Monday 04/09/23

1. In MACRO NEWS, US interest rates could have peaked, China’s slowdown causes ripples in Asia and Hunt expects an inflation blip
2. In CONSUMER, RETAIL & LEISURE NEWS, consumers get hit by fuel price rises, M&S keeps improving, Aldi expands in the US and Bill’s is looking good
3. In REAL ESTATE NEWS, 50,000 households fall into negative equity, student housing shortages reflect wider problems, divorcees get new home loans and developers fear a slump
4. In MISCELLANEOUS NEWS, Chinese banks support Russian comrades, Chinese battery factories move forward and Arm backpedals on its valuation
5. AND FINALLY, I bring you some impressive push-ups…

So US interest rates could be peaking, China’s slowdown hits Asia and the UK might see an inflation blip…

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Cooling US economy gives Fed breathing room on interest rates (Financial Times, Colby Smith) contends that Friday’s US jobs report – which showed unemployment rising in August – could give the Fed more reason to keep interest rates on hold as it could be a sign that the economy is cooling down. This comes just three

weeks before the next interest rate meeting and commentators are now saying that there are fewer reasons for the Fed to keep hiking rates aggressively. An inflation report published last Thursday also reflected a slowdown in price rises, which would also suggest a cooling off.

China’s economic slowdown reverberates across Asia (Financial Times, Edward White and Song Jung-a) shows that China’s slowing growth is causing ripples in the Asian region thanks to weakening consumer demand and a loss of momentum in manufacturing. South Korea is one of many exporters to China who’ve noticed China’s malaise and its exports in July dropped at their sharpest pace for over three years. Japan and Taiwan are also feeling the effect while Hong Kong and Singapore could be most impacted as Chinese demand makes up 13% and 9% of GDP respectively. * SO WHAT? * Things have actually got so bad in South Korea that the country’s finance ministry has put together a special task force to follow what’s going on in China and it has even gone as far as introducing a new national holiday in an effort to boost consumption. Even Australia, which has weathered a period of trade tensions with China quite well, is now feeling the pain as the Aussie dollar has hit 10 month lows to the US dollar. While China’s property sector remains in the doldrums, the economy is likely to remain underwhelming as this sector traditionally sucks up raw materials and machinery.

Then in Expect inflation blip but our plan is working, says Jeremy Hunt (The Guardian, Jasper Jolly) we see that chancellor Hunt is expecting a “blip” in inflation this month but maintains that the UK is on track to halve inflation by the end of the year. We’ll just have to wait and see!

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!

Fuel prices hit drivers, M&S moves forward, Aldi grows in the US and Bill’s is looking good…

Drivers hit by one of biggest monthly jumps in fuel prices (Daily Telegraph, Ruby Hinchcliffe) shows that drivers have had to absorb the fifth biggest monthly rise in fuel prices in 23 years in August! It was blamed on the impact of production cuts by Opec+ nations which were intended to bolster the oil price. As if things weren’t bad enough already!

On a happier note, Sparks flies: how frumpy Marks & Spencer became fashionable again (The Guardian, Michael Segalov) is effectively an ode to M&S’s recovery from four years in the wilderness to being on the brink of FTSE100 re-entry. Basically, the business has modernised under new management, bought better and made its supply chains more efficient. Its improving digital capabilities have also played a role in the turnaround. Estée Lauder part of M&S’s make-up (The Times, Isabella Fish) highlights another positive development as M&S is clearly building on its successful partnership with Clinique and added Estée Lauder to its growing array of third-party brands. * SO WHAT? * I’ve followed M&S for more than 25 years and over that time I’ve seen major revamps that have heralded new dawns, new thinking and new formats. It’s great to see that the high street stalwart is making strides but at the same time, I can’t help wondering that it seems to be turning into a department store by stealth – and investors HATE department stores! Yes, it’s good to have a roster of third-party brands to keep the offering fresh and exciting for its customers but I do wonder whether investors are going to realise that it’s becoming more and more like the new Debenhams-with-food and kill its rating accordingly. Having said that, you could argue that M&S is just moving into space vacated by the likes of Debenhams and House of Fraser albeit with a better offering. Don’t get me wrong – I’m really glad it’s doing well. I just worry that investors will simply fall out of love with it and that its potential return to the

FTSE100 could be short-lived because they put it on a “department store” rating rather than an “exciting retailer” rating (these aren’t official classifications, BTW, but I think you see what I’m getting at!).

Meanwhile, Aldi heads down new aisle with US supermarket shopping spree (Financial Times, Laura Onita and Alexandra White) shows that Aldi is expanding in the US. It recently announced that it would buy Southeastern Grocers (which owns the Winn-Dixie and Harveys chain of supermarkets) to take on America’s larger supermarkets. Aldi plans to have 2,400 stores in 38 states by the end of the year and it is one of the fastest-growing supermarket chains in the US right now. * SO WHAT? * Aldi’s relative success in the US is particularly impressive as the country has been the graveyard of many a UK supermarket chain – just ask Tesco (with its Fresh & Easy chain), M&S (Kings), Sainsbury’s (Shaw’s Supermarkets) who all had to sell out eventually. Even rival Lidl has had a very tricky time with a revolving door of senior management and the glacial pace of expansion of its store portfolio. You would have thought that timing is good for Aldi’s expansion as consumers continue to be very cost-conscious but given its turnover of $37bn in the US versus Walmart’s at $370bn for 2021, the German discounter still has plenty of room to grow! There may be more opportunities to expand if the merger of Kroger and Albertsons goes ahead and the enlarged group has to make disposals…

Then in leisure news, Slimmed-down Bill’s is ready for more (The Times, Dominic Walsh) we see some rare good news in the world of mid-market casual dining as the owner of Bill’s, restauranteur Richard Caring, says it’s back on track after shedding some of its estate and sorting out its finances. In the six months to the end of June, Bill’s saw underlying earnings swing from a loss of £100,000 to a profit of £2.45m. I hope the momentum will continue here as good news in this highly competitive sector is pretty thin on the ground 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!

