Watson’s Weekly 19-10-2024

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.

• IN WAR NEWS – Israel killed the head of Hamas late on in the week. The US and Allies are pushing for a pause but Israel is unlikely to listen given that it hasn’t thus far. That being said, the families of the remaining hostages being held will be keen for their safe return, so will not want Netanyahu to push his luck.
• IN CHINA – China’s GDP growth slowed to 4.6% in Q3, meaning that the official 5% GDP growth target for year end is looking increasingly stretched. Investors seem to be rather deflated at China’s economic pea-shooter, rather than the bazooka that they were hoping for…in the meantime China engaged in a bit of sabre-rattling as it intensified military exercises around Taiwan. The West is getting increasingly concerned about China’s current economic state because it’s been a big growth driver for many years and, given the changing tastes of Chinese consumers and worsening sanctions, many are wondering whether it’s worth clinging on to a presence there given the shrinking prospects.
• IN THE US – markets rose on a positive start to the corporate earnings season, Trump made more pledges to slap additional taxes on imported cars and made fun of the office of the chair of the Federal Reserve while Elon Musk chucked him a $75m to help his campaign and Kamala Harris launched another media blitz to try and grab back the initiative.
• IN EUROPE – the ECB cut interest rates again – this time from 3.5% to 3.25% – to head off a sharp slowdown in the eurozone economy.
• IN THE UK – the Budget chat continued this week! Reeves hinted that business taxes would rise despite the IMF warning that tax rises alone wouldn’t be enough to mend public finances. She suddenly came up with an even bigger funding gap of £40bn (she’s been banging on about £22bn – which she still hasn’t fully explained) – but her job might be made slightly easier by the inflation rate falling below the 2% target to 1.7%. This was much lower than the 1.9% that the market was expecting and makes the prospect of an interest rate cut from the Bank of England much more likely.

IN COMMODITIES NEWS…

• The oil price weakened as OPEC lowered its growth forecast while the market continued to conclude that poor China demand would outweigh an increase in demand due to the war in the Middle East.
• Rio Tinto said that iron ore shipments were steady, pretty impressive considering the economic wobbles in China.
• Gold prices hit a new high, breaching $2,700 per troy ounce for the first time! It’s all about investors flight to safe haven assets in times of geopolitical strife – and bitcoin also saw a bump up as well.

IN BUSINESS TRENDS…

• McKinsey decided to cut headcount in China by a third, adjusting to the risks of doing business there. Work with state entities has been drying up so this sounds like the right thing to do.
• Hopes for a recovery in the UK IPO market appear to be gaining momentum and Blackstone made positive noises about floating some of its investments, although this is probably more aimed at the US market. Still, this will be good for sentiment! That being said, EY has had to react to the relative lack of deal flow in the last couple of years by delaying start dates for graduates because of the slowdown in deal flow as the company has also had to cut its headcount for the first time for 14 years.

IN CONSUMER TRENDS…

• Rich people (and ones that are just “quite well off” as well!) are getting increasingly worried about the imminent UK Budget and what it may bring. Investors are withdrawing money from their pension pots, St James’s Place has seen a big influx of client money, and although a lot of bankers quit the UK for Paris in the wake of Brexit, they might come back given that France is going to hit them with big tax rises and the PRA is looking at cutting the period for deferred bonuses from 8 years to 5 (not to mention that bonuses are now uncapped). The importance of affluent people to the economy is not to be sniffed at, though – apparently high rate tax payers on the 45% tax band now pay over 40% of Britain’s overall tax revenues! This is more than the amount raised by corporation tax, as well as that raised from fuel duties, council tax and business rate put together!
• Australia’s looking at banning “dynamic pricing” after a massive furore over Green Day concert tickets. Given that an election isn’t that far away I suspect this will be a move to appeal to voters. Will we follow in the UK and Europe?? I doubt it, as it works the other way as well (flights and hotel rooms can be much cheaper in quieter times, so it’s all swings and roundabouts) and it limits upside for touts.

IN EMPLOYMENT TRENDS…

• Competition for grad-level jobs is getting increasingly tight. Some of this is down to the increased use of AI in the application process which means that each candidate can spray and pray more effectively.
• The latest data from REC shows that the number of new job ads has dropped to its lowest level since the pandemic, presumably because employers are waiting to see what the Budget is going to bring.
• The latest report from the OECD showed that Britain had the biggest rise in male worklessness in the G7, something that has got considerably worse since the pandemic. Meanwhile, UK wage growth has slowed down to its weakest pace in over two years, according to the latest figures from ONS.

IN CHIP NEWS…

• ASML shares tanked this week following a surprisingly poor set of results that were released a day early “in error”. Its dominance in chip-making equipment is great when things are going well but it goes to show that even its near-monopolistic position can’t shield high-tech from being used as a political football.
• Despite this, and recent chip-related weakness from companies like Samsung and LG, TSMC saw profits boom by 54% on the back of the ongoing AI frenzy. It even went as far as raising its outlook!

IN TECH POWER-RELATED NEWS…

• Google has just ordered six or seven SMRs from Kairos Power, a seven-year old US start-up, to power its data centres. This makes it the first big tech company to commission such plants to power its data centres.
• Amazon announced plans to power its electric vans using SMRs and led a £500m funding round for Maryland-based nuclear start-up X-energy, which is developing the tech.
• China’s answer to Instagram, Xiaohongshu (which translates as “little red book”) just passed $1bn in quarterly sales in Q1 of 2024 thanks to the ramping up of advertising from retailers targeting Gen Z women! It is currently China’s fastest-growing social media platform and has aspirations to list in Hong Kong.

