Watson’s Monthly – JUNE 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 GLOBAL NEWS – The World Bank cut global GDP forecasts in its latest half-yearly Global Economic Prospects report from 4.1% to 2.9% and suggested that the global economy is on track for a growth slowdown over the 2021-2024 period that will be twice as bad as it was in the 1976-1979 period when oil shocks caused stagflation.

In the US – the Fed hiked up its interest rate by a chunky 0.75% in its biggest one-time increase since 1994 in order to combat the highest inflation for forty years! Almost 70% of economists polled by the FT reckon that the US will fall into recession in 2023…

In CHINA – president Xi has reiterated his commitment to the previously-stated full-year 5.5% GDP growth target, despite Covid lockdowns (and it is interesting to note that thousands of permanent testing and quarantine centres are being built in many big cities, which would suggest to me that Xi does not have much confidence in the ongoing fight against Coronavirus and its variants). That said, exports increased by a decent 16.9% in May as activity bounces back and the authorities approved around £100bn in credit to boost infrastructure projects.

In ASIA-PACIFIC NEWS – Japanese PM Kishida is pushing for an increase in defence spending, saying that “Ukraine might be East Asia tomorrow” while Australia accused China of intercepting a surveillance plane in a “dangerous manoeuvre” adding to the regional tensions. Meanwhile, the economies of Vietnam, Malaysia, Indonesia and the Philippines are rebounding strongly from the depths of strict lockdowns as companies look to diversify away from China but retain a presence in the region. Australia’s central bank raised its interest rate by 0.5% from 0.35% to 0.85% in its biggest hike for 22 years!

In EUROPE – Eurozone inflation hit a record high of 8.1%, making an interest rate hike increasingly likely! Switzerland surprised the market with a 0.5% interest rate increase from -0.75% to 0.25% in its first hike for 15 years! Norway also increased its interest rate by 0.5%. France‘s President Macron lost control of the French National Assembly, which means that implementing tricky policies will be more difficult and Italy‘s Five Star party were split on whether the country should help Ukraine.

In the UK – the Bank of England lifted interest rates by a relatively conservative 0.25% as one of the MPC members is pushing for more hikes and City bosses reckon the UK will fall into recession. Amid it all, BoJo faced and survived a vote of no confidence. The OECD warned that the UK’s economic growth is going to be the worst of the G20 apart from Russia!

In OIL & GAS NEWS – EU leaders put together an agreement to ban most Russian oil imports while the EU and UK announced a ban on insurance for Russian oil cargoes, which all served to push up the oil price in response. OPEC said that it would boost production quotas. Interestingly, Russian oil is making it through to places like China and India at a $20-30 a barrel discount to Brent Crude. In gas news, European gas prices shot up by 20% on news of a fire at a major LNG export terminal in the US and then the following week, Russia cut gas supplies to Europe, sending prices up again.

In RENEWABLES NEWS, there was a lot of news about nuclear power this week. EDF made the headlines for the number of nuclear power station closures in France due to corrosion issues which will take years to fix. On top of that, the company said that it would not keep Hinkley Point B in Somerset open beyond its July shutdown unless it got special consent. Austria then decided that now was a good time to voice safety concerns about the design and construction of Sizewell C in Suffolk, but this could be sour grapes as Austria is massively reliant on Russia for energy. In the meantime, Rolls-Royce is pushing for approval for the tech in its Small Modular Reactors so that it can launch on schedule in 2029. Elsewhere, the UAE made positive noises about investing billions of dollars in offshore wind, green hydrogen and batteries in the UK.

In CRYPTO NEWS, there was a lot of drama this month. At the beginning of the month, a story emerged about the FBI charging an ex-employee of NFT marketplace OpenSea with wire fraud and money laundering, which then resulted in 25 crypto experts writing an open letter to Congress urging for more regulation in the sector. Bitcoin fell sharply, prompting holders to try to withdraw funds only to be blocked from doing so by the likes of Celsius Network. Binance’s chief painted a bleak picture of a “crypto winter” and there was more bitcoin carnage going into the end of the month. Coinbase Global announced it was cutting 20% of its workforce and it seems that at least part of the sell-off was due to crypto hedge fund Three Arrows Capital having to try to convince everyone it was still solvent! In a side note, both the yen and pound hit new lows versus the dollar – in the yen’s case, it hit its weakest level for 24 years! Japanese companies will no doubt feel vulnerable to takeovers as a result (and there could be an influx of American tourists if Covid restrictions ease!).

