Watson’s Weekly 09-11-2024

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.

• IN THE US – Donald Trump won the presidential election pretty convincingly. IN TERMS OF REACTION,  US stocks hit a record high and investors dumped bonds in response to the result and banks like JP Morgan, Goldman Sachs experienced a “Trump bump” as investors bet that M&A/IPO activity would rise and Bitcoin broke $75,000 while renewables and pharmaceuticals companies were sold off and Asian manufacturers with exposure to EVs look vulnerable. US prosecutors will probably now drop the criminal cases against Trump as they can’t prosecute a sitting president. Some say that the fears of a Trump presidency have been overblown given some of the differences between what he said and what he did when he was last president (although this time, he’s got a much stronger mandate and some prior experience). IN TERMS OF IMPLICATIONS, the global economy is bracing for a “macro shock”, which is sending shipping rates higher and getting countries that rely heavily on exports to the US (like Ireland) very worried – but, more importantly, there are worries regarding the US’s future role in defence in terms of its commitment to NATO and its stance on Taiwan, the Middle East and Ukraine. Putin says he’s open to talking about ending the war in Ukraine. Meanwhile, Elon Musk’s gamble on getting behind Trump is paying off handsomely and it’s possible that he could now be at the epicentre of a tech M&A bonanza as his companies are all involved in growth areas with massive potential! I wonder whether the higher-than-usual number of employees making partner at Goldman Sachs is part of them keeping their rainmakers happy in readiness for raking in all those fees! Oh yes – and apart from all that, the Fed cut interest rates by 0.25 percentage points.
• IN ASIA – CHINA is turning the screws on rich people and companies to cough up taxes to raise money ahead of a widely anticipated fiscal stimulus and INDONESIA is getting increasingly feisty as the new president has just announced bans on the sales of Apple’s iPhone 16 and Google’s Pixel phones because they don’t source enough local materials.
• IN EUROPE – Germany’s coalition government is collapsing as Scholz ended up sacking his finance minister after no-one could agree on next year’s budget. He will seek a confidence vote in January and then there will potentially be an election in March.
• IN THE UK – the NIESR think tank reckons that Trump’s potential protectionist measures (taxes etc) will hit our GDP growth hard and potentially increase inflation and interest rates. Goldman Sachs trimmed its UK GDP forecasts for next year, echoing the sentiment. The Bank of England cut interest rates by 0.25 percentage points but it said that it thinks that although there will be higher growth and higher prices in the short term, there will be more economic uncertainty beyond that. Opinions re last week’s Budget continue to emerge! Reeves got defensive, saying that UK businesses can “absorb” the national insurance rises but big businesses and industry groups like UK Hospitality are warning about the negative impact, a sentiment again echoed by NIESR. TBF, something like this was expected, which is probably why recruitment slowed down in the run-up to the Budget. Farmers and the NFU (in addition to Jeremy Clarkson) rejected Reeves’s justifications for new rules on inheritance tax and they said that this would put Britain’s food security at risk.

IN FOSSIL FUELS NEWS…

• OPEC+ members decided to delay planned rises in oil production until the end of this year to stabilise prices, while nearer to home Wood Group saw its share price fall by 60% after Deloitte found all sorts of nasties when it conducted an accounting review. This is not looking good…
• Anglo American announced that it would sell its 33% stake in Jellinbah Group, a steelmaking coal business, for £850m as part of wider efforts to streamline its operations and protect itself from hostile takeovers (basically it fended one off from BHP recently and it’s a target because investors see its value as being less than it should be because it’s a bit of a ragbag of businesses).

IN ENERGY NEWS…

• The IEA reckons that the UK can hit its clean power target thanks to recent initiatives announced by the new government. That’s nice. It just has to execute now!
• It was really interesting to hear that the CEO of Abu Dhabi’s national oil company, Adnoc, said that oil companies should be putting more resource into renewables because there will be guaranteed demand as provision for data centres will continue to grow. Many have been rolling back their eco targets, so I thought it was interesting to hear him say this.
• Did you know that it can take up to 11 years to connect solar farms to the UK network? Well a logjam is now building because of the huge amount of time it takes to sort the infrastructure that is needed to feed power generated by panels into the grid. This is clearly going to hold back developments unless something is done about it as a matter of urgency!!!

