Watson’s Weekly 09 -12-2023

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 China’s credit rating took a tumble, when Spotify cut 17% of its employees and when McDonald’s launched CosMc’s…

• GLOBALLY, pressure is mounting on central banks to cut interest rates as inflation is slowing down. Two years on from being too slow to raise them, will they be too slow to cut them as well?
• IN CHINA – Moody’s downgraded China’s debt from “stable” to “negative” thanks to rising debts at state-owned enterprises and the nightmare it’s having in its property sector at the moment.
• IN INDIA – PM Modi’s party, the BJP, put together a string of major victories in India’s state election, putting him in pole position to win another term in next year’s general elections.
• IN EUROPE – it wasn’t such a good week. EU leaders are dithering about a €50m slug of cash that is supposed to be going to Ukraine at a crucial time in the war. Trade talks didn’t go well either as the EU’s trade chief cancelled a trip to Brazil where he was supposed to sign a trade deal with the Mercosur nations and China then dismissed EU concerns about the trade deficit whilst also denying that there was overcapacity in its EV sector. All the while, the Eurozone moved closer to recession as output in the bloc’s four biggest economies continued to drop.
• IN THE UK – research from the Local Government Association (LGA) shows that almost 20% of English councils are close to bankruptcy this year or next because of the lack of government funding. This is the sort of momentum that no-one wants to see gaining pace…

IN COMMODITIES…

• The gold price hit an all-time high as interest rates are peaking and concern continues to abound because of the uncertain political backdrop.

IN OIL…

• Markets don’t seem to be taking into account the potential for conflict in the Middle East to spread to the Strait of Hormuz, which is used to transport about 20% of the world’s crude oil and LNG. If things escalate, supplies could be disrupted, which would mean oil prices going higher.
• There are talks of an Aussie LNG merger between Woodside and Santos that would create an absolute behemoth! Talks are ongoing but it would create a national champion if it went ahead…
• Meanwhile, Canada is talking about imposing greenhouse gas emission limits that would start in 2030 and get progressively tighter heading towards 2050, which is supposed to be when the industry hits net zero. The oil industry isn’t best pleased, but neither are the environmentalists who think that the measures don’t go far enough.

IN RENEWABLES NEWS…

• State-controlled UAE company Masdar just bought a 49% stake in the East Anglia Three offshore wind farm – one of the UK’s biggest wind farms – from Spanish developer Iberdrola. This will be the second deal struck by the UAE in two weeks as Masdar previously bought 49% of the £11bn Dogger Bank south project in the North Sea last week!

IN BITCOIN-RELATED NEWS…

• Bitcoin hit $42,000 for the first time since 2022, clearly tossing aside any concerns about scandals at FTX and Binance! Meanwhile, Coinbase said that it wants to create more crypto jobs in Britain as it presumably benefits from the downfall of rivals in the space!

IN BUSINESS TRENDS…

• German factory orders fell, according to the latest official figures. Things continue to go from bad to worse in Germany at the moment.
• The UK services sector grew for the first time since July, according to the latest S&P Global PMI. Businesses got a boost last month from rising demand from the US and EU.
• The UK M&A market hit its lowest level in a decade, according to research from LSEG Deals Intelligence, something that UK investment bank Peel Hunt is acutely aware of as it suffered a half year loss precisely because of this!
• The NHS is continuing to outsource more eye, hip and knee operations in its bid to cut surgery waiting lists. Companies such as Circle Health Group and Spire Healthcare continue to stand to benefit…

IN EMPLOYMENT TRENDS…

• The latest report by KPMG and REC shows that a recent surge in redundancies has resulted in the biggest jump in the number of job seeker numbers since lockdown! The hiring of permanent staff has fallen for the 14th month in a row.
  EY announced more job cuts thanks to the continued lack of deal flow. It seems to be being particularly brutal with its legal business.
• Spotify announced that it would cut its headcount by 17% amid a weakening economic backdrop and high interest rates. This is its third round of redundancies this year! Its CFO sold £7.2m worth of shares, which is normally a worrying sign – but it turns out that he’s leaving so it’s probably his last hurrah!

IN CONSUMER TRENDS…

• US consumers are increasingly turning to BNPL to pay for their holiday shopping as the cost of living continues to bite and the labour market shows signs of cooling off.
• Chinese borrowers are having a nightmare as they are defaulting in rising numbers. The big problem here is that late payment means you get cut off from all sorts of things as you get blacklisted.
• UK consumers are seeing their living standards fall while they face the worst food inflation in the G7, rein in spending and get hit particularly badly by inflation if they have a mortgage 😱! And talking of mortgages, 20% of first time buyers are signing mortgage deals of 35 years or more – the highest proportion since records began in 2005! They are resorting to this in order to make their monthly mortgage payments more affordable.