In BUSINESS TRENDS NEWS, Kellogg decided this month to split itself into three listed companies specialising in snacks, cereals and plant-based food. This is interesting because it seems to be the latest conglomerate splitting itself into smaller and more focused parts after similar moves last year by General Electric and Johnson & Johnson. Elsewhere, in the UK, bankruptcies look set to boom thanks to rising costs, supply chain problems and rising inflation while British farmers worry about tough times ahead due to a major fertiliser supplier shutting down one of its two massive fertiliser plants in the UK due to high running costs (they use a lot of electricity). Meat processors are saying that consumers will have to go for cheaper cuts of meat because cattle will have to be slaughtered earlier in the season.

In FINANCIALS NEWS, Visa and Mastercard are being investigated by the Payment Systems Regulator due to the quintupling of cross-border transaction fees since Brexit. Buy Now Pay Later (BNPL) had interesting newsflow this month. Apple announced the launch of its BNPL service in the US – which was particularly notable because it will be offering these BNPL loans directly – not via its usual finance partner Goldman Sachs. Elsewhere, Indonesia’s biggest startup, GoTo, will launch a BNPL service. This should be interesting given it has an impressive customer base of 100m monthly users! It was also interesting to note that we are seeing more businesses using BNPL as a way to split rising costs. Meanwhile, in China, there was a run on domestic banks as locals lost trust in banks and tried to withdraw their money…

In INVESTMENT NEWS, Deutsche Bank got raided following accusations that it had been “greenwashing” its investments. Just a few days later, the chief exec of its DWS asset management firm resigned (Deutsche Bank owns 80% of DWS) only one week after the SEC fined BNY Mellon from fudging its environmental credentials. I think it is highly unlikely that DWS will be the only investment manager guilty of “greenwashing”! This could be to investment what dieselgate was to car manufacturers…elsewhere, activist investor Elliott Management announced that it would be suing the LME for the nickel trading disaster that happened in March this year. US trading firm Jane Street joined in on this as well.

In COMMERCIAL PROPERTY NEWS, Prologis put in an offer to buy Duke Realty in a deal worth $26bn, showing that there is still interest in the warehousing sector. In the UK, Singapore’s sovereign wealth fund, GIC, and US property developer Greystar, won the bidding for a £3bn+ portfolio of student housing, showing confidence in the UK rental property market (this is one of the biggest UK real estate deals we’ve seen since before the pandemic) and West End landlords Shaftsbury and Capital & Counties (aka “Capco”) agreed a $5bn merger. Meanwhile, general sentiment is that more UK property companies are going to go bust due to the effects of rising interest rates.

In RESIDENTIAL PROPERTY NEWS, US mortgages jumped by their steepest rate since 1987 in anticipation of more big interest rate hikes from the Fed as retail prices continue to stretch affordability. In the UK, property price momentum is losing steam, according to Zoopla, and UK mortgage approvals have fallen while Halifax says that new home inquiries have slowed down. We saw Lloyds Bank and HSBC raising mortgage rates in anticipation of more interest rate increases from the Bank of England. Rising rates are hitting buy-to-let landlords. In Saudi Arabia, there’s a mortgage boom going on at the moment thanks to government-subsidised mortgages designed to boost home ownership. Rates of ownership have been quite low compared to those in the UK and US and have been playing catch-up as part of the “Vision 2030” plan to transform the country’s economy.

In CONSUMER NEWS, China saw retail sales decline as Covid lockdowns take their toll on consumers. US retail sales also weakened in May in the first month-on-month decline this year. Inventories are piling up and retailers are noticing a trend among consumers of “trading down” to cheaper/own-brand products to cut costs. That said, Americans are still willing to travel despite rising fuel costs. German retail sales figures were also weaker, falling below market expectations. In the UK, consumer confidence hit a record low as we face higher bills and have consequently less to spend on discretionary items. A worrying trend is now emerging where a third of UK users of BNPL say that they can’t make their payments and spending on credit cards is rising. Like our American cousins, Brits are also “trading down” and buying less but Sainsbury‘s is making efforts to hold prices down for its customers (it allocated £500m for price cuts). On a positive note, though, WH Smith is bouncing back because its presence at airports and railway stations is now paying off as people return in increasing numbers and frequency to the workplace

In RETAIL NEWS, in the US, Target had a profit warning (their inventories were too high) while grocers like Kroger and Giant Eagle are pushing back on rising prices from food producers like Kellogg. In the UK, PE firm Clayton, Dubilier & Rice just got approval for the takeover of Morrisons and so it is now planning on selling off properties (which has been expected all along!). In apparel retail, Japan’s Fast Retailing (which owns Uniqlo) is having difficulties because the weak yen isn’t going as far with buying raw materials internationally, Spain’s Inditex (which owns Zara etc.) posted very strong results and Sweden’s H&M also did well, although not as well as Inditex! In the UK, Primark rolled out a limited click-and-collect service that proved to be very popular, Frasers Group increased its stake in Hugo Boss to 30% and Harrods had to delay its summer sale because of supply chain problems. Elsewhere, Ted Baker lost the main bidder for its business, JD Sports had to pay a fine for fixing Rangers’ football kit prices and Missguided was bought by Frasers Group after calling in the administrators while B&M announced disappointing numbers.

