Watson’s Weekly 16-09-2023

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 the EU turned it up a notch against China, when Apple unveiled the iPhone 15 and when Arm returned to the stock market…

• IN THE US – inflation rose to 3.7% in August mainly thanks to a steep increase in energy prices. It’s the first time US inflation has increased since June 2022! This may mean that the Fed increases interest rates later on in the year. Biden also signed major chip and AI deals with Vietnam as part of an effort to broaden the US footprint in the region outside China.
• IN EUROPE – the ECB increased interest rates by 0.25% to 4% as the ECB president appeared to have called the peak. It’s now at its highest rate since the euro was launched in 1999! Meanwhile the European Commission downgraded its GDP forecasts and, in doing so, predicted that Germany would be the only major European economy to contract this year. It’s not surprising given that the latest ZEW survey suggests that Germany is in its worst state since the financial crisis – apart from the pandemic – and has been particularly badly hit by China’s slowdown as it’s Germany’s biggest export market.
• IN THE UK – we saw the UK economy contract by 0.5% in July thanks to wet weather and strikes. All three major sectors – manufacturing, services and construction – contracted together for the first time since summer last year, which will no doubt stoke fears of recession going into the end of the year.

IN OIL NEWS…

• The Saudis and Russians have been instrumental in boosting the oil price, according to the IEA and it looks like they could yet go higher as they extended production cuts to the end of the year.
• BP’s CEO, Bernard Looney, abruptly resigned thanks to the emergence of past relationships with colleagues. He’ll be replaced by the current CFO until a new CEO is found. This puts BPs plans of a path to net zero up in the air.

IN BUSINESS TRENDS NEWS…

• China’s business sentiment has been dampened by the current state of the wider economy as the latest Caixin survey showed it as being at its lowest point in a year in August. This is stifling job creation, wealth creation, innovation and a decent chunk of GDP growth.
• China’s car makers could overtake Japan to be the world’s biggest car exporter this year, according to the latest data from Moody’s. This is something that was not lost on the EU, which announced that it would launch an anti-subsidy probe into China’s EV industry. Chinese EVs currently have an 8% market share in Europe but some believe it could hit 15% within two years! The implication here is that the EU will probably, as a result, whack tariffs on car imports from China. China didn’t like this and said it would protect the “legitimate rights” of its companies. I think this could harm European companies more than Chinese as VW now gets half of its net income from Chinese operations while BMW gets over 30% – and the Chinese will surely retaliate against non-Chinese companies by slapping on their own tariffs.
• In the same way that the Europeans are worried about China making serious inroads with EVs, the chief exec of Arçelik (which owns appliance maker brands including Beko, Grundig, Blomberg and Singer) is getting increasingly concerned that cheap Chinese appliances will be dumped onto the European market because China’s domestic market has been weak and these appliances need to go somewhere. China has a history of dumping large amounts of cheap stuff on overseas markets when it has over-produced and/or when domestic demand has been weak, so the concerns aren’t surprising. I guess the only way of allaying this fear is for tariffs to be imposed on Chinese imports.
• The EU has backed new air pollution limits in line with WHO guidelines, but decided to delay the date for meeting them from 2030 to 2035.
• There’s a construction crisis going on in Germany at the moment as builders are having to cancel projects with increasing frequency and financing is continuing to get pricier in the high interest rate environment, according to the latest Ifo survey.
• IN LAW FIRM NEWS – CMS announced it was going to make “significant” job cuts, particularly among the associate solicitors in its corporate department while DLA Piper has become the latest law firm to launch a dedicated space law business. It will advise on regulatory and intellectual property issues in addition to dispute resolution. Elsewhere, Paul Weiss poached more partners from Kirkland & Ellis and Linklaters as it continues in its quest to build out its European business.
• IN ACCOUNTANCY FIRM NEWS – PwC announced that it would stop offering some advisory services to US audit clients in a bid to reduce any potential conflicts of interest. Deloitte said that it would reduce its headcount in Britain by 3% (about 800 employees) across its consulting, financial advisory and risk advisory businesses due to the economic slowdown while EY posted record revenues over the last year despite all that break-up kerfuffle.
• IN BANKING NEWS – Citigroup is about to undergo its biggest overhaul in almost two decades in a bid to push back against its “also-ran” status.
• UK firms are looking vulnerable at the moment. Although the latest survey by accountancy firm BDO showed a small uptick in manufacturing in August, there was a broader slide in UK private sector economic activity and a separate BCC report highlighted concerns that over 80% UK SMEs were not aware of the new reporting requirements that are part of “Brexit 2.0” that will kick in next month. This will affect VAT in particular.
• IN DEFENCE SECTOR NEWS – Sweden plans to boost its defence budget by almost 30% next year in response to Russia’s invasion of Ukraine so maybe some representatives attended Europe’s biggest ever arms fair at the ExCeL centre in London this week.
• IN FUEL-RELATED NEWS – higher diesel, jet and marine fuel prices are hitting the construction, transportation and agricultural sectors hard so it was interesting to see that shipping container giant Maersk has set up a new company, called C2X, to produce green methanol which it believes could be the key to decarbonising global trade.

