Watson’s Weekly 11 -11-2023

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 fell back into deflation, X launched Grok and WeWork filed for bankruptcy protection…

• IN THE MIDDLE EAST – Wall Street big hitters Jamie Dimon (JP Morgan) and Larry Fink (BlackRock) reckon that a global recession could be sparked by conflict in the Middle East at a time when a fragile global economy is just starting to recover from the major shocks of Covid and the Russia-Ukraine war. Dimon said that geopolitics is now shaping the future of the world in terms of freedom, democracy, food, energy and immigration (which is presumably why Goldman Sachs recently set up a stand-along advisory business to provide insight onto these very things!).
• IN THE US – Trump is currently enjoying a lead in the 2024 polls as more people doubt Biden’s handling of the economy and national security whilst also believing that they’ll be financially better off under The Orange One. Biden’s got an uphill battle but there’s still time to turn things around…
• IN CHINA – falling pork prices pushed China back into deflation (they’ve fallen by over 30% in the year to October!). Beijing has already implemented a stimulus to boost consumer spending and business investment but this will take time to filter through given the fragility of consumer confidence at the moment.
• IN EUROPE – business activity in the Eurozone has fallen by its fastest pace since November 2020, according to the latest S&P Global PMI survey. Germany has decided to introduce a multi-billion euro package to subsidise power for its manufacturers to help them out in the current “higher-for-longer” interest rate environment. This does smack of hypocrisy given that Europe is currently investigating Chinese companies for getting “unfair” help from the state but hey…Portugal is having a nightmare as its PM just resigned over a massive corruption scandal involving lithium mines. This leaves projects like re-privatising the national airline TAP and scrapping tax breaks for rich foreigners in limbo…
• IN THE UK – the first King’s Speech for 70 years was given by King Charles III, setting out the political agenda for the rest of Sunak’s term as the UK government continued with plans to regulate agencies that determine ESG ratings. There is also debate as to whether the FCA will be the regulator to oversee the adherence to these rules. I think that it is high time that this was regulated given the increasing influence of ESG funds and (until now) the lack of quality control!

IN OIL NEWS…

• Shell defended its move away from eco-friendly business areas whilst also announcing that the company is going to be investing more in its gas business to increase sales of LNG by 20-30% by 2030!
• Sunak was also due to unveil new legislation that will allow companies to bid for new licences to drill for fossil fuels in the North Sea on an annual basis. The argument is that this will protect jobs and strengthen Britain’s energy security by making us a bit more energy-independent, but the North Sea Transition Authority reckons that this won’t really move the needle in terms of making us any less dependent on oil imports.
• Saudi Aramco beat market expectations for net profits thanks to higher oil prices. Its plan to keep prices higher-for-longer is working in its favour but this may well contribute to higher-for-longer inflation for the global economy…

IN ENERGY NEWS…

• Britain struck a deal with the US to work together on nuclear fusion after an EU programme rejected the UK due to Brexit. This will involved sharing resources and building shared supply chains.

IN CONSUMER TRENDS NEWS…

• The latest BRC data showed that UK retail spending slowed down last month as pressure on household budgets continued. The question is whether this will continue going into Christmas…
• Grocery inflation is continuing to fall, according to the latest data from Kantar and it looks like Lidl and Aldi continue to attract more middle class customers as the squeeze on disposable income continues.
• This squeeze is pushing up the number of mortgage arrears, although a new “cheap” mortgage deal was announced by Nationwide, which is good news for those who can afford to put down a 40%+ deposit or equity stake!
• UK consumers continue to face other pressures, such as higher car insurance premiums from Direct Line and higher petrol prices as retailers take their sweet time in converting cheaper oil prices to cheaper prices at the pump. While we’re on the subject of cars, US auto loan delinquency rates are rising as lenders are now getting more nervous about car loans dished out during the pandemic.

IN EMPLOYMENT TRENDS NEWS…

• Recruiters have been seeing a sharp rise in the number of jobseekers over the last month, according to a report by REC and KPMG, presumably because more people are being made redundant and others are getting increasingly worried about their own jobs.

IN BUSINESS TRENDS NEWS…

• Digital advertising agency S4 Capital saw a 15% drop in sales over Q3 as the slowdown in ad spending from Big Tech continued to hit home.

