Thursday 06/06/24

1. In MACRO, MARKETS & COMMODITIES, China’s economy gets a boost, Modi gets backing for a new government, Canada cuts interest rates, the ECB is expected to cut interest rates, private sector growth powers UK performance, Texas launches a new stock exchange, investors pull money from ESG, the UK IPO pipeline is improving, De Beers looks tricky and North Sea uncertainty prevails
2. In TECH NEWS, Nvidia becomes bigger than Apple and boosts a Microsoft/Amazon challenger while AI is used at St James’s Place
3. In CONSUMER & RETAIL NEWS, pay growth in Japan jumps, Dollar Tree considers a sale and shoppers lift Zara
4. In MISCELLANEOUS NEWS, EV wobbles continue, new car sales rise and England’s hospitals crumble
5. AND FINALLY, I bring you a very clever and amusing video…

So China gets a boost, Modi gets backing, Canada cuts, the ECB is expected to, the UK gets a private sector boost, Texas goes for it, investors pull out of ESG, UK IPOs could be on the turn, De Beers looks tricky and uncertainty prevails in the North Sea…

Hi there! Just to let you know, I’m preparing for a major overhaul on Watson’s Daily that will enhance the existing offering. You may not see the updates instantly, but I shall let you know when the big “switch-over” takes place this summer. I think you will love what’s to come!

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

China economy gathers pace on back of services growth (The Times, Jack Barnett) cites the latest Caixin services sector PMI for May which hit its highest reading since July last year. It came in at the top end of analyst estimates and suggests that stimulus measures implemented by the government over the last year are starting to gain traction.

In Narendra Modi secures allies’ backing for new government after India election setback (Financial Times, John Reed, Jyotsna Singh and Chris Kay) we see that PM Modi got the formal backing of the National Democratic Alliance to bolster the standing of his own BJP, which shocked everyone by not achieving an outright majority in the election. * SO WHAT? * This has been Modi’s biggest setback in the ten years that he’s been in power and suggests that he may have to water down his approach over time as he can’t rely on the majority he’s had previously that’s helped him push through his policies. Indian stock markets recovered after their post-election blip and share prices of Modi’s BFF Gautam Adani also had a bit of a relief rally.

Meanwhile, Canada becomes first G7 central bank to cut interest rates this cycle (Financial Times, Jaren Kerr) shows that the Bank of Canada cut its main interest from 5% to 4.75%, making it the first G7 nation to cut in the current cycle. A Reuters poll had predicted an 84% chance of a rate cut, so this didn’t come as a surprise! European Central Bank expected to cut interest rates for first time in five years (The Guardian, Phillip Inman) shows that the focus is now on the ECB and whether it will also decide to cut interest rates today. Expectations are that it will cut them from 4% to 3.75%. Private sector growth boosts UK economy and sets up interest rate cut (The Times, Jack Barnett) highlights the better-than-expected performance of the UK’s private sector while inflation slowed down to its slowest pace in three years. This will put pressure on the Bank of England to cut interest rates as well!

In markets news, Texas stock exchange to challenge New York and Nasdaq (The Times, Louisa Clarence-Smith) shows that Texas is going to launch a stock exchange to rival New York and is being backed by BlackRock and Citadel Securities. The idea is to provide an alternative for companies that are getting increasingly frustrated by diversity targets at NASDAQ and rising compliance costs of the NYSE. * SO WHAT? * The TXSE Group has already raised $120m and will be filing registration documents with the US SEC with a view to start operating this year. It will then facilitate trades in 2025 and have its first IPO in 2026, all being well. There have been other regional stock exchanges in the past in Boston, Chicago and Philadelphia but they have been bought by parent companies of the NASDAQ and NYSE over the last twenty years. I find this interesting because of recent high profile moves by Elon

Musk companies SpaceX and Tesla to change their incorporation from Delaware to Texas. Is corporate America shifting?? Has New York had it too good for too long? We’ll just have to wait and see…

