Watson’s Weekly 02 -12-2023

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 when Europe’s inflation fell closer to target, when Shein filed for an IPO and when Tesla finally delivered on the Cybertruck…

• IN THE US – US GDP grew by more than expected in Q3. At an annualised rate of 5.2%, this was the fastest rate since 2021 and was was due to continued consumer spending and government subsidies for green industries.
• IN CHINA – factory activity contracted as the economy lost momentum, according to the latest PMI. This was the second consecutive month of contraction, which could imply that the government’s efforts to stimulate the economy either haven’t worked or haven’t fed through yet.
• IN EUROPE – Eurozone inflation fell by more than expected to 2.4% – its lowest level in over two years, edging closer to its 2% target rate. Although this could be seen as a victory against inflation, it has come at a cost – economic growth. France’s economy shrank and Germany’s unemployment rate rose as the eurozone heads towards recession. The far-right victor of last week’s Dutch elections, Geert Wilders, is looking to “moderate” his stance in a bid to make a proper bid for the premiership.
• IN THE UK – the OECD reckons that the UK’s on track to have the second lowest growth in the G7 over the next two years, just one place ahead of Germany, thanks to lingering inflation. Back in the UK, a Lords committee criticised the Bank of England’s poor record of inflation forecasts, which they argue made inflation worse than it should have been. I’d argue that the Fed, the ECB AND the Bank of England ALL got it wrong (they said that inflation was a temporary blip) so the fact that ex-Fed chief Ben Bernanke is supposedly going to come in and sort it all out in response to the report makes me laugh given that Bernanke didn’t always cover himself in glory. Then there was the news that Nottingham City Council issued a section 114 notice, basically declaring itself bankrupt. Councils had been particularly worried since the Autumn Statement didn’t give them much – and this was the result.

IN COMMODITIES NEWS…

• India plans to triple the amount of underground coal mining in order to meet the country’s fast-growing need for energy. The country’s coal ministry wants to triple output from underground coal mines by 2028. India currently relies on coal for about 75% of its power production.

IN OIL NEWS…

• OPEC+ decided to cut oil production, but the market treated this with scepticism as not every member was fully committed to the new target. Meanwhile, US crude oil inventories rose by more than expected.

IN RENEWABLES NEWS…

• Inflation may affect the viability of mini-nuclear power plants. NuScale Power, an American developer of Small Modular Reactors (SMRs – mini nuclear power stations) said this month that plans to build its first cluster of mini-nukes in Utah died after a number of towns that were backing the project pulled out due to rising costs. Despite this, the mayor of Tees Valley is about to agree a deal with US nuclear power company Westinghouse to build Small Modular Reactors (SMRs) in the North East.

MEANWHILE…

• Global stocks had their best month in three years as market hopes that interest rates would be coming down gathered pace, something that also helped the dollar to hit a three-month low.

IN BUSINESS TRENDS…

• South Korean defence firms such as Hanwha Aerospace, Hyundai Rotem and Korea Aerospace Industries are riding the wave of defence spending at the moment, helping the country to become one of the world’s top 10 defence exporters. It’s in a constant state of readiness anyway because of its neighbour and is robust enough to scale production very quickly and the Europeans are getting a bit nervous about it…talking of defence, the latest figures show that Turkey’s exports to Russia have boomed this year amid allegations that Turkey is becoming a backdoor supply route for sensitive items fuelling the Russian war machine.
• Deloitte and KPMG staff going to Hong Kong on business are being advised to take burner phones even if they’re not doing anything particularly sensitive. This is just symptomatic of the current wave of Chinaphobia gripping major corporates at the moment. Mind you, given the clampdown on western corporates recently, you can understand the paranoia…
• IN THE UK – UK business confidence is actually rising back to levels before the war in Ukraine, according to a monthly report by Lloyds Bank! This is having a positive effect on hiring plans. Meanwhile, given that I’m always banging on about how advertising is often seen to be a decent leading economic indicator, it was interesting to see that Channel 4’s chief said that the TV industry is seeing its worst advertising slump in 15 years! This isn’t boding well for the economy.

IN EMPLOYMENT TRENDS…

• Vacancies are increasing in the approach to Christmas, according to Adzuna, thanks to retailers and warehousing companies.
• The ONS’s new unemployment rate is 3.5%. This is notable because it’s lower than it was before and is using a new methodology because the previous one was deemed to be losing its accuracy.
• On the flipside, EY has decided to push some graduate start dates back in its advisory arm because of the lack of business while London has become the redundancy capital of the UK, according to REC. The tech and construction downturns have proved to be particularly damaging.
• A research report published by the Unit for Future Skills concluded that the finance and insurance sectors would be most vulnerable to AI taking over jobs. Management consulting was deemed to be most affected, followed by financial managers, accountants, psychologists, economists and lawyers – and London was found to be most impacted because of the concentration of these kinds of jobs. There was a mildly concerning article in The Guardian about a report alleging that Sports Illustrated published articles written by authors who were generated by AI! Sports Illustrated obviously denied the allegations. It’s already happening people 😱!!! The bots are taking over!

