Thursday 07/09/23

  1. In MACRO & ENERGY NEWS, the Bank of England reckons we’ve reached peak rates, Erdogan officially changes tack and governments pour money into fusion
  2. In RETAIL & LEISURE NEWS, Waitrose jobs are vulnerable, Ocado cuts prices, Sainsbury’s evolves its fashion offering, Halfords benefits from its cars business, WH Smith’s travel business is looking good and Wagamama’s owner defies defies casual dining gloom
  3. In REAL ESTATE-RELATED NEWS, WeWork renegotiates, Barratt reckons recovery will take two years and prefab specialists benefit from the Raac debacle
  4. In MISCELLANEOUS NEWS, Big Tech faces Brussels, Beijing bans iPhones, Universal does a deal with Deezer, Roku cuts staff,  we look at the disaster of local councils and car makers expound the benefits of e-fuels
  5. AND FINALLY, I bring you some amazing stunts…

1

MACRO & ENERGY NEWS

So the Bank of England hints at peak rates, Erdogan officially changes tack and fusion attracts more money…

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Peak rates ‘reached’, says Bailey (The Times, Jack Barnett) shows that the governor of the Bank of England, Andrew Bailey, hinted yesterday that we’ve reached peak interest rates. The market reacted by sending the pound down to its lowest level in three months. His actual words, when responding to questions from MPS on the Treasury committee, were that the Bank is “much nearer now to the top of the [tightening] cycle”. * SO WHAT? * The Bank’s Monetary Policy Committee (MPC) has raised interest rates 14 times in a row to 5.25%. Bailey’s comments echo those made by his chief economist, Huw Pill. It looks like the Bank will keep interest rates higher for longer rather than ratcheting them up

further to then take them down subsequently. Presumably this is to take into account the delayed effect of interest rate rises in the UK as the majority of mortgages are now fixed-rate.

Then in Recep Tayyip Erdogan abandons cheap money to counter Turkey’s soaring inflation (Financial Times, Adam Samson) we see that the wily old campaigner has, at last, decided to abandon his deep-seated hostility to raising interest rates to combat inflation (doing the exact opposite of what pretty much every other country does!), something he described as “the mother and father of all evil”. He had even been clinging onto his contrarian stance during his election campaign in May but is now fully behind tighter monetary policy as the cure to rampant inflation. His finance minister Mehmet Simsek and central bank head Hafize Gaye Erkan have already been going down this road as the central bank has already jacked up interest rates from 8.5% to 25%, with a 7.5% increase just last month! * SO WHAT? * Interestingly, the Turkish lira remained largely unchanged on this news, but I would have thought that this reversion to economic orthodoxy will be generally well-received by the international community. This is a MASSIVE climb-down by Erdogan.

In energy news, Governments join race for commercial fusion power (Financial Times, Tom Wilson) highlights efforts from governments around the world to accelerate the development of zero-emission fusion power. Many have nurtured public-private sector collaboration to overcome the massive technical and cost barriers to making this power commercially viable. Until now, fusion research has been largely driven by state-sponsored programmes, but private sector companies are increasingly getting involved. Recent advances have increasingly caught the attention of governments and are pushing them to take more of a stake in the potential commercialisation of this energy generating process. As things stand currently, there are 43 fusion companies globally with 25 headquartered in the US and 80% of the money raised from private investment so far has gone to these groups. Fundraising in the US has been generally easier than it has been versus fusion start-ups in the UK, Canada, France, Germany, Italy, Sweden, Israel, Australia, New Zealand, Japan and China. The UK has Tokamak Energy and First Light Fusion while Japan has Kyoto Fusioneering but the EU is lagging others in supporting commercial initiatives but Germany is making significant strides. * SO WHAT? * As things stand, there is still a significant gap between the financial support that is provided and what is actually needed to make the process commercially viable but it seems that recent technological advances have accelerated investment. I guess it just needs to accelerate more!

