Watson’s Weekly 23-03-2024

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.

This was the week that Japan raised interest rates out of negative territory, Vietnam was engulfed in scandal and Nvidia announced an even more advanced chip!…

• IN THE US – the Fed kept interest rates unchanged in the 5.25-5.5% range at its latest meeting but indicated that there would still be three cuts this year. Confidence is building about the economy moving towards the 2% target and markets and the dollar strengthened as a result.
• IN CHINA – official figures from the National Bureau of Statistics showed a jump in industrial production, which is great news for the country and suggests that the 5% GDP growth target for the year is achievable.
• IN JAPAN – the Bank of Japan pulled interest rates out of negative territory to a range of 0-0.1%. This is the first time Japan hasn’t had negative interest rates since 2016 and is the first raising of Japanese interest rates for 17 years! The BoJ originally cut interest rates to -0.1% in 2016 to encourage banks to lend more and stimulate spending.
• IN VIETNAM – the country’s president resigned after just a year in office, becoming the second Vietnamese president to do so in 14 months amid a crackdown on corruption. Talking of which, Vietnamese property tycoon Truong My Lan has been accused of embezzling $12bn from the country’s Saigon Joint Stock Commercial Bank (SCB) and bribing central bank officials. The scale of the fraud is astounding and Truong My Lan faces the death sentence if found guilty. Corruption in Vietnam is nothing new, but to give an idea of scale, this is almost triple the amount involved in Malaysia’s sovereign wealth fund 1MDB, which US officials have previously described as the world’s biggest example of kleptocracy!
• IN RUSSIA – Vladimir Putin, somewhat unsurprisingly, managed to win the Russian election by a massive margin, cementing another six years in power.
• IN ARGENTINA – new president Javier Milei continues to try to come good on his election promises to take a chainsaw to Argentina’s state companies. However, as he only holds less than 15% of the seats in Congress, he has had to water down his proposals in order to get anything done. The efforts will no doubt continue!
• IN EUROPE – the Eurozone’s trade surplus hit its highest level since data started in 2002 mainly thanks to a strong performance by Germany. This is good news if Germany’s performance is sustainable! Meanwhile, Dutch far-right leader Geert Wilders is finding it impossible to form a government as no-one wants to work with him. His Freedom Party may have to concede the premiership as a result, but you do wonder what will happen given that it was the electorate that voted for them in the first place! Then we saw Turkey jacking up its interest rates from 45% to 50% just ten days before local elections in a move that’s been interpreted as showing that the central bank is indeed independent from the government. It’s all part of efforts to bring giddily high inflation rates down in a conventional way after years of President Erdogan urging the exact opposite course of action to tackle inflation.
• IN THE UK – inflation fell to 3.4% in February, something that the Bank of England will have to take into account regarding the future direction of interest rates. Talking of which, the Bank of England left interest rates unchanged in its meeting this week although it hinted that there could be three cuts coming later this year. Government borrowing came in higher than expected in February, which will make it difficult for the chancellor to finance any additional tax cuts. On the plus side, the latest Lloyds Bank monthly economic tracker shows that economic growth has broadened, implying that recession may be short-lived!

IN MINING NEWS…

• Brazilian mining giant Vale is facing a £3bn lawsuit in the Netherlands over the 2015 Mariana dam collapse in Brazil, which was one of the country’s biggest environmental disasters and resulted in 19 fatalities and the pollution of hundreds of kilometres of waterways. This is in addition to the class action launched in England in 2018.

IN ENERGY NEWS…

• The world’s biggest solar panel manufacturer, Longi, announced that it would be cutting up to 30% of its workforce in an effort to accelerate cost-cutting efforts that it put in motion last year. I suspect this will make US solar panels even more paranoid about getting flooded by cheap Chinese product as Longi will presumably just want to get rid of its inventory and have no qualms about undercutting American rivals.

