Watson’s Weekly 08-07-2023

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.

TBH, there’s never a dull week 😁 but there were some pretty amazing developments this week! China reacted to tech sanctions imposed on it by restricting the export of two key minerals for chip production (which caused an immediate kerfuffle!), Meta launched its “Twitter-killer” app Threads and Toyota announced a breakthrough in solid-state battery technology!

• IN GLOBAL NEWS – there was some interesting discussion about why interest rates are taking so long to take effect. It seems that they take 18 months to fully filter down to the real economy and that it’s taking longer because more economies are shifting from manufacturing to services, housing trends have changed, the job market is tight and interest rates started to rise too late, which may have the effect of making the “equilibrium” inflation rate higher than the generally-accepted 2% rate.
• IN THE US – the Fed reiterated that rate rises will resume in order to tame inflation after its latest pause.
• IN THE UK – inflation continues to rise, leading economists to make dire predictions about peak interest rates in the UK that are now being priced into markets. In addition to that, UK borrowing costs reached new highs and Rishi Sunak is gearing up to drop its 2019 climate pledge.

IN RENEWABLES & COMMODITY NEWS…

• The UAE has committed up to £42bn over the next seven years to triple the supply of renewable energy as part of its aim to be carbon-neutral by 2050.
• Russian oil and gas revenues have fallen thanks to lower oil prices and weakening demand from Europe.

IN BUSINESS TRENDS…

• IN MANUFACTURING – Eurozone producer prices fell into negative territory for the first time since December 2020 while the UK’s manufacturing PMI contracted for the 11th consecutive month due to weak domestic and global demand. UK factories are being asked by National Grid about how they’re going to cut their electricity usage in winter.
• IN SERVICES – the latest quarter has shown a growth slowdown in the UK’s all-important services sector despite being up against the effects of rising interest rates.
• Saudi Arabia continues in its efforts to take over sports as its sovereign wealth fund is launching a multi-billion dollar sports investment group to grow its sporting interests. It’s already made big moves in golf and football (among other sports) and the Saudis’ deep pockets will continue to finance sports-washing for a long time to come!
• Chancellor Hunt is set to repeal at least parts of the EU’s MiFID II legislation next week that had a seismic effect on the City when it came into force in 2018. This is all part of the bonfire of EU red tape post-Brexit.

IN CONSUMER TRENDS NEWS…

• US consumers are pretty pessimistic at the moment. Although GDP is the traditional measure of the economy, one commentator called Oren Cass suggests an alternative, the “Cost Of Thriving Index” (“COTI”), which monitors the spending power of the middle classes and how much it costs them to maintain their lifestyle over time. The conclusion to this is that the middle classes are very much being squeezed, much like the situation over here!
• Despite everything, UK consumers still seem to be quite confident and are spending a lot – but this is not because they’re buying more, it’s because what they’re buying is costing more. Restaurants and retailers who serve the mid-market are suffering the most whilst those at the high end of the socio-economic scale and those at the lower end are still thriving.
• Concerns remain about UK consumers getting ripped off as part of the whole “greedflation” thing. The good news is that banks have been ordered by the FCA to accelerate savings rates and fuel retailers are now being ordered to publish live prices so presumably apps can use these prices to help consumers go to the places with the best prices.
• Would-be property owners and those who are re-mortgaging are facing higher costs as the average rate on a five-year mortgage has now breached 6% and those who are taking advantage of mortgage relief could be storing up financial problems for the future.
• In food and drink trends, alcohol-free beer continues to rise in popularity but fewer people are eating in City and Canary Wharf restaurants at lunchtime, but more are eating in the evening.
• Consumers are facing rising insurance premiums, something that Legal & General has benefited from. It is interesting to note that one of the reasons why car insurance premiums are rising is because of the increasing number of EVs. At the moment, when battery damage is sustained or suspected in an EV, regulation states that the cars must be kept 15m apart in repair yards because of fire risk – the same amount of space that you could fit 100 petrol or diesel cars!?! EV insurance premiums are bound to go up as a result.

