Watson’s Weekly 24-06-2023

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 where the Bank of England admitted its failure, Turkey had an economic about-face and Intel invested big in Israel and Germany…

• IN THE US – the Xi/Blinken meeting seemed to go well but nothing concrete was really decided. The fact that it happened was good, though, as it is the first time a US secretary of State has visited Beijing since 2018. Taiwan, the tech industry and a ton of manufacturers will be looking at how things develop with great interest…
• REGARDING CHINA – Goldman Sachs downgraded its GDP growth forecasts for China in 2023 from 6% to 5.4% and for 2024 from 4.6% to 4.5% as an initial burst of activity in Q1 appears to have lost momentum amid ongoing problems with its real estate market.
• IN THE UK – inflation remained stubbornly high (but unchanged) at 8.7% for May and it’s having consequences in terms of higher instances of theft. Having got it wrong for so long, the Bank of England decided to increase the interest rate by 0.5%, which was a mild surprise to a market that had mostly been expecting a rise of 0.25%. Our inflation is particularly high mainly because of the consequences of a labour market and the fact that we import over 50% of our food. Mortgage borrowers are going to face more pain because of the higher rates. It was interesting to see that bank shares fell despite the fact that they tend to do well in a high interest rate environment, but it’s probably because there’s a heightened risk that more loans will go bad. As if things weren’t bad enough already, the latest figures from the ONS show that our debt is now bigger than our entire economy for the first time since March 1961!!!
• IN TURKEY – the lira fell earlier in the week and then Turkey made a dramatic about-face in economic policy as it raised its interest rate from 8.5% to 15%, a reversal of President Erdogan’s preferred way of combating inflation – raising interest rates (which is the exact opposite of conventional economic wisdom). The new governor of the central bank and the finance minister are both from “conventional” backgrounds, so it’ll be interesting to see how this goes and whether they are given time by Erdogan to do their stuff.
• IN BRAZIL – President Lula da Silva is having problems with the “broad coalition”, which is making the implementation of his economic reforms very difficult.

IN ENERGY-RELATED NEWS…

• The UK’s first deep geothermal energy projects for 37 years was switched on at the Eden Project in Cornwall, tapping into water 5km below the earth’s surface at 200°C. It’ll power nearby greenhouses and rainforest biomes and could cut the Project’s energy bills by around 40%!
• Danish wind power company Ørsted wants more financial support from the British government but will still be going ahead with its major UK offshore wind project off the Yorkshire coast, the world’s biggest offshore wind project.

IN OIL-RELATED NEWS…

• The Church of England made the headlines of many broadsheets this week because it decided to sell around £100m of its investments in oil companies. It made a big song and dance about it, but TBH if it really cared that much it should have done this a long time ago!

IN BUSINESS TRENDS…

• AstraZeneca is drawing up plans to spin off its China business give it a separate Hong Kong listing as it tries to simultaneously get around ongoing US-China tensions whilst keeping a foothold in what could potentially be a very lucrative market! It was only last week that we heard about Siemens announcing big investments in China and Singapore, as many multinationals (including VW, AstraZeneca and Tesla) continue to think of how to expand their China businesses without offending anyone or potentially incurring big costs in future.
• Accenture warned about a trend of cooling IT spend and said that it might fall short in terms of revenues for the final quarter of the year. I guess this backs up the general gloom surrounding non-AI-related tech companies, but it won’t stay like this forever!
• Cardboard box maker DS Smith reported stellar profits despite experiencing its first drop in demand for over a decade as consumers are reining in their online shopping activity. They should bounce back longer term though as pressure increases on firms to use less plastic packaging.

IN CONSUMER TRENDS…

• We saw signs that food price inflation in the UK is losing momentum from the Lloyds Bank UK Sector Tracker and Kantar, but obviously it’s still pretty high overall!
• Despite all of the negative news out there, the latest GfK survey showed that UK confidence rose for the fifth month in a row thanks to a buoyant labour market and falling energy prices. It’ll be interesting to see what it’s like next month when the implications of the Bank of England’s interest rate rise this week sink in.

