Monday 25/11/24

I will shortly be launching a 10th anniversary competition that is going to have some unique prizes. One of the prizes will be to work with me in person and write Watson’s Daily for one edition (don’t worry – I’ll help you 😁). No-one has ever written Watson’s Daily apart from me – so this will be a first and, I hope, a good experience for the winners!👍

Ukraine war pushes Europe into a race to build up its defence base (Financial Times, Candace Rondeaux) highlights recent developments like the Trinity House Agreement to “rapidly develop brand-new extended deep strike weapons” as being an acknowledgment of the new world order under Trump after years of European dithering and France drops buy-EU demand for Brussels defence fund (Financial Times, Henry Foy and Paola Tamma) would also suggest that even France is now prioritising speed of execution over European protectionism – sprinkled with a bit of sucking up to the Americans. After all, would it have been a wise idea to cut them out at a time when they are threatening to walk back their defence commitments in Europe?? France had been opposed to non-EU companies getting access to EU-funded financial incentives for Europe’s defence industry but it has now pledged support for a proposal that would enable up to 35% of EU budget-funded cash incentives to be used to buy defence products from outside the EU. This will be music to the ears of defence companies in the US, UK and Israel (among others).

Then in German gloom deepens as Trump tariff threat rattles exporters (Financial Times, Olaf Storbeck, Sam Fleming and Valentina Romei) we see that Germany continues to reel from the prospect of Trump import taxes as a poll by Consensus Economics shows that economists reckon that Germany’s GDP will expand by just 0.6% in 2025, down from the 1.2% rate predicted earlier in the year. Germany’s economy has relied heavily on exporting (which needs free trade – and that’s getting tricky with the prospect of import taxes in the US), its automotive industry (which is currently under serious pressure, particularly from China) and NATO (which the US is getting lukewarm on!) and the prospect of Trump in the White House has prompted companies to pause big commitments and, in some cases, relocate production – and this is all happening at a time when Germany’s political situation is up in the air, precisely at a time where it needs strong leadership. * SO WHAT? * When you consider that the US replaced France as Germany’s most important trading partner back in 2015 and accounted for 10% of German exports in 2023, its highest level for over twenty years, you can see why businesses are so gloomy. If Trump follows through on slapping 20% tariffs on non-Chinese imports, the Ifo Institute reckons that German exports to the US could take a chunky 15% hit. The only hope for the Germans now is if Trump’s pre-election pledges prove to be noise and bluster, as they were in his first presidency. However, given that he a) is way more experienced than he was first time around, b) has had ages to pick his team and c) has a big mandate, I would argue that there is little reason for him to be particularly generous to Germany – he knows very well that he has the upper hand!

Back home, UK business cutting back growth plans after Budget tax rises, warns CBI (Financial Times, Anna Gross) cites the CBI as saying that UK businesses are reining in growth plans following Reeves’s first Budget as almost 50% of respondents said they’d cut employee numbers while almost two-thirds said that they would cut back on their hiring plans. * SO WHAT? * Business is clearly not happy because of the NIC hit AND the minimum wage hike but the government has justified its position by saying that it needed to raise money to sort public finances and patch up public services whilst also promising not to make such a dramatic jump in future. I think that businesses are having a justifiable reaction to these changes – but we just have to hope that the government doesn’t suddenly find other reasons to justify another hike otherwise it will lose any credibility that it had left. Also, I’d say that at least businesses now know what they are up against and can plan accordingly. Still, that’s no comfort for businesses and whole industries that have been left in the lurch…

Talking of which, ‘Sitting with their head in their hands’: farm equipment suppliers fear for impact of budget (The Guardian, Joanna Partridge) highlights the plight of agricultural equipment suppliers as the anguish of their farmer customers in response to Reeves’s Budget is starting to manifest itself in the form of a sudden drop-off in business. Farmers have already been hit by bad harvests – and these latest developments have just added to the misery. They have generally looked to upgrade their machinery every three to five years to get the benefit of new technology – but these latest developments mean that this could be stretched out, which is obviously bad for those who supply the farmers. Reeves’s inheritance tax raid ‘hits farmers harder than tax avoiders’ (Daily Telegraph, Melissa Lawford) is the conclusion of the Tax Policy Associates think tank which pokes holes in the government’s argument that the recent changes

were meant to target wealthy landowners who bought up agricultural land to avoid tax. It said that the Budget didn’t go far enough to stop avoidance and went too far in its application to actual farms.

