Monday 18/09/23

1. In MACRO & OIL NEWS, China has issues, the Fed could defy investors, the Bank of England is expected to raise interest rates, UK manufacturing hunkers down and oil prices head to $100 a barrel
2. In TECH NEWS, the China/Apple thing could be a warning, Arm’s advisors get big fees, SoftBank plans a deal spree with the flotation proceeds and another UK chip designer heads stateside
3. In REAL ESTATE NEWS, the supply of UK homes looks like it’ll get worse, sellers cut prices and renters pay more
4. In INDIVIDUAL COMPANY NEWS, China Evergrande has more problems and worries about Zhongrong deepen
5. AND FINALLY, I bring you ways to fail successfully…

So China has issues, the Fed could increase rates again – and so could the Bank of England – while UK manufacturing hunkers down and oil prices head to $100…

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:

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Peak China? Jobs, local services and welfare strain under economy’s structural faults (The Guardian, Amy Hawkins) outlines some of the challenges facing China at the moment – record high levels of youth unemployment (21.3% in June before the government stopped publishing data on this!), a rise in the proportion of people working in the “informal sector” (a part of the economy that is neither taxed nor picked up in government data) increasing from 33% to around 60%, an inability to collect taxes (personal income tax makes up around 6% of China’s tax revenues versus an average of 24% in OECD countries), regulatory crackdowns on the real estate sector and the parlous finances of provincial governments. * SO WHAT? * All of this adds up to a tricky state of affairs that could become a vicious circle where weak demand hits employment and public revenue which then makes it more difficult for the state to turn things around for jobs and the wider economy. I keep saying that I think that President Xi Jinping needs to come out with some kind of grand plan that everyone can get behind. Sentiment alone could help to jolly things

along but if he also put some money behind it that could help to get the country out of the rut it’s already in. 

Meanwhile, it’s all going on in interest rates! Economists expect Fed to defy investors with more interest rate rises (Financial Times, Colby Smith and Eva Xiao) shows that a poll by the FT of leading academic economists shows that the majority of respondents think that US interest rates will rise by at least another 0.25%, which would lift it to its highest level for 22 years. The consensus view for the next meeting in a few days is that the Fed will leave interest rates unchanged. Bank of England expected to raise interest rates to 5.5% (Financial Times, Chris Giles) shows that the consensus view is that this Thursday’s meeting will see another 0.25% interest rate rise to 5.5%, a level it’s not seen since early 2008. * SO WHAT? * It seems to me that there are mixed messages coming from central banks at the moment as, on the one hand, they are saying that we’re at or near peak interest rates and then they go and increase them (like the ECB did last week, for instance)! However, the fact that they’re talking like this would suggest that we are near the peak – but for now it seems that we’ve not quite reached the ceiling just yet!

Manufacturers fired up for a tough year (The Times, Simon Freeman) cites the latest Make UK/BDO manufacturing outlook survey which shows that optimism about the first half of the year has now reversed as manufacturers fear a recession. Make UK, the manufacturing industry body, has cut its manufacturing growth forecast for this year and reckons that output is going to be weaker as well. The majority of its members reckons that policy incentives in other countries, such as America’s IRA, are making places other than the UK more attractive places to invest. Tough times…

Then in Global inflation fears as oil price rises towards $100 a barrel (The Guardian, Phillip Inman) we see that oil prices look set to hit the $100 a barrel mark after surging 30% since June following production cuts and increasing demand from China. Brent crude hit $94 last week while West Texas Intermediate hit $90 a barrel from $67 a barrel over the same time period. This is not going to be good for inflation – which, in turn, means that we’re more likely to see higher interest rates for longer.

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/Apple is concerning, Arm pays out big fees, SoftBank has plans for the proceeds and another UK chip designer heads stateside…

In ‘A shot across the bow’: how geopolitics threatens Apple’s dependence on China (Financial Times, Patrick McGee and Eleanor Olcott) we see that there are cracks forming in the Apple-China relationship, which is a big deal given that China is Apple’s biggest international market (it made up 20% of its sales in the latest quarter) and its biggest manufacturing hub. Recent bans imposed by government agencies on the use of Apple products have hit the company’s valuation hard and it faced another competitive threat in the form of the launch of Huawei’s new smartphone in August. The Mate 60 Pro sold out straight away on super-strong domestic sales! * SO WHAT? * The question is whether recent bans are a sign of things to come or whether this is just a warning shot to the Americans to say that China can still very much spoil the party if it is minded to do so.

