Thursday 15/11/18

1. In MACROECONOMIC NEWS, the Eurozone slows, Italy continues to rebel, Sweden can’t agree on a Prime Minister, the Brexit treaty is ready for debate and UK inflation stays steady
2. In UK HIGH STREET NEWS, woes at House of Fraser and Debenhams continue, there’s a U-turn on fixed-odds betting terminals and British Land suffers retail fallout
3. In INDIVIDUAL COMPANY NEWS, Tencent’s profits shine despite games restrictions, Uber slows down and Macy’s reports solid sales growth
4. In OTHER NEWS, I show you how to celebrate New Year’s Eve TWICE and some impressive Rubik’s cube art. For more details, read on…

So Europe’s in a tizzy, a Brexit deal gets hammered out and UK inflation is flat…

Wow! It’s all going on in Europe at the moment, eh?! Fall in German output adds to slowdown in eurozone growth (The Guardian, Angela Monaghan and Larry Elliott) highlights Germany’s first economic contraction for three years as weaker car sales, lower consumer spending and sluggish exports made the eurozone’s biggest economy contract by 0.2% in the third quarter of 2018, which had the effect of dragging down EU growth from 0.6% to 0.2%. Goods exports account for 40% of Germany’s GDP (way more than #2 economy France and #3 economy Italy), which makes it more vulnerable to the current US-China tariff shenanigans.

As if that wasn’t bad enough, Italy remains defiant over government budget plans (Financial Times, Miles Johnson and Mehreen Khan) shows that the populist coalition government is standing firm on its refusal to bow to European Commission pressure to change its anti-austerity budget, meaning that it will be slapped with sanctions from Brussels like a fine of up to 0.5% of GDP. If imposed, it would be the first time for Brussels to enforce such a measure.

This is then compounded by Sweden’s parliament rejects centre-right candidate for PM (Financial Times, Richard Milne) which shows that the country’s parliament has just rejected a prime ministerial candidate for the first time in modern history. Sweden’s normally rock solid stability is being buffeted by anti-immigration forces which have continued to divide opinion causing some observers to conclude that new elections are a real possibility.

* SO WHAT? * Europe is in a right two-and-eight at the moment, don’t you think? Anti-immigration and far right forces seem to be gathering momentum once more, eurozone growth is slowing down by pretty much any measure you care to mention, the eurozone’s engine of growth – Germany – is having an existential crisis with a weakened leader and fractious government, Italy is threatening to destabilise the whole bloc by ignoring orders not to spend its way out of its economic rut and even the formerly “safe” Sweden is having problems. On top of that, you’ve got an ECB which is feeling increasing pressure to reverse its decision to relax QE (which will be very

embarrassing for them) and then, of course, you have Brexit – not to mention the mother of all trade wars with the US and China. I’ve always thought that QE was masking a whole load of underlying problems and it seems that a lot of them are coming to the fore right now. Also, it seems that the tide of extreme right-wing anti-immigration populist parties is returning once more – but this time the eurozone is in a much weakened state. Will all of this discord have come in time for Theresa May to negotiate something decent? Or is she going to let this opportunity of a weakened opponent go begging??

There’s going to be a ton of comment on this, but for the moment, I thought that Brexit treaty: what the EU and UK have agreed (Financial Times, Alex Barker) would be a good place to start and have less “noise”. March 29th next year is Brexit day and the Brexit withdrawal treaty will be the only legal agreement with the EU after 45 years of deep integration. This Brexit deal has to get approval from the UK cabinet, then an EU summit, then the House of Commons and, finally, the European Parliament. It will decide how Brexit is conducted and what the future relationship with the union will look like. In terms of financial settlement, Britain will probably have to pay Brussels somewhere between €40bn and €60bn and will have to pay into EU budgets for 2019 and 2020 as if it were still a member. Regarding citizen rights, the agreement protects all existing EU residence and social security rights of over 3m EU citizens in the UK and about 1m UK nationals living on the continent. The agreement also outlines a transition period for the UK until the end of 2020 which can be extended by mutual agreement which will leave us subject to EU rules but have no say in making them. Northern Ireland is obviously one of the big sticking points, but the agreement will protect the peace process and avoid a hard border between the Irelands, allowing free circulation of goods. There are obviously loads more things in this treaty, but I just thought I’d give you some of the main ones.

On the domestic front, Rising energy prices hit families, but weekly shop gets cheaper (Daily Telegraph, Tim Wallace) cites the latest figures from the Office for National Statistics (ONS) which show inflation being held steady at 2.4% as higher energy prices for gas and electricity were offset by lower food price inflation and apparel prices. * SO WHAT? * Well this means that rising wages are likely to be felt in real terms – which is good news short term for shaky consumer confidence. Ultimately, this will feed through to power inflation once more, but it doesn’t look like doing so for the moment.

In UK high street news, department stores House of Fraser and Debenhams continue their downward spiral, fixed-odds terminals get their come-uppance and British Land is another casualty of a tough retail landscape…

Hundreds of jobs to go as stores crisis deepens (The Times, Dominic Walsh) heralds the closure of four more House of Fraser stores after Mike Ashley, chief exec of Sports Direct which now owns the struggling retailer, decided to swing the axe after being unable to come to an agreement on rent with landlord Intu, which owns stores in Lakeside in Essex, the Metrocentre in Gateshead and two other sites in Norwich and Nottingham. Ashley warned that “We had multiple meetings with Intu, but we were no further forward after 14 weeks. Unfortunately, these stores now face closing in the new year. I urge other institutional landlords to be proactive to help save the [House of Fraser] stores in their schemes”.

