Watson’s Weekly 23-09-2023

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 the US and UK left interest rates unchanged, when Sunak reined in environmental commitments and when Microsoft finally managed to get approval for its Activision deal…

• IN THE US – the Fed held interest rates unchanged but indicated that there would be another interest rate rise later this year and fewer cuts than people had been expecting for next year. The headline rate remains at its highest level for 22 years! The ongoing automotive industry strikes could hit Biden’s election chances next year as his commitment to a clean energy revolution is at odds with the unions whose members are worried that, because EVs take 40% time less to assemble than trad cars, job losses are likely to ensue. Biden needs to keep “the Rust Belt” onside to help win the election.
• IN CHINA – we see that recent data is pointing to a weaker economy at the moment what with record high levels of unemployment, a rise in the proportion of people working in the “informal sector”, the inability to collect taxes, surprise regulatory crackdowns and dodgy finances for local governments. Will Xi come out with some kind of “grand plan”??
• IN THE UK – the Bank of England left interest rates unchanged this week, although it was a close call with the MPC voting 5-4 to leave them as they were (governor Bailey had the casting vote on this occasion). The headline rate remains at 5.25%, the highest rate since the 2008 financial crisis. There are various theories as to how it can go from here – whether the graph would look like the Matterhorn (sharp up to a higher peak and sharp down) or Table Mountain (sharp up, then stays at the same level for a while before falling). PM Sunak had an eventful week as he reined in climate commitments, notably pushing back the deadline on petrol and diesel vehicle sales from 2030 to 2035, saw inflation actually falling (expectations had been that it would rise!) and then digesting the news that public sector borrowing in August had come in below expectations. Taking all this into consideration, it now actually looks possible that inflation could hit 5% by year end – meaning that Sunak would actually be able to fulfil the promise he made in January to halve it! Still, the OECD continues to be characteristically pessimistic on the UK economy, saying that it will be the second worst performer in the G20 next year. One other thing that came out this week was that there was talk that Sunak is thinking about introducing a “British Baccalaureate”, but I would imagine that’s not going to be something that’s going to be considered in the short term given the unsettling time we’ve had in lockdown and since.

IN COMMODITIES NEWS…

• Oil prices are heading towards $100 a barrel as a result of production cuts – and this could make inflation more of a headache for Sunak, particularly as Russia made things worse by imposing a diesel export ban towards the end of the week.

IN BUSINESS TRENDS NEWS…

• IN CHINA-RELATED TRENDS – China’s relationship with Apple is being tested at the moment, which is pretty tricky given that China is Apple’s biggest international market, making up 20% of its sales in the last quarter. Recent bans imposed by government agencies on the use of Apple products have hit the company’s valuation hard. Elsewhere, an American VC fund split out its China business just a few months after rival Sequoia Capital did the same and such moves are clearly intended to avoid the impact of a potential worsening of sanctions between the US and China. Meanwhile, EU companies continue to warn about the consequences of China flooding the European markets with EVs. They are concerned that cheap product from China will undercut their own.
• US warehouses are doing well at the moment. Although the frenzy of the glory years of 2021 and 2022 have passed, there’s still enough demand to keep rents buoyant as companies continue to see the value of having more flexibility in their supply chains. Will we see more of the same over here?
• IN THE UK – businesses are seeing a fall in orders across the board, according to the latest Lloyds Bank sector tracker and manufacturers are getting increasingly worried about a recession, according to the latest MakeUK/BDO manufacturing outlook survey while S4 Capital is taking a hammering at the moment after its second profit warning in three months. It said that it suffered from weak ad spending in August and admitted that debt levels would rise. This is interesting because S4 Capital is focused on tech companies and because advertising companies are often seen as leading economic indicators, so it provides a snap shot of a few things at the same time!

IN CONSUMER TRENDS…

• UK consumer confidence is rising, according to the latest GfK survey but shoppers are going deeper into debt, according to the latest data from UK Finance, which shows that outstanding credit card debt is on the increase.

IN RETAIL NEWS…

• UK retail seems to be turning a corner at the moment as the incidence of surprisingly positive updates is increasing!
• Next raised its profit outlook again – for the third time in four months – and it said that prices could fall in spring.
• JD Sports reported strong sales thanks to Gen-Z shoppers who are paid well and live with their parents.
• DFS saw its profits halve thanks to higher mortgage rates hitting the property market, something that also affected B&Q’s owner Kingfisher, which cut its full-year profit guidance.
• Elsewhere, Naked Wines’ future looks in doubt as sales stalled and turnaround efforts just aren’t working. Ocado’s venture with M&S rebounded as sales came in above expectations but the share price tanked shortly afterwards. Some said that this was due to some broker note but I suspect it was more to do with investors just taking profits.

IN LEISURE NEWS…

• Tui said that it would extend the holiday season for Greece and Turkey to accommodate increased demand in the colder months.
• The City Pub Group put in a decent performance and is benefitting from the Rugby World Cup and strong bookings for Christmas.
• SSP, the owner of brands including Upper Crust, was confident enough to raise annual earnings guidance thanks to a rebound in travel and brisk trading in the US market.
• Ten Entertainment Group, which does tenpin bowling, managed to keep customers coming in by keeping charges low. It’s clearly confident as it said it was on the lookout for acquisitions as it has a strong cash position!

