Monday 26/09/22

1. In MACRO, ENERGY & CURRENCY NEWS, Kwarteng doubles down, Truss looks at visas while the market digests the impact of last week’s announcements, falling gas prices might help and Germany does LNG with UAE
2. In CONSUMER TRENDS NEWS, pandemic savings disappear and Christmas isn’t looking very merry but travel groups prosper
3. In REAL ESTATE NEWS, sellers keep putting prices up, first-timers are getting scared off and warehouse space is at a premium
4. AND FINALLY, I bring you British obsessions…

So the fallout continues after the mini-budget and Germany finds other energy sources…

Kwarteng doubles down on tax cuts as Tories brace for investors’ verdict (Financial Times, George Parker, Sebastian Payne, Delphine Strauss and Chris Giles) shows that Kwarteng is sticking to his guns and saying that there will be more tax cuts to come. He contends that tax cuts will boost growth as people retain more of what they earn but investors’ knee-jerk reaction after Friday’s announcement was to take fright at the epic levels of debt that will be needed to fuel these cuts. Pound hits fresh 37-year low after mini-budget rocks markets (The Guardian, Graeme Wearden) highlights the effect the announcement had on the pound:dollar rate as it pretty much hit parity. Meanwhile, Liz Truss to review visa schemes in bid to ease UK labour shortages (Financial Times, Jim Pickard) alerts us to Liz Truss’s next area of focus – visas. This is likely to be popular with some business leaders as it looks like she intends to add to the “shortage occupation list”, where certain industries will be allowed to bring in more staff from overseas. It could even see the relaxation of the requirement to speak English in some sectors and it looks likely that she’ll lift the cap on foreign workers working in British seasonal agriculture. Truss’s go-for-broke gamble means Labour inherits economic mess if it wins election (The Guardian, Larry Elliott) suggests that Labour is a shoo-in to win the next election after 17 years in the wilderness as a result of this widely criticised mini-budget – but that it would also inherit a huge mess. * SO WHAT? * I’ve been asked a lot about my reaction to the mini-budget since it was made and it is this: it is a shocker in terms of the amount of debt it will need to finance it. Also, doing away with the top rate of income tax sounds morally wrong, especially when it seems that those at the top end of earners have been largely insulated from the current cost-of-living crisis (judging from their spending habits) while everyone else suffers. Yes, the lower end of the tax bands have been lowered, but if investors send the pound lower in reaction to these new measures and the Bank of England decides to hike rates more sharply in response, then any gains from the income tax cut will be erased. It seems to me that this mini-budget was designed to get people to sit up but I think that the reaction has been so universally critical that the government will come up with additional measures. Although this is not the Johnson administration, it seems to me

that government behaviour in recent years has been to “leak” information, see what the reaction is and then walk it back if it prompted an overwhelmingly negative reaction or go ahead with it if it got a positive one. The lifting of the cap on foreign agricultural workers, for instance, sounds like a good thing (as it seems that Brits just don’t really want to do this work) but then if our currency is so weak, will workers really want to come here if the money they send back home isn’t worth as much as it was before? I think this mini-budget is a work-in-progress. I also think that if Truss can show that the government is getting more money from the richer end of society via a different means, it could make Labour’s life more difficult as it has been able to shoot into an open goal so far with the axing of the top rate of income tax. Whatever happens, I think that this is a massive gamble. If it works, Truss & Co will win the next election, if it doesn’t, Labour could win and inherit an economic disaster and then lose the subsequent election because it can’t cope.

I thought it was also worth mentioning Tumbling gas prices on track to slash bailout costs (Daily Telegraph, Tom Rees) as it might help Truss reduce the bill for subsidising household and business energy bills. Some City forecasters reckon than gas prices could actually halve in the coming months as Europe has been largely successful in filling energy reserves. * SO WHAT? * This could be quite interesting as it could free up money to deploy elsewhere…

Meanwhile, UAE agrees LNG deal with Germany as Berlin looks to replace Russian gas (Financial Times, Simeon Kerr) shows that Germany is getting busy with trying to arrange alternative sources of energy and has signed a deal with the UAE to supply it with LNG. The UAE, which is more of an oil producer than an LNG producer, is planning on doubling its LNG production to 12m tonnes a year by 2026. Abu Dhabi National Oil Company (aka ADNOC) will also supply Germany utility company RWE with LNG later this year. * SO WHAT? * This is all moving in a positive direction, but the deals signed so far are miniscule in relation to the amount needed by Germany. Difficulties in doing deals with this part of the world (human rights, war in Yemen etc.) have been put aside in order to source energy supplies. There will be more to come…

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!