IN OVERALL AUTOMOTIVE TRENDS…

• Official figures showed that Germany’s factory output fell to a three-year low in September thanks to a drop in car production. The slowing sales of EVs has been particularly problematic.
• Japanese carmakers are facing a dilemma at the moment – do they stay in China and face increasingly fierce competition with ever-improving local makers or do they just shift focus to the US and southeast Asia where they continue to do well?
• EV sales and prices seem to be suffering these days. In the US, EV makers are increasingly turning to discounts to shift vehicles while in the UK, the latest SMMT figures show that demand for EVs seems to have been dented by Sunak’s decision to delay the “electrification” deadline from 2030 to 2035, in line with the rest of Europe. Meanwhile, Auto Trader says that the price of used EVs has fallen so much that they now cost around the same as their petrol equivalents thanks to higher electricity prices.
• Tesla raised wages for German workers as efforts continue to keep unions out of the company! Tesla is currently the only major carmaker in Europe that does not have union representation on the shop floor!
• GM announced that it has decided to stop production of its fully driverless “Origin” van given recent problems with the whole driverless thing. California recently banned GM’s driverless vehicles due to safety concerns and it has had to pause operations in the US in order to “take steps to rebuild public trust”.
• Rivian plans to increase production of its electric trucks and SUVs in 2023, but TBH this is from a very low base – so don’t get too excited about this! The good news is that it is now shedding its exclusive agreement to only supply Amazon – so at least it can now get more orders from other customers.
• Swedish truckmaker Scania, which is wholly owned by VW, is going to launch a pay-per-use truck JV with logistics start-up Sennder. This is an admirable attempt to spark demand for electric trucks, which has been poor because of scepticism about the charging network and high prices.

IN AI-RELATED NEWS…

• X, NatWest and Cleo introduced their respective chatbots this week and comes shortly after rival Meta announced the launch of around 30 AI chatbots across its Instagram, Facebook and WhatsApp apps. ChatGPT launched a new service whereby you can create personalised versions of its chatbot with speech style, knowledge and behaviours as part of its $20 a month ChatGPT Plus service.
• Tech firms including Amazon, Microsoft and Alphabet are pouring even more money into cloud capacity in order to keep up with rising demand for AI. It sounds like this will continue to increase.

IN CHIP NEWS…

• Chipmakers who are more exposed to automotive-use chips, such as NXP, are falling behind companies who make them for PCs and smartphones due to the slowdown in EV sales, so they are under-shipping demand to avert inventory pileup.
• Meanwhile, Arm announced strong Q2 results, a slightly weaker-than-expected Q3 but it is positive about the full-year. It is hoping to benefit from the AI frenzy although the fact remains that it’s still mostly about smartphones, which aren’t doing brilliantly at the moment.
• Nexperia sold Newport Wafer Fab to US chip company Vishay Intertechnology, bringing an end to the whole Wingtech debacle and the UK government not wanting a company with Chinese ownership to buy the British chip company on national security grounds. Vishay’s CEO said that NWF would be an integral part of its expansion plans.
• Nvidia announced the development of three new China-specific chips that meet its growing demand for advanced chips on the one hand but satisfy US sanctions on the other. A tricky balancing act to be sure – but we’ll have to see if further US sanctions scupper the latest attempts to make money from the Chinese!

IN GAMING-RELATED NEWS…

• Epic Games moves into it latest phase of fighting a court battle against Google and its Play Store charges, which originally ended up with Fortnite being taken off its app store (and Apple’s App Store). It’s going to be an uphill battle…
• Nintendo said that it plans to make a live-action film based on its video game franchise “The Legend of Zelda”, which went down very well with investors as they will no doubt hope for similar success following the Super Mario Bros Movie. They plan to release one movie a year which could be a nice little earner outside consoles and games!
• Sony said it might not hit its console sales targets this financial year as it reported weaker-than-expected Q3 results yesterday. That said, sales might get a boost from the imminent launch of the new slimmer version of the console in its first major update to the PS5 since it was launched in November 2020.

ELSEWHERE…

• Apple might have to pay €14.3bn in back taxes after all, according to an advisor to the ECJ. An ECJ ruling is due next year, so EU Competition Commissioner Margrethe Vestager might yet get the last laugh!

• WeWork shares were suspended as investors braced for bankruptcy protection and then the company did actually file for bankruptcy, which enables it to terminate leases without big financial penalties and restructure its debts. SoftBank, a major investor in WeWork, still had to pay lenders (including Goldman Sachs) $1.5bn just days prior to WeWork filing for bankruptcy protection! SoftBank ended up posting a massive – and unexpected – $6.2bn loss in its Q2 results in its fourth quarter in a row of making losses. IWG hopes to profit from WeWork’s woes and has already taken on some of the buildings leased by WeWork. IWG’s Q3 revenues rose by 7% year-on-year but occupancy slipped a bit from 73.7% in the spring to 73.5% in the summer.
• The housing market looks like it’s past the worst, according to Savills, but UK construction activity contracted in October. That said, Persimmon said that the property market has bounced in the last five weeks and Taylor Wimpey also sounded an upbeat note, saying that it expected annual operating profits to come in at the high end of guidance. Maybe there are early signs of a turnaround??

