Watson’s Weekly 12-08-2023

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 slipped, Zoom called employees back to the office and Wilko failed!

• IN THE US – we saw inflation rise by 3.2% in July, which was a smaller increase than expected. This will no doubt give fuel to the argument that the Fed should pause interest rate rises at its next meeting in September.
• IN CHINA – Exports saw their worst drop since the start of the pandemic with a 14.5% year-on-year drop in dollar terms. Imports also fell by their biggest margin in recent years and China’s consumer prices fell for the first time in two years, another potential sign of a slowdown. Given the negative newsflow we’ve been seeing from China recently, it was interesting to see that the authorities have been telling economists at brokerages, universities and state-run think-tanks not to speak about certain topics and put a more positive spin on things. I guess if you have the power to control the narrative, you’re probably going to use it…
• IN EUROPE – Germany’s economy look like it’ll be staying in a rut as industrial production slumped, dragged down by particularly poor performance in car manufacturing. Italy approved a surprise 40% windfall tax on banks but then dramatically watered it down as markets took fright, hitting PM Meloni’s credibility as a safe pair of hands in the process.

IN COMMODITIES NEWS…

• Glencore’s results showed profits halving as commodity prices retreated. First half performance undershot analyst expectations as the weaker coal price took a particularly heavy toll.
• Rio Tinto said that it wants to become a major force in copper as demand for “the metal of electrification” increases. Demand is expected to outstrip supply as soon as 2026, so it looks like this strategy makes sense!
• Cornish Lithium managed to rustle up £53.6m from a consortium of investors to open Britain’s first lithium mine. This is great because things were looking a bit shaky for a while there and it seems that there’s some momentum in lithium gathering as it was only recently that British Lithium announced a venture with French mining firm Imerys to start a mine. It looks like Britain’s EV ambitions are still alive!

IN ENERGY NEWS…

• Asian energy groups – including Tokyo Gas, Osaka Gas, Kansai Electric, SK E&S – are establishing or planning LNG trading desks in London to maximise their exposure to Europe’s shift away from Russian gas and towards LNG. Other Chinese players are also looking to set up in London, which has been a leading gas trading hub since the 1960s.
• France has become Europe’s biggest energy exporter as the maintenance of its ageing fleet of nuclear reactors seems to be working. The majority of exports went to Britain and Italy.
• US scientists made a fusion energy breakthrough as they created a reaction that produced more energy than it consumed but sceptics say that we’re still decades away from a commercially viable option. The danger is that too much hope is placed in fusion and that the money and effort poured into it will detract from more established forms of renewable energy.
• The whole wind power industry is in crisis as price rises are prompting the scrapping of contracts! As if to emphasise the point, Siemens Energy warned of a €4.5bn loss from its problematic wind turbine business – thanks to increased costs.

IN OIL NEWS…

• Saudi Aramco announced that it would make a big increase in its dividend, which will come in useful for Saudi Arabia’s budget deficit and rising borrowing costs as the state is the majority shareholder!

IN BUSINESS TRENDS…

• European companies are counting the cost of closing their Russian operations although Unilever, Nestlé and Raffeisen still seem to be more than happy to do business there! The longer the war goes on, the more likely it is that businesses will be expropriated by the Russian state.
• Biden signed an executive order to ban and regulate any US financial backing for advanced computer chips, quantum computing and AI in China to blunt the country’s advance and it looks like Rishi Sunak is considering doing the same.
• Law firm Dentons announced that it will be separating its China operations from the rest of the business in response to the “evolving regulatory environment for Chinese law firms”.
• London-listed ship broker Clarksons put in a strong performance, enabling it to announce its 21st consecutive year of increased dividends! It has a broader offering than, say, Maersk, which is helping it to navigate choppy waters.
• UK defence companies are getting defunded because of ESG funds withdrawing money. As UK investors are shipping out, European investors are buying into the sector!
• French insurance group Axa reckons that it could benefit from opportunities arising from the current NHS crisis. It’s already put money into its telemedicines business, but it also offers private healthcare, which is likely to see stronger demand as the NHS waiting lists get longer.
• AI-ready data centres continue to be a hot area as data centre start-up CoreWeave just got $2.3bn in funding to spend on data centres aimed at AI. I recently said that Blackstone has already been selling off assets to pour into this area. I suspect we’ll be hearing more companies and investors jumping on this bandwagon!
• There’s a mixed picture in flexible office space as IWG (formerly Regus) reported record revenues as profits doubled for the first half of the year but now it appears that there is “substantial doubt” that WeWork can continue to survive as its costs rise and its cash runs out. It is considering a capital raise, which has gone down badly with investors – and it has just hired directors with bankruptcy experience as previous ones resigned! It’s not looking good…
• There’s also a mixed picture in private equity as many firms – including CVC Capital Partners, Ardian, TPG and Cinven – have been offering investors management fee discounts or other incentives to get them to give them money to invest. Would-be investors are concerned that the current lack of deals will make it harder for them to exit if they put the money in. That said, KKR just announced an all-cash deal to buy Simon & Schuster for $1.62bn as well as a deal to take German satellite group OHB private.

