Watson’s Weekly 22-07-2023

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 grain prices shot up as Russia refused to renew the Black Sea deal, there was excitement about a bigger-than-expected slowdown in UK inflation and Eli Lilly’s Alzheimer’s drug came closer to approval.

• IN CHINA NEWS – Chinese GDP growth came in at a sluggish 0.8% in the April to June quarter, which prompted mass GDP growth downgrades at a number of the big investment banks.
• IN THAILAND NEWS – the winner of Thailand’s recent election, Pita Lamjaroenrat, got suspended from parliament by the conservative establishment. This doesn’t bode well and means that the country’s leadership vacuum will continue as the military regime tries its best to hang on to power.
• IN UK NEWS – inflation actually slowed down by more than expected, meaning that it may be possible for it to hit Sunak’s 5% year-end target after all! Pre the announcement, the markets had been pricing in a 6.25% peak interest rate, but that is now 5.75% since this latest development.
• IN TURKEY NEWS – the government decided to triple petrol taxes as Erdogan tries to shore up state finances after his recent election victory. This was part of a raft of measures designed to get the country back on track financially.

IN COMMODITIES NEWS…

• There’s an olive oil crisis because the spring heatwave decimated harvests in Spain. This is serious because Spain accounts for about 50% of the world’s olive crop! The fact that harvests were also poor in Italy and Portugal does not bode well for olive oil prices going forward…
• Wheat prices surged on the back of the collapse of the Black Sea deal as the Russians backed out. Soya and corn prices also increased on the back of this latest development and it’s likely that this is going to push food prices up again just as things seem to be calming down.

IN RENEWABLES NEWS…

• Rolls-Royce got closer to building its much-talked-about fleet of Small Modular Reactors (SMRs) as the government opened up an international tender to build the new generation of nuclear power plants. A shortlist of successful candidates is to be announced by autumn.
• A major windfarm project off the coast of Norfolk has been abandoned by Swedish company Vattenfall as the costs have gone up so much as to make the whole thing commercially unviable. Maybe this will make it more likely for Danish company Ørsted to get some money from the UK government for its own offshore wind project in the assumption that the government will want to keep the green dream alive.

IN BUSINESS TRENDS…

• GULF STATES BUYING INTO SPORTS – Saudi Arabia’s “assault” on world sports has been followed this week by Qatar’s sovereign wealth fund, the Qatar Investment Authority, spending $200m on a 5% stake in Monumental Sports and Entertainment, the company that owns the NBA’s Washington Wizards and other sports franchises.
• PRIVATE EQUITY FIRMS TAKING STAKES IN PROFESSIONAL SERVICES FIRMS – London-listed law firm DWF, the largest listed legal services business on the LSE, is in negotiations to sell itself to London-based PE firm Inflexion. DWF’s performance since it’s flotation last year has not been exactly stellar. It seems to me that there is a trend here of PE firms buying out professional services companies – and this is the latest example.
• UK CORPORTATE “GREEDFLATION” – the latest OECD report points out that average profit margins in the UK have risen by almost 25% between the end of 2019 and the beginning of this year, more than any other country in the G7 apart from Germany!

IN EMPLOYMENT TRENDS NEWS…

• Hiring by UK firms is slowing down, according to the latest report from REC and KPMG, as companies hold back due to concerns about the economy. This was seen at a more micro-level as recruiter Hays reported a slowdown in activity, although it left full-year figures intact.
• Anti-strike legislation brought in by the Truss government was struck down by the High Court, which said that it was “so unfair as to be unlawful and, indeed, irrational”. This will clearly make things more difficult for the government in terms of options when more strikes inevitably occur.

IN CONSUMER TRENDS…

• IN WAGE-RELATED NEWS – Chancellor Hunt and governor Bailey teamed up to appeal for UK wage restraint as wage hikes have contributed to inflation. This was perhaps underlined by the latest ONS figures which showed record pay growth, mainly from the private sector. That said, Hunt ordered ministers to find £2bn in savings for public sector pay rises which was then followed up by Sunak backing a 6% rise for public sector workers.
• IN SPENDING TRENDS – there was evidence from the BRC which showed that retail sales increased by 4.9% in June, which is higher than the annual growth rate. The latest data from Barclaycard showed that consumer credit card spending increased by 5.4% last month while grocery shopping on cards rose by 9.5%. Various trends were observed, such as the increasing tendency of having mains and ditching starters and/or desserts when dining out. Tightening household budgets mean that Disney parks are getting quieter and fewer people are getting married but they are spending money on Rolexes, at Apple in the UK and on Dr Martens’ footwear. At the other end of the scale, Wetherspoons has also been doing brisk business.
• IN MORTGAGE/RESIDENTIAL PROPERTY TRENDS – home sales are weakening, according to online property portal OnTheMarket, which is one of the reasons why UK estate agent Winkworth announced a profit warning – and the sentiment is also reflected at homebuilder Barratt, whose annual profits dropped sharply as demand fell off a cliff. Would-be home-buyers are getting increasingly nervous, according to the latest data from RICS, which is not surprising given that UK mortgage rates are hitting new highs but that’s not stopping the rush on remortgaging as everyone’s trying to beat the next rises. It’s difficult to escape this by renting as rents keep going up – but it’s not exactly a smooth ride for landlords either as they are facing massive refinancing costs.

IN THE TECH SECTOR THIS WEEK…

OVERALL…

• Amazon has become the first US company to challenge Europe’s forthcoming Digital Services Act, which is a set of rules designed to govern the conduct of tech companies and particularly their responsibilities related to content. There’s a list of 19 companies in the rules who have more onerous obligations to meet and Amazon is trying to get off this list.

