Watson’s Weekly 19-08-2023

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 Russia hiked its interest rates, Harrods rebounded and the UK set a time for the “AI safety summit”…

• IN THE US – we saw that America’s feeling the repercussions of a China slowdown as companies exposed to manufacturing, construction and exports there are cutting sales forecasts. The likes of DuPont, Dow and Caterpillar are among those suffering as the Great China post-Covid Rebound lost momentum pretty quickly.
• IN CHINA – the People’s Bank of China cut one of its key short-term lending rates to encourage growth and announced retail sales and industrial production numbers that came in below market expectations. The administration has also decided not to publish youth unemployment figures any more (or, at least, for now) as it’s become a real nightmare as it hit 21.3% in June. State-owned banks were ordered to support the yuan as it plummeted against the dollar approaching lows not seen since 2007.
• IN JAPAN – the country’s GDP growth hit 6% over Q2, powered by strong car exports. This was way above market expectations of 2.9%!
• IN RUSSIA – the country’s central bank had to hold an extraordinary meeting to stop the fall of the rouble and it subsequently hiked interest rates by 3.5% from 8.5% to 12%, which helped it gain a bit of ground following the emergency move.

IN COMMODITIES NEWS…

• Gas prices shot up by a whopping 18% thanks to a threat of strike action in Australia at key gas facilities. Although Europe doesn’t buy that much Australian LNG, a shortage could have a knock-on effect on prices elsewhere as buyers seek out other sources.
• The FT did some digging and found that Russia is earning way more from crude oil sales to India than had been thought previously as it is exploiting a technicality to do with the price cap that allows it to do so. Will the international community continue to turn a blind eye to this??

IN BUSINESS TRENDS NEWS…

• It seems that there’s been a spate of European governments imposing windfall taxes on industries such as banking, oil and pharmaceuticals, so last week’s move by Meloni wasn’t actually that unusual (although its suddenness – and subsequent climb-down – probably was!). Some industries will be getting nervous about whether they’re going to be next…
• There was a very interesting look at Saudi Arabia’s push into sport over the last few years which is all designed to help transition the country away from oil revenues (as part of the “Vision 2030” project) and increase revenues to other industries including tourism.

IN EMPLOYMENT TRENDS NEWS…

• Certain AI jobs are commanding big salaries at the moment as companies do their best to attract data scientists and machine learning specialists (among others). No doubt demand will suck up all those available now, so the next best thing to do will be to train existing employees, although that will take time and more money…
• UK public sector wage expectations are at their highest level since 2012 due to a shortage of skilled workers and UK employers are increasingly having to engage in bidding wars to keep staff. No wonder UK wage growth is fuelling further inflation concerns.

IN CONSUMER TRENDS NEWS…

• IN THE US – Official figures showed that retail sales increased for the fourth consecutive month as consumers spent more online and dined out at restaurants. Also, a new trend of “gym offices” has been emerging where some gyms are offering co-working spaces and conference rooms/meeting facilities and charging a correspondingly big fee (well it’s big for a gym membership, but not that bad for a co-working space). Will this catch on in the UK? There’s certainly space in city centres in abandoned department stores…
• IN THE UK – high food prices are forcing families to make difficult decisions between “heating or eating” as the latest Kantar figures show that rising food prices may not be dropping any time soon thanks to recent weather patterns. That said, the rate of food price inflation is falling but consumer confidence is weakening as soaring mortgage costs hit household budgets. This is perhaps one of the reasons why the demand for pawnbroking has hit “record levels” as the UK’s biggest pawnbroker, H&T Group, announced bumper profits. At the other end of the retail scale, more retailers are complaining about the detrimental effect of the “tourist tax” (VAT on overseas spending).