And it’s not only House of Fraser that’s suffering as Debenhams’ woes deepen as suppliers abandon chain (The Guardian, Rob Davies) shows that Debenham’s share price fell by over 21% yesterday following reports that it was being shunned by suppliers. This was the biggest one-day share price drop for the retailer in over ten years. The shares closed yesterday at 5.27p versus 40p a year ago and over £1 five years ago. One supplier said “They owed us so much money at any one time, we decided it was too risky” and another supplier said that it had become more cautious on doing business with Debenhams because of the financial hit it took recently on doing business with House of Fraser.

* SO WHAT? * UK department stores are continuing down the road to terminal decline as they are currently failing to change fast enough to match evolving customer behaviour. Landlords are getting increasingly jumpy about being forced into accepting lower rents to keep retailers afloat and it is starting to really weigh on them as per British Land laid low by high street woes (The Times, Louisa Clarence-Smith) where British Land is being adversely affected by the corresponding fall in the value of its properties. Landlords face a conundrum – do they take their trousers down and accept far worse terms or do they chance it to entice new tenants? I think that if I was a landlord, it’d obviously be painful to let a department store go, but then again if I had the money I would use the opportunity to redevelop and change the identity of my space. Ideally, I’d be looking to attract retailers that need a lot of square footage in city centres – what about Ikea, for instance? They are currently on the lookout as they are changing their out-of-town model – but you just don’t know do you. Other than that, I think that it would be wise to split it up into smaller units and maybe even consider converting it into more residential or office space.

I also thought it was worth mentioning Theresa May signals climbdown over fixed-odds betting terminals (Financial Times, Jim Pickard) as this is an important U-turn that will cut the maximum stake of fixed-odds betting terminals from £100 to £2 from April 2019, overturning a decision outlined in the recent budget to delay it by six months which had been a victory for betting industry lobbyists. * SO WHAT? * The gambling industry has said that this move will result in mass job losses, but TBH, the gambling industry has been in a right state anyway and delaying the cap on FBOTs was just briefly postponing the inevitable. Gambling companies are currently looking closely at the opportunities in America anyway as a new source of revenue after a recent change in the laws.

Tencent unveils profits despite having its wings clipped, Uber has a slowdown and Macy’s reports strong sales growth…

Tencent profits top estimates despite China’s games ban (Financial Times, Yuan Yang and Louise Lucas) shows that it’s still possible to thrive as it unveiled a very healthy 31% rise in profits for the third quarter after online advertising, mobile payments and cloud services helped to mitigate the impact from the Chinese government’s crackdown on new internet games. It was also helped by a whopping 81% net gain from its investments in things such as Meituan Dianping, the food delivery and ticket booking app that listed in Hong Kong in September. Having said that, the company’s gaming division has slowed down somewhat due to the government crackdown on new releases and time spent playing online games as its revenues now accounted for around 25% of turnover in the third quarter versus 40% last year. Still, Tencent is marching on regardless and Douglas Morton, head of Asia research at Northern Trust Capital Markets, contended that “Advertising is the absolute blue sky for Tencent in the long run – the options are vast, especially compared with Facebook”. * SO WHAT? * The company’s share price has fallen by 43% since its peak at the beginning of this year, so maybe investors will look at it less harshly now that it has shown it can generate a lot of cash elsewhere despite its gaming division being in a bit of a holding pattern right now. Its potential in advertising may also be enhanced by observing Facebook’s woes from afar and implementing any lessons learned.

Then in Uber posts slower sales gains, widening loss as it prepares for 2019 IPO (Wall Street Journal, Greg Bensinger) we see that the ride-hailing company announced a pretty solid 38% jump in revenues in the third quarter, which only looked disappointing because it had a 63% year-on-year jump in revenues in the second quarter.

The company continues to consolidate its finances by tidying up its expenses and disposing of unprofitable business units ahead of its proposed IPO next year. It is concentrating efforts in food, freight, electric bikes and scooters and investing in the potential growth markets of India and the Middle East.

In direct contrast to what I’ve said above re House of Fraser and Debenhams, Macy’s reports strong sales growth, raises guidance (Wall Street Journal, Suzanne Kapner) shows that it is possible to survive as a department store as it announced solid sales growth for the quarter and raised guidance for the full year. The shares fell by 2.4% in morning trading but then again they have shot up by 85% over the past year, so investors can be forgiven for taking some money off the table. Chief exec Jeff Gennette said that the company was seeing improved results both online and offline and increased sales by double digits versus a year ago. * SO WHAT? * What are they doing that our department stores aren’t? They’re bringing in measures that enhance the retail experience and appeal to their customers’ changing behaviour, that’s what! They have rejigged stores into renovated “magnet” stores, added a discount concept to their existing offering (called “Backstage”) and rolled out new ways for their customers to shop – including allowing them to order online and pick-up in store. Shoppers tend to spend an additional 25% when they pick up their online orders in-store, so this has been an important development. This is great, don’t you think? It just goes to show what can be achieved if a department store really listens to its customers and adapts appropriately. According to research firm GlobalData Retail, two-thirds of Macy’s customers rate their shopping experience with the retailer as good or very good – up from 59% a year ago – so clearly they are doing something right!

*** BY THE WAY – HAVE YOU SEEN BITCOIN’S MASSIVE FALL?? I’ll try to find the reason and get back to you on it. ***

And finally, in other news…

Do you love celebrating New Year? Do you have 20 grand knocking around that you don’t know what to do with? Well then I would suggest you take a look at this – it sounds pretty awesome: Celebrate New Year’s Eve twice with a £20,000 flight from Toyko to Las Vegas (Metro, Faima Bakar https://tinyurl.com/y8knwylz).

Failing that, maybe you feeling like sitting back and admiring the artistry in the video on Artist painstakingly creates giant portraits of celebrities using hundreds of twisted Rubik’s cubes (Daily Motion, https://tinyurl.com/y7d4e3tl). Wow!