Watson’s Weekly 11-03-2023

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 a week where we saw Biden’s big tax plans, law meeting AI and ongoing TikTok problems…

• IN CHINA – we saw China unveil its lowest GDP target for almost three decades! China’s outgoing premier Li Keqiang stated the target of “about five per cent”. Some say this heralds a new era of caution, although some think that this is just China under-promising to over-deliver versus over-promising and under-delivering last year! There was a bit of tension as US house speaker Kevin McCarthy met Taiwan’s president in the US to avoid what happened the last time when speaker Nancy Pelosi popped over to Taiwan (the Chinese really didn’t react well to this). All the while, Chinese defence companies and arms manufacturers like Hefei Jianghang Aircraft, AviChina Industry & Technology and China State Shipbuilding Corp are benefiting from the government increasing its military spending by 7% this year.
• IN THE US – Fed chief Jay Powell warned that bigger interest rate increases were still a possibility as he feels that there’s more to be done about inflation, which is still strong – something reflected by robust recent economic data. Later in the week, President Biden put forward plans for big tax increases which might prove academic as his party doesn’t control the House of Representatives – but even if the proposals don’t get enshrined in law it could be a glimpse of the platform that Biden is making with a view to next year’s elections. Transatlantic friction continues as the EU tries to combat US moves to dish out incentives as part of the Chips and Science Act (for chip production) and the Inflation Reduction Act (for green tech industries), but I would not expect the EU to get much in the way of concessions as it seems that the US is increasingly adopting a “shoot first, ask questions later” approach. The US also imposed sanctions on Chinese companies (Koto Machinery, Raven, Guilin Alpha, S&C Trade and Caspro) for selling aerospace components used to manufacture Iranian drones (which the companies obviously denied).
• IN THE UK – the BCC reckons that we’ll avoid recession but growth will be sluggish. There was a bit of a kerfuffle this week as the valuation gap between the US and UK markets is getting wider and various companies are threatening to list in the US, including WANdisco, but it turns out that WANdisco’s financials are dodgy, so it wound its neck in.

IN COMMODITIES NEWS…

• Nickel IPOs have been a strong driver of public listings in Indonesia this year as President Joko Widodo aims to make the country a powerhouse in the global EV market. Indonesia has the world’s biggest nickel reserves and is the world’s biggest producer of the metal that is a key material for EV batteries.
• Talking of nickel, hedge fund lawsuits are piling up against the LME for last year’s nickel chaos caused by the Exchange suspending and cancelling trades when prices more than tripled in a day last year.

IN ENERGY NEWS…

• National Grid fired up its coal plants for the first time this winter as temperatures in the UK plummeted.
• Cornwall could be the site of the UK’s first geothermal power plant when it goes operational next year! It has drilled a hole that’s over three miles down to tap into water that’s up to 180°C. Fracking expertise could help hugely as well as there’s an American company called Quaise Energy that’s looking at tech that could help it drill down by up to 20km to reach water that is up to 500°C!

IN CRYPTO NEWS…

• FTX’s trading affiliate Alameda is suing Grayscale and its parent company DCG about its crypto investments as interim CEO John Ray tries to claw back as much as he can for FTX customers and creditors.
• Crypto bank Silvergate announced plans to wind down after being hugely damaged by the FTX collapse.

IN BUSINESS TRENDS…

• Automation is accelerating as the war in Ukraine and the pandemic have brought to light glaring weaknesses in the supply chains and manpower in energy, agriculture and manufacturing. Relations between the US and China continue to be fraught and so manufacturers are looking to diversify where they manufacture “just in case”. Increased automation could benefit Japanese companies like Fanuc and/or Keyence.
• Two big London law firms – Clifford Chance and Herbert Smith Freehills – along with US firm Latham & Watkins have been granted foreign law licences to open offices in Saudi Arabia. I suspect others will follow!
• UK construction activity hit its highest growth rate in 9 months, according to the latest S&P Global PMI and things seem to be looking up in the sector.

IN CONSUMER TRENDS…

• First-time buyers are seeing their mortgage repayments skyrocket – ONS data showed that average monthly mortgage payments rose by 61%!
• Barclaycard data shows that discount stores are winning as consumers try to make their money go further. They are also buying more own-brands.
• HelloFresh continues to do well as consumers still seem to want to buy meal kits in a cost-of-living crisis!
• Premier Foods is doing so well that it raised its annual forecasts. Consumers clearly like the familiarity of their brands (which include Oxo, Angel Delight, Bisto and Mr Kipling) in uncertain times.

