Thursday 20/02/20

1. In MACROECONOMIC NEWS, UK inflation hits a 6-month high, UK house prices rise across the UK and we look at the winners and losers from the new immigration laws
2. In INDUSTRY-WIDE NEWS, Big Tech faces data changes, cord-cutting increases and the cruise industry faces big problems
3. In RETAIL NEWS, Victoria’s Secret goes private and Laura Ashley gets a lifeline
4. In INDIVIDUAL COMPANY NEWS, Qatar buys into IAG, Adidas and Puma warn over coronavirus fallout and Metro Bank gets a chief
5. In OTHER NEWS, I introduce you to a talented 6-year old…

So UK inflation and house prices rise while winners and losers emerge from the new immigration rules…

UK inflation hits six-month high as petrol and energy prices rise (The Guardian, Phillip Inman) cites the latest figures from the Office for National Statistics which showed a rise in inflation to 1.8% in January thanks to higher petrol prices and cumulative increases in the cost of gas and electricity over the last year. The rise of 1.8% was above consensus forecasts of 1.6%, bringing it closer to the Bank of England target of 2%. * SO WHAT? * Inflation fell in December to 1.3% – its lowest rate for three years – prompting speculation of a possible interest rate cut to encourage spending. However, given this latest figure and an apparent pick-up in business confidence since the election, you would have thought a cut would be unlikely at the next meeting of the Bank of England’s Monetary Policy Committee (MPC) in March.

House prices rise in every region of UK for first time in two years (The Guardian, Phillip Inman) cites house price data from the Land Registry which shows that average annual house prices increased by 2.2% in December, versus an increase of 1.7% in November. It was also the first month since February 2016 that prices went up in all regions. Separately, the Office for National Statistics observed that slowing house price growth since the 2016 referendum started to reverse last summer in the north and east of England. Recent sales data from Nationwide and Halifax also seem to back this up while the latest Bank of England stats showed that mortgage approvals for house purchases shot up in December to their highest monthly level since July 2017. * SO WHAT? * This is all good news for sellers, but it’s also not too bad for buyers either as there will be more choice in the market and mortgages are still pretty cheap (although they are getting more difficult to get). Still, I think that this initial euphoria following the

election will calm down as the complexities of Brexit negotiations hit. It will be interesting to see whether the upcoming Budget does anything to encourage property buying activity.

Picking winners and losers under new UK points-based immigration system (Financial Times, Robert Wright) looks at the new immigration rules announced yesterday and identifies some of the winners and losers from this new system which gives potential immigrants points based on language ability, job offer (the job has to pay above £25,600 per annum – which is less than the current limit of £30,000) and academic qualifications. So who are the winners? The tech industry, for starters, which brings in highly paid staff from India, the US and others from outside the EEA. Makers of equipment that can automate certain jobs (thus reducing staff overheads) may also benefit – so there may be more tablet computers taking restaurant orders and dealing with customers at check-in desks, but the scope for this is limited at the moment. On the other hand, losers include the social care sector where many employers are restrained in terms of what they can pay by funding they get from the central and local government – so this will make attracting staff trickier. The meat processing industry also looks like it will have difficulties as 70% of its employees are currently from EEA countries and don’t have the academics that meet the new standards for the most part. The agricultural sector is also likely to suffer as it tends to employ low-paid staff without much in the way of qualifications. * SO WHAT? * Given that the rules have only just been introduced, I suspect that more winners and losers will emerge. Overall, I think that this will mean that existing employees may well see their wages rise because employers will surely want to hang on to them but the problem is that, especially in an environment of super-low unemployment, many potential UK employees will avoid poorly paid jobs in unattractive environments/sectors because there are just more jobs elsewhere. I think that huge problems will emerge from this and the government will have no choice but to increase the number of categories in the “shortage occupation list”, where applicants will receive preferential treatment, further down the line.

Big Tech faces data backlash, cord-cutting is on the rise and the cruise industry looks very difficult…

Big Tech will have to share data under EU proposals (Financial Times, Javier Espinoza, Madhumita Murgia and Richard Waters) highlights proposals from the European Commission which will force big tech companies to make their data available to smaller rivals. The document, entitled European Strategy for data, pushes for more pooling of data and suggests that previous EU directives could be revised to reclassify what constitutes a trade secret. The EC argued that tech companies have built enormous advantages over competitors by guarding their data – and so want to move towards what happens in the banking and car industries where everyone has to share customer information. * SO WHAT? * At the end of the day, everyone knows that big tech harvests enormous amounts of data from customers and the advantage that it gives them effectively stifles any meaningful competition. Trump may well whinge that Europe is targeting US companies unfairly and that they are being punished just for being good at what they do – but if Europe does nothing to stop Big Tech’s onward march on the data front, everyone may as well just pack up and go home. IMO, Big Tech will try and stretch things out as long as possible to enable it to continue to collect as much data as possible but eventually something will have to be done. If Europe stands firm on this matter, the companies will have to change – but at the moment the details are unclear. I think that this is the warning shot, to be followed up with more salvos later. The EC’s Margrethe Vestager has form in taking on the big companies, so if anyone can, Margrethe can!

