Monday 13/02/23

1. In MACRO & ENERGY NEWS, Taiwan talks balloons and Erdogan targets construction firms while we consider our avoidance of recession and some energy developments
2. In TRENDS NEWS, we look at the return to China, UK pessimism and UK pub closures as Meta considers more cuts, Monzo tracks staff and lawyers’ whopping bonuses dry up while real estate trends evolve
3. In TECH NEWS, we look at the ongoing impact of AI while TikTok’s parent takes on Meta in VR
4. In INDIVIDUAL COMPANY NEWS, NatWest is set to report massive profits and retailer Reserved expands
5. AND FINALLY, I bring you a banana bread hack and a £3 a head Valentine’s meal…

So German inflation falls, the FTSE hits new highs, MSCI gets tough on Adani, Exxon reshuffles, China dumps green ambitions and Eskom woes continue…

📢 I’ll shortly be publishing my annual P/Review where I roundup the news of the year in 2022 and then outline predictions for themes in 2023. Because it’s such a big report 😱, I will be publishing it in stages. There is nothing like this anywhere else, and it will help your understanding of what’s going on enormously so keep an eye out for it! In the meantime, I’ve recorded a special podcast where Ralph Hebgen and I talk through some key themes to watch out for this year. You can listen to it HERE or watch it HERE.

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:

Further to all the spy balloon drama that went on last week, Taiwan reveals Chinese military balloons fly ‘very frequently’ into its airspace (Financial Times, Kathrin Hille) says that Taiwan has reported frequent similar incidents, fuelling concerns that China could be preparing for an attack. The balloons are believed to be collecting atmospheric data for use in radar and missile systems, and the flights are seen as part of China’s extensive military balloon program and build-up of military capabilities. * SO WHAT? * It’s all speculation and posturing at the moment but worth keeping in mind, particularly as relations between China and the US and China and its neighbours remain tense.

Erdoğan targets construction firms as earthquake death toll tops 33,000 (Financial Times, Adam Samson and Ayla Jean Yackley) highlights Turkish President Recep Tayyip Erdoğan’s response to the disaster. He has launched a wide-ranging probe and put out arrest warrants for many developers, who are being blamed for lax enforcement of building standards. * SO WHAT? * The elections are only three months away and they were already expected to be

Erdoğan’s toughest in his two decades in power, so his response to this disaster will be absolutely crucial for any hopes of victory.

In How the economic establishment got it wrong on recession (Daily Telegraph, Szu Ping Chan) we see that the UK economy managed to narrowly avoid a recession in the fourth quarter of 2022, with real GDP growing by 0.01%. This was just £76m more than what was needed to fall into a recession! * SO WHAT? * The UK’s economy performed better than expected, prompting the Bank of England to withdraw its prediction of a recession in 2022 and the Office for Budget Responsibility (OBR) to lift its 2023 growth prediction. That said, the UK’s economy remains 0.8% smaller than before the pandemic, with the OBR focusing on getting more people back to work to lift growth in the March 15th Budget.

The Fight to Define Green Hydrogen, With Billions of Dollars at Stake (Wall Street Journal, Amrith Ramkumar and Katherine Blunt) highlights the battle that companies such as BP and NextEra Energy are waging against renewable-energy companies such as Vestas Wind Systems and Intersect Power to qualify for tax credits for hydrogen in the US. The credits are seen as vital to make clean hydrogen cost-competitive with hydrogen made from natural gas. The rules defining eligibility for hydrogen tax credits are being written by the Internal Revenue Service (IRS) and the Treasury Department and are at the root of fierce debate because they will have a huge effect on project investment decisions and the development of a new industry. The IRS and Treasury are working to finalize the rules in the coming months and all sizes of businesses are trying to position themselves to take advantage of the new rules. * SO WHAT? * The central issue is what types of hydrogen should be classified as “clean” and receive tax credits, as most proposed clean hydrogen projects use machines called electrolyzers that split water into hydrogen and oxygen. If they are run on electricity produced from renewable sources, then the hydrogen is classed as being clean or green. The battle is about making sure that the hydrogen produced is truly green, with some companies pushing for tighter rules and others pushing for looser requirements to give themselves more wiggle room.

Ineos bucks energy crisis to secure €3.5bn for Europe petchem plant (Financial Times, David Sheppard) shows that Ineos has secured €3.5 billion in financing for its new energy-efficient petrochemical facility in Belgium. The facility, known as “Project ONE,” will convert low-cost ethane into ethylene, a key ingredient used in various products. * SO WHAT? * Ineos is a believer in the future of the European petrochemical and manufacturing sector, despite warnings that capacity will increasingly move to Asia and the US. The financing will come from 21 commercial banks and the export credit agencies of the UK, Spain, and Italy, as well as a loan guarantee from the Flemish government. Ineos plans to power the plant with low-carbon hydrogen within the next decade if plans to make the fuel a bigger part of Europe’s energy mix are successful.

