Watson’s Weekly 02-03-2024

This is an amalgamation of the “best bits” of the daily weekday newsletter/blog woven together to form a concise and coherent view on the things that matter in the commercial and economic news of the week. 

THE COLOURED HIGHLIGHT REFERS TO THE EDITION WHERE THE STORY APPEARED IN WATSON’S DAILY. Clicking on the day will take you to the appropriate edition of Watson’s Daily.

This was the week that bitcoin breached $60,000, China paranoia increased and Ocado and M&S got feisty…

• IN GLOBAL NEWS – the global tax deal put together by the OECD back in 2021 is looking precarious. Over 135 countries signed up to paying a minimum 15% corporate tax rate in this deal and the US is getting particularly wobbly about it. If the US doesn’t sign I would have thought that the whole thing will fall apart (or at least be rendered pretty useless).
• IN THE US – the core inflation number rose between December and January, which means that it is more likely that the first interest rate cut is likely to be delayed until the summer.
• IN EUROPE – inflation in the Eurozone’s two biggest economies (Germany and France) fell to its lowest level since the middle of 2021 but services prices remained strong, making it more difficult to discern when the ECB should start to cut rates. Also, Hungary backed down, allowing Sweden to join NATO.
• IN THE UK – a member of the MPC blamed stubbornly high inflation on rich people spending “disproportionately” on travel, eating out and entertainment. She’s got a point but asking these people to spend less money isn’t going to go well – so the only way to curb their enthusiasm would be to tax them, which isn’t going to go well either, especially when there’s an election coming this year. Meanwhile, chancellor Hunt is considering the ditching of “non-dom” tax status as part of efforts to fund pre-election tax cuts while English councils face tough times ahead in terms of funding – as an annual survey of English councils showed that 10% of them believe that they’ll go bust in the next 12 months if things continue as they are.

IN OIL NEWS…

• We see that, despite Joe Biden’s best efforts, oil and gas industry profits have tripled during his term in office! Despite this, the industry still wants the Republicans to win the next election as the oil and gas companies feel that they will be more supportive. It seems that the industry may not get affected by who is in office by as much as had previously been thought.
• Research by European energy consultancy Rystad shows that western Europe has mostly switched away from reliance on Russian oil and into oil from the US and Canada. Meanwhile, Russia has been increasing its supply to China and India who have been getting it at a discount.

IN ENERGY NEWS…

• It looks like asset managers are continuing to move away form green investments and it’s possible that this could slow down the energy transition as the companies won’t have as much access to cheap money as they had in the past.
• We saw that there’s a project going on at the moment where Britain is going to be linked to the Sahara via cables laid on the seabed with solar panels on the Morocco end and a substation on the UK end! It sounds like it should be inefficient (because of the distance the electricity has to travel!) but it will still be able to provide a sizeable amount of electricity.

IN CRYPTO NEWS…

• Bitcoin breached $60,000 for the first time in two years! Where will it stop? Not far to go now before it hits the $69,000-ish that it hit in 2021!

IN BUSINESS TRENDS NEWS…

• The Red Sea is still disrupting shipping. A report by the BCC said that over 37% of Britain’s exporters have been impacted by the ongoing disruption in the Red Sea via increased costs and delays.
• Joe Biden has now declared that Chinese EVs pose a security threat and has ordered an investigation into whether they can be used for spying (remember that the Chinese said this about Tesla cars not long ago and banned state employees from owning them). The EC is already looking into whether Chinese car manufacturers have been unfairly helped by the state and although tariffs could be imposed to level the playing field, European car manufacturers think that this may not be enough. Officials from the UK’s Department for Business and Trade are also thought to be on the verge of launching a similar investigation. As if to underline the danger, the municipal government of Shenzhen announced a raft of measures designed to facilitate car exports for Chinese manufacturers.
• UK SMEs are very concerned about high inflation and high energy bills, according to BDO’s “Economic Engine” survey. There are also concerns about funding options for business expansion.

IN CONSUMER TRENDS NEWS…

• A big survey was carried out by the Association of International Retail which showed overwhelmingly that tourists would spend more in the UK if they reintroduced the scheme whereby they could reclaim 20% VAT on purchases.
• Data compiled by by Sensormatic Solutions and the BRC shows that Britain has seen its sharpest drop in high street footfall since the pandemic in February! This was blamed on one of the wettest ever Februarys and train strikes.
• There’s good news for UK retailers as the latest figures from the CBI show that the balance of retailers reporting weakening sales has dropped to its lowest level for ten months, meaning that consumers are spending again! Also, food price inflation is slowing down according to the BRC shop price index.