IN RETAIL NEWS…

• IN THE UK – Harrods announced that profits had risen almost tenfold last year, which is particularly impressive given that other department stores including Harvey Nichols, John Lewis, Fenwick and House of Fraser have all had such a nightmare! Talking of department stores, John Lewis said that it wants to roll out its own BNPL service in response to increasing demand from younger customers (which is, IMO, another example of the retailer fiddling around at the edges rather than addressing the weakness of the core business!). Meanwhile, M&S’s road to redemption continued thanks to a broader product range and streamlining of the business to the extent that it’s now on track to re-enter the FTSE100 four years on from its embarrassing relegation. Aldi continued to go from strength to strength and is adding more jobs while the stricken Wilco continued to hunt for a buyer.
• IN EUROPE – H&M said it would be phasing out Myanmar suppliers due to reports of labour abuses in its factories there while Inditex continues to keep its nose ahead of rivals by reacting quickly to trends – which have been improving even more after giving its store managers more control over inventory, displays and designs.
• IN THE US – Home Depot’s Q2 earnings came in above market expectations, although news that sales slipped and Americans are doing less DIY these days is concerning. Target reported weaker earnings and reined in its full-year forecasts thanks to a big conservative backlash against its Pride merchandise. However, its performance probably hasn’t been helped by the fact that its product mix has more gearing towards discretionary items than rivals, which isn’t great in a cost-of-living crisis – a difference highlighted by Walmart’s contrasting robust performance, fuelled by customers need for competitively-priced necessities. Meanwhile, Tapestry (owner of Coach and Kate Spade) reported weaker consumer demand as its quarterly results came in below market expectations, further evidence that the “luxury” end of retailing is starting to see a bit of a wobble.

IN LEISURE NEWS…

• Jamie Oliver is going to open “Jamie Oliver Catherine Street”, a high end restaurant in Covent Garden in November. This marks his return to being a restauranteur four years after his previous restaurant empire fell into administration. Concentrating on the “high end” may be a good idea in theory, as clientele at this end of the market have been less affected by the cost-of-living crisis, but there’s plenty of competition and I would argue that Jamie Oliver will struggle to be seen as truly high-end as I think his image has been cultivated to be more “man of the people”.

IN AI NEWS…

• The UK’s “AI safety summit” has now been set for the beginning of November at Bletchley Park for “like-minded” countries (i.e. probably not China). Google’s DeepMind, Microsoft, OpenAI and Anthropic will be among the attendees – but more details are to follow.
• Google DeepMind is testing out a “personal life coach” AI tool as part of a project that uses generative AI in various fields including life advice, planning instructions and tutoring!
• Tui launched an AI tour guide that will offer you personalised recommendations for destinations, excursions and activities. It was first released to 50% of its UK app users with a view to full subsequent rollout.

IN CHIP NEWS…

• Saudi Arabia and the UAE have splashed out on at least 3,000 of Nvidia’s H100 chips which cost $40,000 each in a bid to accelerate their ambitions in AI development. Both Gulf states want to develop their own capabilities that are independent of the Chinese and Americans.
• China’s regulator blocked the proposed deal for Intel to buy out Israel’s Tower Semiconductor for $5.4bn. Intel is now going to have to pay Tower a $353m termination fee. It hasn’t actually been said, but it looks like Chinese regulators had been dragging their feet in retaliation to ever-tightening US sanctions on tech exports to China.

IN TECH & GAMING NEWS…

• Foxconn still looks like it is very much committed to China despite talks of moving production towards India as part of the whole regional diversification thing to pre-empt further US sanctions and insulate against potential blowback from an invasion of Taiwan (if that happens).
• Tencent’s Q2 revenues came in below market expectations thanks to sluggish domestic gaming sales and weakening consumer confidence. On the flipside, international gaming revenues were strong and it managed to boost profits via successful cost-cutting.
• Twitch announced that it will provide new blocking powers from September to combat online abuse. Users will be able to able to prevent blocked or banned users from viewing their streams in order to cut harassment on the platform.

