Watson’s Weekly 04 -11-2023

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 the world’s first AI safety summit took place at Bletchley Park, when the Bank of England left interest rates unchanged and when Sam Bankman-Fried was found guilty of fraud and money laundering…

• IN THE US – the Fed left interest rates unchanged at their 22-year high (the Federal Funds Rate was held steady at the 5.25-5.5% range) while Fed chief Jerome Powell left himself room to increase rates further should the need arise.
• IN CHINA – FT research showed that direct investment in China has slowed down sharply while the number of tech IPOs has also fallen thanks to clampdowns by Chinese regulators on tech start-ups. Start-ups now have to proof of a more robust track record and sustainable business plan, which is cutting a lot of them out!
• IN JAPAN – the government launched a $113bn stimulus to tackle inflation that will fund tax cuts and cash handouts. There will also be an extension to existing subsidies to take the edge off rising petrol and electricity prices.
• IN EUROPE – the Eurozone’s economy contracted in Q3, as did Germany’s – meaning that they could both fall into recession if the next quarter is also negative.
• IN THE UK – the Bank of England left interest rates unchanged and warned that they could remain at higher levels “for an extended period of time” although some think that we’ve reached the peak and the next move is going to be in the downward direction. Meanwhile, the ONS is trying to fix the way our unemployment numbers are collated as the current methods aren’t working and aren’t accurate enough. It’s important because the Bank of England needs these to inform its decisions on interest rate policy.

IN OIL NEWS…

• The World Bank warned that the oil price could potentially go to $150 a barrel if the Israel-Hamas war becomes more prolonged.
• US oil inventories went up by more than expected, according to the Energy Information Association, which might help to take the edge of high oil prices.
• BP continued to focus more on profitable oil and gas projects but batted away suggestions that they’d be involved in any M&A going on in the sector at the moment, something that the likes of Goldman Sachs and Morgan Stanley are doing very well out of. In the meantime, Shell made decent profits in Q3, boosted by oil and gas production and higher oil prices.

IN RENEWABLES…

• Wind power company Orsted cancelled two massive US offshore windfarm projects, opting instead to pay the £3.3bn impairment charges instead. It has, along with rivals, complained about rising costs in the industry and voiced the need for governments to foot more of the bill.

IN CRYPTO NEWS…

• Bitcoin continues to do well despite all the negative press surrounding the Sam Bankman-Fried trial. There’s an expectation that there will be less supply of bitcoin next year and hopes that incoming regulation could bring crypto closer to the mainstream.

IN BUSINESS TRENDS…

• Smaller UK companies are getting more confident, according to the latest quarterly report from the Federation of Small Businesses (FSB) – which is something reflected by the Lloyds Bank business barometer which also showed businesses becoming more confident.
• That said, while insolvencies are hitting new highs, bankruptcies are benefiting the likes of PJT Partners, Houlihan Lokey and Paul Weiss who advise on them. EY’s latest research says that profit warnings are rising – and as if to illustrate the point, WeWork looks like it will go bankrupt – which has negatively affected investor sentiment in rivals such as IWG, which is actually doing quite well!

IN CONSUMER TRENDS…

• The luxury boom looks like it is losing momentum as LVMH saw a slowdown in its growth rate over Q3, a trend that was confirmed by DVLA figures which showed a fall in the sale of “supercars” in the year to March. Estée Lauder’s share price fell to its lowest level in six years as investors reacted to news of Chinese customers reining in their spending. Mind you, Prada bucked this trend by reporting stronger revenues, as did Ferrari when it reported its Q3 results.
• Consumers continue to face hurdles as home insurance premiums look set to rise after a period of higher claims due to unseasonable weather, high inflation and strained supply chains. UK mortgage approvals have fallen due to the knock-on effects of higher interest rates and real wages are falling as they can’t keep pace with inflation. At least shop price inflation is slowing down, according to the latest BRC figures!

IN EMPLOYMENT TRENDS NEWS…

• Grad recruitment is down as vacancies have fallen by 30%, according to jobs search engine Adzuna.
• Trainline has benefited from more people returning to work in offices as workers use it to buy their tickets. Most of this is from leisure travel so if business travel starts to improve that should provide a further boost.

