Watson’s Weekly 18 -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 Hotel Chocolat went to Mars, David Cameron made a dramatic return to frontline politics and Sam Altman left OpenAI…

• IN THE US – inflation fell to 3.2% in October, which was more than expected. It was its first fall for four months, so the implication here is that there is less pressure for the Fed to increase interest rates.
• IN TAIWAN – we saw that the two main opposition parties joined up in a bid to oust the ruling DPP in January’s presidential election. At the moment, this would be the only way they could win. China has framed the election as a choice between war and peace – and it is rumoured that the Chinese will roll back military threats if the opposition win.
• IN THE UK – UK inflation fell to 4.6%, which is more than the 4.8% economists were expecting and a victory for Sunak who had promised to halve inflation back in January. There was a dramatic Cabinet reshuffle this week paving the way for David Cameron to return to frontline politics as Suella Braverman was sacked as home secretary and replaced by James Cleverly. It was also interesting to see that the UK is going to rein in takeover screening powers in the National Security and Investment Act just two years after they were brought in to make overseas takeovers more difficult in sensitive sectors and industries.

IN ENERGY NEWS…

• The US and China, the world’s biggest polluters, announced that they would accelerate the rollout of renewable energy to offset their heavy reliance on fossil fuels, although they didn’t make any reference to the phasing out of fossil fuels. In the meantime, China’s emissions look set to fall from next year thanks to a record increase in clean energy investments.
• Danish wind power developer Ørsted reported major losses not long after it announced the recent cancellation of two major US projects, which cost it over £3bn to exit. No doubt this prompted the UK to offer higher subsidies for offshore windfarms after developers complained of being faced by extremely high prices – but it was also probably due to the fact that England has seen a major drop-off of onshore wind projects and needed to take action!

IN COMMODITIES NEWS…

• Glencore’s acquisition of Teck Resources’ coal business is expected to be a precursor to a full demerger. The coal business will then be spun off and listed in New York with secondary listings in Toronto and Johannesburg.
• The oil price weakened this week as China demand fell, suggesting that there might be cheaper petrol prices.
• IN LITHIUM – Exxon announced that it was starting to drill for lithium in Arkansas with a view to becoming a major US supplier to EV battery makers by 2030! Meanwhile, Geothermal Engineering Ltd is looking to diversify into lithium by raising £600m to build multiple sites by 2030. In doing this, it would join the likes of Cornish Lithium and Imerys British Lithium in tapping the region for resources to power the future of transport and power generation!

IN BUSINESS TRENDS…

• UK business confidence hit its lowest point this year, according to a report by Accenture and S&P Global. That said, sentiment in the UK is still actually better, on average, than many other regions – including Europe!
• Company collapses are on the rise, according to research from a company called Azets, and could reach their highest ever levels thanks to stubbornly high interest rates.
• Many defence companies reported this week as BAE Systems, Babcock and Qinetiq all reported higher order levels as war – and fear of war – prompted governments to increase their defence budgets.
• Many Middle Eastern carriers – including Emirates, Flydubai and Royal Jordanian – placed massive orders for planes worth tens of billions of dollars at the opening day of the Dubai air show.

IN CONSUMER TRENDS…

• US consumers are finally seeing a slowdown in consumer goods price rises, but they have also been buying less.
• IN THE UK, retail sales fell to a two-year low as interest rates continued to hit household incomes while UK wage growth eased in Q3 and consumers face rising energy bills according to Cornwall Insight and Southern Water, the latter of whom needs bills to go higher to pay for its turnaround. On the plus side, Premier Foods (which owns brands including Mr Kipling cakes, Angel Delight and Bisto etc.) announced price cuts on some of its ranges thanks to weakening inflation and cheaper production costs.