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!

Adidas has issues, Pepsi commits, Unilever increases prices, Watches of Switzerland falters, Hermes beats NFTs and there are job losses at Deliveroo, News Corp and Yahoo…

From Apple to VW, CEOs Gradually Returning to China After Its Reopening (Wall Street Journal, Dan Strumpf and Yoko Kubota) is an interesting article which highlights that top execs from multinationals are visiting China again despite strained US-China tensions, as the country reopens. Volkswagen, Apple, Pfizer, and Mercedes-Benz are among the companies sending their executives to China. They are visiting local operations, meeting with local partners, and attending business conferences. * SO WHAT? * Clearly, Western companies’ still want China’s business despite the geopolitical tensions. However, many executives are holding back and waiting for clarity with regard to US policy towards China. US commerce with China has been increasing, but the problem is that progress can quite easily be negated by unpredictable high level actions (like spy balloons, for instance!).

In Rising costs and consumer woes blight BDO business optimism index (The Times, Tom Howard) we see that British businesses remain pessimistic about the economy due to a sharp decline in output last month, rising borrowing costs, increasing probability of a recession, falling consumer confidence and rampant inflation. BDO’s optimism index was in negative territory for the fourth month in a row  and companies in the services sector – including retailers, restaurants, and accountants – were particularly downbeat in January although optimism among manufacturers actually improved! The gloom continues…

In sad, yet unsurprising news, UK pub closures in 2022 near to highest level in a decade (Financial Times, Oliver Barnes) shows that over 500 UK pubs and bars went bankrupt in 2022 – a 56% increase from the previous year, according to analysis of official figures by UHY Hacker Young. The number of licensed venues in the UK has declined by 15% over the past decade, with an average bankruptcy rate of 466 per year. * SO WHAT? * The whole industry has been struggling with high energy, labour, and food and drink wholesale costs. The UK government has said that it will extend its £18bn energy support package for business for another year from April, but at a reduced level of support and a total cost of £5.5bn. The industry is calling for the government to help lower energy costs to current market rates, particularly because many are locked into fixed-term contracts that were signed last autumn when prices were at their peak. The British Beer and Pub Association is calling for an investigation into energy suppliers for malpractice and profiteering.

Meta delays setting team budgets as it plans fresh round of job cuts (Financial Times, Hannah Murphy and Cristina Criddle) shows that the company is delaying finalising multiple teams’ budgets in anticipation of another round of job cuts. The lack of clarity about budgets and headcount has caused disruptions and some staff have complained that work is not getting done as managers have been unable to plan ahead. The company is currently undergoing performance reviews of staff, and further cuts are expected in March. * SO WHAT? * This is all part of Zuck’s plan to control costs under his new mantra of 2023 being “the year of efficiency.” The company is also looking to flatten its organisational structure and remove some layers of middle management to make decisions faster. This kind of thing is deeply unpleasant as an employee though as no-one knows what lies ahead and everyone is just in limbo.

In Monzo tracks staff screen time with slackers called out in meetings (Daily Telegraph, Simon Foy) we see that the challenger bank is monitoring its employees’ screen time, with customer service staff being checked every five minutes to see if they are using their computers! Monzo wants staff to be working on their devices 85% of the day and this “activity” metric is discussed in weekly meetings with line managers. Those who repeatedly fail to meet the target risk being sent to a performance improvement program! * SO WHAT? * The targets come as Monzo, which has around seven million customers, seeks to improve performance and turn a profit. This is the sort of thing investors like to hear but is a nightmare regime for employees to live with! A Monzo spokesperson confirmed that the bank assesses the availability,

not the activity, of its customer support team to help customers but still, you wonder whether lockdown and WFH has resulted in more companies installing this kind of software – and that it’s now creeping more into the office environment.

