Watson’s Weekly 30-11-2024

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.

There was an Israel-Lebanon ceasefire, US retailers went early for Black Friday and Australia implemented a social media ban for kids…

• IN WAR NEWS – an Israel-Lebanon ceasefire began earlier in the week after the US brokered a deal while it looks like Europe getting more likely to release funds that will allow the purchase of defence products from outside the EU, which should be good news for defence companies in the US, UK and Israel (among others) who may see more orders as a result.
• IN US NEWS – Trump threatened to slap tariffs on imports from China, Canada and Mexico. If he follows through on his pre-election threats with China, it could actually be quite damaging to the Chinese while Mexico reacted by dithering over a new BYD plant that was supposed to break ground in Mexico this week. Meanwhile, we saw the minutes of the most recent Fed rate-setting meeting and it seems that they are likely to be taking a cautious approach to further interest rate cuts (i.e. unlikely to make another 0.5 percentage point cut like they did before).
• IN UK NEWS – PM Starmer was invited to meet EU leaders in February to discuss European security, whilst at home, he announced the imminent launch of an online “dashboard” so that the public could keep track of how the government was doing on its policy promises but the government is still in defensive mode as chancellor Reeves said of her Budget that “We had no alternative”. The CBI warned that UK businesses are reining in growth plans as they react to the Budget and both the BRC and CBI have published reports that show both business and consumer confidence has fallen since its announcement. Agriculture has been hit badly by the Budget. The Tax Policy Associates think tank concluded that the government’s policies had hit “farmers harder than tax avoiders” and farm equipment suppliers have already seen a drop-off in business. Meanwhile, the non-dom exodus is accelerating thanks to a new concession which incentivises them to leave in the current tax year.

IN COMMODITIES NEWS…

• Orange juice prices continue to hit record highs (they’ve gone up by 150% in just two years!) thanks to the impact of devastating hurricanes in Florida and droughts in Brazil. Consumers won’t notice the price spike yet because it can take anything between seven months and a year for prices to filter through.

IN MARKET TRENDS NEWS…

• Inflows to actively managed funds (where humans take investment decisions) have overtaken inflows to passive funds (where algos take the decisions) for the first time in 20 months, according to Morningstar data.
• It is interesting to see that, despite the imminent prospect of RFK Jnr becoming the US’s top health official, Odyssey Therapeutics and Aktis Oncology (both biotechs) are pressing ahead with flotation plans in the next few months. It’s a bit controversial because RFK Jnr looks likely to make the life of biotechs and pharma companies more difficult.
• Gloom turned up a notch in London as Just Eat Takeaway announced that it would quit the LSE and keep its primary listing in Amsterdam, adding to the ongoing hand-wringing about the exodus of companies from London. On the other hand, some say that the IPO market in London is set to improve with listings of Canal+ and Shein in prospect while analysts at Goldman Sachs, BlackRock and JP Morgan Asset Management reckon that the UK will outperform Europe because they think that the UK will be less affected by Trump’s tariffs than Europe will.

IN BUSINESS TRENDS…

• German exporters are still reeling from the prospect of a Trump presidency and economists are already trying to guess the magnitude of the impact on its economy and particularly on its automotive industry.
• Back home, FT analysis shows that professional services have been a major driver of UK GDP this year with a growth rate that is triple that of the overall UK economy.

OVERALL…

• Share prices of carmakers that supply the US market from Mexico – including GM, Nissan, Stellantis and Daimler Truck – fell as investors reacted to Trump’s threats of tariffs.
• In the UK, ministers are considering an extension of the petrol-EV deadline for full hybrids as a concession to manufacturers who are concerned about having to hit unrealistic EV sales targets.
• UK car production slowed down for the eighth consecutive month, according to the latest numbers from the SMMT. The industry continues to struggle with the switch to EVs.

IN INDIVIDUAL COMPANY NEWS…

• Stellantis announced that it’ll close its Luton factory and shift production to its Ellesmere plant. The company blamed the UK’s economic conditions and the government’s continued clinging onto its zero-emission vehicle (ZEV) mandate.
• Aston Martin announced its second profit warning in two months but also announced plans to raise £210m to help its ongoing electrification efforts. When will the nightmare stop??
• German car parts supplier Schaeffler announced major cuts to its labour force across Europe and the closure of its plant in Sheffield. Demand for its clutches is falling thanks to the move to EVs and automatic transmission.