IN BUSINESS TRENDS NEWS…

• According to the latest Bank of America survey, fund managers around the world are feeling at their most optimistic for two years about the prospects for the global economy.
• Hong Kong’s security laws are about to get a lot tougher as the its Legislative Council has just passed a new law that will come out on Saturday. This law builds on the security law brought in by Beijing in 2020 and really clamps down on activities related to national security. I think this has been in the offing for a while and is going to be the final nail in the coffin of Hong Kong being a major financial and business hub for Asia.
• Novo Nordisk is potentially going to get the most almighty boost soon as Wegovy, its blockbuster obesity drug, is due to get approval in China this year. The latest stats say that obesity rates in China now stand at 50.7% of the population so the market it huge. Other domestic makers are working on their own obesity drugs but this Danish pharma company stands to make a ton of money at least until its patent in China expires in 2026.
• IN PROFESSIONAL SERVICES NEWS – PE firms are increasingly investing in professional services companies like consultancies, talent agencies and accounting firms as presumably they like to mix their high risk/reward investments with ones that are more stable. On the other side of the fence partnerships get access to cash quickly that helps them to expand. Accountancy firm Deloitte launched its biggest reorganisation since 2014 in an effort to cut costs and right size itself after a prolonged period where there has been a lack of deals while consultancy firm Accenture cut annual revenue forecasts in response to a slowing market and an “uncertain macro environment”. They said that business flow projections this year aren’t good.
• IN THE UK – the latest S&P Global/CIPS flash UK PMI reported growth in March for the private sector but momentum for the services sector saw a slowdown. It was also good to see that manufacturing appears to be bottoming out as well, meaning that a recovery is more broad-based. That being said, the manufacturing sector is having a hard time as Make UK says that factories are experiencing massive lead times as a result of what’s going on in the Red Sea at the moment.

IN EMPLOYMENT TRENDS…

• It seems that there is a rising trend of Gen-Z workers participating in the “QuitTok” trend where they film themselves being made redundant and then upload it to social media apps like TikTok. They are also posting content about losing their jobs that highlight not only what they are going through but also which employers are making the cuts! This could be highly damaging for QuitTokkers’ future careers but at the moment the job market is still buoyant. Once things get worse, they will get a dose of harsh reality.

IN CONSUMER TRENDS…

• UK consumer confidence has gone sideways, according to the latest GfK survey. Although confidence levels overall remain unchanged, consumers are more positive about their personal finances over the coming 12 months.

IN TECH NEWS…

• Intel is to receive $8.5bn in US government funding as part of efforts to expand domestic production capacity for high-end semiconductors. Intel wants to become a “national champion” and compete with Asian giants such as TSMC and Samsung. The funds will be used to build new facilities in Arizona, Ohio, New Mexico and Oregon.
• Google was fined about $270m in France by the country’s competition authority for breaching commitments it made to negotiate licence deals with an array of news publishers in the country. In 2022, it promised to give publishers estimates of indirect revenue generated when including news content in its search results but the authority deemed that it did not follow through on its promises. Interestingly, Google agreed to just pay the fine and not contest it. Elsewhere, Google is in talks with Apple about putting chatbots on every iPhone via its Gemini bot.
• The US Department of Justice – with a whole host of other state and district attorneys – is suing Apple for potentially abusing its power in smartphones to snuff out competition from rivals and restrict customer choice. Apple is being accused of staying ahead of rivals not by being better but by virtue of its “unlawful exclusionary behaviour”.
• IN AI NEWS – Nvidia unveiled an even more powerful chip to extend its dominance in the AU market – the Blackwell GPU (aka GB200). This will obviously benefit Nvidia – but it will also boost other related companies and suppliers. Microsoft just hired the co-founder of DeepMind and 70 staff from his start-up to run Microsoft’s customer-facing AI business. We also saw that “deepfake” music start-up Voicify is being taken to court by the UK industry body BPI who is saying that it is breaching copyright by allegedly using copyrighted works to create the tech that replicates artists’ voices.
• Xiaomi’s quarterly results came in above market expectations but fell short of annual sales projections thanks to weaker smartphone sales.

