Watson’s Weekly 06-04-2024

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 saw the US and UK sign an agreement on AI safety and Disney’s Iger face down an assault from Nelson Peltz while Julian Dunkerton decided not to buy Superdry after all…

• IN THE US – inflation continues to be stubbornly high, making it more likely that interest rate cuts will be pushed back as Fed chief Jerome Powell wants to see more data points that show inflation going down. Meanwhile, an ex-chief global political analyst at Citigroup reckons that a Trump/Biden race to the White House will not yield a clear result and after the last election debacle, whatever the result turns out to be it may be contested – which creates more uncertainty.
• IN EUROPE – Eurozone inflation fell to a two-year low of 2.4%, which was weaker than the market was expecting. This was probably largely due to the fall in inflation in Germany, the Eurozone’s biggest economy. This will certainly be food for thought at the ECB’s next interest rate meeting! Meanwhile, Turkey’s president Erdogan’s AKP party took a big hit in the country’s local elections as citizens expressed their anger with the inflation crisis.
• IN THE UK – I thought that there were a few interesting observations made in the FT this week about the timing of UK interest rate cuts. Quite often the Fed, ECB and Bank of England move in synch but most recently when they started increasing interest rates to combat inflation, the Bank of England moved first, followed by the Fed and eventually the ECB (remember ALL of these “experts” clung on to the belief that inflation was “fleeting” back then) so it’ll be interesting to see if there is a united front or not. On balance, I think that the Fed could be the last one to move in this latest cycle. Then there was an interesting article which suggested that if there are big defeats in the local elections on May 2nd this year, Sunak may have to call an early general election in June if it results in a load of in-fighting. As things stand, the government will probably want to delay an election for as long as it can on the off chance that an improving economy will give them a boost in support.

IN ENERGY-RELATED NEWS…

• Solar panels continue to get cheaper – BloombergNEF says that the price of solar panels has halved over the last year and the EU announced that it had now launched two probes into Chinese solar manufacturers, looking at whether state subsidies have given them too much of a competitive advantage.
• EU gas storage levels are now at 58.7%, which means that the level could hit its 90% target in early August – three months earlier than its original target of November. This is good news for next autumn/winter.

IN COMMODITIES NEWS…

• Coffee bean prices are reaching record highs as we have a second consecutive year of poor harvests in Asia. It doesn’t like this will improve any time soon either, particularly as coffee consumption is rising strongly across Asia.

IN BUSINESS TRENDS NEWS…

• BALTIMORE BRIDGE – the repercussions continue and business analytics group Dun & Bradstreet reckons that the impact of the port closure is costing about $1.7bn per week in the trade of consumer goods, automobiles, coal and other shipments.
• CHINESE ROBOTS – China’s biggest industrial automation company, Shenzhen Inovance, remains defiant in the face of increasing protectionism in the West and vows to continue in its efforts to be among the top three companies in this space within five years. Given current levels of China paranoia, I would not be at all surprised if their wings were clipped by policymakers wanting to protect European companies.
• BEAUTY – there are signs of an emerging slowdown in the beauty industry and a number of companies such as Ulta Beauty, e.l.f. Beauty, Coty and Estée Lauder are having a tough time. Given the boom post-pandemic it’s possible that we’re seeing more of a “normalisation” in demand but I would have thought that the mojo will return once consumer confidence recovers as interest rates start to fall.
• WEIGHT-LOSS DRUGS – given the massive success of weight-loss drugs by Novo Nordisk (Wegovy) and Eli Lilly (Zepbound), it’s unsurprising to hear that according to health data company Affinity, there are currently 232 anti-obesity medications at varying stages of development! Improved treatments are likely to have better efficacy, be available in pill form, reduce common side effects or require less frequent injections – or perhaps all of the above! This area is absolutely massive and highly lucrative.
• UK MANUFACTURING – the latest S&P PMI showed that a jump in domestic orders has propelled UK factories out of a slump and prompted output to hit a 20-month high! This is a real boon given how tough it’s been for manufacturers for the last couple of years.