Arm IPO delivers $84m fees bonanza for its advisers (Financial Times, Nicholas Megaw) highlights just how much money was made from last week’s successful IPO of Arm! The professional services firms involved were paid the biggest amount of fees for five years and equates to about seven times more than the average large listing. Most of the fees went to Deloitte (around $51m for

accounting services), then lawyers Morrison & Foerster made $17m. The owner of the vast majority of its shares will now move on and SoftBank seeks OpenAI tie-up as Son plans deal spree after Arm IPO (Financial Times, Madhumita Murgia, Kana Inagaki, Leo Lewis and Tabby Kinder) shows that it is rumoured that SoftBank will be using at least some of the proceeds on the deal to invest in AI. SoftBank declined to comment but you would have thought this was plausible at the very least. * SO WHAT? * Given that SoftBank is now thought to have a $65bn war chest at its disposal (almost $5bn of which came from last week’s IPO), its history with Nvidia and keenness to attach itself to the AI theme, you would have thought it highly likely that it will bolster its exposure to AI.

Meanwhile, Another UK chip designer is set to float in New York (The Times, Alex Ralph) shows that Imagination Technologies is planning on doing an IPO in New York in the latest blow to the LSE. Imagination delisted from the LSE six years ago when it was taken private by a fund, called China Venture Capital Fund Corporation, which is linked to the Chinese state. It may well have been inspired by Arm’s success last week! * SO WHAT? * The LSE needs to do something pretty drastic as it continues to lose out to New York. In recent years, the LSE was trounced by New York for SPAC-backed companies and “exciting” start-ups and now it seems that it’s losing out to tech companies!

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!

The supply of UK homes looks tricky while sellers cut prices and renters pay more…

Things continue to be tricky in the UK property market. UK homes: data shows supply squeeze will worsen (Financial Times, Lex) highlights a tough situation at the moment in that planning approval for new housing projects in England is at its lowest quarterly level for over 15 years. It looks increasingly likely that housebuilding targets will not be reached and housebuilders are scaling back new projects due to weaker demand. * SO WHAT? * This is a toughie. On the one hand, if you allow more development you risk outraging the environmental lobby but if you restrict it you are left with a housing shortage. Given we’re going into election year next year, you would have thought that everything is going to go sideways at best because no-one’s going to want to make such difficult decisions when votes are on the line.

Meanwhile, More sellers cut asking prices than any time in the past 12 years (Daily Telegraph, Melissa Lawford) cites findings from Rightmove which shows that over a third of homes had prices

cut at least once in the four weeks to September 9th – the biggest share since January 2011. The discount is an average of 6.2% and it seems that prices are falling fastest for the most expensive properties. * SO WHAT? * OK, so mortgage rates have been calming down from their peak – but that peak is still high! When you consider that the average mortgage rate on a two-year fixed is 6.62% – almost triple the 2.38% level it was at in September 2021 – that means that the monthly interest an a £200,000 mortgage has gone up by an extra £480 per month! The squeeze on household incomes continues…

Then in Rents soar as rates shut out buyers (The Times, Tom Howard) we see that things aren’t much better for renters either as research from estate agent Hamptons shows that residential rents across the UK are increasing at their fastest ever pace as high interest rates are scaring off buyers. This means that there isn’t so much rental property around so strong demand means higher rents. Monthly rental costs are now about 12% higher than they were this time last year! It seems there is nowhere to escape 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!

China Evergrande’s problems continue and Zhongrong concerns deepen…

In a quick scoot around some of today’s other interesting stories, Staff arrests add to China Evergrande Group’s woes (The Times, Alex Ralph) shows that some of the staff at the wealth management business of the troubled China Evergrande Group have been detained by police, although details have been unclear. The group is currently in the eye of the China’s property sector storm and last week ratings agency Moody’s cut its rating of China’s property sector from stable to negative.

However, the problems aren’t just confined to the property sector – Chinese shadow bank exposed to troubled property developers (Financial Times, Thomas Hale and Wang Xuequiao) shows that

the Chinese shadow bank at the heart of China’s $3tn shadow finance industry, Zhongrong, continues to be a cause for concern due to its links with the country’s struggling property developments. * SO WHAT? * Shadow banks sell high-yield savings products to retail investors and companies and then these savings are then lent to companies around China, including property developers. About 11% of Zhongrong’s assets are thought to be invested in the property sector, which is in a lot of trouble at the moment because of debts that it has built up. It’s not looking good for Zhongrong at the moment and everyone will be wondering at the relative health of companies like Sunac, Evergrande, China Fortune Land Development, Yango and Zhejiang Jihua – among others!

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…

Yes, of course we all want to succeed at least most of the time in our endeavours, but sometimes you can almost reach your goal by failing elegantly like this!