Thursday 08/08/19

1. In MACRO NEWS, German recession fears rise, Japan-Korea relations worsen and gold hits a new high while UK house price growth falls and wages rise
2. In RETAIL NEWS, Walgreens cuts 200 pharmacies and Debenhams gets the doctor in
3. In INDIVIDUAL COMPANY NEWS, FedEx stops ground deliveries for Amazon, Continental looks to electric vehicles, Lyft adds users and Diageo invests in a non-alcoholic beverage
4. In OTHER NEWS, I bring you the world’s most expensive burger…

So fears of a German recession rise, Japan/Korea relations worsen and gold hits new highs while UK house price growth dips and wages rise…

Biggest German factory slump for 10 years stokes fears of recession (Daily Telegraph, Tom Rees) highlights tough times for the Eurozone’s biggest engine as industrial production fell by 5.2% year-on-year in June, with output falling 1.5% versus the previous month. Given the importance of manufacturing to Germany’s economy, it looks highly likely that the announcement of its second quarter GDP growth figures next week is going to be baaaad – unless exports surprise on the upside. It seems that a perfect storm is brewing for Germany in the form of the US-China trade war (Germany is heavily exposed to exports – and therefore tariffs), Brexit worries (slowdown in trading activity), China’s economic slowdown (falling demand for Germany’s exports) and weakening global car sales (because its car industry is a major economic driver). And then there’s the possiblility of a currency war in the offing.

I know that many of you won’t really think much about this BUT South Koreans vent anger with growing boycott of Japanese goods (Financial Times, Song Jung-a, Edward White and Kana Inagaki) highlights a very serious – and growing problem – between two of Asia’s biggest economies. Relations have soured between the two because of a flare-up of the perennial problem that Koreans think Japanese aren’t showing enough remorse for how they treated Koreans (especially women) in the occupation and Japanese say that they’ve already apologised and compensated them years ago, so the Koreans should just get over it.  The powder keg was ignited by a south Korean court ruling last year that allowed individuals to make compensation claims for how they were treated in the War by the Japanese. The resulting needle between the two has so far taken the form of Japan putting obstacles in the way of free-flowing trade to Korea – and on the other side, Koreans have been smashing up THEIR OWN Japanese cars, signs being put up in supermarkets saying that customers should not buy Japanese products – and sales of Japanese beer and cigarettes have ceased in recent weeks – while petrol stations and garages aren’t allowing Japanese cars fill up or be serviced. Even the number of flights between the countries are being cut and there is growing pressure for a complete travel ban. * SO WHAT? * China will be loving the whole Japan/Korea thing and they will no doubt stoke tensions in order to get at Trump as part of the ongoing US-China trade tensions. The problem with the latest flare-up is that it looks unlikely to abate anytime soon as Japanese are giving their PM Abe a hefty 71% approval rating on the one side and the Koreans seem to be surfing a growing wave of nationalism on the other that will be increasingly difficult to unpick. Just so you know – and I know how

basic this is going to sound, but bear with me – Japanese are taught about WW2, but textbooks (which are approved by the government) are light on details in terms of what they did to other countries like China and Korea when they occupied them (e.g. chemical weapons testing on civilians, forcing Koreans to adopt Japanese names and speak Japanese, forcing Korean women into prostitution for the “use” of Japanese soldiers etc.) whereas Koreans are taught from a young age what Japan did to them. This leads to Japanese being in a near state of denial, while Koreans continue to feel deep-seated bitterness. Right now, this is driving a massive wedge between the two countries that could have implications on the whole region. Ultimately, I think that Japan will lose out because Korean companies such as Samsung and LG etc. will be looking hard at their supply chains and will plan to de-emphasise reliance on Japan. Other countries in the region could benefit as a result.

Gold rises to $1,500 an ounce for first time in six years (The Guardian, Sean Farrell) highlights new heights for the precious metal as investors buy into “safe haven” assets. Gold is considered such an asset because of its intrinsic value and is thus where people park their money when stock markets and economies are looking a bit iffy. * SO WHAT? * The gold price has now risen by 17% so far this year as US-China trade tensions continue to grow and other economic indicators around the world – such as German industrial production cuts, interest rate cuts in New Zealand, India and Thailand – spooked investors. As you may know, Bitcoin is also being seen increasingly as a sort of safe haven asset, but I just don’t know why considering that every other such asset has intrinsic value whereas Bitcoin has nothing! 

Meanwhile, closer to home, House price growth is slowing, says Halifax (The Times, Gurpreet Narwan) cites the latest figures from Britain’s biggest mortgage lender which show that house price growth is losing momentum. Having said that, Howard Archer, chief economic adviser to the EY Item Club, put a positive spin on things when he said “should the UK leave the EU with a deal at the end of October, we believe reduced uncertainty and modestly improved economic activity could see house prices rise by around 2 per cent over 2020”. * SO WHAT? * Interestingly, different data series have painted varying pictures of the UK housing market, with Nationwide, Halifax and Office for National Statistics all having their nuances (e.g. Nationwide has a more southern bias and Halifax has a more northern one) but overall, the UK housing market appears to be slowing down.