• Chinese EV makers continue to advance in Europe and now have an 11% market share in Norway, a country where 94% of cars sold in October were electric. In 2019, that share was zero!
• STRUGGLING MAKERS include Honda, which had disappointing first-half results and cut sales forecasts; Nissan, which announced a 20% reduction of its global headcount following a bad quarter; Stellantis, which announced plans to cut 1,100 jobs at its US Jeep plant thanks to ongoing sluggish demand for EVs and stubbornly high inventories and BMW, which saw its profits collapse by 80% thanks to evaporating China demand.
• Bentley became the latest car maker to push back its EV plans – it had originally planned to switch to having an all-electric line-up from 2030, but it’s pushed that back to 2035. Toyota, Volvo and Ford have all delayed electric models in response to ongoing sluggish demand – and I’m sure that plenty more will do so as well.
• On the flipside, Ferrari continues to buck the trend by posting higher sales and earnings in Q3 and stuck with its annual guidance. How the other side live, eh?
• IN OTHER AUTOMOTIVE TRENDS – the latest figures from the SMMT show that EV sales increased by 24% in October, accounting for over 20% of the new vehicles registration market, versus an overall backdrop of a 6% fall in sales of new cars over the month. Although superficially positive, a lot of this is being driven by deep discounting in order to hit sales targets to avoid fines. Meanwhile, sales of used cars hit a new high and UK motor finance continues to be in turmoil as lenders impose varying degrees of restrictions on new car loans in response to the recent court decision. Until we get more on the appeal and potential compensation obligations, I think car sales will be in limbo, considering that 80-90% of car sales use a loan of some kind. Now is not the time to be in limbo, now is it! Other than that, automotive suppliers Michelin and Schaeffler announced job cuts and factory closures due to ongoing weakness in the automotive sector. Given the current state of the industry, it’s not surprising – although it does make rival Continental’s recent confidence look like an outlier!

IN THE WORLD OF LUXURY…

• Burberry’s share price got a hefty boost as rumours circled about a potential offer from Moncler. There was no official comment either way but it didn’t stop bid speculation!

IN RETAIL TRENDS…

• UK retail sales growth faltered, according to the latest figures from the BRC, as consumers rein things in ahead of Black Friday offers. Some of the weakness was due to a later-than-usual half term (which pushes the spending into the November figures) but separate numbers from Barclays also highlighted a slowdown in spending.

IN INDIVIDUAL RETAILER NEWS…

• John Lewis is finally making progress in its retail offering and sees the beauty category as a way of improving footfall. There’s plenty of upside to be had here given that John Lewis’s has a market share of 0.6% of the beauty and health market – but this pales in comparison to the mighty Boots with 19% according to GlobalData. I think that, if they can get punters through the door in the first place, they stand a decent chance of making sales.
• M&S continues to perform well and investors are loving its renaissance, having pushed its share price up by 70% since the start of the year. I think it’s primed to have a decent Christmas as long as consumers don’t feel too restricted by the recent Budget.
• Primark owner Associated British Foods made positive noises about consumer confidence re the Budget’s overall effect on less affluent consumers (which are its audience). That being said, the changes in National Insurance Contributions (NIC) will make things trickier for retailers.
• Asos remains hopeful about its outlook despite announcing a £380m loss because it believes that the remedial actions it has had to take over the last two years are starting to take effect.
• Sainsbury’s has extended the Aldi price match, turning the heat up in the price wars heading into Christmas, but warned that the NIC increases announced in the Budget would mean price rises for customers.

IN LEISURE SECTOR NEWS…

• Airbnb posted higher-than-expected Q3 revenues thanks to improving demand in North America, Asia-Pacific and Latin America and things are looking good for Q4.
• Ryanair’s profits dropped sharply thanks to a combination of lower peak season fares and higher costs partly blamed on Boeing’s delivery delays (but fortunately, there was a breakthrough on the strikes at Boeing!) while budget rival Wizz Air launched a very popular subscription All You Can Fly scheme, which sold out!