IN CONSUMER TRENDS NEWS…

• IN THE US – US consumer prices rose, showing that consumers are willing to spend despite facing higher interest rates and inflation squeezing household finances.
• IN THE UK – consumers are facing higher energy bills due to the loss of government subsidies, cash use increases as more people use it to budget but food price inflation fell to its lowest level for over a year. The Stonegate Pub Company (which owns brands including the Slug and Lettuce, Walkabout, Be At One etc.) caused a kerfuffle by introducing “dynamic pricing” on drinks in about 800 of its 4,000 venues meaning that it will charge more for drinks at peak times. In real estate, lenders continued to push through cuts in mortgage rates but arrears have risen to a seven-year high. Meanwhile, consumers could be facing rents that increase by 25% over the next four years, according to research from Hamptons estate agents. If this happens, they will increase more than four times faster than house price rises!

IN EMPLOYMENT TRENDS…

• Pay rises exceeded inflation for the first time for a year in July, according to the latest figures from the ONS, but the wage differential between London and the rest of the country is now at its widest since 1997.
• Analysis by consultancy firm Public First concluded that hybrid working boosted the number of UK women in full-time jobs, particularly in areas like finance and insurance.
• Bernard Looney’s resignation not only threw BP’s future strategy in doubt – it reminded us of previous indiscretions by top management and highlighted the need for companies to seek a better balance between having rules that protect the business whilst recognising that employees have a right to a private life.

IN AI-RELATED NEWS…

• Top US software companies including Adobe, Salesforce and Zoom have said they won’t charge more for their recently-released new AI features. This sounds great, but I think that the real reason is that the features aren’t all that amazing and they’re not confident enough to charge for fear of people abandoning altogether. After all, OpenAI and Microsoft have increased subscription charges!
• UK researchers are partnering up with National Air Traffic Services (NATS), the Alan Turing Institute and Exeter University to use AI in air traffic control. It could be used to direct air traffic along more fuel-efficient routes to cut down the environmental impact of aviation, minimise delays and congestion.
• The chief exec of News Corp reckons that AI will amplify Big Tech’s power in news distribution, making it imperative that publishers come to an agreement with the AI companies to ensure user access to quality information and those generating it get treated fairly. The future of quality journalism could be in the balance…

IN NON-AI TECH NEWS…

• There was mixed news for Apple this week. On the positive side, Apple introduced its iPhone15 line-up to great fanfare but then on the negative side, the Chinese government warned about the security risks of foreign phones not long after state employees were banned from using iPhones and France has stopped iPhone 12 sales, alleging that they emit too much radiation. If this spreads to other EU countries, this could have serious implications for Apple. In other Apple-related news, Qualcomm got a new contract to supply Apple with 5G chips for the next few years. This goes to show just how good Qualcomm is given that Apple has spent the last few years desperately trying to cut it out by making chips in-house.
• Arm had a strong market debut this week, rising by 25% on Wall Street in its first day of trading. Demand had been strong enough to close the order book a day early, which no doubt created FOMO for more orders in the open market!
• Instacart set the price range for its upcoming IPO but it is way lower than the private valuation it got a couple of years ago.
• A trial opened this week asserting that Google got to where it is by abusing its market dominance in search. Google currently accounts for over 70% of all online searches! It’ll take a while to unfold but it’s possible that the company could face huge fines and/or a potential break-up of the business as a result.
• Oracle outlined a weak outlook, identifying increased competition in cloud computing and a slowdown in digital spending by corporates as the main culprits.
• TikTok saw massive revenue rises in Europe as it increased staff numbers by a whopping 40%! That said, parent company ByteDance still reported an overall loss of $512m. This is great but there’s still the threat of a ban hanging over it!

