Monday 11/03/24

1. In MACRO, OIL & ENERGY NEWS, Biden’s economic rating ebbs away, Saudi Aramco pays up despite oil price weakness, cheap power deals are on offer in the UK but the SMR decision has been postponed
2. In BUSINESS & EMPLOYMENT TRENDS NEWS, China goes lukewarm on Apple and Tesla, Russia stands to benefit from the Red Sea problems, New York vacant office space exceeds that in London and a slowing UK jobs market puts pressure on the Bank
3. In FINANCIALS NEWS, hedge funds threaten an Indian withdrawal, Abrdn has a ‘mare and EY staff get frustrated
4. In MISCELLANEOUS NEWS, CATL booms, Nintendo plans another movie and we look at how fashion retailers can fend Shein off
5. AND FINALLY, I bring you a ridiculous sandwich…

So voters think Biden’s meh, Saudi Aramco pays out and UK energy’s a mixed bag…

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:

Biden’s economic rating with voters flatlines despite improving outlook (Financial Times, Lauren Fedor) shows that Americans are feeling increasingly confident about the economy, but that’s not being reflected in Biden’s approval ratings for his handling of the economy. This news came just as the old man kicked off his run for re-election. * SO WHAT? * This is not good for Biden’s campaign. Despite US GDP growth last year being the best of any large advanced economy, inflation falling faster, unemployment flirting with record lows and the S&P hitting record highs this year, this just isn’t translating into belief in the man himself. This man needs a “rizz” boost – and quickly!!!

Then in Saudi Aramco increases dividend to nearly $100bn despite oil price falls (Financial Times, Tom Wilson and Ahmed Al Omran) we see that the state-owned oil giant raised its dividend by 30% year-on-year, powered by its second-highest annual profit ever. This performance particularly impressive given that it occurred despite lower oil prices and state-led production cuts. * SO WHAT? * The world’s biggest oil producer seems to be doing just fine in a world that is supposedly transitioning to renewables and reducing reliance on non-fossil fuels! The company is also looking at increasing its gas output, investing in LNG projects outside Saudi Arabia and lithium extraction using the water production from their wells.

Meanwhile, Cheap power for UK battery plants to curb China control (Daily Telegraph, Matt Oliver) shows that the government is going to start offer cheaper power to energy-intensive manufacturers (e.g. metal refiners and EV gigafactories) under its British Industrial Supercharger scheme from next month. The idea is that it’ll help boost production of key minerals used in things like wind turbines, EVs and defence technologies. China has the stranglehold on the global refining as it accounts for 70% of the

world’s cobalt refining, 70% of nickel, 60% of battery-grade lithium and 90% for some rare earth elements. Clearly, cutting out all China product will be impossible so reducing reliance on it is going to be the next best thing (although if China really got shirty about things, everyone would be in a right pickle!). * SO WHAT? * I must say that I probably sound somewhat anti-China at times but the thing is that it still amazes me how the world has allowed China to become so incredibly dominant in tech that we’re supposed to be using in the future! I cannot emphasise enough how important I think that it is for the world to develop alternative technologies that do not rely on areas where China has near-complete control. It seems to me that everyone has basically sleep-walked into this situation because they assumed that the geopolitical risks were minimal and that going for the cheapest prices in areas that required huge investment was the way to go. We have effectively created our current situation! If China decided that it wanted to invade Taiwan tomorrow – and threatened to cut off the world’s supply of EV battery materials if anyone objected (among other things) – I don’t think there’s much we could do about it as we have already been alienating China over the last few years thanks to US influence and sanctions. This has meant that China has had to boost its own technological capabilities in a number of areas (e.g. semiconductors and telecoms equipment etc.). I’m sure we’d all like to think that China still needs the west, but more alienation and shifting political sands means that this is decreasing. Ultimately, I think this will mean that the west will have to adopt a more conciliatory tone where China is concerned IF it still wants to have any kind of serious presence in the region (but more of that in the next section!).

There’s bad news for mini-nuke hopefuls in Great British Nuclear delays decision on mini-nuke sites (Daily Telegraph, Matt Oliver) as the public body that is responsible for overseeing the “nuclear renaissance” has decided to postpone a decision on where the first mini-nuclear reactors (SMRs) will be sited until after the next election. It had planned to select SMR designs for public support by the spring and then award contracts for development by the summer. The selection of sites has now been postponed to June, which means that the actual awarding of contracts will be virtually impossible to squeeze in before the next general election.  * SO WHAT? * Apparently, this slowdown has occurred due to rising concerns that rushing the process could expose the final decision to legal challenge, although some of the bidders have also asked for more time. Rolls-Royce in particular has been pressuring the government to get a move on re the decision making, so they will be finding this particularly frustrating…

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!