• As I said earlier, Goldman Sachs named its longest list of new partners since 2010. This only happens once every two years and fewer than 1% of its employees get this hallowed rank. I think that this is a major sign of the company’s confidence that advisory work (and trading) are going to pick up. I think there’s going to be a major M&A and IPO bonanza next year, but there’s a chance that it might start earlier if companies believe they need to get finance while interest rates are going down (Trump’s policies so far are widely seen to be inflationary).
• UK banks Lloyds and Barclays face a credit downgrade over the motor finance scandal as Fitch is monitoring them for potential fallout. Credit ratings agencies judge the quality of companies to help money managers decide who they should lend to. The lower the rating the higher the cost of borrowing will be.
• Fund management company Schroders saw its share price crater thanks to news that it’s suffered £2.3bn in withdrawals over Q3. Although the actual value of their funds under management has increased thanks to market movements and decent performance, the incoming new CEO has got his work cut out in stemming the outflows. I do wonder whether this is a Schroders thing or an investor thing where many have decided to take money off the table before the uncertainty of the UK Budget and the US election. Once the dust has settled I would not be surprised to see fund inflows…
• BNPL group Affirm has now launched in the UK. They are big in America and have now come over here, touting themselves as being the more responsible alternative to the likes of Klarna et al. because they do more homework on a customer before granting approval. The only thing is that you wonder how “different” this will be once the FCA properly starts overseeing the whole BNPL industry.

IN TECH…

• Apple warned that future products may never be as profitable as the iPhone. It has an outsize gross margin of over 40% (a threshold it breached in 2021!), which analysts reckon will hit 49% by 2030, so this will be a tough target to beat! That being said, it’s still around so it should bask in the iPhone’s warm glow for now – until another device (smart glasses??) replaces it…
• Arm Holdings outperformed market expectations for Q2 thanks to its new V9 chip that powers the iPhone 16. It hopes to benefit more from the AI boom!

IN MEDIA…

• Data from the Advertising Association and data provider WARC shows that UK Christmas advertising attracted record spending but the spend has shifted away from TV and onto online. Spend on online media was up by 16% – the highest rise since last year over any other medium.
• Fox’s Q1 revenues came in above market expectations thanks to an increase in political advertising before the US presidential election.
• Sky is in trouble because it miscalculated the amount of money owed to partners including Warner Bros Discovery and Paramount and is facing a massive bill of hundreds of millions of pounds as a result of the mistake stretching back to 2017. Will we see a rise in subscription prices as a result?!?

• Foreign investors have been pulling money out of India – October saw them withdraw over $10bn out of Indian stocks in October, the biggest monthly outflow since the start of the pandemic! Foreign investor ownership of Indian stocks is now at a 12-year low. Have they just cashed out for now to keep powder dry only to put back in again in the new year?
• AstraZeneca ‘s share price tanked on news that its China operation is being investigated by Chinese authorities as part of an insurance fraud case.
• Novo Nordisk’s sales of Wegovy and Ozempic were strong, calming nerves that were jangled last week by rival Ely Lilly’s disappointing Q3 results. Weight loss drugs are still a thing!!!
• IN REAL ESTATE NEWS – Hammerson bought back the Westquay shopping centre in Southampton for less than half what it sold it for in 2007, giving it full ownership. Valuation and rents have been pummelled particularly badly in the last few years but there are signs that this has bottomed out. In residential property news, the latest Halifax data showed that house prices are now the highest they’ve ever been, with the average price now clocking in at £293,999. No doubt this – and the stamp duty “discount” that ends in April next year – will stoke the FOMO and power prices to new levels!
• Rolls-Royce announced that it is shutting down its flying taxi business after trying and failing to find a buyer. It’s Q3 trading statement sounded pretty solid.

My favourite “AND FINALLY” video this week was the one with the skilful people! Amazing!