IN EMPLOYMENT TRENDS…

• The number of UK workers on zero hours contracts has gone up, according to research from the Work Foundation at Lancaster University. Those in unstable jobs were more likely to be particularly vulnerable to consistently high inflation as they are more likely to be in a position where they have had to trade security for flexibility that zero-hours contracts give.
• Royal Mail is getting sued by its Parcelforce delivery drivers in an action that is similar to that of Uber and its drivers where workers were initially classified as “contractors” rather than “workers”.
• The number of job vacancies has fallen by almost 15%, according to Adzuna, thanks to businesses being subject to high borrowing costs and recessionary gloom. In theory, this feeds into the argument that interest rates need to be cut sooner rather than later to give businesses more of a chance to borrow money at a lower cost in order to expand.
• UK law firm Pogust Goodhead, which specialises in group actions, announced that some junior lawyers could get paid up to £2m over three years! This is being made possible by an unusual agreement where American fund manager Grammercy invested £550m in the company, £200m of which is going to be a bonus pool from which partners and other lawyers can draw. It will be interesting to see whether other deals like this start popping up, especially as there seems to be increasing speculation that class actions will become a “thing” over here…
• IN LAYOFFS NEWS – Expedia announced that it would be cutting headcount by 9% and Electronic Arts said it would cut about 5% of its workforce as both companies engage in streamlining their respective businesses.

OVERALL…

• Google is now getting sued for $2.3bn by 32 media groups who say that they had suffered losses thanks to Google’s conduct in digital advertising.

IN AI NEWS…

• Apple shareholders Norges Bank Investment Management and Legal & General are pushing Apple to disclose more information about AI risks that the company faces, particularly around ethics. There are increasing calls about this sort of thing regarding AI but at the moment, disclosure isn’t actually binding.
• Big Tech companies continue to invest in smaller AI companies to keep ahead and we saw that Microsoft, OpenAI and Nvidia backed Figure AI in its latest funding round as it tries to bring AI-powered humanoid robots to the workforce “as soon as possible”! Amazon’s $1bn industrial innovation fund is also looking to invest in AI and robotics! Also, Microsoft agreed a “multiyear partnership” with French AI start-up Mistral as it broadened its involvement in AI.
• I thought that there was an interesting article on AI being thirsty! Development of AI involves vast computing power, which involves data centres – and those data centres need cooling down, which means that they need water. This, in turn, raises the question of the environmental impact of the current AI boom.
• IN CHATBOT NEWS – the BBC and the Civil Service are now dabbling in AI! BBC journalists will be using it to write headlines and repetitive admin tasks at the Civil Service will be carried out by chatbots in a bid to cut costs. Klarna said how good its customer service chatbot is! This chatbot, developed with OpenAI, is now handling the work of about 700 agents and is both faster and more accurate in solving issues – all whilst maintaining similar levels of customer satisfaction! Very scary…meanwhile, Chinese chatbots are now facing scrutiny by the newly-formed Artificial Intelligence Safety Institute, which will see whether AI systems present national security threats.

IN GIGAFACTORY NEWS…

• Tesla’s German gigafactory problems are continuing as officials from the water authority near Tesla’s factory in Grünheide want Tesla to close its wastewater line until further notice. There are concerns about Tesla’s factory expelling six times the permitted about of hazardous pollutants in the water system despite repeated warnings.
• JLR owner Tata announced plans to build a gigafactory in Somerset, just outside Bridgewater. It will be the biggest battery factory in the country and will be expected to supply almost 50% of the forecast battery manufacturing capacity needed for the automotive sector!

IN EV NEWS…

• Apple announced that it had abandoned plans to make its own EV. Some of those working on the secretive “Project Titan” will now switch to working in Apple’s AI team.
• Tesla unveiled its new car – the Roadster – and said that it will start shipping next year. The sports car’s 0-60mph time is an insane sub-one second!!!
• VW expanded its partnership with Chinese partner XPeng to collaborate on software and sourcing. A smart move IMO as VW continues to lose traction in the world’s biggest EV market.
• EV start-up Fisker announced a “going concern” warning this week, adding that it would cut staff numbers by 15% following a number of glitches during its first year of production. It’s not looking good…

IN OTHER CAR NEWS…

• It seems that Toyota’s view that hybrids were the way to go is actually turning out to be true! Sales of hybrids continue to climb whereas BEV sales as a proportion of new car sales are falling.
• Aston Martin’s losses are narrowing (good news) but the launch of its first electric model is going to be pushed back from 2025 to 2026 thanks to ongoing supply chain problems.

• Russia’s biggest state-owned lender, Sberbank, posted record profits thanks to a boom in domestic lending. Households have snapped-up state-subsidised mortgages and business have been borrowing money.
• Skipton Building Society’s 100% mortgage (the “Track Record”) mortgage has proved to be successful. It’s had a successful first nine months, arrears levels are at zero and it is a well-regarded product. This is particularly interesting in light of the talk that abounded this week about 99% mortgages…
• American Express announced plans to roll out BNPL in the UK where it will allow certain Amex users to pay for purchases worth £100 and over in equal instalments over three, six or 12 months for a fixed fee but no additional interest. How long can Klarna stay ahead??
• Klarna announced its fifth annual loss in a row. It’s aiming to float on the NYSE but I think that it needs to do this sooner rather than later before competitors eat away at its business.
• Britain’s biggest wealth manager St. James’s Place saw its shares tumble after it put aside £426m to cover potential refunds to disgruntled customers but it could get worse as negative newsflow erodes customers’ confidence…
• Hedge fund Man Group and asset manager Schroders posted disappointing numbers due to poor performance from quant strategies and restructuring costs respectively!

