Thursday 25/10/18

1. In MACROECONOMIC AND MARKETS NEWS, Eurozone growth slows, Merkel faces problems, Italy cosies up to Russia, South Africa cuts its growth forecasts and markets give up 2018 gains
2. In AUTOMOTIVE NEWS, Ford disappoints, Tesla delights, Geely and Daimler announce a ride-sharing JV and UK car manufacturing hits new lows
3. In UK HIGH STREET NEWS, Patisserie Valerie faces more problems, GBK puts its hands up, Taco Bell returns to the UK and Debenhams faces a record annual loss
4. In OTHER NEWS, I bring you David Schwimmer’s riposte. For more details, read on…

So Europe’s in a spin, South Africa signals weakness and markets continue to tumble…

There are quite a lot of stories today on a turbulent Europe, so I thought I’d kick off with Eurozone growth at its weakest for two years (Daily Telegraph, Tim Wallace) which cites the latest IHS Markit’s Purchasing Managers Index (PMI) as showing the Eurozone’s slowest rate of growth for 25 months as manufacturing orders fell across the board for the first time since 2014.

The story’s not much better in the Eurozone’s biggest economy with Merkel fights for future as German voters’ mood turns ugly (Financial Times, Guy Chazan) as the upcoming regional elections in Hesse have the potential to spark the beginning of the end for Chancellor Merkel. Her CDU party, which has been in power in the region (which includes the finance capital of Frankfurt) since 1999, is facing voter dissatisfaction and a loss here could further dent her fragile authority and bring into question her leadership of the party. As things stand, it looks like the Green Party is most likely to benefit – as it did in the recent Bavarian elections – further increasing its influence, or as the local party candidate Tarek Al-Wazir put it, “We’re not just the herbs sprinkled on the meal…we are the meal itself”. No doubt the anti-immigration AfD will also benefit from deepening voter dissatisfaction with the traditional parties.

Meanwhile, Italy is trying to rattle European cages in Italy lauds Putin and sets up Brussels battle (Financial Times, Miles Johnson and Michael Peel) as Giuseppe Conte, Italy’s PM, sucked up to Vlad on his visit to Moscow yesterday. Conte’s visit has followed recent visits by deputy PM Matteo Salvini and foreign minister Enzo Moavero Milanesi. * SO WHAT? * Italy has always been the most Russia-friendly country in the Eurozone but the difference now is that the current government is more willing than predecessors to break through the established niceties and stir things up, as they are now doing with their budget spat 

with Brussels. It seems to me that Italy’s government is using the threat of getting closer to Russia to force concessions out of the EU given that they look far more likely than previous administrations to actually do so. The question is whether the EU will cave (at least to an extent) or stay strong and risk Italy going rogue.

Elsewhere, South Africa slashes growth forecasts amid deficit warning (Financial Times, Joseph Cotterill) shows the challenges facing new president Cyril Ramaphosa as his finance minister, Tito Mboweni, cut growth forecasts and warned about a growing fiscal deficit this year in Africa’s most industrialised economy. The country, which fell into recession this year is experiencing lower tax revenues, higher public sector wages and increasing debt from state-owned companies such as SAA, the national airline. Ramaphosa promised to revitalise South Africa after predecessor Jacob Zuma’s corruption-ridden rule but he has encountered resistance from Zuma’s allies in the revenue services and on boards in state-owned businesses. * SO WHAT? * Clearly, this is a work in progress and Ramaphosa has got a lot to do. Potential for privatisations, I wonder?

With all this stuff going on at the moment, Tech-led selloff tears through Asian stock markets (Wall Street Journal, Saumya Vaishampayan and Ben Eisen) is hardly surprising as tech stocks continued to fall in New York resulting in all the gains made in 2018 by the Dow Jones and S&P 500 being wiped out, with Asian markets following suit. Asian tech shares such as Sony, Fanuc (a Japanese industrial robot maker) Samsung Electronics, Tencent Holdings and Alibaba all fell 3-5% as investors fretted about toppy valuations and ongoing uncertainty regarding the US-China trade spat. * SO WHAT? * I know this sounds like a pipe dream at the moment, but when the US and China hammer out some kind of agreement (and they are going to have to), there is going to be one mother of a relief rally IMHO. Investors with balls and a long term horizon will no doubt be loading up right now. Obviously, the devil will be in the detail of any deal (and the timing) but something has to be done as everyone is suffering. We’ve not got long before the US midterm elections (November 6th) and I think that it would be ideal for Trump to get at least something done before then – but this is by no means a given.

In automotive news, Ford disappoints, Tesla delights, Geely and Daimler get together and UK car manufacturing slumps…

Ford profits sink 37% on weak China, Europe sales (Wall Street Journal, Mike Colias) shows the continuation of gloom at the troubled car manufacturer as chief exec Jim Hackett continues in his efforts to turn fortunes around. On the flip-side, America’s #2 auto maker announced particularly good results in North America due to solid truck and SUV sales which helped to push revenues up by 3% – which was above analyst expectations. The shares climbed by 7% on the news, but to put this into context, they are still 35% down for the year and near decade lows. * SO WHAT? * Clearly the domestic market is going quite well, but given that China is now the world’s biggest car market, the company clearly needs to get its act sorted over there. To this end, they announced a new head of China business earlier this week and the overall cost-cutting plan continues apace. Investors are getting impatient for Hackett to unveil more details on what parts of business he will be “right-sizing” but he said that they will get more specifics “in coming weeks and months” because “it’s a massive undertaking”. Fair enough, but you can only use that line for so long.

