Watson’s Weekly 28-09-2024

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 of devastating Israeli attacks, Labour sheepishness and the Can of Ham test…

• IN WAR NEWS – Israel escalated the Middle East conflict by launching a sustained wave of airstrikes on what it said were Hizbollah targets, the US and Allies called for a 21-day ceasefire but this was ignored. The carnage continues. In the meantime, from a commercial perspective, I think that this means higher freight rates for longer (potentially a positive for companies like Maersk) and more warehousing as companies decide to hold more inventory (good for warehouse operators) to ensure robust supply chains in the face of more geopolitical uncertainty. It may also mean that prices for end consumers will remain higher for longer (which means inflation could be higher for longer) and it may result in more near-shoring in the longer term as companies look to produce more of their goods closer to their end markets so they are less affected by developments like this.
• IN THE US – Harris set out her pro-business policies in a speech in Pennsylvania, a swing state, to appeal to the private sector and differentiate herself even more from Trump. Starmer paid a visit to “recommit” Britain to internationalisation at the UN General Assembly whilst also catching up with US and European leaders.
• IN CHINA – the PBoC announced a number of key interest rate cuts and other measures to boost growth but there was scepticism as to whether this was really going to be enough and a few days later Beijing announced more stimulus measures.
• IN EUROPE – the latest Ifo survey highlighted the fifth consecutive month of GDP contraction in Germany and there are increasing concerns about the effect a Trump victory would have on Germany’s exporters. Meanwhile, France is considering raising taxes on businesses and the rich in an effort to address “one of the worst deficits in our history”. The EU has now put France in an “excessive deficit procedure” and demanded that it comes up with a plan to cut the deficits over the next few years.
• IN THE UK – the government came under pressure for all the gloomy rhetoric about the economy as chancellor Reeves paved the way for a capital spending increase, while KPMG published a report which suggests that the UK economy will grow twice as fast as expected this year and even the OECD was bullish about our GDP prospects! Later in the week, though, it sounded like the chancellor was thinking about watering down her planned tax raid on “non-doms”, presumably given reports of their potential exodus. She’s got a lot of other things to consider, though, like how to shrink the gap between public and private sector pay, how to reduce our electricity bills (we’ve currently got the highest electricity prices of anywhere in the developed world!) and how to resolve labour shortages in sectors like agriculture. The government felt pushback on the proposed cut in the number of people who get access to the winter fuel allowance and the overall feeling of the conference was less buoyant than you’d think after getting in power after 14 years in the political wilderness.
• IN ARGENTINA – the poverty rate has broken through 50% and is now at its worst level for two decades thanks to new president Javier Milei’s drastic spending cuts since being in office. Opposition parties say austerity is making things worse and Milei’s popularity has taken a beating. People will need to see the benefits of his actions sooner rather than later or he will not last long…
• IN AUSTRALIA – inflation has fallen to its lowest level in three years – to 2.7% in the year to August versus the 3.5% it was at in July – but the central bank’s governor is not getting too excited about it and said that it was only temporary. She said that the bank would need to see more evidence of sustained lower inflation before easing monetary policy.

IN OIL NEWS…

• Saudi Arabia decided to abandon its unofficial $100 a barrel price target in order to justify increasing production. The oil price fell as a result, hitting the share prices of oil producers including Shell and BP.

IN NUCLEAR POWER…

• America’s NuScale was ditched in the bidding to build Britain’s first mini-nuclear plant, leaving four companies (including Rolls-Royce) still in the running. This week, 14 of the world’s biggest banks and financial institutions pledged increased support for nuclear power – and, given huge demand for it, this is very good news (if they follow through on this!).

• IN CHINA PARANOIA – the US proposed a ban on Chinese software and components in vehicles. If this actually came to pass, it would effectively ban all Chinese vehicles from the US market. The US has already slapped a 100% import tax on Chinese EVs. Meanwhile the Minerals Security Partnership, a coalition comprising of 14 countries and the European Commission, are pushing to help private industry support critical minerals’ projects in order to push back against China’s dominance in this area. European steelmakers have been joining forces to appeal to Brussels to tackle the flood of cheap Chinese steel that’s being dumped on the market. China is on track to export a whopping 100m tonnes this year, more than any year since 2016!
• IN CHINA PUSH-BACK – Geely is just one of the Chinese carmakers looking at expanding production in Vietnam as producers look to broaden their footprint outside China in order to get around ever-tightening sanctions. Elsewhere, China’s tech self-reliance is continuing as Huawei’s Qingyun L540 laptop’s components show that domestic suppliers are catching up with US companies, whose components are affected by export restrictions.
• CORPORATE MIGRATION TO THE MIDDLE EAST – US-based investment manager Nuveen is the latest financial services company to set up shop in the Middle East as it looks set to open in Abu Dhabi. It is the second investor with over $1tn in assts to move to the financial hub this month!
• THE NO-ALCOHOL BEVERAGE TREND CONTINUES – Data from IWSR shows that sales of low-alcohol beer in the UK boomed by more than any other market in 2023 thanks to the overhaul of alcohol duties! Overall, though, the future for non-alcoholic beverages looks bright because although they make up just 1% of global alcohol sales, margins are good and more younger people are drinking them.

