Watson’s Weekly 09-03-2024

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 where Trump wrapped things up, Hunt announced potentially his last Budget and Nationwide bought Virgin Money…

• IN THE US – Trump continued to gain momentum this week on the campaign trail to the White House and we took a look at the six US swing states that he’ll be fighting over with Biden to be re-elected as president. The long, dull and needlessly-drawn out election process continues…
• IN CHINA – an official GDP growth target of 5% for the year was announced but there are doubts as to whether China will be able to hit it because last year’s 5.2% GDP growth was powered by consumption and weak comparatives with the previous year. Weakening consumer confidence and the prospect of more sanctions could make 2024 more difficult. Officials announced a radical plan to stimulate demand in China’s sluggish economy whereby old vehicles, fridges and washing machines could be exchanged for new ones, but the announcement was light on detail. Official figures showed that last year’s trade was boosted significantly by by exports to Russia, which became China’s fifth biggest single-country trading partner last year. Meanwhile, we saw that China’s defence spending is going to increase by 7.2% this year although some experts reckon this could be up to 30-35% light because it doesn’t include a number of things that others include when posting such a number.
• IN EUROPE – the ECB talked about June as being the earliest one could expect an interest rate cut, after it lowered official forecasts for inflation. Meanwhile, eurosceptic far-right Rassemblement National (RN) leader Marine Le Pen kicked off her European election campaign. The party is currently doing very well and it is on the way to becoming the biggest French party in the European parliament!
• IN THE UK – chancellor Jeremy Hunt announced what could potentially be last ever Budget. Most of the stuff had been trailed in the lead-up by the overall impression was that it was unexciting. Meanwhile, Hunt decided not to extend the policy of allowing councils to keep 100% of the proceeds of council house sales that was due to come to an end this April. This was particularly painful for English councils who are already facing extreme difficulties with finances. On the plus side. the latest S&P Global/CIPS composite PMI showed that overall business activity had been on the rise for four months in a row, leading some observers to conclude that the UK has already dragged itself out of recession.

IN COMMODITIES NEWS…

• OPEC+ members decided to extend existing production cuts until the end of June (they had originally been due to expire in March) in order to bolster the oil price. This had been widely expected in the market. Meanwhile, iron ore prices continued to fall, as did pork prices – which have a major effect on China’s inflation, given that China is both the world’s biggest producer and consumer of pork.

IN ENERGY NEWS…

• The UK’s renewables sector got an unexpected boost this week as the government announced a £1bn annual subsidy for the next UK renewable energy auction. This is four times as much money as had been made available before. The government also announced that it had agreed to buy two sites intended for nuclear power plants from Hitachi in ongoing efforts to kick-start plans for a new generation of reactors.
• There was an interesting report published by the Climate Action against Disinformation group which says that AI is going to cause a spike in energy use and that companies need to be more transparent about Big Tech’s AI-related energy use. It also warned that AI could help spread disinformation about climate science.

IN CRYPTO TRENDS…

• Bticoin smashed through its previous $69k-ish high but Sam Altman’s Worldcoin ran into more resistance – this time in Spain. Worldcoin’s collection of biometric information in return for some obscure digital token is not sitting right with a number of governments and authorities around the world!

IN BUSINESS TRENDS NEWS…

• Washington is now pushing for more tech export restrictions to China among its allies. The Netherlands and Japan are already on board but South Korea is proving to be reticent on this. It seems that the US is getting increasingly paranoid about China’s progress in tech, but particularly in semiconductors.
• The share price performance of US defence companies is lagging that of their European counterparts but this may be due to a logjam at the moment in Congress as the 2024 defence budget has yet to be approved. This is worrying investors about the future government’s commitments. Lawmakers have until March 22nd to pass the 2024 defence budget.
• M&A is showing signs of a turnaround. Morgan Stanley, Goldman Sachs and Lazard are all talking about a potential rebound in activity and there seem to be plenty of decent companies knocking around in the UK with attractive valuations.
• The Red Sea situation continues to pose difficulties as underseas cables that take internet traffic between Europe and East Asia are proving to be very difficult to maintain and repair given the current Houthi attacks. Shipping services provider Clarkson is having no such problems at the moment, though – and it has even seen an increase in demand for its advisory services.
• Meanwhile, serviced office provider IWG continues to benefit from the hybrid work trend as demand for offices in locations outside big city centres continues to get stronger.

IN EMPLOYMENT TRENDS…

• UK wage expectations are losing momentum as a survey of 3,000 CFOs shows that there’s an expectation of a wage growth slowdown. Wage growth is a major worry for the Bank of England as it could potentially stoke inflation just as it’s now coming down.

REGARDING CHINESE EVs…

• Chinese EVs sell well because they’re cheap and good, according to the chief exec of battery materials maker Umicore. While US makers are reining in production, China continues to plough ahead to the extent that sales of EVs made up over a third of new vehicles sold in China in 2023 versus 28% in 2022 and BYD has overtaken Tesla as the world’s biggest EV manufacturer! Chinese manufacturers are able to churn vehicles out because they don’t have any production “baggage” and they have really been able to streamline the process of going from design to production. If legacy manufacturers don’t learn from their Chinese counterparts and the way that they get their vehicles to market so quickly, they will fall further and further behind. Chinese EVs are coming to Europe, according to shipbroking giant Clarksons, as manufacturers have even gone as far as buying their own carrier fleets! At the moment, Chinese makers have about a 10% market share of the UK EV market but they want to expand that aggressively.

REGARDING EVs IN GENERAL…

• Both Tesla and BYD cut prices this week as the price war continues.
• Tesla had to stop production at its German gigafactory following a suspected arson attack on the power grid. Tesla’s German woes continue…
• Rivian unveiled two new lower-priced EVs in an effort to stimulate sales.