IN GLOBAL TRENDS…

• House prices have been rising worldwide, according to the FT’s analysis of OECD data. Many are now concluding that the deepest property downturn in a decade has pretty much bottomed out. House prices are now increasing or stabilising in most advanced nations whereas those in other countries are at least falling at a slower rate.

IN UK CONSTRUCTION…

• The CMA announced this week that it would be investigating the “suspected sharing of commercially sensitive information by housebuilders, which could be influencing the build-out of sites and the prices of new homes”. It will try to ascertain whether Barratt Developments, Bellway, Berkeley, Bloor Homes, Persimmon, Redrow, Taylor Wimpey and/or Vistry have colluded on house prices, the rate at which new homes are built and incentives offered to buyers. Some say that this is more down to the complexity of planning laws rather than anything else more sinister.

IN MORTGAGES…

• We saw speculation build about Hunt considering 99% mortgages, but he scrapped the idea due to a backlash from lenders who warned that such mortgages could prompt a surge in defaults among borrowers.
• Meanwhile, mortgage approvals hit their highest level since October 2022 and although expectations for an interest rate cut have cooled down a bit recently, they are still expected to fall (and bring mortgage rates down with them).

IN COMMERCIAL PROPERTY NEWS…

• Hammerson sold the Union Square shopping centre in Aberdeen for £111m, 8% lower than its value at the end of last year, to US-based real estate fund Lone Star as Hammerson ploughs on with offloading “non-core” assets. Hammerson has now sold off all of its less-dominant properties, freeing up more cash and leaving behind a more focused portfolio.

IN RETAIL NEWS…

• Electrical goods retailer Currys is attracting bid interest! It’s so far snubbed advances from activist investor Elliott Advisors and seems to be holding out for an offer from China’s JD.com, which has been doing its due diligence.
• Homebase is now up for sale again for the second time in four years as owner Hilco Capital wants to flip it after selling off assets and cutting rents. Homebase’s results were a bit of a shocker, though, as it reported big losses in a “challenging year”. It’s now looking as appealing as the last turkey in the shop…
• Halfords announced its second profit warning in just over a year! Cycling, retail motoring and consumer tyres underperformed but its service, maintenance and repair business did OK.
• IN GROCERY RETAILING – the latest Kantar figures show that Asda is lagging all of its major rivals on sales growth as its market share continues to erode. Lidl was the strongest performer over the latest quarter. Sainsbury’s is on the verge of reducing headcount by 1,500 as part of efforts to streamline the company in order to stay ahead of rivals. Also, the relationship between Ocado and M&S is getting increasingly tetchy as the former is threatening to sue the latter for what it sees as a payment that it is legitimately owed. M&S maintains that previously-agreed targets have not been hit, meaning that they are holding back on a £190m payment.
• IN OTHER NEWS – the UK is trying to persuade Shein to list on the LSE. It could potentially get a decent valuation over here as UK investors actually know quite a bit about fast fashion, but I maintain that there is big litigation risk with Shein as its stellar growth has, allegedly, been at least partly due to copying other brands’ designs.

IN LEISURE NEWS…

• British Airways owner IAG posted strong results on the back of the travel boom, EasyJet is about to return to the FTSE100 after a four-year absence and Ryanair is pushing Boeing for compensation for aircraft delivery delays.
• Red Engine, which owns darts-themed Flight Club and shuffleboard-themed Electric Shuffle, has seen sales boom since 2022 and announced the opening of more venues this year. It seems that customers can’t get enough of the experiences!

• IN MEDIA NEWS – Universal Music Group’s war on TikTok is intensifying as both sides are digging their heels in. UMG says that TikTok needs to pay more for access to music from its artists and TikTok is refusing to budge. If TikTok gives in now, it’s going to have to renegotiate will all the others! Meanwhile, UMG announced that it’s planning on streamlining its business although earnings actually increased over the course of 2023. Elsewhere, Disney announced a merger of its India business with Reliance Industries after its initial foray in the country fell short of expectations. This way, it can still keep skin in the game but not spend too much time on it.
• Alcoa has just agreed to acquire Australia’s Alumina for $2.2bn in the latest deal in the mining sector. Alcoa says that this deal will speed up decisions and help with cutting costs.
• Wincanton, Britain’s last independent road haulier, is now subject of a bidding war as the previously agreed bid with France’s CMA CGM looks like it’s going to be gatecrashed by an offer from America’s GXO.

My favourite video this week was the one about what it’s like to keep up with marathon superhuman Eliud Kipchoge! Amazing!