Watson’s Weekly 28-01-2023

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.

Microsoft buys into ChatGPT – which passes an MBA exam – while Adani Group shares get the Hindenburg Research treatment and bankers brace for impact…

• IN THE US – US GDP growth beat market expectations and inflation slowed down going into the end of last year. GDP growth came in at 2.9% versus expectations of 2.6%. The FOMC is due to meet next week to talk about the next interest rate move and it looks like the market’s expecting a 0.25% hike rather than the 0.75% increments we’ve been getting used to!
• IN CHINA – it looks like rural China has run short of Covid drugs over the lunar new year holiday. Pfizer hasn’t yet got approval by China’s national health insurance scheme as there is an impasse over pricing, which is being framed as the company being greedy. Will China be able to style this out and avoid another massive spread of the virus?
• IN EUROPE – economists think that the eurozone will avoid recession, in a sign that there’s been a sudden change in sentiment. The EU is also planning its response to America’s Inflation Reduction Act, creating a multibillion-euro fund to dish out subsidies to qualifying green energy companies and carmakers. The Greek government faced a no-confidence vote, but survived. For now.
• IN THE UK – public sector borrowing hit a new record, according to the latest release from the ONS. That wasn’t the only bad news either – it turns out that UK productivity is losing momentum, which is a problem because you need rising productivity to ensure that wages and living standards can improve without pushing up inflation.

IN COMMODITIES NEWS…

• Oilfield services companies got a serious boost last year and the “Big Three” (Halliburton, Baker Hughes and SLB – formerly known as Schlumberger) had their most profitable 12 months since the peak of the US shale boom of 2014 thanks to higher energy prices. SLB’s chief exec thinks there’s going to be more upside to come…
• Coal power stations in the UK were put on stand-by to help the French but they didn’t have to generate in the end.

IN CRYPTO NEWS…

• The FCA is continuing to investigate the crypto industry amid allegations of dodgy dealings and after having rejected a massive 85% of registration applications by crypto asset firms because they didn’t meet minimum requirements. Meanwhile Tesla has suffered a loss of $34m thanks to its bitcoin holdings suffering a major chill in the crypto winter.

IN REAL ESTATE NEWS…

• IN COMMERCIAL PROPERTY – it seems that big pharmaceutical companies are snapping up lab space, according to data from Savills.
• IN RESIDENTIAL PROPERTY – in terms of buying behaviour, data from Hamptons shows that cash buyers took the biggest share of house sales in eight years – 40% of property purchases in January were made in cash! Cash buyers now have even more advantage over those with mortgages given the rising interest rate situation. Homeowners are also rushing to withdraw money from their properties via equity release, first-time buyers are increasingly joining forces to buy properties as affordability is getting more and more difficult – and those who don’t want to/can’t buy are being faced by rising rents, according to Rightmove. It was also interesting to note that housebuilder Redrow has decided that it will no longer fit gas boilers in detached new builds and will fit air source heat pumps instead in order to work towards the government’s Future Homes Standard mandate to make all new-builds gas-free by 2025.

IN EMPLOYMENT TRENDS…

• IN THE US – companies are shedding temps, in what may be a precursor of what’s to come for permanent workers if the economy doesn’t improve fast enough. 3M cut 2,500 manufacturing jobs thanks to slowing consumer demand and Hasbro said it was going to cut its global workforce by 15% but then on the other hand, Chipotle said it wanted to hire 15,000 additional workers to help them meet demand during “burrito season”!

IN CONSUMER NEWS…

• It turns out that China’s households have accumulated a massive $2.6tn in savings over last year thanks to lockdowns curtailing their spending options. Although hopes are high about them indulging in a bit of “revenge spending” some analysts reckon that “only” around $200bn of this will be unleashed due to cautious households pulling money from riskier investments like mutual funds and leaving it as cash in the bank. Japan looks like it will get a pay rise as workers will hope that companies will follow the lead of Fast Retailing, the owner of Uniqlo, in dishing out big pay rises that will result in a consumer spending boom. Meanwhile, high street spending in the UK is still 20% below what it was pre-pandemic as the ongoing trend of WFH takes its toll.

SO WHAT’S EVERYONE BEEN SPENDING MONEY ON THEN??

• PUBS have had a mixed time of it what with Fuller’s announcing a profit warning (it said it had been badly affected by rail strikes) on the one hand and Marston’s is doing well from consumers not trading down in their booze choices on the other. Marston’s probably did better because it has fewer city centre pubs than some of its rivals.
• RETAILERS have also had a mixed experience! Japan’s convenience stores are benefiting from lockdown behaviour continuing, which is good for the likes of Seven & i, which owns 7-Eleven, and Lawson. In the UK, Asda announced job and pay cuts while Morrisons saw sales and profits dive over 2022. Things were a bit better for Primark, as the apparel retailer owned by Associated British Foods saw sales increase as shoppers returned to city centres and, at the other end of the scale, LVMH lifted its dividend after another year of record sales and profits and drinks giant Diageo fared well despite the cost-of-living crisis thanks to its broad footprint and decent portfolio of brands.

