Watson’s Weekly 16-03-2024

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.

This was the week that US inflation surprised, TikTok suffered a major setback and Xiaomi launched its first EV…

• IN THE US – inflation rose by 3.2% in February. This was above market expectations and shows just how hard it is to get inflation from 3% down to 2%, with 2% being the target rate! Meanwhile Biden’s approval rating continues to underwhelm despite US GDP growth last year being the best of any large advanced economy, inflation falling faster, unemployment flirting with record lows and the S&P hitting record highs this year. Separately, the Energy Department is about to grant a $2.26bn loan to Lithium Americas and it will be used to build a refining plant in Nevada as part of the broader effort to build a domestic supply chain of lithium and other battery materials.
• IN JAPAN – officially revised figures show that Japan didn’t, in fact, fall into recession for the second half of last year because output actually expanded for the final quarter of last year, meaning that the country avoided two consecutive quarters of contraction (which is what you need to have a recession). Initial figures had suggested that output had actually contracted in Q4.
• IN THE UK – it looks like the UK may already have pulled out of recession as the latest ONS data showed that GDP actually rose between December 2023 and January 2024 thanks to 0.2% growth in the services sector.

IN COMMODITIES NEWS…

• IN OIL – Saudi Aramco unveiled its second-highest annual profit ever despite lower oil prices and state-led production cuts. This helped it to increase its dividend by 30% year-on-year. OPEC left its oil demand forecasts unchanged for 2024 while the IEA increased its demand forecasts.
• IN GAS – US natural gas producer EQT just announced that it would buy back Equitrans Midstream, a pipeline business that it had previously owned, to create a $35bn integrated gas group. It believes that this move will position it to take advantage of an expected AI-powered uplift in power usage in North Virginia as demand for data centres increases (this area has the world’s biggest concentration of internet servers).

IN ENERGY NEWS…

• The British government is going to start offering cheaper power to energy-intensive manufacturers (e.g. metal refiners and EV gigafactories) in order to help boost production of key minerals used in things like wind turbines, EVs and defence technologies.
• Meanwhile, Great British Nuclear has decided to delay the decision on where the first SMRs will be sited until June, which means that the official awarding of contracts is now unlikely to happen until after the next general election.
• The prospect of a nuclear fusion-powered grid is getting ever-closer as there have been some major breakthroughs made by Britain’s First Light Fusion and Commonwealth Fusion Systems in terms of energy production. There is increasing belief that it will be commercially viable by the 2030s!

IN CRYPTO NEWS…

• The FCA has now dropped its ban on crypto-backed securities and said that it “confirms it will accept applications for the admission of bitcoin and ethereum crypto exchange-traded notes in the second quarter of 2024”. Bitcoin’s price jumped by 5% on the news as this is clearly another sign of crypto inching ever-further towards the mainstream.

IN BUSINESS TRENDS NEWS…

• China is definitely going lukewarm on Apple and Tesla these days and both companies are experiencing weakening market share and sales as a result. They have both also had to resort to discounting in order to drum up business. This is concerning for both Apple and Tesla because China is their biggest single market, accounting for 19% and 22% of total revenues respectively in the last few fiscal years.
• US solar panel manufacturers are in a “dire situation” thanks to soaring cheap imports from China. Cheap Chinese solar panels have been a real boon for US renewable energy developers but it has had devastating consequences for domestic makers. Local makers like First Solar and Heliene want stricter enforcement of tariffs and a swift return to the imposition of duties against south-east Asian imports. It sounds like EV makers could suffer the same fate as solar panel makers if they are not careful…
• German container shipping company Hapag-Lloyd expects an earnings hit this year thanks to weakening demand, an increase in shipping capacity (loads of ships were bought when the industry was caught short during the pandemic) and the impact of the Red Sea crisis. Speaking of which, Russia is benefiting from the Red Sea disruption as it’s seeing higher demand for rail freight between Asia and Europe.