REGARDING CAR SALES…

• UK car sales hit their highest February level in 20 years but the proportion of cars sold to individual buyers actually fell (fleets were the big buyers) as range anxiety and hefty sticker prices continue to put people off making the jump to electrification. It was also interesting to hear that prices for used cars are now stabilising and margins are returning to normal, according to the boss of car dealership Vertu Motors. That being said, he observed that the retail demand for battery EVs (BEVs) remained lacklustre, despite a high level of discounting.

IN BANKS NEWS…

• The IMF warned that there would be bank failures in the US as high interest rates and weakening commercial real estate prices are endangering the whole sector.
• Banks want a crackdown on Apple as it continues to pursue its interest in the financial sector. Banks say that Apple’s access to users’ spending data will give it unfair advantage.
• Monzo got its $5bn valuation as it attracted another $430m investment in its latest funding round.
• Nationwide put in an offer to buy Virgin Money in a deal worth £2.9bn. This is the UK’s biggest banking deal since the 2008 crisis and the enlarged company would be the UK’s second biggest bank in terms of mortgages and savings.

IN INSURANCE NEWS…

• The new boss of Legal & General decided to take action in response to falling profits at its investment management business. Bonuses were slashed and hiring is restricted for the moment until the CEO conducts a “thorough review of the business”.
• Aviva’s profits rose thanks to a boom in demand in the UK for private health insurance as NHS waiting lists get longer.

IN RETAIL…

• US retailer Target announced its first sales decline since 2016 but it will now be embarking on a refresh to turn things around. Investors liked what they heard in the plan and sent the share price up by 12% in response.
• JD.com unveiled Q4 results that came in above expectations and investors liked plans announced by the company to plough excess profit back into the company as well as the setting aside of a chunky amount for a share buyback programme.
• IN THE UK – data from a BDO report showed that retailers had been hit by the longest sales downturn since lockdown as shoppers cut spending for the fifth month in a row. Another report from BRC and KPMG also showed that retail sales were hit last month thanks to the rain and cost-of-living crisis. Some of Britain’s biggest retailers lobbied ministers about Shein’s alleged used of tax loopholes to dodge customs bills, pushing back on Hunt’s recent efforts to tempt Shein to list on the LSE. Meanwhile, M&S saw its grocery sales outpace those of Aldi and Lidl as the M&S recovery continues to gather pace. Data from research company NIQ showed that M&S was the fastest-growing traditional grocer over the last 12 weeks!

IN LEISRE/RESTAURANTS NEWS…

• Greggs put in a great performance as it announced record annual profits whilst overtaking McDonald’s as the UK’s most popular breakfast takeaway. It also dished up a tasty bonus as a thank you to its workers. I think it’s doing a great job, but I think that there’s even better growth to be had in railway stations and airports – something that SSP and WH Smith are already benefitting from!
• Starbucks has suffered from boycotts in its Middle Eastern franchises because of its stance on the Gaza war. The group that owns franchises in the region, Alshaya Group, said it would cut 4% of its workforce due to “difficult trading conditions”.

IN TECH NEWS…

• Apple was slapped with a €1.8bn fine for breaking EU law over streaming five years after Spotify made the original complaint, accusing Apple of anti-competitive behaviour. Apple is going to appeal the decision but it’s likely that there will more of this sort of thing to come from regulators who are keen to maintain some kind of control of Big Tech. Apple is also facing a probe from the EC over its decision to ban Epic Games from its App Store.
• 17 city governments in China are trying to help smaller AI start-ups by giving them “computing vouchers” that will help them with data centre costs. Giants like Alibaba, Tencent and ByteDance are hogging all the expensive GPUs and Chinese authorities want to ensure that the minnows in AI don’t get stifled by the big fish in the pond before they can mature!

IN MEDIA NEWS…

• Meta and Google are doing very well from Temu’s massive ad spend in its bid to crack America! Temu is Meta’s #1 advertiser and it’s also in Google’s top five! The question is whether this will work long term or whether it’ll go the same way as Wish did a few years ago and wither away…
• ITV announced plans for additional cost cuts as it completed a £150m cost savings plan a year ahead of schedule and still needs to cut costs further because ad spend is still poor.
• Hipgnosis slashed the value of its music portfolio by 26.3%. Investors continue to question the value of its song catalogue as Hipgnosis has seen its share price halve over the last two years.

• IN M&A NEWS – Mondi has, appropriately for a packaging company perhaps, made an all-paper offer for smaller rival DS Smith that would create a £10bn giant in the industry. This combo has long been debated and if it went ahead it would create Europe’s biggest manufacturer of corrugated cardboard for packaging and boxes. Meanwhile, Warner Music Group is thinking of spoiling the party by potentially tabling an offer to buy French digital music company Believe that would be higher than the one made by a couple of private equity firms. Warner is just going to do some due diligence before launching a proper offer but the PE bid is at €15 a share versus Warner’s offer which could be €17 a share.
• IN REAL ESTATE – Foxtons reckons that the rent boom (especially in London) is losing momentum due to a greater supply of properties and a cooling off of demand and the latest S&P Global/CIPS construction PMI shows that activity stabilised in February thanks to improved demand prompted by falling inflation and rising expectations of interest rate cuts. It’s not yet back to growth, but it is knocking on the door.
• Eli Lilly is racing to boost production capacity for its obesity drug Zepbound that will compete with Novo Nordisk’s blockbuster appetite suppressant Wegovy. This is a huge market and the company clearly wants to surf this wave!

My favourite video this week was the one about how to make your own house! I thought this was pretty amazing!