Watson’s Weekly 27-01-2024

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 when US GDP surprised on the upside, 99% mortgage rates were mooted and ElevenLabs became a unicorn…

• IN THE US – GDP grew above expectations last year, meaning that it was up by 3.1% over the course of 2023. Separate data showed that consumer prices were losing steam – all of which would imply that the US economy is heading for a “soft landing”.
• IN CHINA – markets rallied on hopes that Bejing was considering a £222bn state rescue plan but then the PBOC cut the reserve requirement by 0.5%, freeing up money that could be used in lending. It’s another example of the piecemeal approach being taken by Beijing at the moment when really it’s economy could do with a broad-based boost!
• IN EUROPE – the ECB left interest rates unchanged at its latest meeting while President Christine Lagarde’s performance was criticised by her own staff for being “poor”. Economists at Germany’s IFO Institute think the country’s heading for recession while the ultra-right party AfD made ground due to increasing frustration with the government. There was some good news for Sweden as Hungary’s PM Viktor Orbán said he would approve its application to join NATO.
• IN THE UK – the EY Item Club of economists reckon that the UK’s economic growth will rebound in late 2024 thanks to potential interest rate cuts and tax reductions, Goldman Sachs reckons that the UK’s stock market will outperform the US and European markets this year and chancellor Hunt seems to have £20bn he didn’t know he had ahead of the March Budget thanks to higher VAT and income tax receipts and lower spending, according to the ONS. Meanwhile, English councils got allocated an extra £600m, which is nice, but considering that the Local Government Association estimated that councils are facing a £4bn deficit over the next two years, this does look somewhat like a sticking plaster patching up a gaping wound! Still, it’s better than nothing, I guess.

IN TRADE NEWS…

• The Red Sea troubles are set to have long-term repercussions as ships and equipment will be all over the place for quite some time because of all the disruption and now more car-carrying vessels have stopped going via the Suez Canal, taking the longer route around the Cape of Good Hope, adding to the voyage time and costs.

IN ENERGY NEWS…

• The IEA reckons that nuclear power generation will hit record highs, driven by new reactors in China and India, in addition to those coming back online in France following a period of maintenance.
• …talking of which, the French government, which owns EDF, is putting pressure on the UK government to pony up more money for the nuclear projects it’s working on. At around the same time, EDF said that Hinkley Point C could be delayed to 2031 and cost way more than originally thought (now up to £35bn rather than the initially-projected £18bn!).

IN BUSINESS TRENDS…

• The luxury sector has generally been losing momentum – and LVMH is feeling this. That being said, some believe that there will be a divergence in fortunes between those companies right at the top end of the luxury spectrum will outperform those further down because it is the high net worth individuals who will be driving growth, not those on “middle incomes”.
• IN THE UK – research by Begbies Traynor says that almost 50,000 UK companies are close to failure as they battle with higher interest rates and cautious customers. It was, however, interesting to see that UK business activity grew faster than forecast but that was probably thanks to the services sector as UK manufacturers cut production due to the ongoing Red Sea problems.

IN EMPLOYMENT TRENDS…

• We saw job losses at Microsoft, Ebay, SAP, Wayfair, Aberdn, Lloyds Bank and Levi Strauss as companies tried to right-size.
• Bank of America got feisty with employees, sending those they’d deemed to be doing too much WFH “letters of education”, pressurising them to go back to the office.
• John Lewis cut redundancy pay in half, which suggests that there are more big job cuts coming around the corner.
• Research by the CMA shows that 26% of employees think that they have a non-compete clause in their contract. There are calls to restrict the time period where someone’s not allowed to go to a competitor (some say you’re not allowed to go to a competitor for a year!) but it looks like this’ll be on the back-burner in the UK which US, Australia, Italy and Portugal are among the countries assessing what they will do about them.

IN CONSUMER TRENDS…

• Household disposable incomes hit their highest levels in two years and the latest GfK survey said that consumer confidence was also at a two-year high – but then a CBI report showed that retail sales fell at their steepest rate for three years!
• Those with money to invest didn’t pour their money into St James’s Place as their fund inflows halved! The company is due to launch a strategic review.
• There was some interesting speculation about Chancellor Hunt considering introducing 1% deposit mortgages to give the real estate market some pep, but it was roundly criticised as a gimmick although you do wonder whether this would level the playing field for those who don’t have access to the Bank of Mum and Dad.

• Eurostar passenger numbers have now returned to pre-Covid levels – and you’d think they’ll have another good year considering that the Paris Olympics is coming up in the summer.
• Cruise liners are getting bigger – and we saw the launch this week of Royal Caribbean’s Icon of the Seas, which will be the world’s biggest operating cruise ship. With 18 passenger decks, 7 swimming pools and over 40 restaurants and bars, it is five times the size of the Titanic! The sector’s bounced back from Covid but wants to drum up interest from younger people.
• EasyJet is forecasting shrinking losses as summer bookings are building well – but in terms of the planes themselves, Boeing’s nightmare is continuing as the CEO maintained that the company prioritises quality, but then we heard that a nose wheel fell off a Boeing 757 waiting for takeoff! Surely this guy will get fired…
• All this travelling is great for Antler, who makes luggage! It saw a boom in global sales of its suitcases and other accessories.
• Meanwhile, back home, Wetherspoons and Fuller’s traded well over the holiday season, but the night clubs sector remains in crisis, according to the boss of Revolution Bars.