IN BUILDING TRENDS NEWS…

• US homebuilders – like DR Horton, Lennar, PulteGroup, Toll Brothers and NVR – are going well due to the tight supply of homes on the market but there is the danger now that the effects of inflation, rising mortgage rates and the cost-of-living crisis in general will catch up with them!
• In the UK, housebuilder Berkeley said that interest rate fears are restricting sales and it painted a very downbeat picture of its prospects, forecasting another sales drop of 20% over the next year if inflation and mortgage rates continue to rise. Sales of new properties were also pretty concerning.
• The latest ONS data showed that UK house prices actually rose between March and April but the majority view is that this is just a “blip” and that house prices will resume their slide.

IN MORTGAGE CHAT…

• UK mortgage rates breached 6% for a two-year fixed and the expectation is that this could well go higher from here. LibDem leader Sir Ed Davey called for a £3bn “mortgage protection fund” but critics said that this would prolong high inflation, although potential solutions split MPs while Michael Gove’s idea of lengthening mortgage terms was rejected by Sunak. despite the fact that other countries use much longer terms as the norm. Concern about mortgages is already hitting home sales, according to Rightmove, and first-time buyers are finding things particularly tricky as lenders have been withdrawing products – particularly those aimed at would-be buyers with small deposits.

IN RENT CHAT…

• The cost of renting a home hit its highest level in a decade, according to Zoopla, which reflects similar conclusions from the latest ONS data.
• There’s an interesting trend emerging of City investors moving into the buy-to-let sector, taking up the space left by smaller private landlords who are leaving.

IN ONLINE RETAILERS…

• Alibaba announced some senior management changes as current CEO and chairman Daniel Zhang is to be replaced by Eddie Wu as CEO and Joe Tsai as chairman as part of the overall reorganisation plan for the e-commerce giant. The changes will come into force from September 10th.
• In the UK, research from Mazars shows that the number of online retailers going bust increased by 53% in the year to the end of April versus the previous year. Although there were some examples of big-hitters going under (e.g. Made.com and Missguided), most were pretty small. It seems that the lockdown online frenzy has lost its mojo for sure!
• Maybe online apparel retailers should take note of what’s happening in America because they are taking more robust measures to guard against the deluge of returns that cost them so much. In the US, there’s a growing trend where retailers sell merchandise that you can’t return. When the items are billed as “final sale”, you are just stuck with them! I guess this is a push-back to the current trend of over-ordering and then sending back what doesn’t fit/you don’t like!
• Amazon is facing an FTC lawsuit, where the latter is alleging that the former has enrolled customers onto Amazon Prime without their consent for years. Talking of Amazon, there was a rumour that it was going to bid for Ocado, but it was unsubstantiated. That didn’t stop excitement pushing up Ocado’s share price though!

IN OTHER RETAILER NEWS…

• John Lewis wrote down the value of its HQ by £15.6m, shut down seven floors and “revised” the use of its office buildings in Bracknell, its property chief quit and it looks like it is going to miss its affordable housing target at a new site in Bromley. It looks to me like this new supposed growth area for John Lewis is proving to be a disaster and can’t really cover up what really needs to be done – SORT OUT THE RETAIL BUSINESS. I think Dame Sharon White needs to come up with a proper plan and bring someone in who actually knows what they are doing.
• Frasers Group seems to be taking more stakes in other retailers this week. Frasers Group bought an 18.9% stake in AO World from Odey Asset Management, making it the company’s second biggest shareholder, as well as a 5% stake in Boohoo for £22m. It seems that the common denominator of his recent purchases is that they all have very good logistics operations.
• Halfords appears to be running out of puff as customers put the brakes on expenditure, with tyres and cycling being hit particularly hard at the moment. Although the CEO is quite bullish about e-bikes, I would say that the better and more sustainable long-term driver here is the car maintenance business as people hang on to their existing cars longer before making the switch to electric.
• Morrisons saw its profits drop in the first half, which it blamed on inflationary pressures. It is still, however, confident that it’ll hit year-end targets. It also announced price cuts earlier in the week, the latest supermarket to do so.
• On a positive note, Next actually upgraded its profit forecasts for the year as warmer weather and pay rises helped to power sales. Given that it’s seen as a barometer of the health of the high street this is good news!

IN SEMICONDUCTOR NEWS…

• Intel announced that it would invest £25bn in a new chip-making facility in Israel, making it the biggest single international investment in the country. It is due to open in 2027 and create thousands of jobs. Intel also announced that it would be doubling its investment in German semiconductor factories after securing an increase in government subsidies.