• Mars bought Hotel Chocolat in a £534m deal – at a massive 169.8% premium to its share price on Wednesday and came after Hotel Chocolat announced a loss for the year thanks to falling demand and failed expansion attempts in the US and Japan.
• Natura & Co sold The Body Shop to private equity firm Aurelius for £207m, which was way less than the £870m it bought it for in 2017! No doubt it suffered from increased competition as the years ticked by.
• Canadian insurer and money manager Manulife made an offer to buy UK credit investor CQS. It intends to fold CQS’s $13.5bn assets under management into Manulife’s $746bn in assets under management. Manulife is particularly strong in America and Asia.
• Young’s bought rival pub chain City Pub Group for £162m at a 46% premium to what City was trading at before the news. The whole sector seems to be seeing consolidation at the moment.
• Accountancy firm Mazars announced a tie-up between its US business and that of Forvis, a top 10 American accounting firm by revenue. They are both trying to build scale that will help them invest in tech and be more competitive internationally.
• Sports-focused private equity group Arctos bought into Aston Martin’s F1 team, saying that it will “provide extensive resources to enhance” the team’s “reach and brand”.
• General Atlantic, the US private equity firm, bought a controlling stake in Danish sandwich chain Joe & the Juice taking its shareholding from around 30% to up to 90%.
• Canadian private equity firm Brookfield Property Partners announced that it was going to cancel the sale of Center Parcs after it failed to find a buyer willing to pay the £5bn price it was seeking. Does this mean that we’ve reached “peak staycation”??

IN THE US…

• Amazon is showing signs of strong recovery after a period of cost-cutting and overhaul after a frenzied expansion over lockdown. It was also interesting to hear that Amazon is going to start selling Hyundai cars from next year! This will enable customers to get it from a local dealership and then pick it up or have it delivered. It sounds interesting but we’ll have to see how this goes TBH, but it sounds like a fun idea in theory…
• Target stock surged as investors applauded its tighter inventory control and expense management but Walmart saw its share price fall by 8% on its cautious outlook for the holiday season despite it actually raising full-year guidance.
• Home Depot unveiled a better-than-expected decline in same-store sales thanks to demand from professionals rather than amateur DIY-ers.

AMONG EUROPEAN RETAILERS…

• Ikea bought a Brighton shopping mall for around £145m as part of its effort to move away from its traditional out-of-town model to more central locations. It is planning to convert an empty Debenhams site in Brighton’s Churchill Square into a new Ikea that will open within two years.
• Danish jewellery chain Pandora is sounding a positive note ahead of the all-important Christmas season. It continues to experience accelerating growth quarter-on-quarter.

IN THE UK…

• Beauty company Avon is going to open its first actual store in the UK for the first time in its 137-year history. It won’t sell the full range, but it will be there to support its sales representatives. This is already doing well in Turkey.
• Burberry saw its profits hit by weakness in luxury goods spending. Its full-year revenue targets are looking a bit vulnerable now.
• Selfridges saw a shift in control at the top as Thai retailer Central Group has taken control of the department store after major shareholder Signa Investment Group got into financial difficulties earlier this month.
• Ocado signed its first ever non-grocery tech deal to supply an automated warehouse for McKesson Canada, which is a drug distributor that delivers over 40% of the country’s pharmaceutical products! I think that this is an amazing development because it opens up a whole new load of possibilities for the company…
• Petrol retailers will be forced to reveal profits – and could pay big fines if they don’t – thanks to new powers bestowed upon the CMA. The powers will come into force from next year.

IN LEISURE NEWS…

• Fuller’s says that it’s on track for a very merry Christmas as bookings are running 11% ahead of where they were last year! Let’s hope that the train drivers don’t spoil it all again with their strikes.

IN COMMERCIAL PROPERTY NEWS…

• British Land saw the value of its property portfolio drop by a whopping £200m thanks to high interest rates – but its occupancy rates are high across the board. This probably gave it the belief that it could find new tenants for the office space that Meta decided not to take up.
• Rival Landsec is shifting the balance of its portfolio away from the City and Canary Wharf towards the West End as clients are asking for smaller spaces with “more buzz”. That said, Great Portland said that it’s bought more London property than it’s sold for the first time in a decade having spent £123m worth of property since March with a view to spending an additional £700m.

IN RESIDENTIAL PROPERTY NEWS…

• Rightmove stats showed that the UK housing market beat expectations as average asking prices only dropped by about 3% from their peak in May while the number of agreed sales was only down by about 10% pre-Covid. Meanwhile, ONS data showed that the average price of a house fell for the first time in 11 years, but added the caveat that the sample size was smaller than it has been in the past. ONS data has a lag versus, say, property websites because it counts completed purchases where the mortgage has been agreed (and not just asking prices).
• A Hamptons report said that landlords are on track to to have bought the fewest number of homes since 2010 (excluding Covid) while the estate agents themselves are consolidating. In the meantime, estate agents are raking in tens of millions from the interest they get on rent deposits according to a report from the Tenancy Deposit Scheme. This income has been going up as rent rises mean deposits have increased as well.
• Housebuilder Crest Nicholson announced job cuts due to ongoing weakness in the housing market, which isn’t surprising given the generally negative newsflow.

