Watson’s Monthly – APRIL 2022 EDITION

Welcome to Watson’s Monthly! The Monthly is a document that gives you roundup of the major stories and developments that happened over the course of January.

This will give you a different view of how things developed over the month and will really help your understanding and recall of the events as they happened.

IN BIG PICTURE NEWS…

The WTO and IMF downgraded year-end GDP growth forecasts (unsurprisingly) as global markets continued to fall on China Covid concerns and uncertainty regarding the effect of the Ukraine war on economies and supply chains…

In CHINA – we saw that the CSI 300 had its biggest one-day drop since February 2020. Lockdowns and fears of economic repercussions led to panic buying in supermarkets, among other things. President Xi Jinping has acknowledged this and announced an “all-out” spending spree that will involve spending on domestic infrastructure including transport, energy and airports etc. FWIW, this is a classic move for moneyed governments when things aren’t going well – and when China gets out of these lockdowns and starts spending, I’d say that commodity prices will go higher again because this infrastructure splurge will lead to a big increase in commodity demand.

In FRANCE – Emmanuel Macron managed to defeat Marine Le Pen again in the presidential election. He’s the first president to get a second term for 20 years, but the percentage of voter abstentions (28%) was the highest recorded since 1969. He did, however, win by a bigger margin than had been expected (58.55% vs 41.45%). Le Pen says she’ll carry on, but I do wonder why. The Socialists really need to get their act together as they are still nowhere.

In GERMANY – it was a tricky month as criticism intensified over its continued use of Russian gas. It did send tanks to the Ukraine after much foot-dragging but it also turned out that Germany’s Uniper and Austria’s OMV are looking to open “K” accounts with Russian state-controlled Gazprombank to pay for Russian gas in Euros, which the bank then turns into Roubles, in order to get around current sanctions.

In AUSTRALIA – PM Scott Morrison announced an election date of May 21st. If he wins, he’ll be the first Aussie PM to win a second term since 2007! Mind you, he won’t be able to count on the support of all of his colleagues as many seemed to line up and stab him in the back shortly after the announcement! No doubt Boris Johnson and chums will be taking notes (and possibly hiring his PR if he wins!).

In RUSSIA – The Russia/Ukraine situation continued to develop as Russian troop numbers continued to grow on the Ukraine border. Negotiations with NATO and the US kicked off this month but didn’t really get anywhere and President Biden made an almost Trump-esque gaffe regarding the Russia/Ukraine situation when he said that a “minor incursion” by Russian forces into Ukraine would not provoke a full response from the Allies. Putin is sitting pretty at the moment as he’s managed to split the newly-minted German coalition government and NATO whilst giving away no concessions! Russian state media continued to up the ante with the broadcast of accusations against Ukraine, so the ECB asked the 115 banks it overseas in the Eurozone about contingency plans for an invasion and China threw its weight behind its Russian comrade.

In MILITARY DEVELOPMENTS – Joe Biden announced a new agreement with the UK and Australia on the co-development of hypersonic weapons as China is thought to be ahead in the technology. This will no doubt annoy the Chinese given that they are perennially seen as likely invaders of Taiwan. Also, Finland and Sweden are considering joining NATO in response to Russia’s current actions. This isn’t going down well in Russia, but Swedes and Finns are getting behind the idea.

In INFLATION NEWS – inflation in the US hit a 40-year high of 8.5% in March and US producer prices rose by their sharpest level since records began.  In the UK, it hit 7% – but looks like it’ll be going higher – but all of this paled into comparison with Turkey, where inflation hit an astounding 61% thanks to rising food and energy costs. Both Canada and New Zealand raised their interest rates this month in order to take the edge off inflation.

In SHANGHAI LOCKDOWN NEWS, we see that Shanghai’s lockdown, imposed due to the rising number of Covid cases, is continuing to hit supply chains both domestically and internationally, but the government announced a roadmap out of lockdown. This would imply that there is light at the end of the tunnel! The lockdown has hit China’s Q1 GDP, though.

