily Telegraph, Daniel Woolfson and Hannah Boland) shows that our competition regulator is going to investigate companies like Unilever and Mondelez to see whether there’s any truth in the theory that consumers are being overcharged after supermarkets were not found to be guilty of “greedflation”, an explanation of which comes in Why grocers have been cleared of profiteering (Daily Telegraph, Daniel Woolfson). Essentially, although supermarkets were found to be overcharging drivers for fuel in 2022, they were not found to be ripping customers off on food and drink prices. In fact, the CMA found that profits had actually fallen across the sector as retailers took some of the hit to their margins in order to protect the consumer. The average margin drop from 3.2% to 1.8% is pretty considerable, I’d say (although it doesn’t feel like this when looking at the receipt of my weekly shopping bill!). The CMA concluded that competition between retailers kept margins tight. * SO WHAT? * As we all know, things are tough for consumers out there. Despite all the interest rate increases and predictions of doom and gloom from many quarters, UK consumer confidence seemed to breeze along relatively unfettered for the first half of the year, but it seems that the GfK survey shows that cracks are finally appearing. I think that the supermarkets greedflation thing was always a red-herring given the state of supermarket competition in this country but the government and regulators had to be seen to do something about it. I’m not sure I’d be quite so confident about the food conglomerates that are now under the spotlight in terms of greedflation, though! It will be interesting to see what the conclusion is.

Consumers are also facing other hurdles. House prices to slump 12pc and not rebound, economists warn (Daily Telegraph, Melissa Lawford) shows that ratings agency S&P Global reckons house prices will fall by 12% from peak to trough by the close of 2024 and will take time to recover as mortgage holders and buyers will face higher borrowing costs “for the foreseeable future”. That said, Mortgage rates in first fall since May (Daily Telegraph, Melissa Lawford and Ruby Hinchcliffe) highlights a potentially important movement as the average fixed-rate for both two and five-year fixed mortgages weakened a touch, notable because it’s the first time that they’ve fallen together since the end of May. The rates are still high, though! Then on the rental side of things, Private rents outside London have risen by a third in four years, data shows (The Guardian, Rupert Jones) cites Rightmove stats which show

that private rents have hit all-time highs. Despite rent rises hugely outpacing inflation, Rightmove said that it’s not taking long for rentals to get snapped up. For the stat-lovers out there, the average advertised private rent outside London is now £1,231 pcm while the figure in London stands at an eye-watering £2,567! * SO WHAT? * Disposable incomes are getting squeezed from all sides meaning that there’s little (or nothing) left over for many. We saw the other day that credit card usage is on the rise, but that can’t go on forever because those debts will be called in at some point and the longer credit is used the more consumers are going to have to pay for it in this high interest rate environment. Surely at some point soon people are just going to stop spending, which will lead to falling inflation (although we did see a surprise drop already this week). The problem would be if this went on for too long as this could result in recession. It seems that, at the moment, the US looks like it might manage to turn things around without falling into a deep recession so maybe that could happen here (although we have the added banana skin of Brexit and the resulting red tape and labour shortages to deal with).

In retailer news, Marks & Spencer refused permission to demolish and rebuild Oxford Street store (The Guardian, Sarah Butler) highlights disappointing news for the retailer (but a triumph for the campaigners and Michael Gove). Apparently, retrofitting is not an option – so you’d think that M&S will just sell up and leave a massive hole on the street. * SO WHAT? * Well it looks like in this 🍆-swinging contest, Gove won. The problem, though, is that if M&S left, it would add to the increasingly gaping hole that has already been started by the departure of House of Fraser and Debenhams. Can M&S be bothered to come in with alternative plans??

So what are consumers spending their money on? Europe heatwave fails to deter holidaymakers as easyJet demand booms (The Guardian, Joanna Partridge and Gwyn Topham) shows that at least some of it is being spent on holidays as easyJet posted a record pretax profit for the quarter, coming in above market expectations despite strike disruption in Europe but Travel: heatwaves will force scorched earth strategies on tour groups (Financial Times, Lex) reckons that although only relatively small numbers of travellers are being put off by the current heatwave more people may think of going to cooler countries like Iceland and Norway in future if such weather conditions become more common. The problem is that  tourist operators like Tui are heavily invested in the affected places, so although it’s OK for now, they may be caught out further down the line. * SO WHAT? * This is a global warming problem so potential actions could include investing more in cruise ships (because they can move!) and/or investing more in developing cooler countries as weather conditions change.

In leisure news, AMC Drops Plan to Charge More for Better Seats (Wall Street Journal, Denny Jacob) will be music to the ears of cinema-goers as the American owner of Odeon (and other brands) has decided to ditch a plan to charge different prices for different seats while Fuller’s toasts sales boost and buys back shares (The Times) highlights a strong performance by the pub group that benefited from higher footfall from tourists and office workers. Those of you who drink cocktails and/or rosé should celebrate the role you played in helping it recover from the pandemic 😁. The main risks going forward are more inflationary impact on consumers, suppliers, wages and the property market! So not much then 🤣.

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!

