Watson’s Monthly – DECEMBER 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…

Generally speaking – It was a big month for central banks again in the fight against inflation because the Fed, ECB and Bank of England all raised their interest rates by 0.5%.

In the USthe rate of inflation continues to rise but it is doing so at a slower rate, according to the latest data from the US Bureau of Labor Statistics. Having increased interest rates this month, the Fed said that it would be slowing the pace of further rises.

In CHINA – Caving in to popular pressure which manifested itself in popular rioting, the government relaxed zero-Covid measures, but there was a spike in demand for fever medication as soon as the restrictions were lifted. There was also another very important development this month as President Xi and Crown Prince Mohammed bin Salman of Saudi Arabia announced a “new era” in China-Saudi Arabia relations and signed a raft of deals, including one with Huawei to provide superfast internet and a cloud computing facility. IMO this is bad news for Russia (China will have another reliable source for its oil now) and the US (both leader have basically ignored him recently). Talking of which, China has filed a dispute with the WTO to push back against US export controls on advanced semiconductors.

In JAPANJapan stirred things up by taking part in a nine-day training operation, called “Vigilant Isles 22”, which involved UK and Japanese armed forces. The Chinese didn’t like it but Japan is getting increasingly antsy about the prospect of China invading Taiwan. Japan is planning to boost its defence spending by 11% for the year to March 2024.

 

In EUROPEEurozone inflation actually fell by more than expectations, implying that the interest rate hikes are starting to work their magic. The EU proposed more sanctions on Russia – this time on the mining industry – which is going to hurt. There’s a bit of a kerfuffle going on in the EU about what to do about the generous incentives on offer to green industries by the US Inflation Reduction Act. European EV battery “champion” Northvolt is one of many putting pressure on the EU to increase the subsidies that it offers.

In the UK – Inflation growth slowed down last month to a rate that was below expectations. It really does look like this concerted effort to tame inflation via raising interest rates is actually working! PM Rishi Sunak is under increasing pressure to accelerate the introduction of anti-strike legislation given all the scheduled public sector strikes.

In SOUTH AFRICAPresident Cyril Ramaphosa got into hot water as he was accused of using his status to cover up a $4m theft from his farm back in 2020. Fortunately for him, his ANC party got behind him and he remained in his position.

 

IN BRAZIL – 77-year-old-former-president Luiz Inácio da Silva beat Jair “Tropical Trump” Bolsonaro to become the country’s next president taking Brazil from the political right to the left. It looks likely that he’ll increase spending on social projects and infrastructure but there are no details as yet.

In ENERGY NEWSGermany’s Uniper reported one of the biggest ever losses in corporate history because it has had to buy gas on the spot market whilst absorbing the costs itself. On the plus side, Germany looks like it’ll be able to avoid gas rationing this winter as consumption has decreased while the weather has been relatively warm, meaning that it has not had to dip into its emergency reserves. It also managed to do something very impressive – it built its first LNG import terminal in the space of 200 days!!! It usually takes years to do this, but as we’ve seen before with the Coronavirus vaccine, when everyone is desperate enough, things get done! France, on the other hand, would have been facing power shortages anyway – even in a “normal” winter – because almost 50% of its nuclear power stations are offline for maintenance. In the UK, Rolls-Royce announced more detailed plans for its Small Modular Reactors (SMRs) and appealed for government funding. The UK government also allocated an additional £100m to that already committed for nuclear fusion research. In oil news, BP and Saudi Aramco saw profits boom from decent oil prices.

In CRYPTO/CURRENCY NEWS, FTX filed for Chapter 11 bankruptcy following a brief period where there were rumours that rival Binance was going to bail them out. At the time, analysts reckoned that bitcoin could lose 25% in value over the next few weeks. Auditors and regulators then swooped in as the new interim CEO (who had overseen the aftermath of Enron a couple of decades ago) described the collapse as the worst he’s seen for 40 years! FTX businesses owed over $3bn to their biggest creditors and the ripple effects are bound to be big. Interestingly, Binance unveiled a new “crypto recovery fund” that would buy out collapsed exchanges (and perhaps stem the outflow by giving investors some kind of guarantee).