IN CONSUMER TRENDS…

• UK shop price inflation slowed down to its lowest rate in over a year, according to the BRC, as retailers cut prices ahead of the all-important Christmas season.
• Food producers have been found by the CMA to be guilty of putting prices up at a faster rate than their own costs were rising. Companies like Unilever deny this while supermarkets have already been cleared of indulging in “greedflation”.
• More consumers will use BNPL over the Christmas period, which is unsurprising given the cost-of-living crisis. A study shows that over 25% of adults in the UK will use BNPL as part of their Christmas spending – a rate which rises to 50% among parents with young children.
• Mortgage approval rates have risen for the first time in months despite a rise in borrowing costs! Is this the start of a modest housing recovery?? I wouldn’t have thought it would last too long though as we will soon be in the quietest time of the year for real estate (once the Christmas frenzy – i.e. wanting to move in before Christmas – is over, it usually all goes quiet for a few months as people build up cash again!).

IN RETAIL NEWS…

• IN CHINESE RETAILER NEWS – Shein filed to go public in the US – and although it’ll try to get a high price, there are political and regulatory risks. Meanwhile, Temu is going to be investing further in the US and its parent, PDD Holdings, has bought multiple ad units during the Super Bowl, which is some of the priciest ad real estate on broadcast TV! It is clearly putting its money where its mouth is!
• IN UK RETAILER NEWS – UK retailers are bracing themselves for a disappointing festive season, according to the CBI but online market places selling used goods – such as Amazon and eBay – are reporting a surge in sales as people aim to get the most for their money. Companies including Depop and Vinted have also been trading well. Luxury online retailer Farfetch had rubbish results and the founder is thinking of taking it private while Halfords warned of weaker profits. Elsewhere, Lush announced the opening of a new “hair lab” concept store in Brighton and Mountain Warehouse is planning on opening more stores after a strong first half performance.

IN LEISURE NEWS…

• EasyJet reported its first annual profit since the pandemic and the outlook is positive. The CEO observed that customers are starting to return to booking longer holidays and more expensive hotels.
• Saga is looking at financing options as it continues to battle with rising debts. Its CEO, Euan Sutherland, resigned. It looks like he has the opposite of the Midas touch and hasn’t really done a decent job for the last decade…

IN BANKS NEWS…

• Goldman Sachs said that it was reining in its previously aggressive China expansion ambitions given the ongoing US-China tensions.
• Barclays said that it is looking to drop thousands of investment banking clients in order to concentrate on the more profitable ones. This makes sense given that the bank is also looking to cut staff numbers as well.
• Lloyds Bank said it is going to close more branches whilst at the same time throwing its hat in the ring to buy Tesco Bank as the supermarket moves away from finance.
• Metro Bank got the OK from shareholders for its financing and is close to selling most of its home mortgage portfolio to Barclays. It then announced that it would be cutting 20% of its staff and reconsidering opening hours (especially Sunday opening).

IN INVESTMENT/WEALTH MANAGEMENT NEWS…

• Anti-greenwashing reforms that were due to come into force on January 1st next year have been pushed back to May 31st in response to City requests for more time to comply. The reforms are intended to stop fund managers from making false “green” claims.
• Financial advisers are going to be required by the FCA to hold more capital to cover potential compensation claims for poor advice. Until now, claimants have been paid out of the Financial Services Compensation Scheme but the new approach means that those who are guilty will have to pay more of their share.
• Trading app Robinhood is to launch next year in the UK. It’ll kick off with share trading of US stocks followed by London-listed stocks later on. I think they’ve got their work cut out given the relative lack of share-trading culture over here.

IN CHINA…

• We see the effects of the Chinese real estate crisis that were turned up a notch with Evergrande’s default in 2021. The scale of indebtedness in the sector that accounts for 25% of China’s GDP is frightening.
• Talking about indebtedness, Chinese authorities have launched a probe into shadow bank Zhongzhi, after the company described itself as “severely insolvent”. Shadow banks are getting dragged into the real estate abyss as they also lent money to the sector.