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!

2

RETAIL & LEISURE NEWS

Waitrose jobs hang in the balance, Ocado cuts prices, Sainsbury’s refreshes its non-food, Halfords gets more from cars, WH Smith’s travel business purrs along nicely and Wagamama’s owner succeeds at casual dining…

In retail news, Waitrose jobs at risk (Daily Telegraph, Adam Mawardi) shows that Waitrose staff have been warned about potential headcount reductions as it conducts an overhaul focusing on productivity while Ocado slashes price of kale in battle to woo middle class (Daily Telegraph, Hannah Boland) highlights the online grocer’s third round of price cuts since June, this time involving over 330 “everyday essentials”. Sainsbury’s fashion hubs to feature third-party brands (The Times, Isabella Fish) highlights the supermarket’s intention to open branded fashion “hubs” at nine of its busiest stores by the end of this month. They will sell third-party labels including Sosandar, Simply Be and Finery as part of a broader effort to create 50 “fashion destination hubs” across the UK over the next five years. * SO WHAT? * This strategy certainly sounds interesting and seems to reflect an increasingly common trend of retailers selling third-party brands. It’s the strategy that’s been of enormous help to M&S’s revival, for instance! There’s nothing wrong with that, but if everyone starts doing this you wonder whether third-party brands will then be able to pick and choose who they work with, which might affect margins – something that perhaps supermarkets will be more sensitive to.

Elsewhere on the high street, Shift from bikes to cars drives sales at Halfords (The Times, James Hurley) shows that Halfords reported strong sales in the 20 weeks to August 18th thanks to strong demand at its garages. Sales at its car servicing and repair autocentres jumped by a chunky 34.6% versus the more pedestrian growth at its retail business of 3.7%. Interestingly, cycling revenues account for 25% of Halfords sales, but they are showing signs of weakening whereas Halfords’ servicing and b2b divisions (particularly things like fleet maintenance) are growing. * SO WHAT? * I must say that I thought that, prior to the pandemic, cycling was on the wane after the glory years immediately following Britain’s cycling success at the London Olympics in 2012. However, lockdown revived the appeal of cycling and consumers either dusted off their trusty steeds (with perhaps some maintenance from companies like Halfords) or bought new ones either for fun or for commuting purposes. The frenzy was such that bike prices went through the roof and supply chain problems exacerbated this. Now, though, I would have thought that if you were ever going to get a bike

you would have bought one by now and that the main growth in this division will be through maintenance, which is OK but not going to be stellar IMO. On the other hand, I think that cars is the main growth area here because the transition to EV, coupled with the cost of living crisis, means that consumers will be more likely to hold onto their existing cars for longer. If they hold onto them for longer, the likelihood is that they will need more maintenance, which I would suggest is more profitable than maintenance needed for cycling. The other longer term driver is maintenance of EVs, which the company is preparing for by training their staff. I personally wonder whether Halfords would perhaps, longer term, be better off selling the cycling business and just concentrating on cars and car maintenance…

Then in Promising direction of travel for WH Smith (The Times, Max Kendix) we see that the stationer reported a healthy 28% rise in group revenues in the year to the end of August thanks to the strong performance of its airport travel shops. Revenues in its travel division (shops in railway stations and airports) jumped by 42% as WH Smith benefited from a strong summer holiday season. * SO WHAT? * It probably sounds like I’m being a bit aggressive here, but I do wonder whether WH Smith should just sell its boring high street business and concentrate on the travel business cash cow. OK, so the high street business kept it limping through lockdown when all the airports and railway stations were shut, but I’d say that the likelihood of another lockdown going on for as long as the Covid one is highly unlikely. Stationary doesn’t seem to be a particularly fantastic business to be in (Paperchase, anybody??), the cards business has a ton of competition – both online and offline – and magazine/books etc. also doesn’t offer anything particularly compelling. I personally think it should get rid and concentrate on travel. The only problem with this would be I don’t know whether it would be able to get a fat price for it.