IN EMPLOYMENT TRENDS…

• Japanese workers got their biggest pay rise since 1992 in the annual wage negotiations between companies and unions. This may put further pressure on the Bank of Japan to raise its interest rates out of negative territory!
• The pace of UK wage growth is slowing down, according to a recent report by REC-KPMG. In particular, the rate of growth for starting salaries has fallen to its slowest pace in almost three years. More food for thought for the Bank of England as it considers what it’s next move will be regarding interest rates…

• The US House of Representatives has approved a bill to ban TikTok from app stores unless it’s sold by its Chinese parent company, ByteDance. The Chinese aren’t best pleased, ex-US Treasury Secretary Steven Mnuchin is putting a consortium together to buy it but China is unlikely to approve the sale as it would breach its export control rules! If the US ends up banning it, it’s likely that other countries – including the UK – will think about doing the same thing.
• Reddit is seeking out a $6.5bn valuation from a flotation that could kick off at the end of this month. I think this thing’s a turkey as the whole area is having a nightmare at the moment, what with all the troubles at Vice Media and Buzzfeed. The cynic in me says that Reddit’s trying to get this IPO off the ground before its valuation falls. Obviously all those in the deal will pump this up to get the feelgood, but I just don’t think the fundamentals are there…
• Messaging app Telegram is now up to 900m monthly active users and nearing profitability. It’s still got a way to go to rival WhatsApp’s 1.8 BILLION monthly active users, but it’s going in the right direction.
• Reliance Industries said that it would buy out Paramount Global’s stake in Viacom18, a JV between the two companies, for over $500m. This looks like the latest “elegant exit” for Hollywood studios as Paramount, Disney, Warner Bros and Sony have all decided to scale back their ambitions in the country due to the massive gap between content production costs and low Indian user revenues.

IN BATTERY NEWS…

• CATL’s share price jumped by 14% on news that it would collaborate with Xiaomi and BAIC Motor on a new factory that will build advanced battery cells. It is thought that CATL will benefit from a new generation of massive production lines that would improve cost efficiencies and return on equity.

IN EV NEWS…

• The CEO of Mercedes-Benz appealed for Brussels to lower tariffs on Chinese EVs because he thinks that increased competition will be good for innovation. I would take this with a MASSIVE pinch of salt because over a third of Merc’s cars are sold in China, so it would seem to me that he is highly motivated to push the case for Chinese EV manufacturers! Also, Chinese carmakers Geely and SAIC own a roughly 20% stake in Mercedes-Benz…
• Porsche warned that its transition to electrification will take a toll on profits but the company said it was “laying the groundwork in 2024 for a flying start in 2025”. This could be achievable given the prospects of the new electric Macan, a Taycan facelift and a hybrid 911.
• Meanwhile, mobile phone maker Xiaomi did what Apple couldn’t – and produced its first EV just three years after it said it would enter the car-making business. It is said to have better acceleration than Tesla and Porsche EVs while one version of the vehicle has a range of up to 800km! Has Xiaomi found a niche for cars that are tech-led??
• BYD is experiencing headwinds in its overseas expansion thanks to the general cooling in demand for EVs, but it is also having quality issues. Its issues could of course get worse if governments start to slap extra tariffs on their cars to protect local manufacturers!
• Fisker is looking very dodgy at the moment and is preparing for a potential bankruptcy filing. It recently said that it might run out of cash this year and it issued a “going concern warning” only last month where there was “substantial doubt” about its ability to stay in business. Nasty. Investors are clearly assuming the worst as Fisker’s share price collapsed by 46% on this news!

• Metro Bank announced plans to cut 1,000 jobs and scale back its seven-days-a-week operating model in order to cut costs. Tough times…
• Asset manager Abrdn is trying to cut costs and drum up new revenue streams to mitigate the outflow of assets to rivals and low-margin passive funds. CEO Stephen Bird’s original aim was to cut costs and raise income by growing the wealth management business and selling more investments directly to customers. He is clearly failing miserably. I think his days are numbered…
• Hedge funds are threatening to pull investments from India due to new rules from the regulator that will force them to “out” their underlying investors. The new rules were probably designed to prevent further Hindenburg-like shorting attacks on Indian companies although the official line is that the Indian regulator just wants to “better understand the ultimate investors buying Indian stocks”.
• Bain & Co released a report which concluded that PE firms are sitting on a record €3tn pile of assets after making tons of acquisitions over the last few years. PE firms loaded up on assets for knock-down prices during the Covid years when money was cheap and they are now left wearing hefty portfolios that they can’t easily sell. The problem is that they’ve not been able to offload assets, which means that investors can’t get their money out. And because investors can’t get their money out, they are reluctant to put more money in.

IN COMMERCIAL PROPERY NEWS…

• There’s now more empty office space in New York than in London, according to data from CoStar, as working patterns continue to evolve. At the moment, 9.2% of London office space is now vacant (versus just over 5% pre-pandemic) whereas New York is now experiencing a rate of 14% (this was below 9% pre-pandemic) – and the gap is expected to get wider.
• That being said, credit rating agency Moody’s said that it will be leaving Canary Wharf and heading to the City after it did a review last summer. This just adds to the talk of the ongoing Canary Wharf “exodus” (HSBC and Clifford Chance are also high profile tenants who are heading that way as well). The office vacancy rate in Canary Wharf now stands at 16% – its highest level for years.