Negative equity becomes a thing again, student housing highlights weaknesses elsewhere, divorcees get a new home loan and developers expect the worst…

‘Cost of owning crisis’ as 50,000 households fall into negative equity (Daily Telegraph, Szu Ping Chan) cites the latest findings of the National Institure of Economic and Social Research (“Niesr”) which show that August’s sharp drop in house prices has put 50,000 households into negative equity, which is when a property is worth less than the value of the mortgage attached to it. The drop in prices was the sharpest since July 2009 as the world was still digesting the aftermath of the financial crisis. * SO WHAT? * Negative equity makes it harder to sell a property or to remortgage as homeowners are forced to make much higher payments when they come to the end of their fixed rate agreements. Although there are currently far fewer households in this position than they were in the 2007-8 financial crisis, the situation looks like it is going to get worse from here. Ouch.

Student housing: dorm storm means young ones are the stung ones (Financial Times, Lex) contends that the current shortage of student accommodation is indicative of the broader ructions in the buy-to-let sector that has been seeing an exodus of landlords not able/willing to pay higher mortgage costs. Although demand remains strong – a state of affairs that looks likely to continue –

the Purpose Built Student Accommodation (PBSA) sector looks likely to add rooms at a rate that falls short of demand. * SO WHAT? * Until 2020, PBSA developers added over 30,000 student beds per year on average. However, given that the cost of building an ensuite room have jumped from £60-65,000 to around £95,000 in the space of a few years, you can see why they are only planning on adding 12-15,000 beds over the next few years. The shortage looks likely to continue…

Then in Divorcees offered 100pc home loans (Daily Telegraph, Ruby Hinchcliffe) we see that Skipton Building Society is going to offer divorcees zero deposit mortgages if they’ve not missed rent payments in the last 12 months and if their mortgage payments won’t exceed their rental payments. * SO WHAT? * This will be welcome news to some but also goes to show how lenders are thinking creatively to boost their loan books.

Meanwhile, Developers fear they are on the brink of new housing slump (The Times, Tom Howard) highlights upcoming results from Barratt Developments and Berkeley as being under particular scrutiny because they will be seen as bellwethers for the overall market and the London market respectively. The mood is not good and is one shared by the construction industry in general. Initial hopes at the beginning of the year of a recovery look likely to take longer to come to fruition, particularly as Crest Nicholson reported a weakening in sales activity over July and August.

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!

Chinese banks help their Russian counterparts, Chinese battery companies expand and Arm cuts its target valuation…

In a quick scoot around some of today’s other interesting stories, Chinese lenders extend billions of dollars to Russian banks after western sanctions (Financial Times, Owen Walker and Cheng Leng) shows that four of China’s biggest banks have lent Russian banks billions of dollars in a bid to promote the renmimbi as an alternative global reserve currency to the dollar since Russia invaded Ukraine. This huge move came as western banks moved out of Russia and sanctions were imposed. ICBC, Bank of China, CCB and ABC have upped their collective exposure from $2.2bn to $9.7bn in the 14 months to March, according to Russian central bank data! * SO WHAT? * I guess that the only way we’ll see whether these efforts to push the renmimbi stick is what happens when the war is over. I would not be surprised if it did stick and whether countries that want to reduce reliance on the US will increase their exposure as well!

Electric Cars Power China’s Economic Hopes as Internet Titans Take a Back Seat (Wall Street Journal, Clarence Leong, Liza Lin and Rachel Liang) shows that EV and battery makers are now emerging as the main drivers of China’s economy, overtaking the influence of the tech sector which has been a major driver for the

last decade or so. They have sucked in more venture capital money and seen rising exports over the last few years and are now being funded by foreign rivals, such is their domestic dominance. The likes of BYD and CATL have been huge success stories and China’s battery plant rush raises fears of global squeeze (Financial Times, Harry Dempsey and Edward White) underlines China’s sheer dominance in the field of EV batteries. * SO WHAT? * China is accelerating its financing of battery plants via massive state subsidies and bank lending and it looks likely to gain massive market share – as per what happened in steel, aluminium and solar panels – as a result. The breakneck speed of expansion has even prompted Xi Jinping to say that there was actually a risk of over-expansion. As far as I can see, if everyone sticks with the same battery technology that we have now, it will be very difficult to get anywhere near China’s capability. This is why I think it is imperative that other technologies – such as hydrogen fuel cells etc. – continue to be pursued to potentially even out the playing field.

Then in UK chip designer Arm ‘cuts target valuation before Nasdaq listing’ (The Guardian, Jasper Jolly) we see that Arm’s owner, SoftBank, is recognising the inevitable and lowering its target valuation for Arm to $50-54bn from the previously-touted $64bn ahead of its upcoming IPO. * SO WHAT? * The problem is that Arm’s massive dominance in smartphones just isn’t as hot as anything related to AI these days. Still, the IPO is likely to be the biggest since Rivian’s float in November 2021 and SoftBank could still hang on to as much as 90% of Arm post-offering anyway.

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 good to be inspired. Take a look at this lady doing incredibly difficult press-ups/push-ups, for instance. Her focus is amazing (if possible, turn the sound on).