IN COMMERCIAL PROPERTY…

• US property investment trust Realty Income has become one of Britain’s biggest retail owners over the last five years as it keeps snapping up unloved retail properties. The company has a team of quant analysts in the US who crunch the data, they pick out properties with at least a 7% yield and they buy!
• The 21-storey tower at 70 St Mary Axe, aka the “Can of Ham”, is being put up for sale by its current owner Nuveen as it tests market appetite after trying once before to sell it in 2022 for about £400m, but failed. The building, close to Liverpool Street Station, was completed in 2019. It’ll be interesting to see how the sale goes as many will be trying to gauge the state of the market.
• Work has just started on Britain’s first purpose-built skyscraper lab in Canary Wharf. It will have 23 floors and is expected to be completed in 2027. This is part of an effort to make the district less reliant on the financial services industry!

IN RESIDENTIAL PROPERTY…

• The UK housing market is rebounding, according to research from Savills which shows that the housing market is now bigger than its average pre-pandemic size thanks to first-time buyers returning to the market.
• Angela Rayner’s planning revolution will yield four million homes that will be built on green belt land as she changes definitions and pushes forward to make a dent in the housing shortage.
• Nationwide has gone a bit crazy as it said this week that it would allow first-time buyers borrow six times their earnings just weeks after rivals Halifax and Lloyds said they would allow first-timers to take out loans worth 5.5x their household annual income. It is, at the same time, cutting its mortgage rates and increasing its maximum loan sizes. My initial reaction is that this is potentially quite risky but then again property prices have gone bananas to the extent that young people may find it impossible to buy without outside help. I guess the argument is that if they can afford massively inflated rents then it makes sense that they can afford mortgage payments!

IN AI NEWS…

• Sam Altman is in line to get a 7% stake in OpenAI, which could be worth over $10bn, as the company looks to evolve from its not-for-profit status to a company that makes profits. One option is to become a public benefit corporation that will enable it to make profits whilst having a structure that helps it to benefit wider society. It makes sense for OpenAI to make the switch given that more companies are putting more money into it – they are going to want to see a return on their investment, after all! Meanwhile, the company’s CTO, Mira Murati, became the latest senior exec to quit. I guess this is just part of such a company’s evolution!
• The UK is finalising an investment summit to be held here on October 14th, but it’s not invited Elon Musk (presumably because of all that rubbish he spouted about civil war in the UK when we had the riots).

IN HARDWARE NEWS…

• Meta announced some new AR glasses, the launch of its next-gen Ray-Ban smart glasses and the latest version of its LLM.
• Raspberry Pi unveiled its maiden results since flotation – and they were good! Although Raspberry Pi was hit by supply chain issues during the pandemic it has since largely recovered and it now believes that sales will rise in the second half thanks to new product launches.

ELSEWHERE…

• Ubisoft’s shares plummeted by a whopping 17% as it disappointed the market by reining in its forecasts delaying the release of the latest instalment of its Assassin’s Creed game by three months. It decided to do this following weaker-than-expected sales of its new Star Wars Outlaws game.
• French satellite operator Eutelsat is looking to strike up industrial and commercial partnerships to finance the next generation of satellites for the OneWeb broadband constellation if it doesn’t manage to hammer out an agreement about Europe’s satellite communication network roadmap with the European Commission.

IN RETAIL NEWS…

• Luxury group Hermès, having ridden out the luxury storm, is now looking to evolve and thinks that a shift into haute couture is the right move in order to continue to insulate it from economic and geopolitical gyrations. I’m sceptical but I think a lot will depend on how this is marketed to its potential customers.
• H&M disappointed the market by saying that it would undershoot profit targets this year thanks to costs denting its Q3 earnings. What a contrast to rival Inditex’s success!
• UK retailers “face turbulent few months” as consumer optimism has weakened, according to the latest BRC data. It seems to me that we’ll be in limbo at least until we know what the Budget actually contains!
• In terms of individual retailers, Co-op managed to return to profitability in the first half but DFS fell into loss because of weaker sales and shipping delays while Card Factory saw anaemic first half profits thanks to the increase in the minimum wage and higher shipping costs.

IN LEISURE NEWS…

• Mitchells & Butlers – the operator of All Bar One, Harvester and Toby Carvery – had a decent summer of trading although poor weather and August riots took the edge off. Still, it outperformed the competition and all of its brands still managed to grow! It was positive about the full year.

• IN BANKS NEWS – there was a big kerfuffle this week about Commerzbank potentially being taken over by UniCredit. The German government had been caught napping as it had sold off a chunk of its Commerzbank stake to the Italian bank, not realising UniCredit’s true intentions! What a naive bunch of muppets! Citigroup signed a $25bn deal with Apollo to make a more concerted push in private credit – a rapidly growing area of business. Meanwhile HSBC took a pasting thanks to its exposure to defaults in commercial property loans in Hong Kong for the first half of this year.
• Northvolt had a bad week. It announced a 20% headcount reduction and then learned later in the week that it would be served with an investigation notice by Swedish prosecutors over the death of one of its workers. It’s not looking good for the European EV manufacturer.
• Tui said that its annual profits would rise by at least 25% thanks to customers spending more on winter breaks to sunny destinations like Egypt, Cape Verde, Thailand and Mexico. Tui says that winter bookings have had a “promising start” and demand for more expensive holidays has increased.
• News Corp’s REA raised its offer to buy Rightmove but Rightmove rejected it, saying that the approach was lowballing its actual valuation.

My favourite “AND FINALLY” video this week was the one with the unusual running challenge! This looks very scary to me!