Lawyers’ six-figure bonuses dry up as job cuts gather pace (Financial Times, Joe Miller and Kate Beioley) highlights the slowing in momentum of big bonuses among associates at US and UK law firms as the legal sector faces a decline in dealmaking. Bonuses reached a peak in 2021, with one firm offering $250,000 to mid-level lawyers who had job offers elsewhere. However, a rise in interest rates has led to a sharp decline in dealmaking and job cuts at firms, and a recent survey found that US lawyers were billing fewer hours than in decades. * SO WHAT? * The bonus thing has already happened in investment banking – and things have gone a step further in this area as we have been seeing a lot of culling. That said, lawyers tend to have a longer “tail” of involvement in deals and so tend not to be subject to the more extreme boom-bust that we see with investment bankers. For now, though, headhunters say that the excessive bonuses and salary hikes seen in 2021 have fallen away – but they also believe that things could pick up again later this year. If you assume that China will be a growth driver and that economies will start to recover in H2, then this could be possible – but I keep saying that a lot will also depend on how the Ukraine war ends as this could really change everything.

Meanwhile, Companies desperate to recruit skilled workers push up salaries (The Times, Tom Howard) shows that British businesses expect to raise pay again this year, with an average increase of 5% in 2023, according to a report from the Chartered Institute of Personnel and Development. The expected pay rise is the highest forecast since the institute’s first report in 2012, as employers struggle to find enough workers in a labour market that remains stubbornly strong despite a potentially slowing economy and rising inflation. The private sector is expected to see a 5% pay rise, while public sector workers are expected to receive a 2% increase (which is why so many in the public sector are on strike!). * SO WHAT? * Companies are seeking to address the labour shortage by up-skilling existing staff, increasing employee duties, or offering higher pay to make jobs more appealing. Employers are also becoming more open to hiring workers who have been out of work due to caring commitments or health conditions. We have already heard of employers embarking on different initiatives to attract employees, like easyJet appealing to the over-45s and Halfords to the over-50s – but it will be interesting to see how many of these initiatives stick when the labour market loosens up.

In real estate news, Retreat of buy-to-let investors laid bare in stamp duty data (Financial Times, James Pickford) shows that the purchase of buy-to-let and second homes dropped by 18% in the last quarter of 2022 due to rising mortgage rates and the nightmare aftermath of the “mini” Budget in September 2022. The share of stamp duty receipts from these types of homes fell from 42% to 35% YoY, the lowest level since the third quarter of 2016, shortly after the surcharge was introduced by then-Chancellor George Osborne! * SO WHAT? * The increase in average buy-to-let mortgage rates and a decrease in the availability of mortgage credit has made it harder for investors to justify expanding their portfolios. Second home buyers, who tend to be wealthier, were also affected by cost of living pressures. However, some see signs of a recovery in activity this year. The lag factor in stamp duty means the next quarter may continue to show a fall in activity.

This is also having a knock-on effect in the rental market as Rocketing rents drive tenants out of London (The Times, David Byers) shows that nearly 100,000 tenants left London in 2022, double the number a decade earlier, as rents rose to unsustainable levels, according to an analysis by Hamptons property consultancy. 40% of renters whose tenancies ended chose to leave the city, compared to 28% just ten years ago! * SO WHAT? * Renters have faced rapid increases as landlords pass on substantial additional costs at a time of soaring inflation, while the supply of properties is at a historic low. Hamptons found rents rose 9.1% YoY in Greater London last month, and by 11.2% and 11% in the Midlands and the north, respectively. The tenants who left were heading overwhelmingly for the commuter suburbs. On the other hand, the number of homeowners choosing to leave London fell by 23% in 2022 to 62,210.

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 property brokers get antsy while UK developers look on the bright side and buyers and renters face challenges and opportunities…

‘Code red’ at Google as Microsoft’s Bing is no longer the butt of the joke (Daily Telegraph, James Titcomb) highlights the competition between Google’s search engine and Microsoft’s Bing. Google’s search engine is one of the most profitable inventions in history, bringing in $163 billion for Alphabet’s parent company last year! However, the recent integration of artificial intelligence engine ChatGPT into Bing has triggered a “code red” response from Google, as its search engine is threatened for the first time in its history. Google’s clumsy response has exposed the growing sluggish nature of the company, which has been facing criticism for its size and risk-averse bureaucracy. The integration of ChatGPT into Bing forced Google to announce its own chatbot, Bard, but it fell flat last week. * SO WHAT? * While we talked about this last week, an important point to remember is that integrating AI could come at a great cost as processing chatbot-style answers requires a vast amount of computing power, which could cost Google up to 2 cents per answer, which is five times more than the current cost of dealing with search queries. You also wonder how the advertising model is going to change as search evolves.