In BUSINESS TRENDS NEWS, confidence has hit a new low, according to research by the European Round Table (an industry lobby group) and the Conference Board (a US think-tank) because of stubbornly high energy prices and a slowdown in demand. There are also lingering concerns by Europeans that businesses (especially growth ones that need a lot of funding) will decamp en masse to the US, where a massive amount of funding is available. There’s disappointing news for the immediate future as 67% of the UK’s business advertisers polled in a recent survey intend to cut spending on TV. Advertising spend is often seen as a leading economic indicator, so this is not a good sign. Meanwhile, sales at the world’s biggest caterer, Compass (which is a British company a lot of people will not have heard of!), have now risen above pre-pandemic levels as workers have returned to the workplace and working practices have returned to some semblance of normality.

In TECH NEWS…

In REGULATORY NEWS, Meta was told to overhaul its content removal policy after controversially using drill music on Instagram. Apple and Google face an enquiry by our Competition and Markets Authority regarding the power they have over internet and cloud gaming tech. The UK is going to get a new internet watchdog, called the Digital Markets Unit, which looks like it will have teeth because tech companies will have to sign up to a code of conduct and if they then break the rules, the new unit (which will be part of the CMA) has the power to impose massive fines.

In TECH HARDWARE NEWS, Both HP and Lenovo reported weakening PC demand, which is clearly one of the reasons for the slowdown in current chip demand. Qualcomm also reported a slowdown in smartphone demand – which is also hitting chip demand – and UK chip designer Arm had its proposed London listing postponed, presumably due to adverse market conditions. Additionally, Nexperia‘s proposed acquisition of Newport Wafer Fab was blocked under the National Security and Investment Act, leaving the future of NWF unclear. Apple’s Foxconn woes in China continued despite Foxconn paying off staff as they left in protest at the miserable lockdown conditions.

In TECH SOFTWARE/SOCIAL MEDIA NEWS, Elon Musk moved quickly once he took Twitter over officially. He brought a number of trusted advisers in for brainstorming, made drastic cuts to staff numbers and forced everyone to return to the office. He also introduced and then rescinded a new type of “check” mark and amid all the confusion, advertising giant Omnicom advised clients to avoid Twitter due to potential reputational damage. Mastodon is the place where disgruntled Twitter employees are going, but it’s way behind Twitter to be considered a realistic rival. TikTok said it was overhauling its US business in response to the advertising slump it’s currently experiencing and it actually cut global revenue targets for the full year. Given that it’s currently looking into providing other content in music and gaming, I wouldn’t be too worried about this for the moment. Meta cut 13% of its workforce this month to combat slowing revenue growth and tricky economic conditions. The recruitment division bore a lot of the brunt of the cuts and investors are getting increasingly frustrated about how much money Zuckerberg is putting into the metaverse. Unfortunately, given the terrible experiences Swiss wealth managers UBS and Julius Baer have had holding client meetings in the metaverse it sounds like Zuck is going to have to throw a whole lot more money at this to get it to work! In gaming news, Activision Blizzard‘s long-term licencing agreement with NetEase was not renewed, so games including World of Warcraft and Overwatch may disappear in the coming months in China, until a new partner is found. On the plus side, in China, there are signs that the authorities’ clampdown on tech might be relenting as the Games Industry Group Committee has now declared children’s gambling addiction to be officially “resolved”, which will be music to the ears of companies like Tencent and NetEase.

In CAR & BATTERY NEWS…

In CAR NEWS, new car prices in the US are starting to cool down. The news was mixed among manufacturers though – Stellantis put in a solid performance, supply chain problems held Toyota back and Renault mapped out its future, saying that it would split itself into five divisions and deepen its partnership with Geely. The plan then is to float off its Alpine division (presumably to emulate the success of the Ferrari and Porsche spin-outs, although I’d argue Alpine would be nowhere near as successful IMO) and new EV business. Talking about the luxury end of things, Bentley recorded record profits, Ferrari saw strong demand and pricing power but Aston Martin continues to suffer from supply chain problems. BMW also managed to put in a decent performance.