In market trends news, Investors pull cash from ESG funds as performance lags (Financial Times, Patrick Temple-West and Will Schmitt) cites research from Barclays which shows that clients have taken out around $40bn from ESG equity funds this year! This will be the first year that fund flows for ESG have been negative. * SO WHAT? * This is a major reversal for a sector that had been hot for a number of years and which peaked at the end of 2021, just before Russia’s invasion of Ukraine. I have always said that the problem with ESG is that it is fiendishly complicated in terms of how firms are classified and it has been subject to so much abuse. Everything was fine when everyone was jumping on the bandwagon but then Russia’s invasion suddenly prompted governments around the world to increase defence spending suddenly while demand for oil also shifted. This left ESG firms in the lurch because they had little or no exposure to “sin sectors” and their performance suffered as a result. Then there was the whole “greenwashing” thing where funds made dodgy claims about their eco-credentials which just made the whole ESG thing toxic, hence the withdrawals. I do think that there is a space for ESG but it’s had its time in the sun for now. I have no doubt that the pendulum will swing back again, particularly if ESG classification continues to become more transparent. Maybe it’ll have to have a bit of a “rebrand” though and get a new acronym 🤣. I’ve seen it referred to as SRI (Socially Responsible Investment), CSR (Corporate Social Responsibility – which is not quite the same thing because it describes a business model rather than an investment process, but I think it’s related) and now ESG.

Then in A cautious revival of the London IPO market (Financial Times, the editorial board) we see that while the LSE has not had any major IPOs since the disastrous flotation of Deliveroo in 2021, things may be about to change. Raspberry Pi is going to list, Shein is thinking about doing so and Anglo American also appears to be considering listing its diamond business De Beers in London. Mind you, De Beers is very much a diamond in a rough space (Financial Times, Lex) suggests that the business will be very difficult to value because although it will want to be seen as a premium luxury brand, many will see it as a has-been industrial producer of increasingly commoditised stones (prices of rough diamonds have collapsed by almost 17% over the past year). Much in the same way that Ocado has wanted to move away from being rated as a retailer (relatively cheap valuation) to being a tech company (relatively high valuation), De Beers will probably aspire to being seen less as a miner (relatively cheap valuation) to being seen as a luxury brand (relatively high valuation) – but there will be a lot of work for it to do before it can make that switch. * SO WHAT? * Although you wouldn’t say that the current IPO pipeline screams bull market, it is certainly looking better than it has done. With rising confidence, the prospect of interest rates falling, a more benign set of hoops to jump through for IPOs and increased M&A activity you would have thought that there is reasonable chance for momentum to pick up from here.

In oil news, North Sea oil project delayed amid windfall tax uncertainty before election (The Times, Emma Powell) shows that the next government will have to tread a very fine line between attracting investment and scaring off oil companies with promised windfall taxes as Jersey Oil and Gas, Serica Energy and Neo Energy have decided to delay a decision on a new development in the North Sea. The £900m Buchan project was originally projected to produce its first oil in 2026, but the parties have decided to delay their investment decision until after the general election which will push back production until late 2027. * SO WHAT? * This is unsurprising really. Windfall taxes on oil companies could have a meaningful impact on the financials of any project so it is better to be safe than sorry!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Nvidia overtakes Apple, CoreWeave gets an Nvidia boost and St James’s Place uses AI…

Nvidia overtakes Apple as its market capitalisation powers past $3tn (Financial Times, Michael Acton and Nicholas Megaw) shows that the chip maker’s market value breached the $3tn mark and overtook the mighty Apple in trading yesterday to become the world’s second most valuable company after Microsoft. This just goes to show how important Nvidia is to the AI boom. Fun fact: Nvidia has, on its own, been responsible for over a third of the gains this year in the S&P500! Wow! How an upstart is using its Nvidia ties to challenge cloud computing giants (Financial Times, Tim Bradshaw) shows that CoreWeave, which rents out access to its high-end chip-powered data centres, is benefitting from its relationship with Nvidia, which took a $100m stake last year when it was worth $2bn. CoreWeave now has an implied valuation of $19.6bn after its recent financing last month. CoreWeave started off as a crypto miner but then pivoted to using its facilities for AI. It is now planning expansion in Europe (it has plans for three data centres in Norway, Sweden and Spain by the end of next year).

Like Amazon’s AWS and Microsoft’s Azure, it offers companies access to its own servers (so companies don’t have to build their own) but unlike them it specialises in a niche where clients have extremely high-performance computing demands. This sounds like a very interesting business to me! Although it was at pains to say that Nvidia’s investment didn’t guarantee it special access to chips, it did say that Nvidia’s involvement has made it easier to raise financing.