AS FAR AS CONSUMERS ARE CONCERNED…

• Research from jobsite Adzuna showed that there were signs of recovery in the second half of the year as salaries rose at their fastest rate in three years.
• Separate research showed that the increasing incidence of companies requiring RTO is prompting more employees to seek jobs elsewhere.

IN RETAIL NEWS…

• IN THE US – retailers are making Black Friday stretch longer to try to stimulate sales and are injecting the FOMO by saying that customers need to act now before Trump’s punchy tariff regime kicks in. IN INDIVIDUAL US RETAILER NEWS, Tapestry (Coach, Kate Spade, Stuart Weitzman) decided to ditch its plans to buy Capri Holdings (Versace, Jimmy Choo, Michael Kors), which Tapestry investors were relieved by – but left Capri vulnerable. There was a mixed bag in department stores as Macy’s had to delay its results because of $150m fraud but then Nordstrom announced that it would raise its year-end sales outlook as it experiences positive momentum. Meanwhile, Urban Outfitters put in a stronger-than-expected performance as its brands Anthropologie and Free People did well and it was upbeat about the upcoming holiday season.
• IN THE UK – retailers are getting more cautious about Christmas and warn that inflation could be a drag for UK shoppers while retail footfall drops. West End landlord Shaftsbury said that its retailers and restaurant tenants are paying higher rents going into the holiday season, which sounds like a good sign!
• IN SUPERMARKETS NEWS – veteran retailer Alan Leighton returned to Asda at the ripe old age of 71 as chairman to turn its fortunes around (as he did before, over 20 years ago!). Morrisons is scaling back its use of Ocado and will instead supply customers from its own network in addition to one of Ocado’s warehouses on the outskirts of Birmingham. Morrisons will still use Ocado’s tech when it delivers online orders from its own shops. Aldi and Lidl look like they’ll get a boost thanks to the government’s overhaul of the business rates system because their store estate generally has smaller stores than many of their rivals, meaning that their rates bill will be less.
• TikTok is forecasting its best Christmas sales ever as its livestream shopping feature seems to be finally taking off after being launched in the UK back in 2021!
• Kingfisher (which owns B&Q) saw its shares take a hit after it downgraded its full-year forecasts blaming the new tax changes in the Budget. Unfortunately, it also reported a slowdown in trading over the latest quarter.
• AO World warned that prices are going to have to rise after the recent Budget thanks to increase to its overheads. That being said, AO World performed well enough in the first half to increase its annual earnings forecasts and is bullish about consumer sentiment.
• Halfords is thinking about raising prices at its 550 Autocentre garages to pay for increased costs resulting from the Budget. Meanwhile, the company left its full-year guidance untouched.
• Dr Martens saw its share price rise despite falling into loss, but investors seemed to be cheered by cost reductions being on track and the progress being made in its US business.
• Pets at Home cut its annual profit outlook due to weakening demand for accessories and treats but it’s in the middle of efforts to become a “unified petcare platform” by integrating its retail, grooming and veterinary services via a new app.
• Ingka Group, the biggest franchisee of Ikea, said that new trade tariffs could make selling its wares at low prices “more difficult”. It’s particularly tricky given that the US is Ikea’s second biggest market after Germany.

IN LEISURE NEWS…

• The government is poised to announce a £100m levy on gambling companies to finance research, education and the treatment of the consequences of gambling. The levy is due to come into force in April. This is going to hurt!
• Mitchells & Butlers (which owns Havester and Toby Carvery) said it will take a £100m hit from tax changes and is the latest hospitality business to warn of a Budget-powered hit. It is, however, quite upbeat about market expectations for the coming year.
• Posh bakery Gail’s is up for sale as current owners Risk Capital Partners and Bain Capital are looking for a partial or full sale of the business.
• Meanwhile, Starbucks has been outclassed by local rivals in China, particularly Luckin Coffee and Cotti. It’s now looking at the possibility of bringing in a local partner.