IN THE UK…

• IN COMMERCIAL REAL ESTATE – UK estate agent group Carter Jonas estimated that almost seven million square feet of office space in Canary Wharf currently falls short of environmental property standards, which could mean that Canary Wharf Group is left with a whopping bill to upgrade. Not great for them, but it could be a nice money-earner for construction companies and building materials suppliers!
• IN RESIDENTIAL PROPERTY – UK house prices are falling, according to the latest stats from Zoopla, as discounts are now getting bigger – 5.5% in November. This is the highest discount since 2018. Meanwhile, Rightmove remains bullish about its own prospects despite the imminent juicing up of rival OnTheMarket after the latter’s acquisition by deep-pocketed American property data group CoStar.

IN EV NEWS…

• The EU’s got a plan to get around the 10% Brexit tariff on EVs – it will extend the validity of the 2023 “statements of origin” into 2024 while the car industry itself continues to lobby for a three-year suspension of the tariff.
• Tesla’s Cybertruck is now ready for delivery and the prices have already been announced. Funnily enough, the prices are way higher than what had been stated previously ($61,000 starting price – way north of the $40,000 that had originally been touted!) but then again, those who’d put their deposit down have had a few more years to save the extra pennies given how many delays there have been to its release! Meanwhile, Tesla continues to battle Swedish unions – and there’s a bigger battle at stake here because losing in Sweden could have global implications for its workers!

IN OTHER CAR NEWS…

• VW is looking to cut more jobs as part of a €10bn cost-cutting exercise.
• Ford has slashed its profit forecasts thanks to lost production and higher labour costs resulting from the union strikes.
• GM announced a $10bn share buyback as a way to reassure investors about the health of its carmaking business. It also cut its investment in its driverless division Cruise. I think it needs to ditch the thing entirely as it is just a massive money pit IMO.
• Meanwhile, UK car production continues to increase – and has now done so for the eighth consecutive month!

IN AI NEWS…

• The US, UK and 16 other countries unveiled a new AI pact that calls for AI systems to be “secure by design”. It’s not binding, but it’s a step in the right direction!
• PwC launched a chatbot that can work out whether acquisitions are worth making. It should speed up the due diligence process but the timing of the announcement isn’t great given that it comes not long after the company made 600 redundancies in its advisory team.
• Retailers are using AI for inventory now. This will ensure that they have the right amount of stock in the right places depending on variables such as weather patterns and social media trends.
• OpenAI is readying itself for a employee share sale which will be an interesting indicator of sentiment following the dramatic events of last week! Talking of OpenAI, Microsoft now has a seat on its board, which will give it access to confidential information although it won’t be able to vote on key decisions. And talking of Microsoft, the company has shown that there are no hard feelings with the UK about the Activision Blizzard debacle as it announced a £2.5bn investment in a new data centre in west London and expanded computer capacity in Cardiff, among other things.

IN SOCIAL MEDIA NEWS…

• Meta has been accused of getting children addicted to its platforms and knew about underage users, but Meta is trying to shift blame onto the app stores, saying they should be tighter on age restrictions.
• Twitter has lost 3m British users since Elon Musk took it over, according to the latest figures from Ofcom and Ipsos. CEO Yaccarino’s job wasn’t made any easier by a frustrated Musk telling advertisers who’d abandoned the platform to “go **** yourself”.

ELSEWHERE…

• A report by VC group Atomico shows that funding for European tech companies has almost halved this year as US investors pulled back. It seems that this is at least partly because investors are now much more focused on profitability rather than raw growth.

• Private equity firm Blackstone announced it is to buy petcare marketplace company Rover Group in a deal worth $2.3bn. Rover Group now has 30 days to seek alternative buyers.
• Cigna and Humana are in talks to combine in what could become a new giant in the health insurance industry!
• The Saudi Arabian sovereign wealth fund is taking a 10% stake in Heathrow for £1bn. It’s buying it from Ferrovial which has been trying to offload its 25% stake for the last few months.
• AbbVie is to buy ImmunoGen in a $10bn deal which basically buys the former a promising new technology for treating cancer. This will be a much-needed boost given AbbVie’s anaemic drug pipeline.
• Aviva is buying a Canadian vehicle insurance rival for £100m as part of its drive to focus on business in the UK, Ireland and Canada.

• Novo Nordisk is looking at flexible pricing for its obesity drug. It’s not planning to cut prices but it’s talking to healthcare systems around the world about how they can spread the cost. I think that this shows a lot of confidence – and given that the obesity market is absolutely massive it’s a decent call, IMO!
• Rolls-Royce is looking to sell its flying taxi and electric plane business as the CEO wants to streamline the business as part of plans to quadruple profits.
• Uber was in the news this week for a couple of eye-catching reasons! Uber is having another go at tempting London’s black cabbies to join its app after its last abandoned attempt  in 2017. It is also pushing its train-booking service, something it’s had for a while but hasn’t pushed so much until now. Will Trainline be worried??

My favourite “alternative” story from this week was the one about which is better – Roses or Quality Street! I agree with the conclusion in this article 👍