IN RETAIL NEWS…

• Alibaba is losing its lustre and it has relinquished its position as China’s most valuable online company after losing most of the gains it’s had since its 2014 IPO. Its online retail business is suffering from an increasing amount of pressure from newer rivals and has seen its market share in e-commerce slide from over 80% in 2014 to around 40% now!
• The company that superseded Alibaba in the #1 spot is PDD, Temu’s parent. The company is growing much more quickly than Alibaba and although it has overseas expansion ambitions, it may have to adapt its approach to suit local markets and be wary of ongoing US-China tensions.
• Online luxury retailing continues to falter with the likes of Farfetch, MyTheresa and Matches all suffering. I think this is because, of all the types of retailer, luxury retailers are the ones that concentrate the most on the actual experience. Online just doesn’t come close IMO!
• Frasers Group sees better sales but is cautious about the “softening” of the luxury market. That said, weakening in this area could throw up interesting opportunities either to consolidate what they have (e.g. Hugo Boss) or give them other targets to go for.
• Games Workshop is so bullish about its first half profits that it’s given its staff a £2,500 bonus to enjoy! How great is that ahead of a cost-of-living-crisis Christmas!
• Moonpig saw a rise in profits but a fall in the number of orders (because basket sizes were bigger). It is benefiting from using an AI algorithm which makes targeted recommendations.
• Sainsbury’s is winning back market share from Aldi and Lidl, according to the latest figures from Kantar. Although this is good news for Sainsbury’s, this is at least partly due to price matching with Aldi – and I wonder how sustainable that is over the medium-long term!

IN LEISURE NEWS…

• McDonald’s announced the launch in America of a new format called CosMc’s that will offer iced beverages, all-day Egg McMuffins (but no burgers or fries!) and will be drive-through only! CosMc’s is named after an orange alien mascot that featured in McDonald’s ads in the late 80s.
• SSP has benefited from more travellers, which means higher footfall in its outlets at stations and airports. Full year revenues have recovered significantly and it has been expanding into new overseas markets.
• On the Beach managed to breach £1bn in revenues for the first time as “revenge travel” has well and truly kicked in since lockdown! The company says that the majority of consumers have this year protected their holidays and not sacrificed them and that it was confident about the coming year.
• Travel company Tui is thinking of ditching its primary London listing and moving to Frankfurt instead. Although this will be bad news for the LSE, it makes sense for Tui given that 75% of the shareholders and share trading volumes are in continental Europe. It would also help the company cut costs and give it better trading liquidity.

• AbbVie made an offer for Cerevel Therapeutics for $8.7bn, enhancing its neuroscience portfolio. This is AbbVie’s second big acquisition in the last fortnight – the other one being ImmunoGen which it is buying for $10bn.
• Alaska Air made an offer for Hawaiian Airlines in a deal worth about $1bn but it will have to pass the regulators. Execs are hopeful that the deal will go through as there’s not much overlap for the airlines in terms of routes.
• Saudi Arabia’s sovereign wealth fund just bought 49% of Rocco Forte Hotels with the aim of helping it double in size over the next five years.
• Private equity firm Trive Capital Partners has just made a recommended offer for ten pin bowling specialist Ten Entertainment Group that values the business at £287m and is being struck at a 49.7% premium to the average share price over the past 12 months. This is just the latest example of consolidation in the leisure sector!
• Coventry Building Society launched a bid for Co-op Bank. If it is successful, the enlarged group would be big enough to take on the likes of Virgin Money.
• Meanwhile, Brookfield’s $13bn bid for Origin Energy failed to get shareholder approval. This is the second big deal that has failed in this way in the last few weeks – the first being US lithium miner Albermarle walking away from a $4.2bn bid for Liontown Resources in mid-October.

IN BATTERIES…

• Europe continues to fall behind on  automotive electrification as it’s only managed to secure 16% of the battery raw materials it needs by 2030 to hit EV battery targets. Meanwhile, the European Commission is now looking at offering €3bn in subsidies to battery makers in the EU.