China goes cold on Apple and Tesla, Russia gets a Red Sea boost, New York office space vacancies exceed London and a stalling jobs market puts pressure on the Bank…

China’s love affair with Apple and Tesla has rocky patch (Financial Times, Ryan McMorrow, Nian Liu, Gloria Li and Michael Acton) highlights the current tricky patch that Apple and Tesla are going through as they are being caught up by domestic rivals in China and not helped by increasingly patriotic buying. Both companies are experiencing weakening market share and sales and have had to resort to discounting to prompt interest. The move away from Apple has been particularly sudden as a ban was imposed last year on state employees using the iPhone (for national security reasons) at the same time that local champion Huawei produced its own viable smartphone alternative. * SO WHAT? * This is concerning for both Apple and Tesla because China is their biggest single market, accounting for 19% and 22% of total revenues respectively in the last few fiscal years. Interestingly, this has been at least partly responsible for the two companies’ share price falls this year (Apple’s seen a 9% drop and Tesla’s seen a 28% fall so far), which have made them the worst performers in the so-called Magnificent Seven group of stocks. Other big companies are feeling the chill from China as a recent McKinsey report highlighted a growing preference among Chinese consumers for local brands. Tesla’s going to take a hit later this year, though, as it is going to lose a 15% preferential tax rate that will still be available to local makers. It looks to me like non-Chinese companies wanting to do proper business in China are going to have to be increasingly careful and perhaps ensure that their supply chains can withstand changes in the whims of the authorities and consumers there.

Meanwhile, Russia’s rail boosted by demand to move goods to Europe after Red Sea attacks (Financial Times, Robert Wright) shows that troubles in the Red Sea are boosting demand for the movement of goods from Asia to Europe by rail via Russia. Germany’s DHL said that requests to transport product via Russia have jumped by about 40% since container ships had to go the long way round while RailGate Europe reported an increase in demand of 25-35% and and Rail Bridge Cargo said that cargo rail

traffic on this route had increased by 31% versus the same time last year. * SO WHAT? * Some logistics providers, such as Kuehne & Nagel and Maersk insist that they’ve been avoiding all rail routes through Russia since the Ukraine invasion. Still, needs must and other providers won’t be so picky given the massive demand that there is out there.

Then in More empty office space in New York than in London (The Times, Tom Howard) we see that corporate renters are shedding office space at an unprecedented rate, according to data from CoStar, as working patterns continue to evolve. The among of vacant office space in both London and New York has increased since lockdown and the WFH trend but London’s market has now started to settle down while the number of vacancies in New York continue to climb. * SO WHAT? * At the moment, 9.2% of London office space is now vacant (versus just over 5% pre-pandemic) whereas New York is now experiencing a rate of 14% (this was below 9% pre-pandemic). Apart from the whole WFH trend, this difference is also down to the “flight to quality”, where businesses have sought out more modern spaces with better amenities and London has more of this sort of space than New York does. CoStar reckons that this gap will continue to widen to the extent that it thinks that by 2026, almost 20% of New York offices will be empty versus London at just over 12%. It seems that NY developers are adopting a wait-and-see approach regarding their next moves and there aren’t many major urban planning proposals in the pipeline that are likely to change the current situation.

Back home, Stalling jobs market puts pressure on Bank to cut interest rates (The Times, Jack Barnett) cites a report by REC-KPMG which highlights a sudden drop in the pace of wage growth and slowing demand for staff. The Bank of England is monitoring the situation on both of these things – and the sharpness of the fall will feed into the argument that inflation has now been tamed enough for our central bank to cut interest rates sooner rather than later. The report said that the rate of growth in starting salaries has dropped to its slowest pace in almost three years. The risk is that if the Bank of England takes too long to cut interest rates it could force the country into (prolonged) recession (as we’re already in recession).

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!

Hedge funds are in a huff over India, Abrdn has issues and EY staff feel unsettled…

Hedge funds threaten to pull India investments due to regulatory crackdown (Financial Times, Costas Mourselas and John Reed) shows that hedge funds are pulling a hissy fit and “threatening” to pull investments in India due to new rules being implemented by Indian markets regulator Sebi that will force all big foreign investors – including hedge funds – to reveal their end investors. * SO WHAT? * The new rules goes against international practice and will severely blunt any potential “attacks” on Indian companies (which is presumably the whole idea, although that’s obviously not the official line! Sebi says this is part of an effort to “better understand the ultimate investors buying Indian stocks”. 🤣 Haha. My 🍑). We saw such an attack last year when Hindenburg Research launched a short seller attack on the Adani group of companies with a damning report that wiped billions of dollars off the value of the Adani group of companies. Some mainstream banks were initially worried that they’d be caught up in this, but I’d wager that the banks aren’t the real target here. Adani is BFF with Modi and so you’d think that there’s something going on here with Modi trying to protect him (although this is complete speculation on my part) although there is also a legit part of this where India wants to better track money coming into it via neighbouring countries, including China. I’m not sure that hedge funds will really WANT to withdraw from such a promising market, but if these rules are tightly enforced it will make things much more difficult. Maybe they’ve already pulled out and want to drive prices lower so they can invest at a cheaper price 🤣.