In EMPLOYMENT NEWS, the UK labour market remains tight, 20% of people are planning on quitting their jobs within the next year to get better pay and benefits and the global trial of a four-day week went ahead to see what the effect on productivity would be if people worked 80% of the time for 100% of the money.

In TECH NEWS, US Big Tech is lobbying hard (with a lot of financial backing) to stop Congress (with comparatively little in the form of financial backing) from restricting their business. Thus far, pressure on Big Tech has worked to the extent that many of the major players are going to sign up to the new European anti-fake news “code of practice on disinformation”. Elsewhere, Google claimed that YouTube Shorts are now on a similar scale to TikTok just two years post launch, HP lifted its earnings outlook due to feeling more confident about component shortages, Sheryl Sandberg left Meta/Facebook after 14 highly eventful years of massive growth and Apple said it was moving some of its iPad production out of China into Vietnam as a precautionary measure against future US-China tensions. In China, the tech clampdown by the Cyberspace Administration of China appears to be easing off and tech companies strengthened as a result but edutech companies whose business model was pretty much shut down overnight last year (companies like New Oriental) are having to adapt in order to get around restrictions in order to make money. One particularly popular teacher is teaching English whilst selling steak, for instance!

In TECH HARDWARE NEWS, the ship shortage situation is ongoing as two of the world’s biggest manufacturers (TSMC and Samsung) are still facing delivery delays. It was also interesting to hear that Brussels has now ruled on one standard for chargers – and that will be USB-C, which is bad news for Apple which has been using Lightning cables until this ruling, which will come into effect in 2024.

In CAR NEWS, US car prices keep rising, forcing wannabe owners to travel vast distances to buy their cars – and when they get there, they are faced with what Americans think is a scandalous $5 per gallon (which equates to £1.07 per litre versus the £1.83 per litre we are currently paying!). Meanwhile, Germany objected to a 2035 cut-off date for selling combustion engine-powered cars in the EU and Mercedes-Benz announced a recall of one million cars because they had dodgy brakes. In the UK, the latest figures from the SMMT show that the number of cars owned in Britain fell last year due to rising petrol prices, a relative lack of new vehicles for sale and a growing trend of owners keeping their vehicles for longer.

In EV NEWS, a report from EY shows that there is increasing interest in the UK in owning an EV but then there was frustration regarding the UK government’s decision to axe the remaining subsidies that were on offer. Tesla increased its prices again (but added that it was cutting 10% of its workforce), Toyota announced a recall of an EV it released only a couple of months ago, Ford warned that there would be major job losses in Europe as it re-jigged EV production, Rivian continues to have supply chain problems, Ferrari reiterated its commitment to electrify its range and Volvo said it was getting close to squeezing a 600-mile range from a lorry battery, which is particularly good news given that HGVs accounted for 20% of road transport emissions in 2019.

In BATTERY NEWS, Foxconn said it was building an EV battery-manufacturing facility in Taiwan, reinforcing its commitment to diversification into EV assembly. Britishvolt is trying to get Tesla on board as a customer for its batteries and is linking up with Northumberland College to offer a qualification in battery technology. It was also interesting to note that the Pentagon signed a $120m deal to build the country’s first major rare earths refinery in an effort to reduce reliance on China, which currently refines most of the world’s rare earths common in batteries.

In INDIVIDUAL COMPANY NEWS, Dutch ingredients and biosciences group DSM announced a deal to buy Swiss fragrance and flavour maker Firmenich for a whopping €41bn in cash and shares to create a global alternative foods and nutrition “powerhouse” to be listed in Amsterdam and called DSM-Firmenich. Juul got banned from selling its products in the US by the FDA (bad for Juul because it accounts for 90% of its global sales!), Netflix said it was putting together a new ad-backed tier of membership and Shopify said it was diversifying into B2B services. K-pop giants BTS announced they were going on hiatus, which sent their management company Hybe into a major tailspin (well, the boys bring in about 70% of the company’s total operating profit!) and Revlon filed for bankruptcy protection due to its massive debts. Talks are getting more serious about EY splitting its accountancy and consultancy arms and then floating the latter, but no decision has been made just yet.