Thursday 10/03/22

1. In BIG PICTURE NEWS, Russia bombs a hospital, markets rally, nickel faces further suspension, fracking is back on the table and crypto gets a boost
2. In ACTIONS & CONSEQUENCES, we see who’s pulled out and who’s still in and consequences for aviation and Chinese smartphones
3. In MISCELLANEOUS NEWS, Stagecoach ditches National Express’s offer and ESG investment looks likely to change
4. AND FINALLY, I bring you the cheesiest ad ever and a questionable supermarket shopping “hack”…

So Russia’s attack continues while markets and commodities respond and crypto gets a boost…

📢 It’s Thursday – so it’s time for the one hour weekly ZOOM call for SILVER and GOLD subscribers. *** THIS CALL WILL RUN FROM 6PM TILL 7PM ***. In this call, I will do a round-up of the week’s news and then open it up to questions from you. After that, depending on how much time we have, we will also debate the following:

• What do you think professional service companies that have pulled out of Russia will do after this war?
• If you were head of ESG investing at an investment management firm, how would you change your strategy now?

You can just listen into the debate if you want to, but I thought I’d give you the heads up on topics for if you would like to engage. You will definitely get more out of this call if you take part in the debate, though 😜!

The crisis in Ukraine is beyond words. Many stories that we see now of tragedy, sacrifice and loss make everything else pale into insignificance. However, I will continue to bring you news on this and everything else in the business and financial markets news because it may well have repercussions that have major consequences for us all and that we still need to understand better.

Ukraine accuses Russia of Mariupol hospital bombing ‘atrocity’ (Financial Times, Guy Chazan) highlights accusations that Russia breached a ceasefire and reduced a hospital to rubble with ongoing bombing campaigns. The port city of Mariupol has been hit particularly hard as its citizens try to shelter without water, heat, sanitation or a phone network. The death toll continues to climb and pressure on the world intensifies regarding finding the least violent end to the war.

Meanwhile, Stocks rally as commodity prices dive (The Times, Tom Howard) shows that European stocks had a bit of a rebound after a torrid few days Shanghai halts trading of key nickel contracts in wake of LME suspension (Financial Times, Neil Hume, Philip Stafford and Hudson Lockett) highlights the suspension of more than half of the nickel contracts traded in mainland China on the Shanghai Futures Exchange not long after the London Metal Exchange suspended trading until at least the end of this week as price volatility went crazy. Things are getting so desperate right now regarding the oil price – and concern about where we’re going to get it from in the future given current conditions – that all options are being considered as per Boris Johnson opens door to fracking in response to Ukraine war (Financial Times, Jim Pickard, George Parker and Nathalie Thomas). It seems that hitherto reticence about fracking for shale gas in the UK could dissipate in a new energy plan to be drawn up by BoJo designed to wean us off reliance on Russian oil imports.

I thought that it was also worth noting Bitcoin jumps 11pc after regulation revamp (Daily Telegraph), which says that the sudden rise in crypto (including Bitcoin, Ether and Monero) was due to an announcement by US Treasury Secretary Janet Yellen that there would be a “historic” overhaul of crypto regulation. A number of federal agencies are under orders to research a number of crypto-related topics, which was interpreted by crypto fans as a move to work with crypto operators and not against them. * SO WHAT? * As with pretty much all explanations related to why cryptocurrencies move, I think that this sounds VERY tenuous! There’s absolutely no detail on how this might go and what the rules might be. It is WAY too early to get excited about this as a driver of crypto IMO. I think a more realistic interpretation here would be that crypto has been taking a pasting during this war and proved that it isn’t really a “safe haven” asset as some were touting when things go wrong (unlike gold, which has been a very strong performer). This latest statement offers the faintest glimmer of news about crypto and investors were looking for an excuse to hop back on the crypto fun bus.

More companies pull out of Russia and consequences of sanctions continue to bite…

In ACTIONS, if you can have a look at the full version of this article you should do so but How Western companies in Russia are responding (Daily Telegraph, Matt Oliver) does a great job of listing who’s leaving Russia and who’s staying as more companies take a stance on Ukraine. It’ll take me too much time to do it this morning to post this edition of Watson’s Daily at a decent time, but I’ll send you all a spreadsheet with a few extras on it to give you the picture – so please bear with me and look out for it in your inboxes! City law firms shutter Russian offices (The Times, Jonathan Ames) shows that another three law firms – Freshfields Bruckhaus Deringer, Eversheds Sutherland and Gowling WLG – have decided to shut operations in Moscow and St Petersburg and Amazon joins boycott by stopping deliveries and streaming (Daily Telegraph, James Titcomb and Matt Oliver) shows that the e-tailer has effectively shut down its services in the country but Russia/US brands: cutting business ties is easier said than done (Financial Times, Lex) points out that much of the “exodus” is just mothballing and that actually pulling out of the country on a more permanent basis will be more difficult because Moscow has put in place a temporary ban on foreign investors selling foreign assets – so they will be in limbo until we get some kind of resolution. * SO WHAT? * I do, however, think that the longer this war goes on for, the longer the sanctions are going to last and even if sanctions are dropped as part of a negotiation, there will be a lot of reticence about doing business in the country. On the other hand I also think that, especially for high profile professional services companies, it is possible for them to make a return by ditching their famous names in Russia and renaming local operations with something suitable neutral or Russian-sounding. I think that there will be a huge amount of M&A going on in Russia when this war ends because many companies will have been decimated by sanctions and you just know that law firms, accountants and management consultants etc. will want to earn big fees to advise on these deals. If they don’t have a seat at the table, they just won’t be able to take part in the feast…