Then in Abrdn cuts jobs, costs and investors confidence (Financial Times, Emma Dunkley and Sally Hickey) we see that

CEO Stephen Bird, who described himself as a “futurist” when he took on the top job in September 2020, is scrambling around to cut costs and drum up new revenue streams as one of the UK’s largest remaining asset managers tries to develop new revenue streams to mitigate the outflow of assets to rivals and low-margin passive funds. His original aim was to cut costs and raise income by growing wealth management and selling more investments directly to customers. * SO WHAT? * This plan worked initially, but the wheels have fallen off as costs are still high, the share price has dropped by a third and it has underperformed versus its peer group. Many are now calling for a change in leadership. I wonder whether this “futurist” can see whether he’s still got a job or not in six months…

In Staff in EY’s deals unit hit out at bosses after job cuts and sales slump (Financial Times, Simon Foy) we see that employees at its strategy and transaction business have, in a survey, criticised bosses for a lack of transparency and for allegedly making misleading comments about a recent redundancy round. Unsurprisingly, morale is low and staff have been frustrated by how management has handled the layoffs. * SO WHAT? * Clearly this is a hangover of the failed attempt of EY to separate its accountancy business from its consultancy business and the overall lack of dealflow. EY’s not alone in wielding the axe – others in the Big Four (and beyond) have been reducing headcount due to the lack of deals. As I have said before, I think that there are already signs that the flow is improving – and when that happens I would expect many employees to jump ship. Wages would probably have to go up again to stem an outflow, but I would have thought that would probably be easily absorbed by rising revenues from more deals.

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!

CATL jumps, Nintendo wants another movie and we look at how rivals can stand up to Shein…

In a quick scoot around some of today’s other interesting stories, CATL Shares Rise After JV News, Morgan Stanley Upgrade (Wall Street Journal, Jiahui Huang) shows that the Chinese EV battery giant’s share price boomed by 14% on news that it would collaborate with Xiaomi and BAIC Motor on a new factory that will build advanced battery cells. CATL’s CNY510m investment will buy it a 51% in the JV. According to the latest stats from China’s Automotive Battery Innovation Guidance, CATL was China’s #1 EV battery maker in January. * SO WHAT? * This article also said that a Morgan Stanley buy note on the company prompted the share price rise but I have to say, as an ex-broker, that is highly unlikely most of the time 😁. Still, the report said CATL could be “a cash cow in the long term” and that the company would benefit from a new generation of massive production lines that would improve cost efficiencies and return on equity. BTW, when you ask someone “why did such-and-such’s share price go up” and get an answer along the lines of “[insert name of big investment bank here] published a research note on [whatever company]”, it is usually code for “I don’t know” 🤣. I used to fall for this “explanation” in my innocence when I first started in the industry but I learned this pretty quickly!

Meanwhile, Nintendo Plans New Super Mario Bros. Movie (Wall Street Journal, Kosaku Narioka) shows that Nintendo and Universal Pictures announced plans to release a new film in a follow-up to last year’s successful “The Super Mario Bros. Movie”. It is scheduled to be released in April 2026. * SO WHAT? * This is good news as last year’s film helped to shift Super Mario software titles. It did announce plans last year to release movies based on its humungous back catalogue of characters and games given their revenue-enhancing qualities so it’s good to see some concrete plans. This should time nicely with the release of the next Switch console, which is scheduled to be released early-ish next year. It’ll give it time for the inevitable lack of supply of consoles to calm down and provide a nice boost.

Then in Shein’s fast fashion rivals may find stores are their best defence (Financial Times, Lex) we see potential ways that “bricks-and-mortar” retailers can fight back against Shein. The article suggests fewer numbers of bigger and more appealing stores could help – this is something that Zara owner Inditex is already doing – as it helps to improve sales per square metre and allows them to display a fuller range, which means that shoppers are more likely to spend more per visit. Also, such retailers can optimise the relationship between online and offline retail to enhance sales across the board. Fun fact: according to a report from Shopify, web traffic on a retailer’s website can jump by almost 40% in the quarter after a brand opens a new store! How long can Inditex continue its winning run?!?

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’ve never been to New York (I’ve always wanted to, though! I’ll get there someday 👍) but apparently this is the place to go if you’re feeling a bit peckish 🤣! This sandwich is just ridiculous!