The radical new aircraft threatening Heathrow’s grip on global travel (Daily Telegraph, Christopher Jasper) is an interesting article highlighting a new aircraft from Airbus – the A321 XLR – as potentially being the catalyst to a major change for airports. The new aircraft, which entered service this month, has a massive fuel tank that can lengthen the distance a plane can be kept in the air for an additional 1.5 hours versus existing short-haul jets’ flight times. The clue is in the name – XLR stands for eXtra Long Range! Such planes can potentially fly for 10 or even 11 hours which means that airports that struggle to accommodate larger planes that do long-haul can suddenly offer additional destinations. * SO WHAT? * Iberia and Aer Lingus have already got involved in terms of orders but it is thought that regional airports could also stand to benefit, potentially at the expense of the hubs like Heathrow and Schipol which make a lot of money from travellers changing planes for onward flights. Given the scarcity of operating slots at Heathrow and delays to it adding a third runway, you could say that this new plane could be the catalyst for regional airlines to tap in to the demand. The other interesting thing here is that Airbus has been able to add this capability at a reasonable cost, which means that it only needs around 100 passengers on board to break even! The XLR can carry 244 people.

In markets-related trends, Biotechs test IPO market despite concerns over Robert Kennedy’s health role (Financial Times, Oliver Barnes) highlights the actions of a couple of plucky biotechs – Odyssey Therapeutics (which focuses on autoimmune diseases) and Aktis Oncology (cancer drug developer) – as they have decided to press ahead with flotations in the next few months despite Robert F Kennedy Jr’s recent nomination as top US health official. * SO WHAT? * RFK Jr is notorious for being a vaccine denier and critic of weight-loss drugs which has meant that valuations of biotech, pharmaceutical and healthcare companies have suffered as it looked increasingly likely that he would get the job. If you are bullish on the sector, you would say that falling interest rates are more important than RFK Junior’s appointment because lower interest rates make funding more attractive, which benefits biotechs and pharmaceutical companies as clinical trials cost a lot of money. However, if you were being critical about it, you could say that the decision to go ahead with flotation despite all this uproar shows that the companies are both desperate – so much so that they are willing to take a big hit on their valuation just to get the money in their pockets now.

Meanwhile, Flows to European active funds buck trend to outpace passives (Financial Times, Chloe Leung) shows that inflows to actively managed funds (where humans take investment decisions) have overtaken inflows to passive funds (where algos take the decisions) for the first time in 20 months, according to Morningstar data. * SO WHAT? * The uptick has benefited both bond and equity funds but it remains to be seen as to whether this is just a short-term blip as I’d say that money has generally been flowing more to passive funds over the last decade or so due to lower costs and improving technology.

Then in employment trends, Enforced return to office leads workers to seek new jobs (The Guardian, Joanna Partridge) shows that the increasing incidence of companies requiring RTO is prompting more employees to seek jobs elsewhere. According to a survey of 500 in-house an agency recruiters, about 75% of respondents said that they’d seen candidates reject new roles that didn’t offer hybrid working. * SO WHAT? * Although I am a long-time fan of hybrid working, I have always thought that the employers ultimately hold all the cards as they are the ones paying the wages. It’s all very well for employees to grumble about this when the labour market is tight, but things move in cycles and WFH was never going to be for everyone all of the time. The pendulum is definitely swinging back to the employers (although there are some exceptions).

Talking of tight labour markets, Salaries rise at fastest rate in three years (The Times, Lauren Almeida) cites data from jobsite Adzuna which shows that salary growth is about to get a boost as Christmas hiring is due to kick in. Adzuna’s co-founder said that the second half of the year had shown signs of “recovery and resilience” after a tricky first half (presumably this was employer reticence ahead of the UK election and relief after it). I still think that many employers are reeling from the Budget so we won’t get to see the real picture until the dust settles down (after Christmas, perhaps).