IN AI NEWS…

• Google praised the UK’s take on AI regulations in its AI white paper which identified “five principles” that the industry should use instead of a huge list of rules. FWIW, I think this approach is better than a more prescriptive approach because it can change with the times more quickly.
• Celebs are signing deals with brands to put AI-generated versions of themselves into marketing campaigns. This means that their earning power will increase without them actually having to do much more work! Celebs doing ads where they are younger – and perhaps speaking in different languages – opens up all sorts of possibilities!
• German tabloid Bild announced that it would be replacing a range of editorial jobs with AI as part of a broader effort to cut €100m in costs.
• There’s discussion at the moment as to whether the current AI boom is comparable to the dotcom boom as valuations are just getting ridiculous. The tech-heavy NASDAQ has just had its eighth consecutive weekly gain – its longest winning streak since March 2019! FWIW, I think it is EXACTLY like the dotcom boom and a lot of people are going to get burned by throwing money at companies that are long on promises and short on execution.

IN SOCIAL MEDIA NEWS…

• Meta has just released a new platform, called Threads, that is pretty much a copy of Twitter in terms of functionality. There have been many would-be Twitter-dethroners out there (particularly since all the Elon Musk drama), but you would have thought that Meta’s bigger user base will give it a better chance of being a proper contender.
• TikTok’s top US executive is to leave after five years at the company. This has been a huge growth period and they will be kept on as a strategic adviser to the company. Meanwhile, TikTok creators are getting nervous about a potential ban and posting on other platforms “just in case”. That said, the app has had a tremendous impact on R&D and product cycles over the years. It is currently preparing to launch a new shopping feature called “Trendy Beat” which offers up items that have been popular on videos. I think it’s only right that TikTok continues to innovate as it can’t just sit back and wait for the US.

• Latin America’s airlines are consolidating after surviving through Covid largely without any direct state help. The newly-created Abra Group, bringing together Colombia’s Avianca and Brazil’s Gol, is an example of recent developments. However, there are still hurdles to overcome in the form of weaker regional currencies making fuel more expensive although passenger numbers are actually going up.
• Back in the UK, the increasing popularity of air travel is lifting UK manufacturing as the sale of new planes rises. Talking of which, Airbus got an absolutely massive order of 500 jets from India’s IndiGo, in what is thought to be the world’s biggest ever commercial jet deal!
• Rolls-Royce is really pleased about the rise in long-haul jet demand but it also announced the launch of a new small engine at this week’s Paris Air Show that can be powered by synthetic low-emissions sustainable aviation fuel.

• Ford is getting ready to make more layoffs in the US as part of a broader effort to cut costs, but on the other hand it is in line to get $9.1bn from the US Department of Energy as part of a general push to improve domestic supply chains and wean America off reliance on China. This is a massive loan!
• GM announced that it was looking at opening a fourth battery plant in the US as it tries to bring more of the manufacturing process in-house. Tesla’s strategy of vertical integration has paid off over the last decade and GM hopes to emulate this.
• Tesla opened up its Supercharger network to another maker – this time Rivian. It has recently made similar agreements with Ford and GM. Stellantis is currently in talks to join the network as well.
• Former Nissan chief Carlos is suing his former employer for $1bn, saying that it caused “deep damage” to his reputation and finances.
• UK Car dealer Lookers was bought by Canadian car dealership Alpha Auto Group for £465m in cash. The deal will have to pass the regulators, but if it goes ahead there are hopes that a new owner will inject some oomph into the dealership.

• IN FINANCIALS NEWS – BlackRock and JP Morgan are seeing up a Ukraine reconstruction bank to rebuild the country once the war is over. I would have thought that their early involvement could give them first dibs on future lucrative projects. BlackRock is seeking FTC approval for a Bitcoin ETF. If this goes ahead, Bitcoin could get a considerable boost as this would signal another step towards the mainstream for the crypto currency. Talking of crypto, Binance has given up on its UK registration to concentrate on facing increasing regulatory pressure by US authorities.
• IN LEISURE NEWS – Whitbread-owned Premier Inn saw its sales get an 18% boost as tourists made full use of budget hotels amid the cost-of-living crisis. It has taken considerable market share over the last quarter!

My favourite “alternative” story this week without a doubt was this one: ‘Wild’: Pizza delivery man spotted flying over Glastonbury wearing JETPACK (The Mirror, Tom Howell). Wow!