Then in St James’s Place uses AI to spot and help ‘vulnerable’ customers (Financial Times, Emma Dunkley) we see that the UK’s biggest wealth manager, St James’s Place, has started to use AI to help identify and assist customers by identifying “any kind of intonation or any kind of language…that may trigger that someone is a vulnerable customer”. * SO WHAT? * The idea is that the AI flags to the adviser that they should engage with the client in a different way. St James’s Place is particularly sensitive to customer service at the moment because it was forced to put aside £426m earlier this year for potential compensation to customers to whom they’d given insufficient service.  This is just another example of AI in action!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Pay growth in Japan jumps, Dollar Tree considers a disposal and shoppers boost Zara…

Pay growth in Japan jumps to highest level in 30 years (The Times, Mehreen Khan) heralds Japan’s highest level of pay growth (don’t get too excited – it was 2.3% in April) since 1994. Higher wage growth could help boost inflation in Japan to the target level of 2%. The next question now is whether consumption will pick up.

In retailer news, Dollar Tree weighs sale of struggling Family Dollar discount stores (Financial Times, Gregory Meyer) shows that US discount retailer Dollar Tree could potentially sell its Family Dollar chain almost ten years after it bought it for $8.5bn. Dollar Tree-branded stores have a bigger presence in the suburbs

whereas Family Dollar outlets tend to be in poorer urban and rural areas and sell a higher proportion of grocery items. The company has been shutting down Family Dollar stores and will continue to do so as it tries to streamline its operations whilst opening more Dollar Tree stores. Dollar Tree, Family Dollar and Dollar General all operate in the budget space. Will they continue to prosper when economies get stronger??

Shoppers shrug off wet weather to give Zara a lift (The Times, Isabella Fish) shows that the Spanish owner of Zara, Inditex, has had a strong start to the summer season despite poor weather across Europe. The trading update showed that its Q2 numbers were solid, suggesting that it could hit double-digit growth over the period. It said that its summer collections had been well received. Inditex keeps going from strength to strength!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

EV wobbles continue, new car sales increase and England’s hospitals suffer…

In a quick scoot around some of today’s other interesting stories, Electric car discounts now ‘unsustainable’ amid record price cuts (Daily Telegraph, Matt Oliver) highlights manufacturers’ warnings that big discounts for EVs can’t go on forever as overall sales rose by about 6% in May versus the previous year. Market share has increased from 16.9% to 17.6% – and while that is quite eye-catching, the reality is that the majority of those sales are to businesses and have also been boosted by big price cuts. Average discounts have reached record highs this year, at around 10.6% in April, according to Auto Trader. The discounts are ongoing because the Zero Emissions Vehicle mandate stipulates that 22% of all cars sold in the UK this year must be electric and goes up every year until 2030 when the proportion must be 80% and then 100% at 2035. If this doesn’t happen, the manufacturers have to pay massive fines. Meanwhile, UK new car market marks its 22nd consecutive month of growth (The Times, Robert Lea) shows that the ongoing popularity of hybrids has powered new car sales to another strong month. The SMMT said that it was the best May

for car sales since 2021 although they are still short of pre-pandemic levels. * SO WHAT? * I feel sorry for car manufacturers because it takes years for them to implement change. They all acted in good faith when governments were telling them that they had to make the switch but now that production is outstripping actual demand they have been left high and dry. Only the government can really help them at this point, but then the government may be wary of providing too much help given the relative lack of public charging infrastructure and uncertainty as to whether the grid can cope with a sustained steep rise in EV uptake.

Then in Capital investment delays leave England’s hospitals crumbling (Financial Times, Laura Hughes) we see that the state of hospitals in England is continuing to suffer with the lack of capital spending in the NHS. There is a massive £11.5bn maintenance backlog and is something that Labour is obviously seizing on as evidence that 14 years under the Conservatives has led us to this point. This is definitely something that the new government is going to have to deal with as a matter of urgency – but then there’s always the question of how will it be funded!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

Sometimes, when I feel the need for a bit of a mood boost I watch videos that make me laugh. This “Total Shreds” video does it for me every time as whoever is behind this makes the Backstreet Boys’ classic “I Want It That Way” sound absolutely terrible, although this one of One Direction’s “Story of My Life” just had me in tears of laughter when I first heard it. Whoever does this is an absolute editing genius as it looks sooooo convincing! I apologise to all fans of the Backstreet Boys and One Direction in advance 🤣