IN BANKS NEWS…

• UBS announced its first quarterly loss since 2018 thanks to the cost of the Credit Suisse takeover. Still, the increased scale could help it catch up with rivals in the wealth management space!
• N26 withdrew from Brazil as the German fintech continues to rein in its overseas ambitions. It will concentrate on its European business as it has already pulled out of the UK and US.
• Metro Bank’s refinancing seems to have been successful in stemming deposit withdrawals so far. We’ll just have to see how things go from here and whether they come up with a decent plan going forwards!

IN BUY NOW, PAY LATER NEWS…

• Klarna is making preparations for a stock market listing as it is just setting up a new holding company registered in the UK, although it’s probably going to list in New York because it’ll probably get a higher valuation there.

IN INVESTMENT NEWS…

• The fortunes of private equity firms diverge as KKR prospers in infrastructure and property while Carlyle announces job cuts due to poor fund raising performance.
• Robinhood’s Q3 earnings were lacklustre as competition got tighter and trading revenues languish.
• Clara-Pensions, a start-up that aims to consolidate the UK’s 5,000 traditional pension funds, has just agreed its first deal as it has taken on the pensions of 10,000 former workers at Miss Selfridge, Warehouse and Wallis who are in the £600m Sears Retail Pension Scheme.

IN PROFESSIONAL SERVICES…

• Bain Capital made an offer to buy consultancy Guidehouse (which specialises in advising government organisations and businesses) in a deal worth $5.3bn including debt. This is the latest example of a private equity firm buying a professional service provider.
• PwC is going to cut up to 600 UK jobs via voluntary redundancies (initially, anyway!) as demand for its services has fallen. The axe will fall mainly on the advisory business and across all levels below partner. Rivals at EY, Deloitte and KPMG have already launched their own redundancy programmes.

IN RETAIL NEWS…

• M&S smashed analyst expectations and it even regained its title as top womenswear retailer after four years, overtaking Next in the process! The CEO said that it was experiencing a strong start to Christmas.
• Shein is thinking about putting in an offer for Topshop, which Asos bought for £330m in 2021 from Sir Philip Green’s Arcadia. If this went ahead, it’d be Shein’s second acquisition of a British fashion brand after it bought Missguided from Frasers Group last week!
• B&M has benefited from Wilko’s collapse and even jacked up its profits forecasts for the full year as it had an influx of customers. It bought 51 Wilko stores in the aftermath, all of which have now been rebranded.
• WH Smith profits almost doubled over the course of one year as it has benefited from rising traveller numbers going to its airport convenience stores. The UK high street business was a bit of a drag but the overseas business boomed.

IN LEISURE…

• Flutter, which owns Paddy Power and Betfair, warned that its profits for non-US operations this year would come in at the bottom end of expectations. Understandably, it looks likely that it’ll switch its primary listing to NY in Q1. This makes a lot of sense since the US is where’s it’s at now for Flutter in terms of growth.
• In pubs, Wetherspoon toasted better sales as it managed to outpace rivals as inflationary pressures have started to ease.

• IN MEDIA NEWS – Hollywood actors reached a tentative agreement with major studios and streamers that could bring an end to months of disruption in the industry. The agreement includes the biggest increase in minimum wages for 40 years, a new streaming participation bonus and various protections against the use of AI. Disney boss Bob Iger outlined the company’s future strategy but rival Warner Bros Discovery saw its share price have its biggest one-day drop since March 2021 after it said it would fall short of targets as the ad market had been particularly disappointing. In the UK, ITV cut back on new shows due to disappointing ad revenues. There’s definitely a trend here!
• IN AIRLINE NEWS – Ryanair reported a record high for profits and is on track to smash previous full-year records although it said that it does expect to be lossmaking for the first months of 2024. On the other hand, rival Wizz Air cut annual profit forecasts due to an “unprecedented operational challenge”.
• IN LUXURY GOODS NEWS – LVMH is going to buy LA-based eyewear maker Barton Pereira to enhance its existing eyewear division. LVMH aims to expand the brand outside Japan. Meanwhile, Watches of Switzerland announced plans to more than double its sales and profits in less than five years by expanding in the US and getting involved in the secondhand market where it will launch a Rolex-certified, pre-owned programme.
• IN PHARMACEUTICALS NEWS – AstraZeneca is making a push into the weight-loss market by signing an exclusive licensing agreement with Chinese company Eccogene, for an obesity and type 2 diabetes pill that is in the early stages of development.

My favourite “alternative” video of the week was the one with the AMAZING rice ball!!! I love this!