In CONSEQUENCES, Russian invasion and soaring oil prices shake airline industry (Financial Times, Philip Georgiadis and Steff Chávez) shows that airlines are now facing yet another massive air pocket as oil prices hitting 14-year highs are hitting fuel prices. Execs from companies

including Ryanair and Lufthansa have been pretty downbeat about their prospects but Wizz Air is in particularly dire territory because it has stopped hedging completely (basically, this involves airlines betting on future price movements to mitigate short-term price volatility and usually helps to limit risk), meaning that it was completely exposed to volatile oil prices although it reversed this stance on Monday. Fuel can account for up to 35% of airline operating costs – so current price moves are extremely painful. Still, Summer will take off again for us, says Gatwick boss (The Times, Robert Lea) shows that the chief exec of Gatwick Airport is talking a good game as he outlined plans for the airport to return to 85% of its full capacity this summer as airlines remain hopeful for a summer rush. * SO WHAT? * Gatwick is expected to fare better than Heathrow because of the latter’s reliance on long-haul (which is more likely to be negatively affected by rising fuel costs, a reticence of customers to fly long distances during a war and the slow recovery of business travel) but I still think that hopes are overblown for the second half because customers are seeing household budgets being squeezed by rampant inflation as rising prices everywhere you look take their toll. Yes, we all WANT to get away from it all, but will households have a bit of a wobble after a few incredibly expensive utility bills and postpone travel plans? After all, it’s much easier now to cancel bookings than it was pre-Covid.

Chinese smartphone shipments to Russia plunge as rouble collapses (Financial Times, Sun Yu and Edward White) is a really interesting article which shows that China’s smartphone makers might actually have more trouble than you’d think in basically back-filling the hole being left by foreign firms leaving Russia. Smartphone makers such as Huawei, Oppo and Xiaomi have been cutting their shipments to Russia considerably (50% or more in some cases) due to the collapse of the Rouble and western sanctions despite China and Russia being BFFs. Given that Chinese brands make up around 60% of the Russian smartphone market, this is a big deal. * SO WHAT? * A rouble collapse means that it has become increasingly difficult for Chinese companies to sell their products at a profit because they have to charge Russian customers a much higher price in roubles to make up for the shortfall in the exchange rate, which isn’t great for the Russian consumer given current circumstances. As Western sanctions grow, it is becoming increasingly likely that secondary sanctions will be imposed on Chinese companies if they are seen to be benefiting too much from selling into Russia, hence the reticence from the companies’ side in getting too excited.

Stagecoach ditches National Express’s offer and ESG investment looks likely to change…

In other news, Stagecoach cancels domestic merger to accept German bid (The Times, Robert Lea) shows that Stagecoach has decided to go with another suitor in the form of German fund manager DWS. It is a higher offer than National Express were prepared to pay, is all in cash (unlike National Express’s offer, which was all in shares) and will potentially stand a better chance of getting past the competition regulator, so it sounds to me like a no-brainer for brother-and-sister Sir Brian Souter and Dame Ann Gloag. At this moment it looks like National Express will not come back with a counter-offer. I wonder whether we will see a raft of consolidation in the UK of bus/train companies in response to this as many operators have been weakened considerably over the pandemic due to passenger numbers falling off a cliff.

Then in Ukraine war prompts investor rethink of ESG and the defence sector (Financial Times, Peggy Hollinger) we see that ESG investing is likely to take a bit of a change in direction due to Russia’s invasion of Ukraine. Just one year

after Sweden’s SEB bank announced a new sustainability policy that cut out any defence stocks from its funds, it has now said that, from April 1st, six funds will be allowed to buy into the defence sector. Spending on defence is a necessity, says L&G chief (Daily Telegraph, Simon Foy) echoes this sentiment. * SO WHAT? * It is a shame that it has taken a war on our doorstep to prompt investors to see the benefits of the defence sector. With Germany announcing a major boost in defence spending and other countries doing the same (or at least considering it), it makes a lot of sense to lift restrictions on investing in companies that are involved in the industry. It always seems to me that many people assume ESG investment is relatively straightforward with things like tobacco companies being “bad” and electric vehicle companies being “good”, meaning that you can invest with your conscience. The problem is that it is not as clear-cut as that. For instance, are EVs actually all that “good” for the environment? Gigafactories are built in the middle of nowhere, which requires huge environmental disruption and they use materials in batteries that come from questionable sources or via questionable means (e.g. use of child labour etc.). As far as I am concerned, as with many things, it’s all shades of grey when it comes to ESG investment and I think that current circumstances have shown the need for investors to retain a flexible mindset.

…in other news…

I thought I’d bring you an interesting yet unbelievably cheesy Japanese ad in A self-driving car that delivers ramen is Nissan’s newest automotive innovation (SoraNews24, Casey Baseel). I think we’d all need some wine to go with this cheese! There is some tremendous acting going on here. However, I couldn’t help but notice that the car was not filmed going around the curved bit of the restaurant counter…and then there’s a supermarket “hack” that is bound to raise eyebrows in Woman’s ‘genius’ suitcase shopping hack leaves shoppers in hysterics (The Mirror, John Bett). TBH, I think that this is a good idea in theory but is not good for people who are self-conscious 🤣. As it is, I go shopping with a clipboard (yes, I know you think I’m weird) and get funny looks so I think dragging a suitcase around with me would be a step too far…