Monday 28/01/19

1. In CHINA RELATIONS NEWS, US manufacturers feel the slowdown and Apple continues to seek alternatives
2. In ENERGY NEWS, Germany commits to phasing out coal-fired power and a new energy company is set for flotation
3. In CONSUMER/RETAIL NEWS, US consumers look set for a nice boost, but UK consumers continue to look downbeat whilst Tesco aims to cut more and M&S is in talks with Ocado
4. In UK REAL ESTATE NEWS, London property transactions fall and Lloyds Bank favours rich kids

So US manufacturers feel the heat of the slowdown and Apple continues to look outside China for production…

Manufacturers take a sales hit in China (Wall Street Journal, Austen Hufford and Patrick McGroarty) shows that an increasing number of US manufacturers are finding that their sales are slowing down in China after a storming three years. They’ve invested heavily over the years to get a piece of the action in a country with 1.4billion people in it and so stand to take a hit as the country’s economy slows down. Companies like Caterpillar and 3M make about 10% of their sales in China and are due to report figures today and tomorrow and will be closely watched as bellwethers for their respective industries. Other companies that have experienced slowing sales are HB Fuller (industrial glue maker), PPG Industries (car coatings), Stanley Black & Decker (tool makers) but smaller companies will probably suffer much more. Horween Leather (a tannery) exports 40% of its premium hides to high-end shoe and luggage manufacturers in China and reported sales falling by 10% last year. On the other hand, companies with more US domestic exposure are seeing a sales uptick (which, I guess, is what Trump has been after). * SO WHAT? * The thing is that a lot of the growth that has been experienced in the last few years is down to exports and so a global economic slowdown is starting to have a negative impact on US factory output after reaching its highest point in the third quarter since the financial crisis – as evidenced by the sharper-than-expected fall in US factory activity in December cited by the Institute for Supply Management. A 

stronger dollar and higher costs due to tariffs on foreign goods are adding to the slowdown in activity. As I have said before, I believe that a resolution to the current US-China trade stand-off could do wonders to turn this all around as I would expect activity to make a sharp recovery that could at least provide a short-term boost to global growth.

Further to what I have been saying recently about Apple looking to move at least some production out of China due to the current trade impasse and uncertain prospects for selling to the Chinese consumer, Apple suppliers step up expansion outside China (Financial Times, Kathrin Hille) identifies two of Apple’s biggest contract manufacturers – Foxconn and Pegatron – as companies looking to expand production capacity outside China. Foxconn told the Taiwan Stock Exchange on Saturday that it had invested up to $213.m in its Indian subsidiary since September and had bought land use rights in Vietnam. Pegatron – which accounts for almost a third of Apple’s assembly orders – said yesterday that it was planning to build production capacity in Indonesia, Vietnam and India. * SO WHAT? * The spectre of increased tariffs has really forced gadget manufacturers to take a long hard look at their supply chains and made them consider other options. I think that this is a good thing as currently it all seems rather unbalanced to me. There will no doubt be infrastructure problems initially in these countries but surely the number of jobs and boost to the respective economies will be incentive enough to get governments to support these potential moves. I continue to believe that Apple needs to concentrate its efforts on India rather than China as I think that there is more upside potential if they can get their pricing right – and China has so many more domestic manufacturers that it will want to support in preference to the American outsider.

Germany promises a coal-free future and a new energy company is about to float…

Germany plans to phase out coal-fired power stations by 2038 (Financial Times, Tobias Buck and Guy Chazan) shows the country’s commitment to weaning itself from coal as a government-appointed commission announced on Saturday that it would join an increasing number of countries promising to end the use of coal due to its contribution to greenhouse gas emission. * SO WHAT? * This sounds lovely, but isn’t going to come cheap as German taxpayers are likely to have to stump up for the bill to compensate coal miners, coal producing regions and power station operators. Interestingly, the country has been dragging its feet on this issue versus other western economies given that it had to make a sudden u-turn on its previously pro-nuclear strategy in 2011 (Merkel had to do this to win votes to continue in power in the aftermath of the Fukushima disaster-sparked anti-nuclear backlash). Currently, coal-fired plants account for about 40% of Germany’s electricity, but under the new proposals this will 

diminish over time to be replaced by renewable sources, which are projected to account for 65% of power generation in the country by the close of the next decade.

In Energy giant set for £23bn float (Daily Telegraph, Ben Marlow) we see that former BP boss Lord John Browne and Russian billionaire Mikhail Fridman are on the verge of bringing about a new energy giant by merging their LetterOne business with Germany’s BASF into something called Wintershall DEA and floating it on the market for a valuation mooted to be around £23bn. It is expected to extract enough crude oil by the end of the year to make it the biggest independent oil and gas explorer on the Continent – with only the Spanish state-backed producer Repsol being larger. Its production output will be more than double American producers Anadarko and Apache Corporation and will even be greater than BG Group when it was taken over by Shell in 2016. The enlarged company will be German majority-owned and is likely to float on the Frankfurt Stock Exchange. * SO WHAT? * This is a big deal and will throw another major player into the ring in terms of drilling rights etc and with someone as well-known as Lord Browne behind it, you would have thought it could quite conceivably grow much bigger given his deal-making reputation.