IN EMPLOYMENT TRENDS…

• PageGroup became the latest recruitment agency to suffer with a slowdown in the jobs market. It saw its pre-tax profits crater by 44.7% in the first half of the year. Companies are taking longer to make hiring decisions and candidates are getting increasingly nervous about accepting job offers.
• Scotland’s job market has been weakening thanks to uncertainty in the oil and gas industry. That said, Sunak is about to grant a load of oil and gas exploration licences to boost our energy supply, so things could be worse!
• The latest report from KPMG and REC shows that the gloomier economic outlook is prompting employers to rein in permanent and temporary staff hires.
• It looks like there’s ongoing momentum to get people back into offices! Working-from-home champion Zoom wants staff who live within 50 miles of the office to come in at least twice a week! Also, PwC is going to give this summer’s interns a much more in-person experience than it has done for the last few years because there was a noticeable shortage in skills among those who have lived a lot of last few years online.

IN CONSUMER TRENDS…

• The latest BRC-KPMG report shows that there was a sharp fall in sales in July this year versus July last year, which prompted more retailers to offer discounts to attract cash. A separate report from Barclays said that spending on credit and debit cards was just 4% higher than it was a year ago.
• In terms of food costs, orange juice prices have risen by almost 50% since the beginning of the year, Asian rice prices have hit their highest levels since 2008 and the harvest for the UK is looking rather iffy. This doesn’t sound good for grocery prices and so companies like Birds Eye owner Nomad Foods look like they’ll be keeping prices higher for longer, as they’ve been doing until now. The cost-of-living crisis is making life for alt-meat companies very tricky as they are more expensive than the meat equivalents and Beyond Meat has had to cut its annual revenue forecasts as a result.
• In terms of housing costs, rising mortgage costs have hit households and estate agent Savills’ profits although NatWest and Virgin Money have become the latest lenders to cut their rates. Although UK house prices overall have fallen for a fourth consecutive month, buyers are increasingly being priced out of London. Homebuilder Persimmon has decided to cut headcount thanks to high mortgage rates choking off demand and killing sales.
• In other consumer trends, UK consumers are using BNPL increasingly frequently for medical loans as NHS waiting lists lengthen, which is benefiting companies like Chrysalis Finance and Scan.com.

IN RETAIL NEWS…

• IN ONLINE RETAIL – Alibaba managed to outperform forecasts in its Q2 results although there are doubts as to how much the American restrictions on advanced chip exports are going to hit Alibaba’s cloud computing potential. Meanwhile, Amazon announced a cull of the vast majority of its clothing brands in addition to some own-label furnishing brands. Given that own-brand sales make up just 1% of its total retail sales, this sounds like a reasonable strategic decision.
• IN THE WORLD OF LUXURY GOODS – Britain’s biggest retailer of Rolex and Omega watches, Watches of Switzerland, blamed weaker watch sales on the tourist tax and Ralph Lauren cut its forecasts for the quarter on weaker demand (but kept full year forecasts intact) but Tapestry (owner of Coach and other brands) announced that it was buying Capri Holdings (which owns brands including Versace and Jimmy Choo) for $8.5bn in a sort of American answer to the likes of LVMH and Kering.
• IN UK HIGH STREET RETAIL – Aldi cut prices of over 30 products as supermarkets fight for increasingly thrifty consumers in a price war. Meanwhile, Wilco brought in the administrators, PwC, as buyers for the business failed to emerge. It has been hit by supply chain problems, inflation and the cost-of-living crisis affecting its client base.