In EV NEWS, carmakers are resisting calls from America to cut China components out of the EV manufacturing process as it would make things even more difficult (and expensive!) than they already are! Saudi Arabia launched its first electric car company, called Ceer, which uses BMW tech, Foxconn’s manufacturing expertise and has the financial backing of the kingdom’s sovereign wealth fund! Separately, Foxconn announced plans to invest $170m in EV truckmaker Lordstown Motors with a view to jointly developing an EV. Sony and Honda announced a JV to make an EV with an emphasis on entertainment. Ailing British electric van start-up Arrival announced delays to its working prototype, saw its share price plummet when it warned that it might run out of cash and then got a new CEO. Lucid said it planned to raise up to $1.5bn on share sales – yet another example of an EV start-up with cash burn issues! Randomly, Domino’s Pizza is buying a fleet of EV delivery vehicles in the US to attract more drivers who don’t own their own vehicles.

In BATTERY NEWS, Britishvolt got five weeks of funding from an existing investor and then asked the government for more – with the incentive that what they put in would be matched by a private equity investor. Australia’s Syrah Resources, the world’s biggest natural graphite producer outside China, warned that Western supplies of graphite could get very tight over the next ten years as the material is used in battery anodes. EV charger company Pod Point announced a profit warning on delayed installation of EV home chargers.

In TECH NEWS…

In REGULATORY NEWS, the infamous “Section 230” law that protects the likes of YouTube, Facebook and others from legal recourse from harmful content on their platforms is going to the Supreme Court to be tested. Critics of section 230 of the US Communications Decency Act say it is outdated and doesn’t provide enough protections while Big Tech says that content restrictions will violate their First Amendment right to free speech. In the UK, the FCA is looking to do an investigation into Big Tech’s recent interest in financial services. Apple, Google and Amazon have all started to dabble and so I think it would be better for the regulator to get involved at an earlier stage rather than just leave things.

In SOCIAL MEDIA NEWS, it turns out that Elon Musk is going to buy Twitter after all! He managed to change the conversation away from “how has Elon failed to wiggle out of the deal?” to “is Elon trying to use Twitter to engineer a super-app” like WeChat in China. When he bought it, he promptly fired the CEO and CFO and made conciliatory noises to advertisers to keep them onside. Meta was forced to sell Giphy by the UK’s CMA, who deemed the purchase to be anti-competitive and the company’s shares fell to a new low as investors fretted about how much money Zuck’s throwing at the metaverse – talking of which, Meta unveiled a new headset. TikTok parent ByteDance said that it saw deepening losses as it has been ploughing money into growth. It announced a potential foray into music streaming and TikTok said it would be launching a standalone gaming channel. Meanwhile Kanye West reinforced the view that he has more money than sense by buying right wing social network Parler for an undisclosed amount. Snap saw its share price crater by almost a quarter as revenues disappointed the market and Google put in a nightmare performance as YouTube saw falling ad revenues, reporting a fifth consecutive quarter of slowing sales growth.

In TECH HARDWARE NEWS, semiconductor giants Samsung and AMD are turning pessimistic thanks to weakening consumer spending that will hit demand for their memory chip and smartphone business (although I think that demand from EVs will more than make up for this over time!) and VW announced a €2.4bn chip venture with Chinese AI specialist Horizon Robotics, which makes a lot of sense considering that VW makes around half of its net profits in China. Apple said that it was suspending plans to use Yangtze Memory Technologies chips as a direct result of Biden’s new export controls. It was also interesting to hear that SpaceX is getting increasingly tight with the Pentagon thanks to the proven success of its Starlink satellites in the Ukraine war.