OVERALL…

• EV demand  continues to wane, according to the latest figures from the SMMT. Sales of petrol and hybrid vehicles are proving to be particularly strong. Any March gains in EV sales were mostly down to fleet buyers – not individual ones.
• Figures from the AA show that the value of second hand EVs has crashed since the beginning of this year. I would have thought that this will be because of a) the influx of cheap new Chinese EVs coming onto the market, b) early adopters putting their used EVs on the market and c) the rubbish charging network. Is this weakness in EV sales just a blip or is it going to become a trend? I think it could become a trend and that there won’t be a big spike in sales because a) there’s no FOMO, b) until the charging network gets appreciably better it’s just inconvenient (especially for those who do not have off-street charging access) and c) we don’t know yet whether our electricity infrastructure can actually cope with loads of EV owners charging their vehicles!

IN CAR MANUFACTURER NEWS…

• AMONG CHINESE MANUFACTURERS – BYD saw stronger sales in March (although sales were actually weaker overall in Q1) while Xiaomi’s share price spiked up on the feelgood from last week’s SUV launch. There’s more potential upside for Xiaomi given it’s got the cash to put into its new business line and has great brand recognition.
• AMONG AMERICAN MANUFACTURERS – Tesla saw its first quarterly fall in sales for four years but it also looks like it’s seeking out sites for a gigafactory in India, which would no doubt be a useful springboard in a market with great potential! Fisker announced that it has decided to withdraw all financial and operational guidance for 2024 due to its ongoing search for funding as it fights for survival. Meanwhile, although we saw that Ford sold enough EVs over Q1 to make it America’s second biggest selling EV brand after Tesla, it has decided to delay the launch of a couple of its much-hyped new EVs by up to two years! Presumably they want to wait until tech, charging networks and the market improves. Sounds pretty sensible to me!

IN CONSUMER TRENDS NEWS…

• UK wage growth is slowing down (which could mean that the Bank of England are more likely to cut interest rates sooner rather than later) and data from the latest BRC/Nielsen IQ report shows that shop price inflation is losing momentum (meaning that disposable incomes should go further) although another report by BDO shows that retail sales fell in March, continuing a six month losing streak as consumers continue to be careful about their spending.

IN RETAIL TRENDS…

• ON THE HIGH STREET – What I said above is presumably a major factor in the ongoing collapse of various high street retailers including Muji, Ted Baker and The Body Shop (and potentially Superdry??) although Oxford Street seems to be emerging from a very tricky last few years with the promise of new flagship stores. Co-founder of Superdry, Julian Dunkerton, decided that he wasn’t going to save his own company by buying it after all, so I presume that he’ll wait until it goes under so he can buy it back on the cheap as part of some kind of consortium or something.
• IN ONLINE RETAILING – Shein announced that it had more than doubled its profits (very useful ahead of a much-anticipated IPO!) while Amazon is having to deal with the rising incidence of returns fraud. Returns really are a major headache for retailers (especially online ones) who have to strike a tricky balance of providing a smooth customer experience and looking after their third party sellers.
• Waitrose has decided to cut its pricing again – for the second time in two months as it tries to tempt M&S shoppers back through its portals! M&S is currently the UK’s fastest growing grocer, according to the latest NIQ figures for the quarter – so Waitrose had to do something!

IN LEISURE NEWS…

• Revolution Bars is in a lot of trouble as its shares were suspended on AIM following its failure to publish financial results. The company claims to be “actively exploring all the strategic options”. This sounds terminal…

• Paramount announced that it has entered into exclusive talks with Skydance and rejected a $26bn offer from Apollo. The deal comes at a time where Paramount has been struggling to make its streaming service profitable.
• BC Partners sold IT business Presidio to US investment firm Clayton, Dubilier & Rice. Could this be the beginning of a spate of PE firms reshuffling their portfolios after a shopping bonanza over the last few years??
• Liberty Media agreed to buy MotoGP owner Dorna Sports in a €4.2bn deal. Cue “Ride to survive” on Netflix 😄! The deal will still have to pass regulators though.
• Home Depot, America’s biggest DIY retailer, bought speciality building products supplier SRS Distribution in a deal worth $18bn that will help it to expand its reach among contractors and builders. Getting more exposure to pros may be a good move as they visit stores more often and tend to spend more than traditional home DIY-ers.

IN AI NEWS…

• The US and UK signed a landmark agreement to co-operate on the testing and risk assessment of emerging AI models. The two governments will pool tech knowledge, information and talent on AI safety.
• The music industry is pushing back against AI via the International Confederation of Music Publishers (ICMP), a music industry body that covers about 90% of the world’s commercially released music. The body has launched a website that will enable labels to protect their copyright.
• Google is thinking about charging for AI-powered search, something that could help smaller rivals because it would mean they could start to charge as well.