Savings crumble and Christmas is looking bleak but travel groups remain confident…

Pandemic savings evaporate as the cost of living crisis intensifies (Daily Telegraph, Eir Nolsøe) cites a report published by KPMG which shows that the cost-of-living crisis continues to chip away at the savings we stored up over the pandemic as prices of everyday goods continue to rise. The research shows that 30% of Britons are now relying on savings to afford basic necessities like shelter, food and fuel and 50% are already spending beyond their means or don’t have the funds to act as a buffer against price rises. * SO WHAT? * Gone are the days under the pandemic when households stashed an average of 26% of their disposable income into savings – rising prices are now eating into this. Consumers aged between 35 and 44 reported the highest rise in the cost of monthly essentials since January. This is painful and is something the government needs to address as a matter of urgency to stop the economy grinding to a halt. The measures announced last Friday in the mini-budget were aimed at putting more money in people’s pockets quickly, but it remains to be seen whether they will be sufficient or not.

Looking forward to “the golden quarter” for retailers (the crucial three-month period where retailers generally make most of their profits), UK high street warned not to expect return of pre-Covid Christmas (The Guardian, Jasper Jolly) cites the latest forecasts

from retail data specialist Springboard which say that footfall at UK shops this Christmas could be 18% lower than levels seen in the same time period in 2019. Given the prevailing atmosphere of gloom at the moment – and the prospect of energy bills shooting skywards this Sunday – it seems credible that people will just hunker down and let the economic storm pass. * SO WHAT? * TBH, everyone is expecting a disaster it seems (with the exception of travel companies – as you will see next!). I think that the risk here is that no-one is expecting any kind of upside. It is possible that consumers will throw caution to the wind in order to enjoy the festive season (remember last year’s was snatched away from some because of the outbreak of the Omicron variant) and that changes brought in by Truss actually spark some relief. From where I’m standing at the moment, that looks unlikely, but it is a fluid situation!

Further to what I said last week about Tui, Travel groups enjoy resilient demand despite economic headwinds (Financial Times, Philip Georgiadis and Oliver Barnes) shows that demand for travel is still surprisingly strong (I say surprising because give how poor we’re all feeling at the moment, you would have thought this would dent demand) with figures from Amadeus – a travel company which aggregates data from around 35,000 global hotel properties – showing that hotel bookings for Q4 are now above pre-pandemic levels! Maybe people just value experiences more, but you do wonder whether cancellations will start flooding in going into the end of the year…

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 residential property market evolves while warehouse space availability continues to be tight…

Sellers ‘putting up prices despite rate rises and cost of living crisis’ (The Guardian, Graeme Wearden) cites Rightmove findings which show that the house sellers are continuing to increase asking prices. This is happening despite the current squeeze on borrowers faced by higher mortgage rates. Price growth was particularly notable in the middle and high end of the market among those looking to climb up the property ladder. Last week’s changes in stamp duty might help keep the party going but Rate rises scare off first-time buyers (The Times, Tom Howard) points out that Rightmove reckons that the number of first-time buyers looking for a home this month has dropped by 8%, although the overall level is still higher than it was pre-pandemic. It also estimates that first-time buyers are now spending over 40% of their gross monthly salary on their mortgages, which is a third more than they were paying in January. Ouch. * SO WHAT? * Although it’s possible that the stamp duty reduction will help matters, I think that most people will just be focused on monthly outgoings – and that

is continuing to rise. Do you really want to mortgage yourself to the hilt and then potentially face ever-increasing strain on your finances on a monthly basis? For now, though, I think that the main driver of house prices will continue to be the lack of supply compared to demand.

Then in Record warehouse shortage blocks expansion (The Times, Tom Howard) we see that there is an ongoing shortage of smaller warehouses in the UK. “Small-box sheds” (less than 100,000 sq ft) vacancies are at record lows, according to Savills, and now stand at around 5% when 8% is thought to be about right – and for warehouses under 10,000 sq ft, vacancy rates are around 3%! Most developers are concentrating their efforts on “big box” sheds, but they face problems with getting planning permission. * SO WHAT? * This is clearly a problem that needs addressing – and I wonder whether other spaces can be made available as landlords of smaller business parks, for instance, decide that it’ll be too expensive to upgrade existing properties to tighter environmental standards and sell out instead.

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 this was quite interesting: Britain’s top 30 obsessions revealed – including the weather, queueing, and tea (The Mirror, Sarah Lumley). I’m pretty sure you’ll be nodding quite a lot when you see this! I remember working at one company early in my stockbroking career where I was surrounded by Europeans and one of my Italian colleagues said “Why do you British always talk about the weather? It is such a boring subject!” 🤣. I put it down to having a temperate climate and just small talk. However, ever since then, I have always tried to avoid it and think of other small talk in a bid to be original! Regarding tea, though, this classic has always made me laugh (there is swearing in this, but it is sheer genius IMO). I have included this in the past, but it’s worth it 👍. If you’ve not seen this before, you’re in for a treat – but if you have, it’ll still make you laugh! Someone should definitely do a rap about whether cream teas should have cream first or jam 🤣 (or maybe I will!)…