Then in Wagamama owner TRG defies casual-dining sector gloom (Financial Times, Oliver Barnes) we see that The Restaurant Group (TRG) actually increased its full-year profit forecasts thanks to reporting strong sales at its restaurants (which include the Brunning & Price pub chain, Frankie & Benny’s and Wagamama). The company even managed to make progress on its efforts to cut debt and boost margins. * SO WHAT? * The company had been under a lot of pressure from activist investors (such as Oasis Management and Irenic Capital) to overhaul the business so this performance will have bought it some time at the very least. I still think that casual dining is a tricky area, so a proper overhaul could be good for the business.

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!

3

REAL ESTATE-RELATED NEWS

WeWork renegotiates, Barratt has a gloomy outlook and prefab specialists benefit from the raac problem…

WeWork revises office rental prices as collapse looms (Daily Telegraph, Adam Mawardi) shows that the shared office provider is now renegotiating rental agreements with landlords on a global basis in order to cut down on costs. It looks likely that underperforming locations will be culled as part of this strategy. * SO WHAT? * The company that was once valued at a whopping $47bn at its peak last month said that it could go bankrupt unless it was able to “improve liquidity and profitability over the next year”. Given that, for instance, it is London’s biggest private tenant, going bust would leave an absolutely massive hole if it did fail.

Meanwhile, Barratt to conserve cash as demand for homes slumps (The Times, Tom Howard) shows that Barratt Developments is having a nightmare at the moment. It cut its dividend, imposed a hiring freeze and hit pause on share buybacks in order to preserve cash as it hunkers down in the face of a gloomy housing market. First-time buyers generally account for around a third of Barratt’s sales so they are feeling the pinch

particularly keenly as this segment is seeing a major loss in confidence at the moment. * SO WHAT? * Trading has been volatile over the last year what with one thing or another and many will be craving more stability (and interest rate cuts). The company expects sales to weaken over the next 12 months. FWIW, I think that things will only revive when buyers are convinced that interest rates have peaked! That said, there is a risk that buyers will then decide to wait until rates fall further…

It sounds terrible to highlight beneficiaries of a terrible situation but Boom for prefab classroom makers as England schools’ Raac crisis deepens (The Guardian, Julia Kollewe) shows that companies like Algeco, which specialises in hiring out modular buildings, have been in huge demand as schools and academies rush to secure temporary classrooms in the wake of the ongoing Raac (Reinforced Autoclaved Aerated Concrete) nightmare. The company says that it’s keeping prices unchanged at the moment despite the obvious demand. Portakabin is another obvious beneficiary of the current situation as are Speedy and Ashstead who are likely to see higher demand for equipment such as heaters for temporary classrooms. A number of schools have already been closed down because of the RAAC problem and others nervously await their fate as their buildings are assessed.

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!

4

MISCELLANEOUS NEWS

We take a look at the latest in tech, streaming, local government disaster and e-fuels…

In a quick scoot around some of today’s other interesting stories, Big Tech faces fresh legal obligations as Brussels lists services bound by new rules (Financial Times, Javier Espinoza) shows that Apple’s App Store, Google search and WhatsApp are among those who are going to be bound by stricter conditions under the new Digital Markets Act and will be forced to share data with rivals and make their services interoperable in order to encourage greater competition in the tech sector in Europe. 22 tech giants have been classed as “gatekeepers” for the purposes of the Act and face more onerous obligations than others and TikTok clashes with EU over big tech ‘gatekeeper’ rules (Daily Telegraph, Matthew Field) highlights TikTok’s feelings of anguish as being on the list! Clearly, being on the list is more restrictive and more expensive, which is why many companies will argue that they shouldn’t be on it for whatever reason…but then again UK pulls back from clash with Big Tech over private messaging (Financial Times, Cristina Criddle, Anna Gross and John Aglionby) shows that Big Tech have had a win as the UK government has now said that it will not use controversial powers in the online safety bill to scan apps for harmful content. A number of tech companies, including WhatsApp, threatened to pull their services in the UK if the government had gone ahead with it. The online safety bill has been brewing in the wings for several years and is in the final stages in Parliament. Its aim is to make Big Tech companies more responsible for the content that is shared on their platforms. Elsewhere in the world of tech, Beijing bans government staff from using iPhones at work (Daily Telegraph, Gareth Corfield) shows that staff at central government agencies have now been banned from using Apple iPhones at work. They have been directed to use Chinese-made devices instead. This just sounds like another one of those tit-for-tat moves as the whole US/China sanctions thing plays out. It wasn’t long ago that Chinese state-company employees were told not to drive Tesla cars for fear of them “listening in” to conversations…