IN MEDIA NEWS…

• PE firm Apollo Global Management offered $11bn for Paramount Global’s film and TV studio. This could scupper a deal that is already under discussion with Skydance Media. It looks to me like M&A activity is certainly hotting up!
• Reddit launched its IPO this week and saw its share price boom by 48% on its first day! This is pretty amazing considering it hasn’t turned a profit since its launch in 2005, but it sounds like it played the AI card by saying that its content is used to train AI models.
• Warner Bros Discovery planned to launch its Max streaming service in Europe to challenge market leaders Netflix and Disney. At the moment, it makes about 80% of its sales in the US market, so there is plenty of room for diversification!
• ITV announced more job cuts, this time at its in-house advertising agency, ITV Creative, in response to the biggest advertising downturn since the financial crisis. All eyes will be on when ITV’s ad revenues turn a corner…

IN TELECOMS…

• Three UK swung into its first loss since 2010 after posting a big loss for 2023 immediately after posting a big profit in the previous year. It says that it really needs its merger with Vodafone to go ahead in order to get the requisite scale to prosper.

IN BATTERY NEWS…

• Chinese EV battery giant CATL posted solid earnings for 2023 and announced a surprise special dividend as it benefited from falling raw material costs last year. It remains China’s biggest EV battery maker by far – with a market share of 53%!

IN EV NEWS…

• Troubled EV maker Fisker has decided to pause production for six weeks while it has talks with a big automaker that could result in an investment that could save the company.
• Honda and Nissan announced an EV tie-up which will involve joint procurement and development of components, but there is scepticism as to whether this will work or not given the two companies’ fierce rivalry.
• Renault is calling for a European war chest to be built up and used to clip the wings of incoming Chinese competition in EVs.
• XPeng managed to cut losses and report record high revenues, bringing it closer to profitability.

IN CAR NEWS…

• Bentley reported its second-highest annual profit in its history whilst also walking back its commitment to go 100% electric by 2030. The massive average spend of customers on options for their cars (70% of buyers last year spent an average of €40,000 on options in their vehicles!) helped to offset a fall in demand from China in the first half of the year.
• In the US, the National Highway Traffic Safety Administration opened an investigation into a recent fatal crash involving a Ford SUV whose driver-assisted tech is suspected to be at least partly at fault for the incident.

• Close Brothers decided to launch a £400m capital plan just in case it has to start paying out compensation after an FCA investigation into dodgy car financing. Close Brothers has the most exposure to car financing so this seems to be a sensible course of action.
• Prudential announced a rise in profits as sales in insurance policies rose when the border was lifted with China. Hong Kong was the main growth driver last year and the company is on track to meet 2027 targets that it set itself in 2022.
• Direct Line launched a £100m cost savings plan after returning to profitability. The company is due to announce the conclusions of a “comprehensive strategy review” in July.
• Nationwide agreed to take over Virgin Money, with the enlarged group on track to become the UK’s second-biggest mortgage lender. It pledged to extend its “branch promise” for both brands and keep all existing branches open to at least 2028 (it was originally going to be 2026).
• Investment banking bonuses have been slashed at European investment banks thanks to the lack of deals. Will this be the year that turns around??
• M&G unveiled better-than-expected profits as it saw a sharp increase in fund inflows from retail investors offsetting outflows from its institutional asset management business.

IN COMMERCIAL PROPERY NEWS…

• Evergrande has been accused by the China Securities Regulatory Commission of inflating its revenues by $80bn over the course of 2019 and 2020. This Evergrande thing just isn’t going away…
• British Land sold half of its stake in Meta’s abandoned office block to Royal London Asset Management for £192.5m. It’s now being transformed into a lab space that will attract higher rents. You wonder whether we’ll see more deals like this as this deal limits the risk to the landlord.
• L&G has decided to exit the property market thanks to high costs and the admin involved. It’s going to sell British housebuilder Cala as the new CEO is keen on streamlining the business.