IN AI NEWS…

• IN REGULATION – China’s internet regulator, the Cyberspace Administration of China, is putting together new rules to govern AI with the emphasis on content control, America’s FTC is now investigating OpenAI with a view to deciding whether ChatGPT has caused physical or reputational harm to people by publishing false information about them and our own FCA sounded warnings about how AI currently handles sensitive information like biometrics, financial data etc.
• IN NEW DEVELOPMENTS – it was also a week where we heard about new chatbots! Anthropic launched Claude 2, that has a number of in-built principles to guide it, while Meta is on the verge of releasing a new customisable AI platform and Elon Musk launched xAI, a “pro-humanity” model. In the meantime, Google’s Bard is to be rolled out across Europe and Brazil along with some new features.
• IN OTHER AI NEWS – Reuters reckons that AI will be able to generate certain types of news stories by the end of this year but at the same time AI spam is flooding the internet, which may affect the future quality of outputs if chatbots regurgitate their own iffy outputs as they scrape the internet for information. Also, KPMG announced a $2bn investment in AI and Cloud services over the next five years via a partnership with Microsoft.

IN CHIPS NEWS…

• Foxconn ditched its Indian joint venture with Vedanta not long after announcing a $20bn collaboration last year, but Foxconn emphasised that it was still committed to finding an Indian partner.
• There was interesting discussion on the development of “chiplets”, which can be used to create powerful chips for use in AI. Chiplets are essentially blocks of chips that can be stacked like Lego bricks and most of the major global chipmakers are talking about an international standard that means they can be stacked together. It is a simpler way of designing more powerful semiconductors.
• Nvidia is in talks to be an anchor investor in the forthcoming flotation of Arm, but at the moment both sides’ idea of what constitutes fair value is pretty far apart! The talks are ongoing…

IN M&A…

• The FTC’s bid to block the Microsoft/Activision Blizzard deal was rejected by a US federal judge, the FTC is now appealing the decision and the UK’s CMA is looking at how the deal could go ahead, although this may involve another investigation, further delaying the timetable.

IN SOCIAL MEDIA THIS WEEK…

• Threads’ momentum is continuing and it seems to be denting Twitter traffic. All it has to do now is live up to the hype!
• Twitter said it had started ad revenue sharing with creators who hit various criteria. This seems to be a trend and I can imagine that there is going to be a war on attracting creators as platforms try to sustain (and grow) audiences.
• Snap’s attempts to tempt creators onto its platform appear to be working thanks to a new revenue sharing programme.

IN THE MEDIA SECTOR NEWS THIS WEEK…

• Hollywood went on strike, with actors now joining up with screenwriters and others surrounding guarantees re streaming and the use of AI in films and TV. This is the first joint strike since 1960 and could affect film releases and filming generally for the rest of this year at a time when the industry is just getting back on its feet. Time to catch up on all those old box sets you’ve missed I think!
• Disney’s “new”/old CEO Bob Iger got a contract extension to 2026 and there are rumours that the company could hive off their sports and TV assets.

IN TELECOMS SECTOR NEWS THIS WEEK…

• There were rumours that Deutsche Telekom is looking to launch a takeover bid for BT as the latter is in a weakened state currently with big debts and top management changes.
• Vodafone threatened that it would cut infrastructure expenditure if the proposed merger with Three didn’t go ahead, saying that it would not be able to meet the government’s 5G rollout ambitions.

• IN AUTOMOTIVE-RELATED NEWS – VW and Stellantis are closing in on a $1bn deal that will create a mining company that will supply them with nickel and copper for their batteries, Toyota announced plans for rolling out its hydrogen fuel cells outside Japan and Fisker finally started to deliver its first EVs to US customers. Deliveries started last month.
• IN DEFENCE – Rheinmettall got massive €1.9bn orders for assault vehicles from the German and Dutch armies and BAE Systems got a chunky £280m order for munitions. The trend in rising defence spending around the world is filtering through…
• IN FINANCIALS – UK banks managed to pass the Bank of England’s annual stress tests but they were also told by the Bank of England governor to pay out better rates for savers. Meanwhile, Revolut’s faulty US payments system allowed thieves to steal $20m, which will give even more excuses for authorities in the UK not to give Revolut the banking licence it has been pursuing for the last couple of years.
• IN RETAIL NEWS – Shein is making moves to broaden its offering from apparel to pretty much everything by becoming more of a general third-party marketplace. Uniqlo’s parent, Fast Retailing, announced that it had a great quarter and would be upgrading its guidance for the full year. while M&S is looking to refresh its partnership with Ocado, which is flagging somewhat at the moment. It is committed to the JV, but wants a more integrated and streamlined operation. Elsewhere, Waitrose signed up to Uber Eats to provide more delivery options and Superdrug announced strong annual profits, with a particular stand-out area being fragrances thanks to the demise of department stores.
• City law firm Allen & Overy had a bad week this week as equity partners decided to take a 6% pay cut due to “challenging market conditions” and its global managing partner resigned. Will this destabilise the proposed merger with Shearman & Sterling?
• The FDA just approved the first over-the-counter birth control pill made by Irish-American group Perrigo. It will be available without prescription from pharmacies, convenience stores and online from Q1 2024. This could be absolutely massive IMO…

My favourite “alternative” video this week was the one of this immense tennis rally involving Andy Murray! Amazing!