In GENERAL TECH NEWS, Apple got some disappointing news as the EU backed a universal phone charger – the USB-C standard – which clearly heralds the end of its proprietary lightning cable. On a brighter note, Apple announced a new high-yield savings account supported by Goldman Sachs. Microsoft‘s shares fell to a new low, earnings weakened thanks to slowing PC demand and a stronger dollar and it announced that it would be cutting headcount, as per its peers Twitter, Netflix and Uber in order to save on costs. Shopify‘s revenues managed to beat market expectations, which helped to send its share price up by 17% after recent disappointments! Uber announced that it is going to be rolling out a new advertising business.

In CAR & BATTERY NEWS…

In CAR NEWS, various data sources suggest that used car sales in the US are weakening, UK car dealership Lookers announced strong profits and rival dealer Vertu reckons that car sales will be cushioned in the short term because of long lead times and limited car supplies. Interestingly, after Porsche‘s successful IPO, its market cap has since overtaken that of parent company VW! Meanwhile, Mercedes-Benz pulled out of Russia. In the UK, Aston Martin seems to be attracting the interest of Chinese car manufacturer Geely, which is exploring collaboration opportunities.

In EV news, Tesla hit a new sales record in China and it also announced cuts to car prices in order to compete better with Chinese makers BYD and Great Wall. Having said that, overall sales fell short of expectations – which disappointed the market. Elsewhere, Rivian announced a recall of almost all of its vehicles and, shortly after Arrival said it was seeking more funding, the company announced it was going to shift production from the UK to the US and stop making buses and cars to concentrate on vans. In the UK, rising electricity prices are hitting demand for EVs, according to the SMMT, and the prospects for EV production in the UK took a blow as BMW decided to shift production of its electric Mini from the UK to China although EV exports from the UK overtook those of petrol and diesel vehicles for the first time last year. Then Foxconn, which has made its name by assembling iPhones, said that it now has major ambitions to supply EVs as it tries to diversify away from the assembly of consumer electronics. Meanwhile, Rolls-Royce announced its first ever 100% electric car – a snip at £300,000+!

In BATTERY NEWS, Britishvolt’s financial problems continue and it looks like it may even have to resort to selling itself. What a fall from glory! Then Shell announced that it will shut down all three of its hydrogen refuelling stations in the UK as hydrogen-powered cars just haven’t caught on over here.

In CONSUMER, RETAIL & LEISURE NEWS…

In CONSUMER SPENDING NEWS, European consumers cut discretionary spending, particularly on big ticket items while in the UK, ONS figures show that real wages continue to fall, around 50% of shoppers are putting spending limits in place for Christmas and they are facing a shortage of turkeys and champagne! UK food price inflation hit a 14-year high last month, according to Kantar, but on the other hand, Jet2 said it was seeing decent holiday bookings for next summer.

In RETAIL NEWS, in the US, retailers started Black Friday early but there were mixed performances from the retailers themselves. Walmart and Home Depot put in solid performances while Macy’s, Kohl’s and Target reported weaker sales. Amazon said it was in cost-cutting mode and then announced a headcount reduction of 10,000 staff. On the other hand, it boosted its Prime offering by making a big expansion of its music catalogue. Meanwhile, Ralph Lauren put in a stellar performance and it was interesting to note that research from Bain & Co predicts that the luxury goods sector will continue to grow next year despite expected recessions. Elsewhere, Alibaba announced a shock loss thanks to the effects of repeated Covid-lockdowns. In the UK, Aldi and Lidl continued to go from strength to strength – and Lidl actually managed to quadruple its profits – but B&M reported weaker sales. Morrisons said it would shut 132 McColl’s outlets after it got the official go-ahead from the CMA to buy the retailer out of administration. Among high street retailers, M&S saw profits plummet by 24%, Pets At Home saw its profits fall short of expectations due to the rising costs of heating their stores and Halfords warned that its year-end profits would be at the lower end of expectations. In contrast, WH Smith reported sales at a 14-year high thanks to the post-pandemic travel boom! In apparel retailers, the introduction of Primark‘s click-and-collect service was so popular that it crashed the website but, on the other hand, it’s thinking of shutting down its German stores as profitability has fallen to “an unacceptably low level” and Joules appointed the administrators – as did Made.com. Next subsequently bought out the brand for just £3.4m, domain name and IP of Made.com but let all the staff go.