Staff shortages trigger pay rises (Daily Telegraph, Tim Wallace) is a heartening headline for workers as a report by the Recruitment and Employment Confederation and KPMG shows that skills shortages are translating into employers paying higher wages to retain existing staff and attract new ones. Job vacancies are rising, but there just aren’t enough candidates to fill them – with IT and computing being particularly starved of the right people.

Walgreens cuts pharmacies and Debenhams gets a doctor in the house…

Walgreens to close 200 American pharmacies (The Times, James Dean) shows that Boots’ American owner, Walgreens Boots Alliance, has announced that it will close 200 stores in the US as part of a cost-cutting drive in a global restructuring. Walgreens has 18,500 shops in 11 countries but makes most of its profits in America. However, it’s suffering at the moment because of falling prices of generic drugs (which are less profitable). * SO WHAT? * OK, so it already announced 200 closures of

Boots pharmacies in the UK as well as 350 job losses at its Nottingham HQ but given that things aren’t sounding much better for the company I wouldn’t have thought that’d be the end of it.

Troubled Debenhams calls in doctor (The Times, Robert Miller) is quite an interesting development for the terminal troubled department store as it has decided to replace the executive chairman, Terry Duddy, with turnaround specialist Stefaan Vansteenkiste when Duddy departs next month. * SO WHAT? * The fact that they went for a “company doctor” rather than a retail veteran would suggest to me that the company is going to undergo some serious surgery. I suspect the new guy will be sizing up the assets with an eye to maximising returns on a break-up – but that’s just my opinion.

FedEx halts Amazon ground deliveries, Continental looks to an electric future, Lyft adds users and Diageo buys alcohol-free…

FedEx to end ground deliveries for Amazon (Wall Street Journal, Paul Ziobro and Dana Mattioli) heralds a historic moment for FedEx as it announced that it was ending its contract with Amazon, deciding to create space in its trucks to deliver other companies’ goods. The current contract expires at the end of this month and shows that the company is positioning itself to be the main carrier for Target, Walmart – and any other retailer that wants to take on Amazon. * SO WHAT? * This sounds dramatic, but then according to the parcel consulting firm (I never knew such a thing existed!) SJ Consulting, Amazon used its own drivers to deliver 45% of its July orders, the US Postal Service for 28% and UPS for 21%, with FedEx not getting any deliveries last month. I suspect that other delivery services will be looking at broadening their exposure to retailers other than Amazon given that Amazon continues to pour money into improving its own logistics network.

Continental to make big switch to electric vehicles (Financial Times, Myles McCormick) highlights the aspirations of Europe’s largest listed auto technology supplier as it said that it would stop investing in the production of injectors and pumps for petrol and diesel engines and switch to making parts for electric vehicles. Andreas Wolf, head of its power-train division, said that “Our customers are increasingly turning to the electrification of drive systems, so we are concentrating systematically on this area”. * SO WHAT? * Will this be too little too late? The fact is that this company had two profit

warnings in 2018 followed by another one last month that also came with a massive cut in its full-year forecast – so you get the feeling that it is clutching at straws. Nice (but late) move strategically, but EVs still make up a tiny percentage of cars sold, so aligning yourself with this sector of the market while car sales continue to decline on a global basis is like p!ssing in the wind IMHO. More disappointment to come, I suspect…

On a positive note, Lyft raises 2019 outlook and sees smaller annual loss (Wall Street Journal, Eliot Brown) shows that things are going quite well for the San Francisco-based ride-hailer as its user numbers increased, powering its share price up by 11% initially in after-hours trading yesterday. * SO WHAT? * Good news for Lyft but, like rival Uber, it’s still far from profitable. The respective market shares are largely unchanged (Lyft had 28% market share in the US in June and Uber had 70%) and Lyft’s share price is still “under water” at about $60 versus the $72 a share it floated at. Surely, fares need to increase over the longer term to even stand a chance of profitability, but as long as they are trying to maintain and grow market share I don’t think this will happen any time soon.

Diageo gets into spirit of non-alcoholic drink (The Times, Ashley Armstrong) shows that the distilling giant is continuing its efforts to broaden its non-alcoholic beverage offering by buying a majority stake in Seedlip, whose non-alcoholic clear spirit is derived from herbs, peas, hay and botanicals and is designed to be a gin/vodka substitute. A bottle of this stuff can set you back over £25 – more than bottles of Bombay Sapphire or Hendrick’s. * SO WHAT? * Given that fewer people are drinking these days, according to the latest figures from the Office for National Statistics, and that people continue to have a thirst for gin, Seedlip ticks both boxes quite nicely. Hardly a transformative deal for the giant, but a sign of more non-alcoholic things to come in this space! 

And finally, in other news…

I thought I’d leave you today with This is the most expensive burger in the world (The Daily Meal, Dan Myers https://tinyurl.com/y36rxz3x). Perfect for if you are feeling flush (and hungry!).