IN SOFTWARE NEWS…

• Microsoft confirmed that it made a “multi-billion dollar investment” in ChatGPT maker OpenAI, although the final amount has not been confirmed officially. As if to reassure Microsoft that it made the right decision, it turns out that ChatGPT passed an MBA exam with a B to B- grade – showing that things are going to get very difficult in education if they don’t adapt! BuzzFeed said it would use ChatGPT for content creation to enhance quizzes and personalise some content for its audiences but if I was a journo working there I would be very concerned about my future. Yes, the company said that it remained committed to humans, but I think we need to see whether that wavers at all in the event of an economic slowdown/recession.
• It turns out that Microsoft’s results actually came in better than expected thanks to the strong performance of its cloud division but it caused a lot of frustration for users in the UK as it suffered an outage.
• The US DoJ is suing Google over its dominance in digital advertising. The pressure from regulators on Big Tech continues to gather momentum…
• Apple said that it was strengthening its smartphone services and working hard to differentiate its mobile operating system from Google’s Android. It is focusing on mapping, search and advertising. Rivals should be particularly concerned about the latter area of focus as this is where Apple really can make massive inroads!
• Elsewhere, Elon Musk is looking at raising up to $3bn to help pay off his Twitter debt, which could help pay down an unsecured portion of the debt; Strava bought British off-road navigation app Fatmap to enhance its premium subscription business; Slack owner Salesforce has attracted the attention of activist investor Elliott Management, which has built up a big stake in the business software company. Elliott is looking to shake things up…and Spotify announced an overhaul which involved a 600-person headcount reduction in an effort to reduce costs.

IN HARDWARE NEWS…

IN CHIP NEWS, ASML’s chief exec called for “sensible” chip export controls as the US tightens conditions of business in the tech arena, Intel had weak guidance thanks to falling PC sales and pressure on its market share in its server chips business. It’s also feeling the heat from Arm, whose chips are making inroads with Apple and Amazon.

Elsewhere in hardware, there’s growing concern that the speedy march of the Internet of Things is leaving users vulnerable to cyber attacks and if fears continue to grow, the uptake of these devices could lose momentum. Also, IBM announced that it would cut 3,900 jobs amid a broader tech slowdown…

IN EV NEWS…

• India’s EV market is hotting up as the government is offering incentives to producers and suppliers as it looks to reduce reliance on Chinese imports.
• Kia says that making affordable EVs isn’t possible, but I think that’s a ridiculous statement and the company is just talking its own book (for the moment, anyway). Meanwhile, Tesla’s price cuts are hurting other EV makers and it’s thinking about spending $3.6bn on expanding its plant near Reno. It announced record profits over Q4 but saw used Model 3 prices fall in the UK.

IN OVERALL CAR NEWS…

• Ford announced plans to slash jobs in Europe, UK car production fell to its lowest level in 70 years and JLR returned to profit. It has maintained its aim to have an all-electric line-up from 2025.

• IN INVESTMENT BANKING – bankers are bracing themselves for the deepest job cuts since the financial crisis due to the ongoing lack of M&A and IPO deals. The Qatar Investment Authority doubled its stake in the troubled Credit Suisse and Citadel announced massive profits.
• Activist fund Elliott Management has become one of the biggest shareholders of Dai Nippon Printing which has a near-monopoly on certain components that go into EV batteries and smartphone screens. It reckons it can unlock value in the company, but I’ve seen this before in the past with foreigners muscling in on Japanese companies and failing miserably as the Japanese companies close ranks and help each other to keep outsiders out. It’ll be interesting to see whether Elliott will have learned from previous failures. If its efforts work, though, there could be a massive spike in other funds trying to replicate it…
• IN UK BANKS – NatWest said it close another 23 branches in England and Wales, not long after similar recent announcements by Halifax and Lloyds Bank as customers continue to gravitate towards digital. Meanwhile, TSB announced record profits and a fat bonus for employees but it said that it was now bracing itself for a potentially rough period ahead as the UK economy suffers.

• Adani Group shares bombed after Hindenburg Research published a damning report on the sprawling Indian conglomerate. Hindenburg was the firm that did the hatchet job on Nikola a couple of years back, so this will have a significant impact given the size of Adani Group.
• Defence firms, like Rheinmetall and BAE Systems, are bracing themselves for more orders as countries restock the weapons they’ve donated to Ukraine and up their defence spending in general.
• MSC and Maersk have ended their alliance as they pursue different paths to growth. MSC is more interested in expanding its shipping fleet whereas Maersk is keen on developing its land-based logistics business.

• Watson’s Yearly 2022/23: coming shortly…

My favourite “alternative” story this week was the one about the very frustrating illusion in Tricky illusion sees people dubbed ‘genius’ if they can spot 5 items in 15 secs (The Mirror, Grace Hoffman and Christine Younan). If you haven’t seen this already – have a go! It’s very annoying!!!