IN TECH TRENDS…

• Lenovo is the latest company to say that it’s seeing signs of recovery in PC demand despite reporting its fifth consecutive quarter of shrinking revenues. It’s not alone in saying that there are encouraging signs, so maybe this is the bottom of the market??

IN REGULATION-RELATED NEWS…

• TikTok and Meta are now challenging their classification as “gatekeepers” for the purpose of the Digital Markets Act because they say it will limit their growth prospects. The legislation will force companies designated as “gatekeepers” to make their services interoperable with those of rivals and subject their currently closed ecosystems to competitors. The DMA is set to come into force in Q1 of 2024.
• Big Tech is resisting the Digital Markets, Competition and Consumer Bill (DMCC) which had been due to give more powers to the CMA. Big Tech is being given more opportunities to appeal things including forcing Apple and Google to allow alternative app stores and Google and Meta to pay news providers for content.

IN CHIP NEWS…

• Microsoft announced the launch of its own proprietary chips for AI as developers continue to look for alternatives to Nvidia, which has a virtual monopoly on high end GPUs that are needed to train large AI models.
• Nvidia just launched its most cutting edge chip in the form of the H200, which will replace the hotly demanded H100 as Nvidia’s fastest chip (it will double the speed of the current one) and it will be compatible with the current model

IN OTHER TECH NEWS…

• It turns out that Apple takes a chunky 36% cut of Google ad revenue from searches on Safari. The figure is usually secret but came out in the antitrust trial against Google. The contract between Google and Apple for Google to remain Apple’s default search engine is thought to be worth up to $15bn a year! The drama continues…
• YouTube has brought together a number of stars including Demi Lovato, John Legend and Sia who have agreed to offer AI-generated versions of their singing voices to be used as soundtracks for Shorts. The AI advance continues…

IN CAR-RELATED TRENDS…

• Owning a car is becoming less attractive these days as costs rise. Hiring is becoming more prevalent and many expect sharing to become the norm. However, I’ve seen this before and I don’t believe that people will stop wanting to own their own cars. The fact is that not everyone lives in areas with good transport and, for many, cars are the only way of getting around!
• German car parts giant Continental is going to be cutting thousands of jobs thanks to falling car production and chip shortages over the last few years.
• Driverless car unit Cruise is suspending an employee share programme in order to revalue (downwards!) the company. This looks like bad news as it shows that GM is kind of drawing the line under any previous bullishness in this area.

IN ELECTRIC VEHICLE NEWS…

• Companies are racing to make EV batteries recyclable. Hong Kong’s GRST and America’s OnTo Technology (as well as giants like BASF) are working on water-based tech that will bind battery components together and make them much easier than current batteries to recycle. This’ll be great but isn’t going to be an overnight cure for the perennial problem of recycling EV batteries.
• Carmakers are offering more discounts on EVs in order to shift them these days. In the UK, the average discount last month was 11% below RRP. Higher prices, wobbles about charging and safety and political attacks on EVs as well as reticence by potential buyers have really hit sales growth.
• Fisker cut production targets after a lacklustre Q3, sending its share price tumbling. The EV landscape isn’t good at the moment!

IN INVESTMENT NEWS…

• ESG investment is facing more criticism as there is speculation that MSCI, a major player in the ESG ratings space, gives higher rankings to companies that get better stock market performance! The problem here is that the ratings reflect this performance more than proper ESG criteria…
• Warren Buffett’s Berkshire Hathaway has sold off a number of shareholdings in Q3 including GM, UPS, HP and Chevron and his cash pile continues to build up. It’ll be interesting to see what he buys next!

IN PAYMENTS…

• Wise saw a massive 848% increase in profits made on customer balances in the six months to September thanks to the high interest rate environment which meant that they could enjoy earning revenues with zero effort! Nice if you can get it!

• Diageo’s CEO said she wants to introduce the world to tequila! The US and Mexico makes up 85% of the spirit’s sales, so there is massive room for improvement here. I think that a company of Diageo’s size and marketing muscle is able to convince people to change their tastes (I’ve seen this done before!) so it could get interesting!
• Pfizer announced that it is going to cut about 50% of its workforce at its Kent site as it rejigs the business. There will be additional job losses in the US and Ireland. Tough times as it transitions to post-Covid times.

I have to say I thought this game looked like a lot of fun! It could get a bit messy though…