IN EMPLOYMENT TRENDS…

• Britain is looking at relaxing foreign worker rules to plug gaps in our workforce, putting bricklayers, roofers, carpenters, plasterers and others in the trade on the “shortage occupation list” which will allow employers to bring in people from these professions on lower wages. This clearly needs to be monitored as I suspect this could be subject to abuse by employers wanting to cut their wage bills!
• Recruiter PageGroup had another successful year thanks to a tight labour market and rising wages but it is seeing momentum slowing down. All eyes will be on the trading update next month.

OVERALL…

• US listed tech companies continue to have a tough time with many that floated in 2020 and 2021 now trading below their IPO price. Interestingly, private equity firms like Thoma Bravo are picking them up on the cheap with a view to putting some of them together and floating them down the road as a more “rounded” entity. Investors are less impressed with growth these days – they are much keener on profitability (although any company with “AI” in its name may still be able to attract interest 🤣).

IN AI NEWS…

• AI is now facing investor scepticism as they worry about the cash burn and real prospects of actually making money and cyber experts warn about AI being used for nefarious purposes like phishing attacks and other types of fraud. Still, law firm DLA Piper poached ten data scientists from a smaller rival to help advise clients on the use of AI and build tools to help its own lawyers and its clients.

IN HARDWARE NEWS…

• South Korean firms Samsung and SK Hynix are hesitating whether to take Uncle Sam’s dollar via the US Chips Act because there are too many strings attached. No doubt other chip makers will be watching this with interest to see who blinks…mind you it’s possible that Intel might be held back by the Chips Act because it doesn’t produce the top spec chips like rival AMD does – so actually its rivals may benefit more.
• Although some chip companies – like Intel and Qualcomm – have been reporting a slowdown due to falling PC and smartphone demand, chip companies that supply the automotive industry have been reporting rising sales. NXP Semiconductors, Infineon, Renesas, Analog Devices and Texas Instruments have been among those to experience this trend and I  suspect this will continue as the whole automotive industry advances towards electrification.
• The Netherlands has now bowed to US pressure and said it will restrict chip exports to China, which will not be great for China long-term.
• Germany is reviewing potential security risks with Chinese 5G equipment in its networks. This could lead to a potential ban on some parts manufactured by Huawei and ZTE…
• Apple and Foxconn are getting closer to increasing India production as labour laws have been changed there to accommodate its 12-hour (as opposed to the previous standard of 9-hour) shift patterns, easing its path to potentially become the next major manufacturing hub.

IN SOFTWARE NEWS…

• TikTok is rolling out its “Project Clover” charm offensive to convince Europeans that it’s not going to steal user data for spying purposes. Project Texas is the American equivalent – which will be needed because senators are pushing through a bill (called the RESTRICT Act) that could pave the way for Biden to ban TikTok! This could also be bad for other Chinese-controlled tech groups like Alibaba, PDD and Shein.
• Twitter had its biggest malfunction since Musk took over while the EU told him to hire more human moderators and fact-checkers to oversee content. The FTC is also concerned that his recent headcount reductions have adversely affected user protection but it’s probably the ruthless cull that’s led him to say that he thinks Twitter could be cashflow positive by Q2.
• Spotify launched a new video feed that gives you podcast, music and audiobook recommendations via short video clips à la TikTok and YouTube Shorts.

THE MAIN NEWS WAS THIS…

• Germany just rejected the EU’s proposed ban on the sale of internal combustion-engined vehicles by 2035, showing that Germany continues to hold the upper hand here – not the EU! This was supposed to be a central plank of the EU becoming carbon neutral by 2050. It continues to push for an exemption for cars using e-fuels.

IN BATTERY NEWS…

• VW decided to put a European battery plant on hold and is threatening to up sticks and head to the States for the “free” money on offer under the Inflation Reduction Act rather than settle for the lower amount of money available in Europe. FWIW, I think VW is in a very strong negotiating position here as the EU will not want to lose it.
• China’s CATL reinforced its leading position in batteries with a huge jump in profits, but it was interesting to hear President Xi say that he was happy that it was so successful, but concerned that it could be over-reliant on raw materials from foreign countries, which may be subject to future sanctions.