In ENERGY NEWS, Poland and Bulgaria got cut off from Russian gas as part of Putin’s push-back on sanctions and European gas prices spiked by 20% straight afterwards. Some say that turning off Russian gas could cost Germany’s economy €220bn, but the practicality of actually doing this is nigh on impossible, not least because uranium fuel rods (that power nuclear power stations) are rather difficult to come by! Coal-fired power stations got a stay of execution in the UK as three such stations have been asked by the government to operate past their previously-scheduled September shutdown. In RENEWABLES, UK PM Boris Johnson announced a new energy strategy plan that would quintuple our offshore wind power capacity, there were some ground-breaking developments with nuclear fusion from Oxford-based First Light Fusion, energy from wind turbines hit a new high and Shell signed a deal with Germany’s Uniper to produce hydrogen that would provide energy to industry around the Humber. Rolls-Royce’s SMR’s seem to be making progress – it announced that it could be pumping electricity into the national grid by 2029!

In AUTOMOTIVE NEWS…

VW said that it wants to axe the number of models it has in its line-up from around 100 to around 40. It wants to concentrate its efforts on premium vehicles which are much more profitable. On the other hand, GM and Honda announced a joint venture to develop cheaper EVs. Production is set to start in 2027 and they will try to standardise equipment to keep costs low. UK car dealer Lookers reckons strength in the used market will continue – and, given ongoing problems with supply chains hitting new cars in particular, it looks like it will be proved right! Renault was in talks to dispose of its Russian business to a state-controlled company for one rouble, with the option of buying it back over the next five or six years. It was also interesting to see that Volvo bought a minority stake in Carwow in order to boost its online sales capability.

In EV NEWS, Polestar sold 65,000 cars to Hertz and Tesla deliveries rose for the first quarter but fell short of analyst expectations. Britons are buying a lot of EVs although they aren’t shifting in sufficient numbers at the moment to hit our ambitious targets to only sell EVs from 2030 onwards (as new cars, that is). Ford launched its new electric pick-up truck, the F-150 Lightning, ahead of rivals like Tesla (Cybertruck, anyone??) and GM (its equivalent Silverado won’t be out for another year) while start-up Rivian continues to moan about poor production and battery shortages. Chinese EV manufacturer Nio continues to tout the joys of its swappable battery technology.

In BATTERY NEWS, raw materials prices are continuing to rise strongly, Honda committed to continue investment in hybrid and hydrogen fuel cell development while GM struck a deal with Glencore to supply it with cobalt for its car batteries. LG Energy, however, went one further by buying an entire mines-to-manufacturing supply chain in Indonesia!

In CONSUMER, RETAIL & EMPLOYMENT NEWS…

Consumers in the US and Russia are cutting expenditure and numerous surveys are showing that the British consumer is losing confidence as the cost-of-living crisis hits household finances. While Kantar figures show that households could be paying an extra £271 a year on food bills, we all seem to be spending more on consumer staples – which is benefiting the likes of Nestlé, P&G, Reckitt Benckiser, Heineken and Coca-Cola among many many others! Things are getting so bad with some items that consumers are starting to stockpile. Cooking oil, for instance, seems to be particularly badly hit as prices have rocketed – to the extent that supermarkets are rationing it to two or three bottles per customer! Supermarkets realise that their customers are having a hard time and Tesco, Morrisons and Asda are among those who have announced price cuts for basic items this month.

In CONSUMER SPENDING TRENDS, in addition to spending on staples, we’ve been splashing out on Tesla cars, utility bills, holidays (domestic ones in particular – Bourne Leisure’s Butlins has been doing well, for instance) and casual dining (Tortilla announced record sales) but not so much on streaming (this has hit Netflix and Spotify very badly, which we’ll discuss more later) or takeouts (both Deliveroo and Just Eat Takeaway have been experiencing slowdown, for example).

In RETAIL NEWS, a BDO survey showed that 40% of retailers are planning on putting their prices up. In apparel retail, Shein got into hot water for allegedly copying Zara’s designs (but it will probably get away with it as no-one can really be bothered to enforce this), although it also attracted a massive valuation in its latest funding round. M&S announced the launch of “Resale”, Primark upgraded its website (a step closer to online shopping perhaps?!?) and Ted Baker attracted potential buyers of the business. Elsewhere, Boots attracted potential buyers as current owner Walgreens Boots Alliance pushed forth with efforts to offload the UK high street stalwart. WH Smith said that it is already buying in stock for Christmas to avoid any supply shortages later in the year – something that is bound to help push the warehousing sector up even more!