In streaming news, Universal deal with rival raises heat on Spotify over royalties (Daily Telegraph, James Warrington) highlights Universal Music’s deal with French streamer Deezer that will channel more revenues to professional artists and away from the “sea of noise” uploaded by amateurs and bots. Non-artist audio will be de-prioritised and replaced with Deezer’s own content. This will clearly put pressure on Spotify to do something similar but Universal Music: Deezer deal is symbolic but not yet a game-changer (Financial Times, Lex) points out that Deezer is tiny as streamers go (it has a 1.5% market share in this space) while

Apple, Tencent Music and Amazon all have over 13% share each so this latest deal is unlikely to have a massive impact. Still it is a step in the right direction as AI will prompt a proliferation of more “noise” that crowds out proper artists. Fun fact: Goldman Sachs estimated that the sound of rain generated $900m in royalties last year! Surely this has got to stop (and yes, I am bitter that I didn’t think of recording rain and putting it on Spotify 🤣).

Elsewhere in streaming, Roku Cutting 10% of Staff to Rein In Rising Expenses (Wall Street Journal, Colin Kellaher) shows that the streaming platform is gearing up for a 10% headcount reduction in order to cut costs. Shares of Roku have actually doubled this year, but the company is keen to maintain the momentum. Fun fact: Roku was the one that bought doomed Quibi (remember them??).

In other news, Local government audit is a serious mess (Financial Times, Helen Thomas) does a really good job of bringing us up to speed with the collapse of local councils following Birmingham’s news yesterday. There has been a massive backlog of local authority audits which could be hiding all sorts of disasters as Birmingham followed the likes of Croydon, Thurrock and Woking into issuing section 114 notices which stop non-essential spending. Cuts to government grants, higher utilities costs and rising demand for services (and I bet they are all now looking for RAAC in their properties!) have all conspired to decimate local authorities’ finances, not to mention them making badly-timed big financial decisions that they subsequently found themselves on the wrong side of. Sigoma, a group of 47 major urban authorities, said last month that a third of its members could declare effective bankruptcy either this financial year or next. For now, things aren’t looking good as reform of local authority audits has fallen down the list of priorities…

Then in European carmakers bet on a future with e-fuel vehicles (Financial Times, Patricia Nilsson and Peter Campbell) we see that manufacturers at the current Munich motor show are talking up the role of e-fuels in future motoring. Companies including BMW, Renault and Mercedes-Benz are talking about it as a practical solution but EV makers are obviously talking their own book saying that concessions on this will mean that plans for phasing out the combustion engine will be kicked into the long grass. * SO WHAT? * You will be aware that I had a rant on this very subject on Tuesday this week, but overall I think that traditional carmakers will want to string things out as long as possible to give them time to develop whereas EV-only makers will be chomping at the bit to take market share away from the incumbents.

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!

5

...AND FINALLY...

…in other news…

Whatever you do, don’t try any of these stunts at home – just marvel at how amazing humans can be sometimes!

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Some of today’s market, commodity & currency moves (as at hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)