IN RESIDENTIAL PROPERTY NEWS…

• UK house prices rose by their biggest margin in 10 months, according to Rightmove. This certainly adds to the argument that the UK residential property market is picking up after a tricky 2023.
• UK rents saw their biggest ever annual increases over last year, according to the latest ONS figures, and the biggest rise was in London where average rents were £2,035 per month!

IN RETAIL NEWS…

• Kering, the owner of Gucci, issued a profit warning as Gucci sales were particularly weak in the Asia Pacific region. Gucci accounted for two-thirds of the group’s operating income last year, but to be fair to it there’s been new management and a new creative director so I guess this has not yet had time to properly kick in. The problem is that rivals LVMH and Hermès are doing pretty well at the moment, so that makes Kering look particularly poor in comparison…
• Temu’s owner PDD Holdings managed to more than double its quarterly revenues, dubbing 2023 as a “pivotal” year thanks to Temu’s progress.
• It was really interesting to hear that the rising incidences of shoplifting is prompting supermarkets in particular to rein in their conversion to self-checkouts as they are losing more from stealing than they would be saving from having human cashiers! Go Team Humans!!!
• DFS and Wickes reported weak demand for big ticket goods as consumers continue to rein in spending. Separately, Wickes just bought a 51% stake in Solar Fast, a solar power installation company, for £5m with an option to buy the remainder in 2025.
• Tesco lost its logo battle with Lidl and is going to have to drop the logo for its Clubcard loyalty scheme after losing its appeal. It won’t appeal the decision.
• IN APPAREL RETAIL – Next announced strong profits and talked about an improving consumer backdrop while, on the other hand, Ted Baker brought in the administrators. The company just hasn’t been the same since the abrupt departure of its founder, Ray Kelvin, in 2019.
• Curry’s is going to go it alone after all as its two potential suitors are out of the picture. It rejected two offers from Elliott Advisors and didn’t get the offer it was hoping for from JD.com in the end. Still, it managed to raise its profit forecasts for the year as it said that it is getting its Nordic business back on track!

IN CONSUMER GOODS NEWS…

• Unilever has decided to spin off its ice-cream business in an effort to streamline the business after a turbulent few years. Unless a buyer is found, it’ll just become a stand-alone listed company by the end of the year. Reckitt is going to continue to sell Enfamil in the US despite last week’s judgment by an Illinois state court where a mother who said her premature baby died after consuming Reckitt’s product was awarded $60m in damages. This could become a serious problem for the company but we’ll just have to see where this goes…

IN LEISURE NEWS…

• IN TRAVEL – Gatwick profits are up but passenger numbers are still below where they were pre-pandemic. Samsonite is looking at a potential secondary listing on the New York Stock Exchange in order to broaden its investor base (it’s been listed on the Hong Kong Stock Exchange since 2011) and take advantage of the current travel boom.
• IN RESTAURANTS/HOSPITALITY – Nespresso said it would open its first “Nespresso Bar” in Old Broad Street, near Liverpool Street Station in London. If it works, it will be rolled out across Europe. Hot choc brand Knoops is looking to expand fast both domestically and abroad in the Middle East, US and China. This sounds interesting because I think it has no real competition at the moment – but surely others will see how successful it is and copy it. Surely Hotel Chocolat, for instance, has the means to do this?!? Meanwhile, the latest stats from the Insolvency Service show that some areas of the hospitality sector have been suffering badly as the number of closures has been climbing. Until the cost-of-living crisis subsides I suspect that more businesses in this sector will go bust.

• Boeing’s nightmare continues as it said that cash outflow would be higher in Q1 than previous expectations thanks to the ongoing repercussions of the door plug blowout crisis. The company’s share price has fallen by 25% since the start of the year and quality concerns remain.
• Trustpilot announced a return to profitability last year as the number of unique users on its website jumped by 30% as the company showed “resilient retention and strong growth across all regions”.

My favourite video this week was the one of the really cool clock! I’d love to see this IRL!