The US consumer is looking forward to a boost and the UK consumer feels the pinch while Tesco wants to cut more costs and M&S engages with Ocado…

US workers set to enjoy ‘nice tax surprise’ (The Times, James Dean) heralds some potentially welcome news for the American consumer as it looks likely that they will be getting much bigger tax refunds than they were expecting as many have overpaid taxes because they didn’t update their status with the Internal Revenue Service (IRS) following the big tax cuts that came into effect at the start of last year. Expecting a big tax refund? Don’t be so sure (Wall Street Journal, Richard Rubin) is more cautious in terms of how many people are likely to benefit, but for many it is going to come as a nice little boost. * SO WHAT? * This could prove to be a nice little boost for consumption over the first quarter of this year as people spend the money. UBS analysts believe that, if ALL of the tax refund money was spent, it would add between 3 to 6 percentage points to retail sales in February and March.

On the other hand – and on the other side of the pond – Shoppers keep purses closed as Brexit chaos bites (Daily Telegraph, Tim Wallace) provides yet more evidence of the downbeat mood in the UK as Deloitte’s quarterly consumer tracker showed spending getting more cautious despite wages outpacing inflation. As Deloitte’s chief economist Ian Stewart put it, “Recent data, in the form of record employment, higher earnings and falling inflation, are great news for UK consumers. But consumers are more focused

on Brexit worries at home and the clouds gathering over the global economy”.

Meanwhile, Tesco to cut up to 15,000 jobs and close deli counters (Daily Telegraph, Tim Wallace) heralds the latest potential round of cost cuts as the UK’s #1 supermarket in terms of market share aims to make £1.5bn in savings by 2020 to increase company profitability. * SO WHAT? * On the one hand, it’s good that the supermarket is not resting on its laurels in terms of finding ways to stay ahead of increasingly stiff competition, but it’s not great news for the workers. Tesco did not comment on the reported 15,000 job cuts. You do wonder whether other supermarkets will follow suit in making cuts, using Tesco’s action as an excuse.

M&S in talks with Ocado to enter online food fight (Daily Telegraph, Tim Wallace and Natasha Bernal) highlights talks between the two companies regarding online groceries. Talks are in the early stages, but possible outcomes could range from M&S using Ocado’s state-of-the-art distribution centres to the purchase of their delivery fleet and warehouses. * SO WHAT? * If such a partial takeover of Ocado occurred, it would leave the latter more focused on the tech business which designs and licences out its online grocery tech to supermarkets around the world. It would also herald a change of direction for M&S which has, thus far, only dabbled with the online grocery shopping market. I would have thought that such a tie-up/partial takeover would be very well received by all because it would boost M&S’s online capabilities and allow Ocado to concentrate on the “s3xy” side of the business, the recent success of which has propelled it into the FTSE 100. Potential losers could be UK retailers who have an existing agreement with Ocado as there could be conflicts of interest.

London property transactions fall and Lloyds Bank favours rich kids…

You will no doubt be used to hearing gloomy noises emanating from the UK real estate sector – and London property transactions drop to decade low (Financial Times, Judith Evans) won’t change this state of affairs as figures from LonRes, a research firm, show that the number of transactions in the central London housing market are now at their lowest since 2008. Roarie Scarisbrick, a buying agent at Property Vision, observed that “The market is massively suppressed. Everyone is concerned about what’s going to happen in the future, every buyer is extremely cautious and counting every penny”, but then if you have a bob or two to spare, there are some bargains to be had. Take hedge fund supremo Ken

Griffin who recently purchased a townhouse in London for the bargain-basement price of £95million – a steal considering that the asking price was actually £125million!

At the other end of the market, Lloyds offers 100% mortgages for first-timers with well-off relations (The Guardian, Patrick Collinson) tells us that the UK’s biggest lender is going to offer 100% mortgages (i.e. no deposit required) to first-time buyers of properties worth up to £500,000 if a member of the family can put up a sum equal to 10% of the value of the property into a Lloyds savings account. This represents a major expansion into the first-time buyer market as other lenders still ask for a minimum of a 5% deposit. * SO WHAT? * In practice, this is already being done anyway IMHO as the “bank of mum and dad” just give their kids the money. However, I think it is a canny way of giving kids with doshed-up parents (and relatives!) more ammo to pressure them into giving them a hefty slug of cash.