IN EV NEWS…

• The EU proposed a 3-year delay to EV sales tariffs between the UK and EU that would have come into force next year. The rules had been introduced originally to encourage the development of the European battery supply chain – but things haven’t quite turned out as expected as the Chinese continue to be absolutely dominant in this area.
• Tesla’s fight against Sweden’s unions spread to Denmark and PensionDanmark, one of Denmark’s biggest pension funds sold out of its £46m stake in Tesla, ostensibly because of Tesla’s anti-union stance. Tesla also lost in its legal bid to force Sweden’s postal service, PostNord, to deliver its licence plates. Meanwhile, the UK won’t be taking part in the Cybertruck frenzy as much as the Americans because its weight means that the standard driving licence won’t cover it!
• Car dealership Vertu saw its value shrink by up to a quarter as it continues to suffer from falling demand for EVs.

IN OTHER CAR NEWS…

• Toyota is looking at making two potential investments in the UK after the government extended the petrol/diesel/hybrid sales ban deadline from 2030 to 2035. One involves a new model being made here and the other is making hydrogen fuel cells. Meanwhile, it sold down some of its stake in parts maker Denso, which is notable as cross-shareholdings in suppliers are quite common in Japan and some think that this could prompt other companies to reduce their cross-shareholdings as well.
• GM’s Cruise has been ordered by the California Public Utilities Commission to testify about the infamous October incident. It said that Cruise omitted crucial information about its vehicles’ safety.

IN AI NEWS…

• Meta and IBM launched an “AI Alliance” which takes an “open-source” approach to the larger players in AI at the moment – Google, Microsoft and OpenAI (who take the opposite approach). Dell, Sony, AMD, Intel and a number of uni start-ups and universities are also part of this new alliance.
• Google launched a new batch of AI models that will run directly on mobile phones for the first time. Being able to run an AI model natively on a mobile phone has two main advantages – firstly, it’s cheaper to run, and secondly, it means that private data will be restricted to the device itself.
• BlackRock will be rolling out its first generative AI tools to clients from the beginning of next year that will enable them to access information from its risk management systems. A number of financial services companies are also experimenting with AI tools for their own use and for the use of clients. Bank of America, Wells Fargo and PwC are among those who are already working on/launching such models.

IN OTHER TECH NEWS…

• Apple is looking to use batteries made in India for its latest generation of iPhones as part of an overall effort to lessen its reliance on manufacturing in China. It has told component suppliers of its preference to source batteries for its iPhone 16 from Indian factories!
• ByteDance announced a share buyback, putting its enormous $50bn+ cash pile to work ($5bn of this has been earmarked for the share buyback). It’s heading towards an IPO at some point but there are still regulatory clouds hanging over it so I guess a buyback is something to keep the investors happy for the time being!

• IN REAL ESTATE NEWS – The massively indebted Evergrande just got a stay of execution and has been given some extra time to put together a restructuring plan by a Hong Kong judge that will satisfy its creditors. It has until next month to come up with something. If it fails, this could have major repercussions not just on Evergrande – but also on China’s economy. Elsewhere, luxury brands are snapping up high profile commercial property (LVMH just bought 150 Avenue de Champs-Élysées for a whopping €950m, a record price for a building on the glizty street) as they look to protect their prestigious addresses but, overall, many property firms are now feeling the nasty hangover they got from “free money” when they borrowed at virtually zero rates of interest. We saw this most recently with Signa Group and Selfridges. In residential property, the latest stats from Halifax show that house prices increased in November, making it the second consecutive monthly rise. This has been mainly down to the relative short supply of properties on the market as opposed to red-hot demand.
• IN FINANCIALS NEWS – the SEC warned companies against “AI-washing” – where companies make false claims regarding their association with AI – and that they need to be making “full, fair and truthful” disclosures. I think that AI-washing is going to become the new “greenwashing”! Elsewhere, the Qatar Investment Authority is going to halve its shareholding in Barclays which would suggest that it doesn’t believe in Barclays’ current turnaround plans…then we saw that investment platform AJ Bell saw a huge rise in pre-tax profits thanks to the interest earned on customer accounts! You would have thought that although this is great right now while interest rates are high this state of affairs won’t last forever and it will need to make sure its core business is firing properly for when they don’t get this income!
• IN PHARMA NEWS – Novo Nordisk is already looking beyond its wildly successful obesity drug and is now looking into drugs that can stop you gaining weight in the first place! Research is in the early stages, but it sounds exciting! Meanwhile, Roche bought Carmot Therapeutics for up to $3.1bn. Carmot is developing its own anti-obesity drugs.
• The UK’s mobile networks are now facing a big class action as they are being accused of overcharging millions of customers on their phone contracts when they consistently fail to cut the amount charged to customers’ bills once the minimum term of their contracts expire.

My favourite “alternative” story from this week is actually this educational one about how to find the centre of a circle! I never knew this!!!