In Huawei to launch phone with own software in sign of China-US splintering (Financial Times, Ryan McMorrow and Nian Liu) we see that Chinese tech giant Huawei is about to launch a new flagship phone that can run its own apps on its proprietary operating system. The Mate 70 smartphone is due to be released tomorrow and will run on HarmonyOS Next, which the company hopes will be the third major mobile operating system along with iOS and Android. * SO WHAT? * This just goes to show how sanctions intended to hobble the advancement of Chinese tech have had actually enabled China in the long run to shun Western tech that it has relied on for so long.

Then in TikTok dreams of bright Christmas amid live shopping boom (Daily Telegraph, Emma Taggart) we see that TikTok is expecting its best Christmas sales ever this festive season as its livestream shopping feature, which was actually launched in the UK back in 2021, is finally taking off after initial teething troubles! This function enables users to buy products while watching videos from social media influencers and brands on its marketplace. Livestream shopping has really taken off over the last year and cosmetic products have performed particularly well!

Meta loses ground to Bluesky as users abandon Elon Musk’s X (Financial Times, Hannah Murphy and John Burn-Murdoch) follows on from what I said last week about X users migrating to Bluesky as Meta’s Threads is also suffering from an exodus of its own, also to Bluesky’s benefit. Amazingly, Threads had 5x the number of daily active users in the US than Bluesky before the November 5th election – but it now has only 1.5x more users! * SO WHAT? * I just wonder whether users are getting Musk/Zuch fatigue and are just migrating to other platforms in a fit of pique. It will be interesting to see whether this trend sticks!

In streaming news, Music revenues overtake cinema’s pre-pandemic peak on back of streaming boom (Financial Times, Daniel Thomas) cites research from media consultancy Omdia which shows that music industry revenues shot up by 10% last year, an increase of 25% since 2021 and double the revenues in 2014! Digital channels are now more valuable than broadcast and radio channels for music publishers and songwriters. We have come a long way since digital made up about 5% of revenue collections ten years ago!

UK property sector hit by fears of resurgent inflation (Financial Times, Ramsay Hodgson and Joshua Oliver) observes that a combination of inflation fears, borrowing costs, the UK Budget and the Trump effect have all conspired to hit valuations of the whole UK property sector and House price growth forecast cut by Knight Frank (The Times, Tom Howard) confirms the mood as estate agent Knight Frank announced that it had downgraded its forecasts for house prices

and sales in the UK. That being said, Nationwide builds on mortgage progress despite profit dip (The Times, Patrick Hosking and Ben Martin) shows that the building society has managed to take market share from banks thanks to more competitive pricing on home loans and flexibility towards stretched borrowers. If the doom and gloom has been overdone, it would seem that Nationwide will be poised to benefit given their focus on growth!

In a quick scoot around some of today’s other interesting stories, US retailers stretch out Black Friday deals to lure flagging shoppers (Financial Times, Gregory Meyer) shows that US retailers are going all-out to tempt shoppers with Black Friday discount offers as the National Retail Federation reckons that while sales will reach almost $1bn in November and December, the rate of spending growth is expected to be the slowest since 2018. * SO WHAT? * I guess that retailers are just having to work harder for their money! Sentiment surveys continue to show US consumer sentiment being well below the long-term average but you do wonder whether Trump’s new regime will bring the feelgood back…

Meanwhile, in the UK, Retailers prepare for cautious Christmas as a chill settles on consumers (The Guardian, Sarah Butler) shows that there is an air of caution as data from e-commerce trade body IMRG points to sales continuing to fall this month after a disappointing October. Sales of clothing and gifts are proving to be particularly tricky after a difficult 2023, so it’s looking pretty dicey at the moment for e-tailers.

I thought that you might enjoy this short skit on Google! OK, it’s a bit niche but I think it sums up the situation quite well 👍