IN LEISURE…

• EasyJet has been bounced back from the nightmare of Covid and is now targeting profit of £1bn as its CEO steps down after seven (turbulent!) years in charge. Still, it has – like rival Ryanair – decided that it will cut domestic flights after Reeves’s tax raid, which will affect Scotland the most.

IN A SNAPSHOT OF THE OVERALL MARKET RIGHT NOW…

• The UK property sector is currently being hit by a combo of inflation fears, higher borrowing costs, the UK Budget and Trump effect.
• UK housebuilding has fallen to an 8-year low, further underlining the challenge that’s facing the government in making a sizeable dent in the housing shortfall.
• Nationwide is taking market share in mortgages from banks thanks to more competitive pricing on home loans and flexibility towards stretched borrowers.
• Knight Frank downgraded its forecasts for house prices and sales in the UK but Zoopla’s latest research forecasts that sales and prices will pick up the pace over the next four months as buyers try to beat the stamp duty deadline, which is due to end next April. First-time buyers will be particularly keen to get involved.

IN AI NEWS…

• OpenAI’s text-to-video AI tool Sora was briefly leaked by some artists who had been testing the new model. A number of testers have since complained to OpenAI for taking advantage of “hundreds of artists [who] provide unpaid labour through bug testing, feedback and experimental work” when testing AI models.
• Apple is facing AI difficulties in China as foreign companies are being warned that they will be faced with a “difficult and long process” to get approval from authorities unless they partner with local groups. The company wants to roll Apple Intelligence out to its devices sold in China.
• Meanwhile, Europe’s Mistral – which is now Europe’s most valuable start-up – is boosting its US expansion in an effort to compete with Silicon Valley rivals for AI employees. One of the three co-founders is also considering relocating from Paris to its new office in Palo Alto, California.

IN HARDWARE NEWS…

• Dell and HP posted downbeat outlooks thanks to a slowdown in PC upgrades overall. There are hopes, however, for an increase in demand for AI capabilities that may provide the catalyst needed for consumers to replace what they (probably) bought under lockdown.
• Huawei is about to launch a new flagship smartphone, the Mate 70, that can run its own apps on its proprietary operating system. This is a great achievement and narrows that gap with Western counterparts.
• The world’s biggest memory chip maker, Samsung, had its second big management shake-up of the world’s biggest memory chip maker this year! Various management changes have been made at the top of the company in order to address growing concerns about its technological competitiveness, particularly in AI memory chips and AI hardware.

IN SOCIAL MEDIA NEWS…

• Meta continues to lose ground to Bluesky while users abandon X. Amazingly, Meta’s Threads had 5x the number of daily active users in the US than Bluesky before the November 5th election – but it now has only 1.5x more users!
• X’s backers look like they’ll be even as they were granted 25% of the shares in xAI when they lent Musk the money to buy the platform – and although the platform’s performance hasn’t been stellar, xAI’s has! The question is whether they’ll sell out or hang on for the (probably volatile!) ride. Talking of X, Reddit overtook the platform to become the UK’s fifth most popular social media platform in the UK, according to Ofcom.
• Meanwhile, Australia just implemented a ban on children under the age of 16 using social media sites. This ban was one of over 30 bills passed into law overnight – but it has caused a lot of controversy given how quickly it has been pushed through and relative lack of debate. The question is – will other countries follow suit??

ELSEWHERE…

• CrowdStrike is bouncing back from its horror show in Q3 where it was responsible for one of the worst computer outages ever – but it managed to raise its fiscal year outlook and announced higher revenues!

IN MEDIA…

• Research from media consultancy Omdia shows that music industry revenues shot up by 10% last year, an increase of 25% since 2021 and double the revenues in 2014! Digital channels are now more valuable than broadcast and radio channels for music publishers and songwriters

• Direct Line rejected a £3.3bn takeover offer from Aviva – the second takeover offer it’s received this year! Aviva then changed tack and approached shareholders directly to get them to back their bid. The two businesses are actually quite a good fit, so we’ll just have to see how this goes…
• The world’s biggest catering group, Compass Group, announced that it has decided to slim down its global footprint and withdraw from nine countries to focus on those with decent growth opportunities.

My favourite “AND FINALLY” video this week was, of course, the one with Alan Partridge copying what I do on long car journeys 😁!