In EMPLOYMENT NEWS, both the UK and US job markets continue to be tight but wage rises aren’t keeping up with inflation, meaning that there are a lot of disgruntled employees out there. This has led to a resurgence in the popularity of unions and there were strike votes for UK railway workers, communications workers and, unusually, at GSK. In the US, Apple workers have joined others in Starbucks and Amazon in considering/joining unions. Starbucks’ new CEO is trying particularly hard to dissuade staff from unionising.

In TECH NEWS…

In SOCIAL MEDIA – the biggest news this month was of Elon Musk buying Twitter. It started off with him buying a chunk, then the company offered him a seat on the board which he accepted and then declined before, dramatically, making an offer to buy the whole company. Investors were concerned about financing the $44bn purchase and it turns out he sold a chunk of his Tesla shares to give him the money he needed. He made a number of suggestions for changes but no concrete plans at this stage.

In OTHER TECH NEWS, this month saw the introduction of new EU legislation in the form of the Digital Services Act which aims to, among other things, make Big Tech companies more accountable for the content that their platforms support. So far, there has been no official backlash from the US, but I would expect there will be considering this is going to affect them in a big way! In other “top down” news, it seems that China’s tech clampdown seems to be relaxing a bit as regulators approved some new games after a bit of a hiatus.

In COMPANY-SPECIFIC NEWS, Apple is facing another antitrust lawsuit from the EU as part of an ongoing investigation into music streaming and TikTok is smashing it in ad revenues. It was also interesting to see that Epic Games got a nice $2bn cash boost from Sony and Lego to build a metaverse for children.

In FINANCIALS AND INVESTMENT NEWS…

In BANKS NEWS – Deutsche Bank and Commerzbank got sold off by major shareholder Capital Group as the investor thought that the sector would be having a tough time against a difficult economic background, but then Deutsche announced its best quarterly profits in ten years! Elsewhere, it was mixed as JP Morgan saw profits fall in Q1 thanks to a slowdown in dealmaking and the impact of the Ukraine war while in the UK Lloyds Bank did OK, Barclays saw its profits dented by litigation costs and Standard Chartered beat market estimates in Q1 thanks to trading income and transactional banking.

In INVESTMENTS NEWS, many investors are questioning their positions on emerging markets like China and Russia given the repercussions of the war and how things could unfold sanctions-wise over the coming months. I guess this is all part of the same conversation that investors will be having about ESG and how their mindset might have to change in order to take into account the need to support the energy industry (including fossil fuels) and defence industry (weapons companies make product that defends as well as attacks, for instance). Private equity companies like Blackstone continue to announce massive deals (like the $13bn purchase of a student accommodation portfolio in the US, for instance) as it seems like their dry powder is being used to buy some bargains! I suspect more assets will become available as time, supply chains and economic uncertainty continue.

Talking about investments, UK house prices are reaching record highs, 35-year mortgages are getting more popular and landlords are wading back into the market again. London property prices are rising again but the real estate star performer continues to be warehousing! If supply chains continue to prove problematic, it is likely that there will be more upside for warehousing as companies make their orders well in advance to ensure they have enough product going into the end of the year. All that product needs somewhere to go, after all!

There’s also the rumbling of a major shake-up in the pre-paid funeral industry in the UK as the failure of one such company, Safe Hands, has prompted scrutiny of the entire industry by the regulator.

ELSEWHERE...

Streaming took a big hit this month as Netflix announced a record drop in subscribers – the first time they have fallen for over ten years! Spotify also suffered as investors fretted that consumers are tightening their household budgets and looked for other streamers to sell off. Netflix’s main rivals (Disney+, Amazon Prime, Apple+) all have other businesses (and TONS of cash) to rely on in lean times whereas Netflix’s core business burns cash at a rapid rate and has thin margins. Spotify was at pains to say it was different, but I think that it is in an even worse position than Netflix as it doesn’t really have much to speak of in terms of proprietary content. In order to address this, I think that Spotify should concentrate on buying up podcasts – and I don’t think they’ll have to shell out $100m like they did for Joe Rogan’s.

It’s also interesting to see how world agriculture may have to change to a new world that is trying to cut Russia out of the supply chain. South American farmers are looking to alter their crop mix to make up for the shortfall caused by the Ukraine war, debates are being had about introducing GMOs and UK farmers are appealing strongly for help from the UK government as they deal with the dual threats of fertiliser prices shooting through the roof and a restricted workforce following Brexit.