In LEISURE NEWS, it was mixed news for pubs as Young’s is doing well but Wetherspoons is slowing down and Fuller’s has taken a hit from recent train and tube strikes. Restaurant chain Loungers (which owns Cosy Club) is going to launch a new roadside diner brand called Brightside. In travel-related leisure, British online ticket group Trainline has benefited from the liberalisation of railways in Europe and saw ticket sales rise by 81% in France, Italy and Spain. Ryanair posted strong half-year profits after a strong summer and is pretty bullish about its prospects for next year at a time when rivals Lufthansa, IAG and Air France are actually cutting capacity. In gambling news, FanDuel, DraftKings and BetMGM in America had some bad news as the state of California rejected a bid to overturn the ban on sports gambling. America has been a massive growth area for embattled gambling companies so this is a setback for companies like Flutter Entertainment, which owns FanDuel, as California has an economy the size of Germany!

In EMPLOYMENT TRENDS NEWS, over in America, although Big Tech has been shedding jobs of late, there is still demand for tech staff in other industries including banks and insurers. Also, there appears to be a trend of middle managers losing their jobs in a “white-collar recession” as they are more expensive to employ (and arguably less expendable) than “blue-collar” workers. Will that trend make it to the UK?? In the UK, global law firms are scaling back hiring due to higher wage costs and a lack of M&A and IPO action and bosses generally are gaining the upper hand as recessions loom large. Britain’s biggest recruitment firm, Reed, observed that the rising cost of living is driving early retirees back into the workforce, which is interesting because some employers are now actively trying to take on older staff! Halfords is targeting the over-50s to fill 1,000 roles and easyJet is seeking out over-45s for cabin crew.

In REAL ESTATE NEWS…

In COMMERCIAL PROPERTY NEWS, China’s state banks announced a $30bn increase in additional credit lines for real estate developers, which is great news for an indebted sector. In the US, Big Tech firms are dumping office space as headcounts continue to fall. The national vacancy rate is rising and is currently at its highest level since 2011! In the UK, high energy bills have pushed businesses to rethink how they use their offices and are consolidating spaces to save money.

In RESIDENTIAL PROPERTY NEWS, Spanish homeowners are facing particularly hard times because of the rising interest rate environment. Around 75% of mortgage holders in Spain are on variable rates! In the UK, house prices fell for the first time in 15 months, demand for property in the south-east fell and Barclays stopped offering 95% mortgages. Things are looking bleak as the latest figures from the Ministry of Justice show that home repossessions are set to double and the chances of negative equity are increasing as house prices are now falling at their sharpest rate in almost two years. Housebuilder Persimmon reported falling sales and prices while cancellations are also on the rise. However, I would say that these trends could be particularly exaggerated – and still reeling from – the shock that everyone got from the mini-Budget…

ELSEWHERE...

In INDIVIDUAL COMPANY NEWS, Deliveroo quit Australia as the company concentrates more on profitability than growth, Disney’s old chief Bob Iger returned as CEO after the company’s losses doubled despite seeing subscriber numbers increase, Oatly cut annual revenue forecasts and staff numbers after rivals like Planet Oat and Chobani muscled into its market. Uber beat pre-pandemic numbers and Juul got a cash bailout and sacked a third of its staff to stave off bankruptcy. In financials news, a number of investors changed classification of their “green” funds as ESG continues to evolve, the FCA voiced its unease with the gamification of trading apps (so maybe there’s an investigation in the offing) while Societe Generale and AllianceBernstein announced an equities joint venture with SocGen having the option to buy after five years. In healthcare-related news, Johnson & Johnson bought cardiovascular tech group Abiomed for $16.6bn to broaden its focus on drugs and medical devices and Wallgreens Boots Alliance agreed to buy private equity-backed Summit Health in a deal worth about $9bn to boost its capabilities in medical care. Separately, CVS and Walgreens have agreed to pay over $10bn to settle opioid lawsuits, which could draw a line under the whole opioid nightmare that has gone on for years.