IN SUPERMARKETS NEWS…

• Carrefour decided to shame brands over “shrinkflation” by putting price warnings on products where manufacturers have cut pack sizes rather than increase prices. This is to put pressure on the likes of Nestlé, PepsiCo and Unilever etc. and perhaps take attention away from the fact that Carrefour also indulges in a bit of cheeky shrinkflation!
• UK supermarkets have cut prices on numerous occasions over the summer and Waitrose cut again this week in response to Ocado’s recent cuts. Amid all this, Aldi and Lidl actually lost market share to the British incumbents but that doesn’t seem to be putting them off further expansion! Lidl in particular has been hit by expansion costs but there could be other ways for supermarkets to generate revenues – by using loyalty data to sell ads to consumer goods companies, for instance!
• Meanwhile, Wilko shut down while Poundland picked up some of the sites with a view to turning them into Poundland outlets.

IN APPAREL RETAIL NEWS…

• H&M is going to sell used clothing at its flagship store (alongside its new stuff, obviously!) in response to “fast fashion” criticism, but I’m not a believer of this long term because I think that people – particularly when they go clothes shopping – want something new.
• Inditex, arch-rival of H&M and owner of Zara and other brands, has committed to the large store format in order to facilitate new product lines and online logistics.

IN OTHER RETAIL NEWS…

• John Lewis is going to take two years longer than originally thought to turn around, according to chairman Dame Sharon White. She had targeted 2026 as being the year where the retailer would make “sustainable profit”, but that’s delayed until 2028. Will the company give her a chance to follow her plan through??
• Wickes published some strong numbers as it continues to benefit from WFH and people wanted to enhance their home working environment.
• THG shares cratered after it announced lower-than expected sales for the half year and a downbeat forecast for the full year.

IN LEISURE NEWS…

• Wagamama’s owner, The Restaurant Group (TRG), has agreed to sell Frankie & Benny’s and Chiquitos to Big Table, which owns brands including Café Rouge, Las Iguanas and Bella Italia. This will leave TRG free to focus on Wagamama and its remaining businesses.
• Chick-fil-A is planning to return to the UK four years after it left. It plans to open give in the UK in the first two years.

IN COMMERCIAL PROPERTY NEWS…

• AI data centres continue garner interest as Australia’s biggest pension fund – AustralianSuper – is putting €1.5bn into Vantage Data Centers, one of the biggest data centre businesses in Europe!

IN RESIDENTIAL PROPERTY NEWS…

• Vistry announced that it would focus purely on social housing, which investors seemed to like. This means that the company will be less exposed to land price fluctuations, thus lowering its risk profile.
• UK estate agents are the gloomiest they’ve been for 14 years as the latest RICS survey showed that house prices and sales fell in August thanks to high mortgage rates denting demand. As if to confirm the gloom, Redrow had a profit warning and predicts that there will be further weakness in buyer demand.

• IN IPO NEWS – TKO floated began trading on the NYSE this week and given the initial success of Arm’s IPO, it seems that other companies – such as Birkenstock and Lime – are considering their own flotations to take advantage of the feelgood!
• IN CAR NEWS – Morgan Stanley published a report which said that Tesla’s AI-powered supercomputer system could be a serious advantage against its competitors and could make it possible for them to be used as robotaxis while BMW announced a £600m package to upgrade its Oxford factory to enable it to produce the new electric minis.
• IN HEALTH-RELATED NEWS – Spire Healthcare Group, one of the UK’s biggest private healthcare companies, posted strong revenue growth for the first half thanks to getting more business as a result of the NHS waiting list crisis. Meanwhile, the FDA approved new Covid boosters from Pfizer and Moderna ahead of the traditional ‘flu season.
• Associated British Foods, which owns Primark in addition to its substantial foods business expects to beat previous expectations for the full year.
• The Hipgnosis Songs Fund is going to offload 29 catalogues of music and use the proceeds to fund a share buyback programme and cut debt, following investor frustration with the share price performance.

My favourite “alternative” video this week concerned two things that are close to my heart – kids doing amazing things in sports and amusing dog tricks!