• It’s rumoured that Tesla is in early talks about setting up a gigafactory in Saudi Arabia. Musk has had a mixed experience dealing with the Saudis and there could be awkward moments regarding the kingdom’s existing partnership with Lucid, which is majority owned by the PIF. However, I think this could be interesting given Saudi Arabia’s status as China’s BFF currently, which could come in handy for raw material supply purposes.
• BYD just launched its second model for the Japanese market, called the Dolphin. Some argue that it’s good for the local market but I don’t give it much of a chance to make major inroads in this market given that there is major rivalry with the Chinese – plus the fact that the Japanese are generally very patriotic with their car-buying!
• In the UK, carmakers are still going to have to hit EV sales targets despite Sunak’s eco U-turn this week unless he changes this as well. Surely this will have to change as the U-turn will probably lead to slower EV sales, which will then be punished by big fines, making things even harder for auto makers. UK makers also called for more tax incentives to encourage the switch to EVs – and clearly Sunak’s petrol/diesel deadline delay may actually make this more necessary as the easier thing for budget-conscious consumers to do is to just sit on their hands and delay EV purchases until they become more affordable. Having incentives in place may therefore help to persuade some to make the switch.
• Lenders have had enough of Cazoo’s failures and empty promises and have done a deal whereby they now own 92% of the stock. Another SPAC-backed IPO failure!

IN IPO NEWS…

• Arm’s advisors earned $84m in fees from last week’s IPO, with the lion’s share of around $51m going to Deloitte. However, Arm’s share price dipped below the IPO price. That aside, owner SoftBank was rumoured to be thinking of sinking some of the proceeds of the IPO into OpenAI but it did actually lead a $280m funding round for Mapbox whose software powers the in-car navigation systems of many major car manufacturers. Interestingly, another UK chip designer, Imagination Technologies looks like it will head stateside to do an IPO in New York. Another one gets away!!!
• All eyes were on the IPOs of Instacart and Klaviyo this week to see whether the Arm “party” would continue and help usher in a new flood of flotations. Instacart’s IPO went well and closed up 12% on its debut.
• Kokusai Electric is gearing up to be Japan’s biggest listing for five years! It makes machines that are used for part of the chipmaking process so it is able to take advantage all the current AI hype!

IN M&A NEWS…

• Cisco bought cybersecurity company Splunk for $28bn in cash in Cisco’s biggest ever acquisition! The combined company will provide customers with AI and other tools to analyse their data and find security threats.
• Toshiba is to be taken private in an £11bn private equity deal led by Japan Industrial Partners. It would be Japan’s biggest takeover this year if it gets shareholder approval in November.

• China Evergrande Group’s woes continue – this time at its wealth management business as some staff are detained by police. Last week, ratings agency Moody’s downgraded China’s property sector from stable to negative.
• Dubai property prices have shot up at the fastest rate in the world thanks to rich Russians and Ukrainians buying properties. At first it was just the top end of the market that was particularly hot, but activity there has dragged up the whole market, according to the latest research by UBS.
• IN UK COMMERCIAL PROPERTY NEWS – British Land bucked the general gloomy trend as its portfolio of out-of-town retail parks has done particularly well against a difficult economic backdrop. It has the biggest retail park portfolio in the UK.
• IN UK RESIDENTIAL PROPERTY NEWS – the supply of UK homes looks like it’ll get worse, according to the latest research while Rightmove says that sellers are cutting asking prices more than at any time in the last 12 years. Mortgage bills are likely to rise as more people come off fixed rate deals, according to the FCA, while property price inflation has hit its lowest level in 11 years thanks to high mortgage rates (although lenders are now cutting them). Research from Hamptons shows that rents are continuing to rise and the latest numbers from the ONS back that up, saying that UK rental costs in August rose at their steepest rate since records began (although they only started seven years ago!). All these higher costs are resulting in rising rates of homelessness.

• Apple reported sales coming in above Wall Street estimates, with orders for the 15 Pro and Pro Max being particularly strong. This is impressive given the overall trend for smartphone sales is that they are weakening!
• Huawei appears to have made a technological breakthrough with a processor in its new Mate 60 Pro smartphone, which sold out shortly after launch. Will it need any US tech in future??
• It looks like the Microsoft/Activision Blizzard deal will go through as the UK’s CMA appears to have been satisfied by the revised merger agreement.
• WhatsApp launched an in-app payments service in India. Clearly this is a market with huge potential, so the success of this move will be closely monitored!

• IN MEDIA NEWS – Disney said it would be investing $60bn in theme parks and cruises over the next decade – but it needs to do more and sort out the cable TV and broadcast business in order to make a proper go of a turnaround. Deezer increased its subscription prices following recent rises by YouTube and Spotify. It’s interesting to note that music subscription prices have been largely static for the last ten years or so whereas TV/movie streamers have been able to double theirs. There’s good news for the movie/TV industry in the UK as Warner Bros announced that it will make a major investment in the expansion of its studios in Leavesden that will create 4,000 UK jobs. Also, Rupert Murdoch stepped down as chair of Fox and News Corp at the tender age of 92! Although eldest son, Lachlan, will take up the reins, it’s likely that Murdoch senior will be pulling strings in the background.
• IN FINANCIALS NEWS – Hargreaves Lansdown made a hefty £270m in interest payments from cash lying around in client accounts – an amount that was almost as much as it earned in fees! Revolut got an extension to publish its annual results as it waits to hear whether its application to obtain a UK banking licence succeeds. Meanwhile, Chinese shadow bank Zhongrong continues to cause concern due to its exposure to massively-indebted Chinese property developers.
• IN MISCELLANEOUS NEWS – HS2 looks like it is slipping away as there are rumours that it won’t run any further north than Birmingham and speculation is rife. Marlboro maker Philip Morris International could be giving up on its efforts to diversify away from tobacco as it looks to potentially sell out of its pharmaceuticals division.

My favourite “alternative” video this week was the one with the guy with the mask! Genius 🤣🤣🤣