• Tesla warned that sales growth would be “notably lower” in 2024 due to weakening demand, more competition and stubbornly high interest rates. However share prices of Chinese rivals – including Nio, Xpeng, Li Auto, BYD and Great Wall Motor – also fell as investors got nervous. That being said, BYD launched a new luxury brand – Yangwang – which will be releasing a Lamborghini-like sportscar with a $150,000 price tag that can turn 360° on the spot and float in water (something, perhaps, for James Bond to consider in his next outing – after he magically comes back to life, of course 😁).
• Meanwhile, Porsche’s finance chief made a bold prediction this week – that Europe’s 2035 petrol powered car ban could be pushed back further. There are rumours, even, that it could be abandoned altogether as some conservative EU lawmakers are proposing to ditch the deadline as they head towards EU elections this year.
• The FCA is now looking into allegations that motor finance companies made consumers overpay in finance deals. If they find this is the case, auto lenders could be facing a potential £13bn compensation bill! Lloyds Bank has the most exposure here, but others will be affected.

• IN REGULATORY STUFF – the FTC launched an inquiry into investments and partnerships between Alphabet, Amazon, Anthropic, Microsoft and OpenAI. It will look into what rights the tech giants’ investments confer on them and whether they harm competition. This could get interesting!
• IN CHIPS NEWS – Chip-making equipment maker ASML announced a record amount of orders in Q4 and 2024 is looking good! Meanwhile, China spent a record $10.6bn on chip imports in Q4, bringing the total amount spent on chips last year to a whopping $31bn! Despite many players getting more positive about an upturn in the chip cycle, Intel gave a muted outlook for 2024 in the near term but that might be coloured by its autonomous driving business being hit by recent developments. Meanwhile, Computacenter is on track to have its 19th consecutive year of rising profits. It looks like PC demand is turning up again – and that’s got to be good for chip demand as well!
• IN AI NEWS – AI voice-cloning specialist ElevenLabs achieved Unicorn status in its latest funding round. The $80m it raised this time will go towards research and infrastructure that will ensure ethical development. Meanwhile, Japan is looking at ways to use AI and automation to help with its increasingly tricky labour problems. According to research by the Recruit Works Institute (RWI), Japan will have a labour shortage of 11m people by 2040 with the number of people above 60 expected to hit a peak in 2042 (they already make up almost 30% of the population!)
• ELSEWHERE – Apple is now going to allow EU customers to download apps without using the App Store as it is forced to bow to the new EU Digital Markets Act, which aims to encourage competition. Spotify is now taking advantage of this. This could come to the UK fairly soon as a similar bill is going through the House of Lords.

• Research by LCH Investments shows that the world’s top 20 hedge fund managers made their biggest profits ever last year. They included the likes of TCI, Citadel and Viking.
• Aussie bank Macquarie raised a record amount of cash (€8bn) for a European infrastructure fund and it seems that interest in such funds is starting to gain momentum…
• Exxon is now suing two ESG investors, Arjuna Capital and Follow This, saying that they only push proposals that will “diminish the company’s existing business” by suggesting they go further in their eco-efforts. Sounds dodgy to me as they are only doing what activist investors always do – but if Exxon succeeds, this could be a major problem for all ESG funds IMO.

• IN COMMERCIAL PROPERTY – Blackstone said that it intends to make more acquisitions after a very busy Q4 at the end of last year. It already has $1tn of assets under management and wants to buy properties now before everyone else starts piling in.
• IN RESIDENTIAL PROPERTY – Hamptons data shows that homeowners who sold up last year made an average profit of £102,000 despite property prices falling. There’s talk of the reintroduction of Help to Buy to boost the market but RICS says that all it does is jack up house prices and doesn’t actually help all that much. Chancellor Hunt is also looking at 99% mortgages as another way of stimulating the market, particularly among first-time buyers. Housebuilder Crest Nicholson saw its profits fall by 70% after a “disappointing” year and its CEO left the company. IN MORTGAGES, we saw some contrasting actions as Nationwide cut mortgage rates in order to drum up more business while Santander lifted them in response to last week’s surprise rise in inflation. Real estate agent Foxtons sounded quite chirpy about home sales in 2024 after benefiting from a strong performance in lettings last year. Meanwhile, Rightmove stats say that private rents have hit new record highs, but this rate of increase is slowing down as first-timers buy houses.

• Netflix saw a record uplift in subscriber numbers for Q4 and announced that it had struck a $5bn deal over 10 years to be the new home of WWE Raw and other WWE shows in the US and oversees. This is part of efforts by Netflix to get into the world of live programming!
• Vice and Buzzfeed are having to sell off key assets as the world of digital media continues to suffer. BuzzFeed’s trying to sell Tasty and First We Feast, while Vice’s owner Fortress Investment Group is trying to sell Refinery29 as its efforts to sell Vice in its entirety fell flat.
• Advertising and marketing group Publicis announced plans to pour €300m into AI to stay relevant for the future! It’s concerned that AI will enable clients to do their own marketing and strengthen tech companies as competitors.
• Research by the Advertising Association and consultancy Warc shows that TV advertising is on track to have its worst year since the financial crisis (excluding the Covid pandemic). Traditional broadcasters are expected to suffer the most.

• State-backed French lottery operator Française des Jeux made an all-cash offer to buy Sweden-listed betting group Kindred to create one of Europe’s biggest betting companies. It gives FdJ options for international expansion and takes the heat off Kindred, which has been under pressure to sell itself.
• Sony has called off the proposed $10bn Zee merger in India and Sony is now seeking a $90m termination fee. Will this make other foreign companies more reticent about making big acquisitions in India?
• Biotech company Zealand has high hopes for its anti-obesity drug that is late on in the approval process. Novo Nordisk and Eli Lilly are making serious inroads in this area but I think there’s room for a few players given the size of the market!
• Tonic and mixer maker Fever-Tree had a historic moment this week as sales in the US market overtook sales in the UK market for the first time! It continues to pursue overseas growth…

I thought that there were some pretty good “alternative” stories this week, but TBH the one I liked the most was the pineapple hack!