IN TECH HARDWARE NEWS…

• Amazon has decided to pull back on the use of its “just walk out” tech that it introduced a few years ago. Instead, Amazon Fresh stores in the US will be introducing “Dash Carts” that scan items as you shop, which still means that cashiers aren’t needed. The “just walk out” tech will, however, still be used in Amazon Go locations and some Amazon Fresh stores in the UK.
• The Taiwan earthquake earlier this week acted as a reminder about how reliant the world is on this region for its semiconductors. When you consider the risk of an invasion by China and the seismic risk of this region, it is even more imperative that chip manufacture is spread more widely around the world!
• Samsung gave an upbeat assessment of its Q1 performance (probably thanks to the AI boom) while LG was rather downbeat thanks to the sluggish recovery in demand for home appliances.

IN TECH SOFTWARE NEWS…

• Microsoft will now sell Teams separately following pressure from the competition regulators. This comes “just” four years after Slack and other rivals complained about it being bundled in with their other productivity software. This is just the latest example of regulator crackdown on Big Tech.

IN MEDIA NEWS…

• Disney faced a battle at its AGM this week over the proposed composition of its board – and it won after CEO Bob Iger announced a raft of measures to boost its fortunes. It then announced that it was going to do a crackdown on password sharing for its streaming services, which the market liked given how positive a similar move has been for Netflix.
• Reddit warned that strict application of the Online Safety Act might make some of the smaller social media companies quit the UK because the rules are too onerous for companies with less financial firepower than their larger counterparts.
• Spotify is looking to raise prices for the second time in a year later this month. The rises will be up to $2 per month in five markets, including the UK, to be followed by the US later in the year. A cheaper basic tier will also be launched.
• X decided to award blue ticks to users with over 2,500 “verified subscriber follows”, reversing its previous stance where the ticks were only given to those who paid. This caused a bit of a kerfuffle as non-paying celebs scrambled to say they hadn’t paid for their ticks but I think this is just a load of noise and CEO Linda Yaccarino needs to come out with a proper plan for X’s future.
• Truth Social’s share price dropped by 21% after it unveiled big losses. I think there is something inherently dodgy with this company, particularly in terms of disclosure. That being said, it’ll be interesting to see if/how Trump mobilises his fans to pump up the share price!

IN TELECOMS NEWS…

• Perhaps unsurprisingly, the Vodafone and Three merger is going to be investigated by the CMA over worries that it could potentially lead to higher costs and less choice for customers. The CMA has now got until September 18th to complete its in-depth review.

IN COMMERCIAL PROPERTY NEWS…

• IN OFFICES NEWS – Deloitte is now reversing the post-Covid trend and is expanding its office space in London just two years after it made cutbacks! Everyone will be wondering whether this signals the bottoming out of the office market and whether others will start to do the same. Meanwhile, Morgan Stanley announced that it was extending its existing tenancy for another 10 years – so it’ll now be Canary Wharf-based until at least 2038. As part of the deal, Canary Wharf Group is going to fund an extensive refurbishment of the building that was completed in 2003.
• IN RETAIL PROPERTY NEWS – Kering announced that it would be buying a retail block in Milan that houses its Saint Laurent store for €1.3bn! It seems to be de rigeur for fashion houses to buy their properties these days but the problem here is that Kering’s not firing on all cylinders at the moment and this purchase will significantly reduce its cash buffer if things don’t go so well.

IN RESIDENTIAL PROPERTY NEWS…

• European house prices fell for the first time in a decade, according to the latest data from Eurostat. Interestingly, weaker house prices in many northern EU states (including Germany and France) were more than balanced out by strength in the property markets of Croatia, Bulgaria, Lithuania, Poland and Portugal.
• In the UK, house prices increased for the second consecutive month and mortgage approvals rose while Rightmove observed that market activity appears to be picking up ahead of the all-important spring-selling season!

• JP Morgan has pivoted into advertising (don’t worry, though – it’s still going to be a bank!) by using its customer data to target the right people. The new division, Chase Media Solutions, will clearly be taking on the might of Google and Meta with this initiative. Will other banks follow a similar course??
• Alaska Air received a $160m payment from Boeing to make up for lost profits tied to the mid-air door plug blowout in January. Alaska Air said it expects more payments. No doubt Boeing will be paying a lot of compensation in the months and years to come for its quality issues…

My favourite video this week was the one with the fancy potatoes! They look great don’t you think?!?