IN RESIDENTIAL PROPERTY NEWS…

• UK mortgage arrears rose 9.2% in 2023 over the last quarter, according to the latest Bank of England stats. Although the absolute level of arrears is pretty low, the rate at which they are rising is potentially a cause for concern.
• The latest RICS survey showed that UK estate agents are feeling at their most optimistic regarding the near-term growth in house prices since June 2022.
• Vistry has managed to weather the housebuilding storm by building homes for housing associations and big build-to-rent landlords. I do wonder, though, whether whether rivals will bounce back more strongly when the housing market improves, as it is expected to do.

• IN CHIP NEWS – a Singapore-based chipmaking start-up, called Silicon Box, is looking to invest €3.2bn in a chipmaking plant in Italy. It plans to produce chips for AI, EVs and high-performance computing. This is great news for Italy, but also for the EU as the bloc set a punchy target of doubling its semiconductor production capacity by 2030 to 20% of the global total versus the 10% in 2021. Elsewhere, Arm unveiled its first chip design to power self-driving cars in a move to reduce its reliance on smartphone processors. The company believes that there is a lot of room for growth in automotive.
• Apple has decided to bow to Brussels and allow iPhone apps to be downloaded directly from their developers’ websites for the first time from this spring. This is all about complying with the Digital Markets Act which will come into effect later this month. Meanwhile, Apple announced plans to open its eighth store in Shanghai in a central business district this month. Will this help to arrest the current slide of iPhone sales??
• Nintendo and Universal Pictures announced plans to release a sequel to last year’s successful Super Mario Bros’ movie. It is scheduled to be released in April 2026!
• The National Audit Office reckons that the government’s recently announced plans to use AI to cut costs in the Civil Service may be tricky due to the existing “ageing IT infrastructure”. It was never going to be a smooth ride now was it!?!

IN RETAIL…

• IN THE US – US retail sales bounced back, albeit by less than the market was expecting. This was good news after a slow beginning to the year. Food for thought in the Fed’s next meeting re what to do with interest rates. Meanwhile, Dollar Tree, owner of the Family Dollar chain, said that it would be shutting down almost 1,000 of its 16,700 outlets over the next few years as it recalibrates its offering. I wonder whether the company’s positioning itself for an upturn in the economy and its customers being able to buy more.
• IN APPAREL – Superdry is now in talks with Hilco about a new loan to help with its turnaround efforts. Its nightmare continues. Zara owner Inditex announced plans to spend €1.8bn to boost its logistics “muscle” and power sales growth. It reported a strong start to the current quarter and continues to outperform arch-rival H&M.
• John Lewis managed to drag itself back to profitability, but isn’t going to share the love with its workers as it’s not going to pay a bonus (again). The company decided to ditch targets in non-core areas and focus (at last!) on retail!
• Morrisons announced a £1bn loss for last year as debt payments related to its private equity takeover increased. It continues to lose ground to the German discounters and I think it is in dire need of a new and distinct identity otherwise its decline will be terminal.
• US activist hedge fund Elliott Advisers decided to give up on buying Currys after having two offers rejected. Currys is holding out for an offer from Chinese giant JD.com.

IN LEISURE…

• Cathay Pacific manage to post its first annual profit since the pandemic thanks to a rebound in travel demand. This is just the latest example of an airline benefitting from a rebound in international travel!

• IN PHARMACEUTICAL NEWS – AstraZeneca boosted its drugs pipeline with the $1bn acquisition of French rare diseases company Amolyt Pharma while Eli Lilly announced a deal with Amazon to deliver medicines in America. It was also interesting to see just how important Wegovy has been not just to Novo Nordisk – but to the entire Danish economy!
• Adidas announced its first loss in 30 years as the end of the Yeezy collab hit hard. The company does, however, expect things to get better this year.
• Lego reported its slowest growth for seven years but managed to outperform its rivals in what the CEO said was the worst toy market for 15 years.
• The CMA announced that it would launch an investigation into the veterinary market over concerns that consolidation over the last few years has led to pet-owners being fleeced by overpaying for medicines and prescriptions.
• Deliveroo announced better-than-expected results for 2023 and was quite upbeat about its prospects for this year. There is still, however, a cloud hanging over the company in the form of the never-ending debate over whether workers should be classed as employees or contractors!

My favourite video this week was the one with the amazingly athletic basketball referee! Incredible skills!!!