• IN CHINA – there are concerns that Country Garden could become the next Evergrande as it failed to pay the £22.5m coupon owed to its international bondholders. Its share price plummeted on the news. The real estate sector is proving to be a major drag on the economy, so it will be interesting to see how this is addressed.
• IN THE UK – More UK lenders cut mortgage rates in anticipation of further weakening of inflation. However, more landlords have been selling up due to higher mortgage costs over time, which have all added up to the steepest rent rises in seven years!

• IN BANKS NEWS – Credit Suisse retail investors got to challenge the UBS takeover in court, represented by the Swiss Association for the Protection of Investors. This will be the second class action lawsuit brought by Credit Suisse shareholders against UBS. Meanwhile, the government has told UK banks that they have to ensure access to cash – and this will be overseen by the FCA. I guess this is the response to critics of our move towards a cashless society.
• IN INSURANCE NEWS – Admiral reported higher profits for the first half of the year thanks to whacking premiums up by 20%! Its pursuit of profitability has meant sacrificing customers but it has been a tough year all round for motor insurers.
• IN PAYMENTS NEWS – PayPal is going to stop customers in the UK from buying bitcoin and other digital tokens on its platform ahead of the FCA’s overall crackdown on cryptocurrencies. Trading in them will be suspended for at least three months starting on October 1st. Meanwhile, one of Europe’s biggest payments companies, Adyen, saw its shares collapse by almost 40% on news that costs involved in expanding its business in the US against stiff competition have been particularly high.
• IN ALT-FINANCE NEWS – One of China’s biggest players in the shadow finance sector, Zhongzhi, has caused major panic as it missed payments to retail investors. This comes not long after recent speculation about the health of its wealth management business. Concerns here are that a) this could spread further in China’s $3tn shadow finance sector and, more seriously, b) that problems in the sector could spill over into commercial banking.

• IN BATTERY NEWS – it turns out that battery materials groups including Umicore and Albermarle reckon that solid-state battery tech will be here sooner than had previously been thought. The tech is more stable than current batteries but the problem has always been how to make it commercially viable. Elsewhere, Korean giant Posco has decided to relocate the production of battery materials from mainland China to South Korea to comply with America’s Inflation Reduction Act. Will more companies do the same?? Incidentally, if you are interested in seeing the story so far with EV battery technology, you should definitely read this.
• IN EV NEWS – Tesla cut prices in China as the price war there intensifies and announced the launch of cheaper, lower-range Model S and Model X vehicles with shorter ranges to tempt more customers. Disgraced electric truck maker Nikola announced a recall and loss-making Vietnamese carmaker VinFast had a hugely impressive debut on the NASDAQ, seeing its valuation rising so high that it’s now worth more than Ford and BMW!

• BAE Systems bought NASA supplier, Ball Aerospace, for $5.6bn. This is its biggest ever acquisition and will give it access to space warfare tech, albeit at a high price.
• Private equity firm TPG approached EY about buying a stake in its consulting arm but EY rejected the approach. This will no doubt fire more speculation of other approaches! In the meantime, EY warned staff that headcount reductions are on the cards. It is blaming tricky market conditions, but it is probably due to the need to cut costs following the expensive abandonment of its plans to split its auditing and consultancy business.
• IN PHARMA NEWS – Chinese drugmakers are developing copycat versions of weight-loss drugs that are proving to be so successful for Eli Lilly and Novo Nordisk.
• IN HEALTHCARE NEWS – Aviva is seeing rising demand for private healthcare in the wake of the NHS waiting list crisis while private equity firms that have been investing in healthcare assets heavily in the last few years are also now well-placed to benefit.
• Carlsberg raised its forecasts after a solid first half performance, in contrast to rivals AB InBev and Heineken. That said, other competitors Diageo and Molson Coors have also done well.

My favourite “alternative” video this week is the one of my favourite drummer El Estepario Siberiano (aka Jorge Garrido) doing an incredible cover of a classic song!