Cord-cutting accelerated in 2019, raising pressure on cable providers (Wall Street Journal, Lillian Rizzo and Drew Fitzgerald) shows that the pace of customers abandoning traditional pay-TV packages accelerated by over 70% last year in the US. Prices for satellite and cable contracts continued to rise while the number of cheaper streaming services continued to proliferate. Cable TV providers such as Comcast, Charter Communications and Altice lost around 1m pay-TV customers in 2019 while satellite providers did even worse as AT&T’s DirecTV lost

3.4m customers and Rival Dish Network lost 500,000. * SO WHAT? * “Traditional” providers are having to increase prices because of the rising costs of content. Matters are made even worse for them because more streaming services are coming online with deep-pocketed backers who don’t mind losing a ton of money in order to build a big customer base quickly. Netflix was bad enough – and then came Amazon, Hulu and now Disney+ and Apple TV+, soon to be followed by Comcast’s Peacock and AT&T’s HBO Max later this year. I think this is a golden age for customers – but reality will certainly hit a few years from now when these ventures have to start making money. As I keep saying, I believe that consumers will hit “peak subscription” at some point (probably when economies start to go downhill and people start reining in their extraneous spending) at which time I would expect the streamers to consolidate. However, I think it will be a few years before that starts to happen!

Coronavirus: cruise industry caught in the eye of the storm (Financial Times, Alice Hancock) highlights the difficulties facing a sector worth $45bn as two cruise ships, the Diamond Princess and Westerdam (both owned by Carnival Corporation), are in the news on a daily basis with trapped holidaymakers and staff, chipping away at consumer confidence. So far, over 50 cruises have been cancelled, seven ports have been shut down and thousands of holidaymakers have faced disruption. Share prices of the major players in the industry – Carnival, Royal Caribbean and Norweigian Cruise Line – have fallen between 10% and 16% since the beginning of the year and they have all admitted to weaker bookings since the outbreak began. * SO WHAT? * Asia is a small market with big growth potential – especially in China – so this will certainly hit hard at least in the short term. Compensation costs are likely to be painful, but the other thing is that most major cruise lines do not have commercial insurance to cover the latest outbreak because premiums that cover such things are extremely expensive. I am stating the bleedin’ obvious here but the longer it takes to contain the coronavirus, the worse it will be for the industry and the more they will have to spend to get back on an even keel. This will have to come in the form of advertising, increased measures to reassure passengers that their health is not at risk and cheaper prices. I would have thought that there will be lots of incredibly cheap deals for cruise holidays coming up this year – especially for rooms that have no windows.

Victoria’s secret is to go private and Laura Ashley gets a lifeline…

Victoria’s Secret to go private at $1.1billion valuation (Wall Street Journal, Khadeeja Safdar and Cara Lombardo) heralds a major development for the lingerie retailer as its owner, L Brands, is close to selling 55% of the company to private equity firm Sycamore Partners – who is expected to then take the company private. * SO WHAT? * L Brands has been selling off a number of its brands in the last few years to raise cash and Sycamore Partners has been hoovering up a number of poorly

performing apparel brands including The Limited, Hot Topic, Nine West and Staples in an effort to make a huge profit after staging a turnaround. Victoria’s Secret has seen falling sales over the last few years, so maybe a new owner is just what it needs right now.

Laura Ashley agrees emergency funding deal with Wells Fargo (The Guardian) heralds a stay of execution for the clothing and furnishing retailer as it now has enough funds to meet its immediate funding needs via its bank and not from Malaysian firm MUI Asia, with which it had been holding talks. * SO WHAT? * Stay of execution or are Wells Fargo just rearranging the deckchairs on the Titanic?? Sorry to be harsh, but I think Laura Ashley is way past its heyday and that the only way out would be for someone else to buy it. But who would do that now?? 

Qatar buys a chunk of IAG, Adidas and Puma warn on coronavirus and Metro Bank gets a full-time chief…

In a quick scoot around other news that hit the headlines today, Qatar spends £450m to bag 25pc stake in BA’s owner IAG (Daily Telegraph, Oliver Gill and Simon Foy) shows that state-owned Qatar Airways now owns 25% of IAG, the airlines group that owns British Airways, Iberia and Vueling. This comes as chief exec Willie Walsh is retiring and follows on from the stepping down over the weekend of BA’s COO and head of HR. IAG’s share price rose by 1.6% yesterday, but it has shot up by over 50% in the last six months! * SO WHAT? * It seems that Qatar is just adding to its interests in foreign airlines as it has already built up stakes in China Southern and Cathay Pacific. It is currently in talks to buy 49% of RwandAir and to take its current stake in Latam Airlines from 10% to 20%.

Adidas and Puma warn of coronavirus sales drag (Financial Times, Philip Georgiadis) shows that both

German sportswear makers (founded by two brothers – but that’s another story) have issued profit warnings, saying that their businesses in China have taken a major beating due to store closures and slower sales. * SO WHAT? * Puma only has 2% market share in China versus Adidas’ share, which is in the high teens, but both companies should recover strongly once the coronavirus calms down. However, no-one knows how long the current slump will last.

Metro banks on restructuring expert for turnaround (The Times, Ben Martin) shows that Dan Frumkin, who has been Metro Bank’s active chief exec since the beginning of the year, has now been appointed to the role on a permanent basis. * SO WHAT? * Metro Bank has had a very rough ride since it admitted to mis-classifying its loan book last year and there has been a senior management vacuum after the subsequent departures of  its previous chief exec and its colourful chairman Vernon Hill. Let’s hope this steadies the ship. I expect there will be pain to come, however, as new management generally like to make some dramatic moves to put their stamp on the business.

And finally, in other news…

There’s been a lot in the news recently about the girl who is about to be our youngest Olympian, Sky Brown, but this Russian girl also looks like she’ll be taking the world by storm: At six, Russian snowboarding prodigy is flying high (AFP, https://tinyurl.com/vw5yrgu). Incredible!!! What do these kids eat for breakfast??? I need to get some for my own two boys (and myself)!