America’s climate law boosts foreign firms, grain prices look set to hit costs, Legal & General bets on a recession and the US economy sees a fall in jobless claims…

The Biggest Winners in America’s Climate Law: Foreign Companies (Wall Street Journal, Amrith Ramkumar and Phred Dvorak) is a really interesting article which takes a look at the effects of last year’s Inflation Reduction Act. So far it has prompted a whopping $110bn in investments in US clean-energy projects, according to WSJ analysis but it seems that around 60% of the companies that actually benefited from the massive pot of money created by the IRA were mainly from South Korea, Japan – and China! * SO WHAT? * Although this piece of mis-named legislation was intended to build and strengthen supply chains for green energy industries in the US, the fact of the matter is that the expertise in this is mainly outside America, hence the influx of foreign companies. It is interesting to note that Ford is building a $3.5bn battery factory with tech from China’s CATL (although Ford’s at pains to say it will own 100% of the factory and that it is just licensing CATL’s tech!). I guess the main difficulty here is finding the companies with the right expertise that don’t have (obvious) China connections because that would just mean the Americans handing money to the Chinese, which is something they say they want to avoid.

In other business trends news, Grain prices rise after Russian pullout of Black Sea deal sparks food crisis fears (The Guardian, Joanna Partridge) further highlights what I said earlier this week about the effect of the Russians pulling out of the UN deal to allow Ukraine exports pass through the Black Sea and that wheat – and other commodity prices including those of corn and soya beans – are continuing to rise. * SO WHAT? * Given that, until the Russians

ditched the deal, wheat and corn prices had fallen by around 14% and 20% respectively since January, you would think that this is bound to a) cause shortages and b) result in increased prices for end products, which will put further upward pressure on global inflation rates.

Meanwhile, closer to home, Businesses held back by struggle to recruit staff (The Times, Patrick Hosking) shows that, according to the most recent research by the Recruitment and Employment Confederation (REC), employers continue to face difficulties in filling vacancies. * SO WHAT? * This would imply that wages aren’t going to be coming down much any time soon – which means that inflation is likely to hang around longer because the more people get paid, the more they spend – and the more they spend, the more that prices increase, which is a major cause of inflation!

Then in Legal & General investment chief bets on UK recession (Financial Times, Mary McDougall) we see that the UK’s biggest asset manager is position itself for a recession by buying bones and selling equities. Despite recent signs of inflation losing momentum, it says that the labour market is still tight and that the effect of the interest rate rises hasn’t yet fully filtered through – so there’s more misery to come! Ouch…

Back over the Pond, US economy holds firm as jobless claims fall (The Times, Callum Jones) shows that unemployment benefit claims in the US have fallen unexpectedly, something that the FOMC is going to have to take into account when it decides interest rates next week. Some commentators warn others not to read too much into jobless claims in July and August because the extent of car-makers’ (and other manufacturer) annual shut-downs makes the readings more volatile than they otherwise would be. Anecdotally, there is an upward trend in Google searches for “unemployment benefits”…

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!

Blackstone sees light at the end of the tunnel while Lookers faces a hurdle…

There’s good news for investment bankers (and other related advisers!) in Blackstone predicts end of deal drought as US inflation fades (Financial Times, Antoine Gara) as the president of the world’s biggest alternative asset manager reckons that we’ve reached peak pain in inflation and that M&A is going to pick up. CVC Capital Partners said yesterday that it had raised €26bn for the biggest-ever private equity fund as a dealmaking war chest while CEOs of both Goldman Sachs and Morgan Stanley recently indicated that they thought a turnaround was in sight. Although there is perhaps an element of all of these parties talking their own book, the fact that they are all saying pretty much the same thing at

roughly the same time would suggest that a turnaround really is in the offing.

Meanwhile, Lookers sale to Canada’s Alpha Group hit by investor revolt (Daily Telegraph, Howard Mustoe) highlights a bit of drama in the proposed takeover of Britain’s biggest car dealership. Constellation, which owns just under 20% of the shares in Looker, is kicking up a stink (but not saying why) and says that it would vote against the deal. Given that Lookers needs to get 75% of shareholders to support the deal, this latest development makes it seem likely that the whole thing could collapse and Lookers may remain independent after all. Surely Constellation is just angling for Alpha Group to put in a higher bid…

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!

We look at what’s next for Netflix and experience disappointment in UK renewables…

In a quick scoot around some of today’s other interesting stories, Netflix: password sharing cutback provides shortlived gain (Financial Times, Lex) just follows on from the news about Netflix benefitting from higher subscriber numbers and emphasises that the boost from password-sharer becoming proper subscribers will just be temporary. Ad revenues are still in the early stages but one thing it could do is get rid of monthly subs and offer only annual or 18-month subscriptions to tie people in…

Then in Giant British offshore wind farm shelved (Daily Telegraph, Matt Oliver) we see that Swedish state-owned energy giant Vattenfall has decided to postpone plans to build a major wind farm off the coast of Norfolk as rising inflation just impacted the costs to such an extent (they are up by 40% since the agreement was made!) as to make it commercially unviable. * SO WHAT? * The Boreas project has now been suspended. What a shame! Mind you, this might play into the hands of Danish company Orsted, which is lobbying the UK government for more money for its own project. Maybe Orsted can threaten that it could go the same way as Vattenfall unless it gives them more subsidies… 

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…

I have to say that I think this sounds soooooo wrong, but then again I have yet to try it: Espresso martini fans divided over expert’s recommendation to add cheese to cocktail (The Mirror, Amber O’Connor). Apparently, the “parmesan espresso martini” is the real deal! The thing is, I don’t know whether I could bring myself to sully a drink that I actually really like – it would be such a waste! What do you think??