IN EMPLOYMENT TRENDS…

• Russia’s labour woes are getting worse as it already had a shortage of workers pre-war – but this is set to get worse if Putin appeals for wider conscription. There are now two vacancies for every worker – and there is a particular shortage of young people.
• India is pushing back on recent law changes re shift patterns. This could potentially slow or limit India’s ambitions to become a real alternative to China as a manufacturing hub.

IN CHIP NEWS…

• China decided to retaliate against the US sanctions it’s been slapped with by placing export restrictions on various minerals, including two – gallium and germanium – that are key ingredients for semiconductors. China has a virtual monopoly on them and it caused such panic that South Korea’s commerce ministry called an emergency meeting about it. Short-term, prices are likely to rise as companies try to stockpile but longer-term this should provide incentive to countries to drastically lessen their reliance on China’s supplies (and/or find new technologies!).
• India is aiming to produce chips in 18 months after starting to build its first semiconductor assembly plant in Gujarat with Micron Technology.
• Japanese chip materials maker JSR is being taken private by JIC, a fund overseen by Japan’s Ministry of Economy, Trade and Industry (METI). It is being strenuously denied that JSR is being nationalised, but hey.
• It was interesting to note that although the AI boom isn’t actually turning around the chip slump at the moment it is leading some interesting pivots. Increasingly, crypto miners are adapting their rigs to be used to train AI systems. It isn’t cheap or easy to do this but the demand is there so it is a lucrative option.

IN AI NEWS…

• A class action has been initiated by some writers in San Francisco against OpenAI for “unlawfully” using their books to train their models. This is the first lawsuit that concerns copyright on ChatGPT, so many will be watching this with interest.
• New York City is launching a new law, called NYC 144 which will force employers who use AI in recruitment software to do an annual audit on it to ensure there is no race or gender bias.

IN SOCIAL MEDIA NEWS…

• Meta’s answer to Twitter, Threads, launched this week and created a splash as it got 30m sign-ups in less than 24 hours! In response, Twitter’s lawyers accused Meta of hiring its old employees and just creating a clone. On the subject of Meta, Facebook faces a setback as the EU’s Court of Justice that ruled it must get user consent before sending personalised ads in certain cases.

IN OTHER TECH NEWS…

• The US is looking at implementing more restrictions on China – this time in cloud computing as there is a chip workaround which involves using services from cloud providers like Amazon and Microsoft. This means that the Chinese can currently access powerful computing capabilities without actually having the advanced chips that the Americans are banning at the moment.
• Apple has had to make major revisions in its production schedule due to complications and various difficulties. The launch of the more affordable version has also been postponed.
• Google announced that it had made a leap in quantum tech, developing a quantum computer that can make calculations in a split second that would take current computers 47 years to work out.

IN VEHICLE NEWS…

• US new vehicle sales have risen by 13% in the first half, which was way above what everyone was expecting! Pent-up demand was said to be the reason.
• The European Commission isn’t budging, despite protestations from the car industry, and will keep the “rules of origin” requirements in place. This means that EVs traded to Europe must have 60% of their battery and 45% of their parts overall sourced from the EU or UK or they will have to pay a 10% tariff.
• Tesla delivered a record number of cars in the latest quarter, thanks to it slashing its prices, but it’s still worth noting that EVs still only make up 7% of all car sales, making Tesla a big fish in a small pond.
• Rivian said that its deliveries increased over Q2, coming in above Wall Street estimates.
• Embattled electric truck start-up Nikola managed to increase deliveries over Q2 although it had to cut production by almost half to modify its assembly line. It’s still very very small though, in the scheme of things.

IN BATTERY-RELATED NEWS…

• Toyota announced a massive breakthrough in solid state battery technology which means that the price, size and weight of batteries could halve! They will also be more stable and take less time to charge! The tech has been around for ages but commercialising it has been extremely difficult. Toyota reckons it could mass-produce such batteries for EVs by 2027 or 2028. This could well quash any kind of range anxiety!
• BMW continues to back hydrogen as an alternative to the usual lithium-ion battery-powered EVs around at the moment. They just built a small test fleet of of hydrogen-powered X5s to show what’s possible. Given what’s going on re battery materials etc. at the moment, I think that it is imperative that we keep our options open re how cars are powered in the future – and that includes other things like “clean” synthetic fuel.