IN AI NEWS…

• The inaugural two-day AI Safety Summit took place at Bletchley Park this week. A lot of AI’s big hitters – as well as representatives from many governments – took part and even Elon Musk added some celebrity stardust to the proceedings (although Presidents Biden and Macron gave it a miss). 26 nations agreed to co-operate over AI development while the US pursued its own efforts back home and although the “landmark” agreement isn’t legally binding, it is a first step! I thought it was impressive that the event even took place with so many big shots making it there in person but opinion was divided as to the damage that AI can do to society and countries are at different stages regarding how to regulate it. As if to further illustrate the need for regulation, an Australian academic was forced to admit using false information gleaned from Google’s AI chatbot Bard in a piece of research submitted to a parliamentary inquiry.

IN TECH HARDWARE NEWS…

• The $69bn Broadcom-VMWare merger was held up by Chinese regulators dragging their feet (presumably in retaliation for US sanctions) and a final deadline has been set for November 26th.
• Panasonic cut profit forecasts for its battery division due to worse-than-expected sales to Tesla, one of its main customers. It seems that there are a lot of EV manufacturers cutting back on EV/battery factory expansions due to slowing customer demand.
• Samsung managed to beat consensus in its Q3 results and although its memory chip business remained in loss for the third quarter in a row, the losses narrowed. It reckons that demand for memory chips will continue to improve from here – another major player saying the same thing!
• Western Digital announced that it would split itself in two after abandoning merger talks with Japan’s Kioxia. It will be separating into a flash memory business and a hard drive business, which is something activist investor Elliott Management has been pushing for for over a year.
• Huawei’s Mate 60 Pro phone continues to be popular in China’s domestic market and has raised its market share there from 9% to 13%! It’s coming for Apple, but Apple still has that status-symbol cachet at the moment and there may be trouble ahead given America’s moves to starve Chinese tech companies of advanced chips.
• Apple suffered its longest continuous streak of revenue decline in over 20 years. It’s thought to be down to a global drop-off in smartphone sales and the economic slowdown in China. Still, it’s just unveiled a new lineup of products ahead of the key Christmas season, so you would have thought that things will pick up from here!

IN SOCIAL MEDIA NEWS…

• Meta says it will charge EU users of Facebook and Instagram up to €12.99 per month to get ad-free versions in order to “comply with its data privacy rules” after the EU’s top court ruled that Meta needed to get users’ permission before targeting them with personalised ads.
• TikTok has asked its managers around the world to dole out more lower ratings in employees’ performance reviews. This is bad news for staff as this sort of move is a precursor to job losses. It also faces continued pressure for not sufficiently policing the content on its platform, particularly regarding Israel-Hamas war videos.

IN EDTECH…

• Byju’s is on the verge of collapse as the company that was once India’s most valuable start-up is about to start a programme of asset disposals to pay down its debts. It went on a massive debt-fuelled acquisition spree to consolidate its place in the edtech industry and it’s now backfiring…
• Educational publisher Pearson, which said that full-year profits will be coming in slightly higher than previous forecasts, is committing to the ongoing development and integration of AI in its transition from textbook purveyor to edtech master!

ELSEWHERE…

• Magic circle law firm Allen & Overy sold a stake in its legal tech business aosphere, to UK private equity firm Inflexion and US investor Endicott Capital whilst retaining a minority stake. It looks like this is part of an emerging trend of companies attracting private equity cash to finance non-core business units whilst retaining a stake to make sure they can participate in any potential upside.

• An agreement has been reached between Ford, GM, Stellantis and the powerful UAW union in America over recent strikes. Workers’ pay will increase by 25% over the next four years and they will be paid for the time they spent on the picket line! Stellantis reckons that the strikes will have cost it about €3bn in lost revenues.
• Toyota announced a more than doubling of its investment in a North Carolina factory that is being built right now to increase manufacturing capacity for hybrid vehicles and it announced a doubling of profits over the quarter, prompting it to raise its full-year forecasts. On the flipside, Toyota announced the recall of over 1.8m RAV4s built between 2013 and 2018 due to potential fire risks involving the batteries! This could be expensive because a software update this ain’t!
• IN LUXURY AUTO MAKER NEWS – Ferrari had a great Q3 and decided to raise its full-year guidance as a result. It beat market expectations for profits and revenues thanks to an improving sales mix and rising demand for vehicle customisation. However, Aston Martin had to cut sales forecasts because of production delays to its new DB12 model.
• JLR returned to profit in Q3 and raised its forecasts for the full-year. This marked its fourth consecutive quarter of growth so it certainly seems to be going in the right direction!
• Tesla had an important win in an Autopilot lawsuit which is examining its role in a fatal crash as a jury found that there wasn’t a manufacturing defect in the driver-assistance system.