IN LEISURE NEWS…

• Tui is investing in northern European destinations as wild fires rage in southern Europe. This trend was backed by separate data from Mastercard which shows that there was a rise in holiday bookings to northern European countries this year. FWIW, I think that it will take years for people to change their holiday habits and preferences unless we get a repeat of the high temperatures for the next one or two years in a row.

IN GENERAL TECH NEWS…

• India passed a long-awaited data protection bill. The idea of it is to find a balance between protecting user data and keeping the internet open! It’s basically like GDPR-lite but critics say that it leaves the door open to state surveillance.
• SoftBank has managed to improve the performance of its Vision Fund and is/will be putting money into AI-related investments. While we’re on the subject of SoftBank, Arm announced a disappointing quarterly performance, which isn’t ideal given that SoftBank’s wanting a $70bn valuation for it from its imminent IPO. And while we’re on the subject of Arm, it turns out that Amazon is considering becoming an anchor investor in said IPO along with other biggies such as Intel and Nvidia.
• Roblox stated that it wants to switch from growth to profitability, which is great, but I think there will be a ceiling on profitability given the age of its young audience.
• X (formerly Twitter) announced it would be adding video call functionality to its platform as well as measures to arrest the slide in its advertising revenues. This is just another step towards X becoming an “everything app”.

IN AI NEWS…

• Amazon removed books created by AI after an author complained that a number of titles had been falsely published in her name. It looks like Amazon is going to have to tighten its policing policies!
• Google and Universal are in talks about how to licence artists’ melodies and voices for songs that are generated by AI. Deepfake songs have been leaking into the charts and the artists (and their labels!) want a piece of the action!
• It looks like Apple is spending money on building up expertise in AI to compress LLMs enough to run efficiently on mobiles rather than in the cloud. This would be an amazing development as running AI on devices would be quicker and more secure.

IN CHIP NEWS…

• Chinese tech companies ordered $5bn-worth of Nvidia chips to beat the deadline of US sanctions. The likes of Baidu, ByteDance, Tencent and Alibaba racked up orders in order to beat the deadline and pre-empt any further tightening of sanctions by the Biden administration.
• TSMC announced plans to build a €10bn chip plant in Germany along with a few other companies. This will make Germany a major European hub for chip manufacturing.
• The new CEO of Slack made an interesting point in that she said that the mushrooming cost of powering generative AI could actually inhibit its growth because the availability of chips needed to run it won’t be sufficient to keep up with demand for AI.

• IN PHARMACEUTICALS NEWS – Eli Lilly and Novo Nordisk heard results from a late-stage trial that their anti-obesity drugs also reduced the risk of hear attacks and strokes! Novo Nordisk subsequently lifted sales forecasts. On the other hand, BioNTech has been suffering as demand for its Covid jab is declining, something that Pfizer has also been experiencing – to the extent that the latter has cut its full-year expectations.
• IN AUTOMOTIVE NEWS – Rivian said that it was increasing production as revenues more than tripled over the latest quarter while the Geely-owned Lotus announced that it had churned out a record number of sports cars in the first half of 2023. Meanwhile, Japanese carmakers are very concerned about what they’re going to do in the Chinese market as they continue to lose ground to local makers.
• IN MEDIA NEWS – Disney has been having a tough time of it as turnaround efforts continue but at least it’s on course to saving $5.5bn after a recovery in streaming. Rival Sony is counting the cost of the current Hollywood strikes as its Q1 results have been hit but, on the flipside, it did a major deal in India by merging its India arm with domestic broadcaster Zee to create the country’s biggest media company.
• Elsewhere, Deliveroo is heading towards profitability as its losses almost halved in the half-year while cannabis company Tilray Brands bought eight beer and beverage brands from Anheuser -Busch for an undisclosed cash sum to further its ambitions in booze.

My favourite “alternative” video this week was the one of ordinary-looking people doing some extraordinary (yet ultimately pointless 🤣) things! Gotta love this!