• Top-ten accountant Moore Kingston Smith (MKS) just got investment backing from Dutch private equity firm Waterland, becoming the first UK accountant to get PE backing. This is particularly notable in that it will be able retain its partnership structure – and it will also be a boon for recruitment and any scaling-up plans. It will be interesting if this creates a precedent in terms of PE firms investing in other professional services companies.
• UK fintech CAB Payments saw its share price fall on its debut on the LSE. It was the biggest IPO on the LSE this year, but this is disappointing and if it keeps weakening it’s going to do nothing for sentiment regarding whether companies should float or not.
• Hedge fund manager Man Group just bought a controlling stake in $11.8bn credit fund Varagon Capital Partners, with an option to increase the stake within the next eight to ten years. This is part of an overall effort to advance broaden its capability in private credit, something we’ve been seeing more of recently as banks get increasingly cautious about lending.
• Equity funds saw record withdrawals as investor concerns about markets continue.

• IN UK OFFICE NEWS – vacant office space is at record highs as companies rethink (and re-size) their office space requirements. HSBC announced it was leaving Canary Wharf, which get everyone panicking about some kind of mass exodus, but it’s not just the companies that have their offices in Canary Wharf that will suffer – businesses that supply them are also suffering.
• IN UK RESIDENTIAL PROPERTY NEWS – more home sellers are offering discounts to their asking prices as UK prices fall more than other major European economies. It is also interesting to note that 70% of central London properties this year have been bought with cash, according to Savills. This contrasts with the national average of 35%.
• IN OTHER NEWS – the Dubai market for properties worth $10m+ in Q1 was more active than Hong Kong, New York and London, according to statistics from Knight Frank. Will this bubble burst as it did so spectacularly in the wake of the financial crisis in 2009. Elsewhere, activity in UK housebuilding has slowed down at its fastest rate since lockdown – or for 14 years if you take lockdown out of the equation!

IN RETAIL NEWS…

• IN ELECTRIC GOODS RETAILERS – AO World announced a bounce back to profit after a rocky period and restructuring. Currys, on the other hand, saw its share crash to a 20-year low as it painted a very bleak picture of its customers’ financial situations.
• IN GROCERY RETAIL – Sainsbury’s said that food price inflation is slowing down but it also had to defend its pricing and pay packages for senior execs after reporting a 9.8% rise in sales for the latest quarter. Naked Wines is having a shocker as it announced slowing sales and a delay in the publication of its accounts.

IN LEISURE NEWS…

• IN AVIATION-RELATED NEWS – Ryanair reported that it had carried a record number of passengers last month and that its planes are flying at 95% capacity despite paying higher prices. Wizz Air is also seeing higher passenger volumes and are at 92% capacity! This seems like a good time, then, for Gatwick to submit plans for a second runway, but I think this is going to be risky as I feel that there’s going to be a major drop-off next year for British going on holiday as mortgage rises hit hard.
• IN LEISURE NEWS – Centre Parcs lost one of the favourite bidders for the business as PE firms get pickier about what they buy. In hotels, Accor is in an interesting place at the moment as it is trading at a discount to its pre-Covid valuation multiples despite performing well…

• IN PHARMACEUTICALS NEWS – AstraZeneca shares weakened on disappointing results about its potential blockbuster new cancer treatment, which were OK but not stellar. US biotech firm Moderna announced a deal to develop mRNA drugs in China on an exclusive basis, which begs the question as to whether more deals like this will be done as China’s own vaccine was pretty mediocre.
• India’s richest man, Mukesh Ambani, announced plans to launch the “Jio Bharat”, a $12 internet-connected phone. It’ll be available on a trial basis initially but then rolled out, targeting a market for those who don’t yet own a smartphone. This sounds like a great idea, but you do wonder how profitable these customers are going to be for the company on a longer term basis.
• Netflix has overhauled its advertising strategy to attract more brands and is looking at ways of maximising revenues in innovative campaigns.
• Thames Water managed to get backing from one of its biggest shareholders, USS, for its eight-year turnaround plan. I guess it needs Thames Water to succeed otherwise it’ll make a biiiiiiig portfolio loss…

My favourite “alternative” videos this week were both music-related! One of them was a fantastic cover of “All The Single Ladies” and the other gave inspiration of how to make music in the office. Both are superb!