IN BANKS NEWS…

• Deutsche Bank announced plans to shut down about half of its Postbank branches over the next two years but promised to drastically improve its digital offering. Germany’s bank branch network has dropped by over 43% over the last ten years as more customers move online but Deutsche has attracted massive criticism recently as the migration of Postbank’s 12m customers to its IT platform was disastrous.
• HSBC had some pretty solid Q3 results and pre-tax profits more than doubled thanks to higher interest rates boosting income. It chief exec reckons that China is now past the worst of the property crisis but I’d take what he says with a massive pinch of salt as HSBC is trying to suck up to the Chinese government (remember the government recently told commentators and analysts not to be so negative about China’s economy??) as it commits more to the Chinese market.

IN PAYMENTS NEWS…

• The FCA is taking action against PayPal and QVC as it believes that customers using its BNPL functionality were deemed to be “at risk of harm” because of the dodgy fine print in their contracts.
• Zilch, a British rival to Klarna, has just attracted a low single digit million pound equity investment from eBay ventures, giving Zilch an implied valuation of $2bn. It almost tripled revenues in 2023 but still reported an overall loss but it is clearly in a hot area as now over 25% of people in the UK now use BNPL services.

• The troubled Evergrande is facing a winding-up petition in Hong Kong two years after it had its first default. If this goes ahead, Evergrande could face liquidation and the repercussions would be serious.
• In the UK, Zoopla has highlighted house price weakness across the UK this year thanks to – surprise, surprise – higher mortgage rates frightening off buyers of new homes. That said, the latest Nationwide numbers showed that house prices actually rose unexpectedly last month – but that was because of a shortage of supply rather than an uptick in demand.
• Housebuilding is in a rut currently as the latest RICS survey showed that construction output is falling, which will add to housing supply shortages. The outlook for next year isn’t all that great either, unfortunately!

IN RETAIL NEWS…

• Amazon announced the closure of its “Amazon style” clothing stores. It comes after other physical outlets for Amazon, including bookstores and specialty outlets, also shut down. Surely it should just stick to e-tailing?
• IN APPAREL RETAIL – Asos announced a downbeat outlook at the delayed publication of its results and blamed the weather for poor sales. Frasers sold Missguided’s brand and IP to Shein and there is a possibility that Frasers could have more of a relationship with Shein as the latter aims to expand in Europe. Next announced strong results and upgraded its annual profit expectations for the fourth time in five months! It seems that its mix of online, offline and array of brands is proving to be a hit with the customers.
• Sainsbury’s said it was winning customers back from Aldi and Lidl and that it would hit full-year profit forecasts at the top of the expected range. Supermarkets are beginning their Christmas ad campaigns in earnest, hoping to tempt customers with the help of various celebs!

IN LEISURE NEWS…

• McDonald’s saw profits rise in Q3 but in order to keep ahead of the game in a cost-of-living crisis it needs to make sure that it keeps the right balance on pricing.
• Six Flags and Cedar Fair announced an all-paper merger to bring together the two US theme-park operators which will give them scale, a broader geographical footprint and the potential for cost cuts.

• IN PHARMACEUTICAL NEWS – Moderna had a nightmare as its shares were hit by a bigger-than-expected quarterly loss and a downbeat outlook as demand for its Covid vaccine has tanked. Meanwhile, Novo Nordisk continues to benefit from its anti-obesity drugs – which it seems can also treat other conditions! Its Wegovy drug is doing extremely well – but if Eli Lilly’s Mounjaro diabetes drug gets approval for treating obesity there will be more competition (although it sounds like there’s enough demand to go round!).
• IN TELECOMS NEWS – BT announced bigger profits thanks to higher bills for customers and the implementation of cost-cutting measures. Vodafone offloaded its Spanish business to Zegona Communications as part of efforts to streamline its business.
• Disney has kicked off the process of buying the rest of Hulu that it doesn’t own in an $8.6bn deal.
• Beyond Meat announced that it would be cutting a whopping 19% of its non-production staff and 8% of its global workforce thanks to waning demand for its products and competition from the likes of Tyson Foods and Impossible Foods.
• Deckers Outdoor is doing well thanks to its Hoka brand of shoes. This is interesting given that more established rivals Nike and Under Armour are losing ground currently. Another brand to watch out for is On Holding, which continues to gain ground…

I didn’t get to do this with my kids this weekend, but this was my fave video of the week by far 🤣! I am definitely going to try it though!