IN EV NEWS…

• Tesla went and cut prices again in its fifth round of price cuts since the beginning of the year! This should be good for sales volumes but it’s bound to be annoying for current Tesla owners. Mind you, what is going to be even more annoying than this is steering wheels in Tesla cars falling off while you are driving – something that is being investigated by the National Highway Traffic Safety Administration!
• BMW gave Oxford reasons to cheer as it brought electric Minis back to Oxford after it looked like production was going to go to China. It seems that a £75m injection of cashpayers’ money did the trick 😜. BMW also announced that it’d be paying a fat dividend to shareholders thanks to profits from its increased stake in Chinese partner Brilliance.

MEANWHILE…

• GM’s push into EVs has been slower than expected as production has failed to keep up with demand and British EV-start-up Arrival is facing another lawsuit from creditors.

IN TERMS OF SALES…

• UK car sales rose by 26% year-on-year as the industry recovered from the chip shortage and it was interesting to hear that sales of hybrids are catching up with 100% EVs implying that consumers are seeing this as an acceptable stepping stone to full electrification.

IN CONSUMER GOODS NEWS…

• Adidas cut its dividend as it faced its first annual loss in 31 years after big changes in its top management and sharp drop-off in China sales.
• Dyson’s sales hit a new record but rising costs took the edge off profits.

IN RETAIL NEWS…

• Morrisons ditched at least 80 maintenance suppliers as it tries to cut costs.
• WH Smith is trying to appeal to Paperchase fans by launching a high-end souvenir and stationary format called Curi.o.city to plug the gap Paperchase left behind.
• Fast fashion retailer In The Style agreed to sell itself to Baaj Capital, a UK private family office, for just £1.2m just two years after it floated with a £105m valuation on AIM!

IN LEISURE NEWS…

• Fortunes in the restaurant/takeaway sector were mixed as The Restaurant Group (owner of brands like Wagamama and Frankie & Benny’s) announced plans to cut around 35 underperforming outlets as part of its streamlining plans while Greggs announced the opening of 150 new stores despite rising overheads. and Domino’s benefited from the World Cup, helping it to its busiest ever quarter!
• MGM China and Melco Resorts have put in strong performances in Macau, which is great news for a sector that has been decimated over the last few years.

IN COMMERCIAL PROPERTY NEWS…

• IWG had a stellar year last year on the back of record revenues as hybrid working practices continue. They sounded pretty confident about the rest of the year also.

IN RESIDENTIAL PROPERTY NEWS…

• Surrey house prices fell the most, according to data company TwentyCi but Halifax said that house prices are generally holding up as mortgage rates fall.
• That said, rating agency Fitch reckons homeowners with mortgages in the UK are currently more at risk of falling behind on payments that those in any other developed country!
• There’s potentially bad news for renters in London as more landlords have been priced out of the market, meaning that there will be fewer rental properties, which means that rents are likely to go up.

• US investors dumped bank shares as investors worried that problems at tech-focused lender Silicon Valley Bank (SVB) could reflect similar problems at larger rivals. Over the weekend, SVB got taken over by regulators, prompting the US and UK governments to pledge support for depositors. This is getting messy!
• Credit Suisse’s share price plumbed new depths as it delayed the publication of its accounts due to the SEC asking questions about its financials, which CS is downplaying.
• In the UK, the FCA told banks to pass on rate rises more quickly when the interest rate changes while an investors in Revolut saw a major sell-off as a big early investor has cut the internal valuation of its sake by 15%, implying that there’s not much to cheer about at the moment.

• EY decided to postpone a contentious vote on whether it should break up its auditing and consulting businesses. Deloitte, KPMG and PwC have said that they have not interest in splitting their businesses up.
• International schools are switching focus away from China and on to other countries like Japan, India, Vietnam and Nigeria to make money. The clampdown on the education sector in China by its own government has made life very difficult for private sector education providers ever since.

• Watson’s Yearly 2022/23: coming shortly…

My favourite “alternative” story this week was the one about the guy who got a six-pack tattooed on his stomach but the optical illusion thing was also pretty clever!