IN RETAIL…

• IN LUXURY – Mulberry rebuffed takeover offers from Frasers Group and the biggest shareholder, Challice, says it has no interest. Still, British luxury brands Mulberry and Burberry are having a rough time as their efforts to go further “upmarket” by raising prices have failed. Mind you, even the mighty LVMH has faltered thanks to weakness in Japan and China as it saw its first quarterly drop in sales since the pandemic. You do wonder, though, whether things might get better because although EssilorLuxottica (owner of the Ray-Ban brand) saw revenues fall short of expectations for Q3, it’s still positive about the outlook. I think that sunglasses and fragrances are the entry point for many into the world of luxury and if this is starting to look up then maybe there a rebound may be on the cards…
• Fenwick reported yet more losses amid challenging trading conditions – this will be its seventh consecutive year of losses! It’s facing tightening competition and is still looking for a CEO The bloke they had sort of earmarked for the role isn’t in play at the moment because he was previously at Harrods when Al Fayed was there, so presumably the situation could be a bit delicate if he got taken on and was then embroiled in damaging scandal.
• M&S increased its share of the grocery market in the last four weeks and it’s now the fastest growing traditional supermarket since August! Interestingly, growth at Aldi has slowed while Asda continues to lose customers.
• Boots’ parent, Walgreens Boots Alliance announced plans to close 1,200 stores in the US over the next three years as it tries to adapt to the market and lower drug reimbursement rates.

IN CONSUMER GOODS NEWS…

• Cosmetics company Coty – which owns brands including Max Factor, Covergirl and Lancaster – saw sales slowing down faster than expected over Q2, confirming similar trends from rivals like L’Oréal and Estée Lauder. Beauty and skincare has fallen a long way since the height of the post-pandemic frenzy.

IN LEISURE NEWS…

• Ryanair said it would have to fly fewer passengers than expected next year because it looks like Boeing will not be able to deliver enough of its new aircraft on time next year due to strikes and ongoing safety issues.
• Premier Inn saw a fall in H1 profits but outlined a positive-sounding 5-year plan. It also said that bookings for October and November were looking good.
• There are rumours that Uber has been talking to Expedia with the intention of creating a travel super-app. There’s been no official statement and if there are any talks going on, they’re at a very early stage.
• Rank Group saw a rise in its Q1 revenues as punters spent at its Grosvenor casinos and Mecca bingo halls and the performance of its digital business was particularly strong. Things were rough in the pandemic but it looks like things are getting better – and perhaps the company’s improving fortunes are a sign that consumers are feeling a bit less thrifty??

• Chinese carmakers denied that they are trying to “overthrow” western rivals and were at pains to reiterate their continued commitment to the European market.
• European car makers will be releasing a number of cheaper EVs next year, which is when the new EU emissions targets take effect.
• Used EV prices in the US continue to fall to such an extent that dealers are now left wearing rising inventories and have had to resort to discounting. Depreciation is steeper than that of used petrol/diesel cars and Tesla owners are suffering the most due to the unpredictable price cutting of new cars.
• GM raised its investment in Lithium Americas by about 45% to almost $1bn. This is part of its latest efforts to secure supply of the essential ingredient for EV batteries! Given that lithium prices are low right now, perhaps it’s a good time to invest!
• Stellantis’s CEO doesn’t want the petrol/diesel deadline to be extended because he thinks it’ll just mean that they’ll have to develop both EV technology and internal combustion engine technology, which will increase costs (this is the opposite of what BMW wants – it wants the 2035 deadline to go!). The CEO said that the company would decide the fate of its UK plants in a few weeks and it unveiled disappointing news – that deliveries of its vehicles fell by 20% versus the same quarter a year ago.
• The huge rise in prevalence of LNG-powered trucks in China has decimated sales of Daimler Truck’s Chinese business because Daimler is focused on diesel. Just to give you an idea of scale, LNG trucks made up 9% of China’s heavy-duty truck sales from January to August in 2022 – but now they make up a massive 42%! Will we see this happen elsewhere??

• IN FINANCIALS – US banks are booming as Morgan Stanley unveiled a strong set of Q3 results, as did Goldman Sachs as trading revenues and IPO/M&A activity picked up. In Europe, Switzerland’s wealth managers are looking to target Asia and use their reputation to win more mandates in wealth management. In the UK, it looks like FCA oversight of BNPL lenders is getting closer while increased instances of card fraud have prompted UK Finance, the industry body, to call on social media companies to do more to prevent scams.
• IN REAL ESTATE – the Bank of England is warning of tough consequences later in life as more people take out bigger mortgages over a longer-than-usual time period but in the meantime, confidence is rising at Bellway after a decent summer. Meanwhile, the latest figures from Rightmove show that average rents across Britain have reached record highs. In commercial real estate, it looks like big London offices are testing market appetite after a very quiet few years. A number of major properties have come to market, so it’ll be interesting to see what, if any, demand emerges – and, perhaps even more importantly, what prices they achieve versus the asking.
• IN MANUFACTURING – Airbus announced that it is intending to cut about 7% of workers from its ailing defence and space division amidst programme delays, rising costs and tighter competition. Rival Boeing is looking to raise up to $25bn via a stock and debt offering to bolster its finances as it continues to try to navigate itself through current turbulence.
• Tesco and Shell announced that they are, together, buying the entire output of a massive solar farm that’s currently under construction on the Kent coast. The development, called Cleve Hill, will become the UK’s biggest solar farm when it goes online in early 2025 – but it only managed to get past objections by promising to power over 100,000 homes, which of course it now won’t!
• Netflix announced its most profitable ever quarter despite seeing a slowdown in subscriber growth. Its its customer defection rate is the lowest in the industry – so I guess it is imperative that it can keep churning out the content that everyone wants at costs that don’t get out of hand.

My favourite “AND FINALLY” video this week was the one about the quirks of the English language!