AI song generators threaten ‘lasting harm’ to artists, warns Universal (Daily Telegraph, James Titcomb) Universal Music Group, the world’s largest record label, has warned that the rise of AI-created music, like the ChatGPT-like song generators, poses a threat to artists and could cause widespread harm to the cultural ecosystem without robust copyright protections. The company is concerned about AI-generated material that can use human-created work without compensation and the AI-created music that imitates certain artists and genres. * SO WHAT? * Universal Music Group’s chief digital officer, Michael Nash, called for respect and fair compensation for artists when their works are used to train AI, warning against relaxing copyright laws to attract AI development. The UK government had planned to relax copyright laws to allow AI to mine works for text and data, but reversed the proposals after opposition from the music industry. I think that this an extremely interesting area that is in the very earliest of stages. It seems to me that many of those working in the creative industries will need to

think about how their material is used and how it can be monetised because, on the one hand, it is desirable for the bots to have as much access to quality data as possible – but on the other, humans who create the content on which AI’s results are based need to be fairly compensated as well. I would say that graphic designers, for instance, will also be particularly vulnerable.

On a positive note, AI used to process a flood of information (The Times, Katie Prescott) shows that AI isn’t all bad as the UK’s Environment Agency has commissioned Aecom, the engineering group, to use artificial intelligence to predict the severity and extent of floods by scanning and mapping data from historical photographs. The AI technology analyses archive images of flooded areas and works out their location, taking an average of 15 seconds per picture. The data is used to judge the length and severity of flooding in an area and could be used in the future in the conveyancing process for house searches and by the insurance industry. The software has been tested on a small part of the archive and the agency plans to roll it out across its entire database. Things like this really can be game-changing, don’t you think?

In TikTok’s Parent Takes On Meta in Battle for Virtual-Reality Market (Wall Street Journal, Meghan Bobrowsky and Stu Woo) we see that ByteDance, the owner of TikTok, has acquired a share of the virtual-reality headset market via its acquisition of Pico, a Chinese VR headset maker. Pico has become a fast-rising number two to Meta in the global market for VR headsets. Meta held 90% of the market share about a year ago, but its market share fell to 75% by Q3 of 2022, while Pico’s market share more than tripled to 15% in the same time period. * SO WHAT? * The VR headset market is expected to become a $16 billion industry by 2026 and competition is expected to get more intense with the entry of new players such as Apple and Microsoft. Meta really needs to get a move on to create a more appealing VR environment for its toys! I do wonder which area has higher barriers to entry – making the hardware that gives access to virtual worlds, or making the software that enables and enhances the experience. I would suggest that not making the hardware is perhaps best on a cost basis but then again hardware can be a nice way of tying people in to YOUR products.

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!

Affirm has wobbles, Credit Suisse has a ‘mare, bid rumours circle Standard Chartered, Samsung focuses on upscale, used EV demand rises and Tesla hits the shorts…

In a quick scoot around some of today’s other interesting stories, NatWest poised to report biggest profits since 2008 financial crisis (The Guardian, Kalyeena Makortoff) shows that yet another high street bank has been raking it in thanks to the higher interest rate environment! NatWest, the UK bank that is still 45% state-owned, is expected to unveil its largest annual profit since the 2008 financial crisis. Given the current economic environment, NatWest is expected to have set aside £434 million for potential defaults. * SO WHAT? * The rise in profits is more than likely going to spark speculation over whether the government will sell more of its stake in the bank.

Meanwhile, Reserved signs set to go up across high street (The Times, Isabella Fish and Jessica Newman) shows that Polish fast-

fashion retailer, Reserved, is planning to open several new stores in London and 400 stores throughout Europe by the end of the year! The company is planning to open stores in the Westfield Stratford and Brent Cross shopping centres in London and is in talks about sites in cities including Manchester, Liverpool, Leeds, and Newcastle. * SO WHAT? * The plans were delayed due to the pandemic and rising costs since Russia’s invasion of Ukraine, but the company is now pushing into more western markets due to reduced competition. The CEO of LLP, the parent company of Reserved, believes that entering the British market is “easy” due to many big retailers scaling back – not to mention the availability of decent sites as other retailers have shut down. It’s good to hear that other retailers are looking to fill the space left vacant by other retailers who have been sold off, bought out or just plain gone under. They will need to be very good at identifying their target market and coming up with an appealing price point given the pressure on budgets 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!

…in other news…

I thought that this was something I’ve not heard before – Foodie shares ‘weird but life-changing’ hack for delicious banana bread (The Mirror, Amber O’Connor) – and I’m a fan of this stuff, so will be trying this! And as Valentine’s Day is tomorrow and budgets are being squeezed I thought this was pretty impressive: ‘I tried Aldi’s £3 per head Valentine’s Day meal – it wasn’t what I expected’ (The Mirror, Danielle Kate Wroe). Amazing!