Tesla motors on with first profit in two years (The Times, Tom Knowles) follows on from what I was saying yesterday as the company revealed after hours that it had turned a profit for the first time in two years (to the tune of $312m in the third quarter) after a very turbulent time marred by production delays and Elon Musk’s erratic behaviour. The results came a week earlier than scheduled and they got a boost as a result. * SO WHAT? * This is clearly great news, but what the company’s achieved has to be consolidated and built upon quickly as the incumbent car manufacturers continue to gain ground in the electric vehicle market. Tesla will also have to address reliability issues as its cars increase in popularity as an annual survey released yesterday by magazine Consumer Reports, which ranks cars based on owner reviews, showed that Tesla fell by 6 places to 27th out of 29 brands.

Geely to launch China ride-hailing venture with Daimler (Financial Times, Peter Campbell) heralds a new joint venture in China offering ride-hailing services. It will offer premium ride-hailing using Mercedes cars initially and then electric Geely models. This is the first collaboration between the two companies since Geely took a 9.7% stake in Daimler back in February this year. Geely already owns Volvo Cars as well as black cab maker LEVC, British sports car maker Lotus and Malasian car maker Proton. It also runs CaoCao, a Chinese domestic ride-hailing operator which has over 17m registered users whilst Daimler owns a number of ventures including moovel and mytaxi, which combined have about 26m customers. * SO WHAT? * This is interesting news as it continues to show substance behind Geely’s overseas ambitions but I’m not sure how successful it will be on the revenue-generation front given that the Chinese domestic market is dominated by one player (Didi Chuxing) amongst a whole host of weeny (in comparison) also-rans. I think that scale is the most important thing in ride-hailing as you have more room to maximise margins, but I guess this move does get them a seat at the table either as a future consolidator or consolidatee.

Meanwhile, back in the UK, Car production at lowest level in three years (The Times, Robert Lea) cites the latest figures from the Society of Motor Manufacturers and Traders (SMMT) which show that car production has fallen by almost 17% due to weakening consumer confidence, plummeting sales of diesels, new pollution regulations and would-be investors holding off because of Brexit uncertainty. The UK car industry employs 170,000 people, is the 11th biggest car manufacturer but is the country that produces the most marques globally. 30% of UK car production comes from Jaguar Land Rover in the Midlands and Merseyside and another 30% comes from Nissan in Sunderland. * SO WHAT? * Given that 80% of UK manufactured cars are destined for overseas, it’s hardly surprising that Brexit is the biggest cloud on the immediate horizon. However, I have no sympathy for the continued bleating from manufacturers about the cratering of demand for diesels. The writing was surely on the wall years ago when various European cities started to ban them from city centres and then they had further warning when the VW dieselgate scandal broke a few years ago. 

There’s more carnage on the UK high street with Patisserie Valerie, GBK and Debenhams facing problems, although there’s some good news for burrito lovers…

In a seemingly never-ending sea of bad news on the high street, Patisserie Valerie owner fights off petition to wind up café chain (The Guardian, Sarah Butler) highlights the company’s continued travails as it is facing a winding-up petition from its principal trading subsidiary as well as a new investigation on share bonuses cashed in by its chief exec and FD amidst its continued battle for survival, Gourmet Burger Kitchen to shut 17 outlets, putting 250 jobs at risk (The Guardian, Sarah Butler) signals the latest restaurant chain going to the wall as it seeks to get support for a Company Voluntary Arrangement (CVA). Fun fact – GBK is owned by South Africa’s Famous Brands, which also owns Wimpey and posh bakery Paul. GBK’s demise follows in the footsteps of Jamie’s Italian, Carluccio’s and Cau.

Having said that, there is hope yet for lovers of casual dining in Burritos back on the menu for Londoners (The Times) as Taco Bell, the Mexican fast food chain, is about to make a return to London after abandoning the capital in the 90s. The chain is owned by New York-listed Yum! and has just given the go-ahead for franchise holders to open restaurants in west and central London before the end of the year. The new outlets will add to the 27 existing outlets dotted around the country.

The news for department stores continues to get worse in Debenhams scraps dividend after £500m loss (Financial Times, Naomi Rovnik) as the company announced a cancellation of its dividend, a full year loss of £500m and the closure of up to 50 of its stores, putting around 4,000 jobs at risk. The shares have fallen by 75% so far this year after a number of profit warnings, and this news ain’t going to do much to change the feeling of impending doom surrounding the company. * SO WHAT? * This is not the bottom IMHO. It will get worse before it gets better, but the question is whether it will be able to survive long enough to see any upside. No doubt Sports Direct’s Mike Ashley is calling his bankers in preparation for a bid in the not-too-distant future. Although he’s got a massive job on his hands with turning around the fortunes of House of Fraser, Debenhams could be reaching a price that will be too compelling to ignore. If he did manage to do it, the potential synergy benefits could be huge – although there will be a lot of work to be done.

And finally, in other news…

You may well have seen the whole Ross Geller is-he-a-beer-thief story doing the rounds yesterday, but I think he had a pretty good comeback in David Schwimmer tells police in Blackpool: ‘I swear it wasn’t me’ (The Guardian, https://tinyurl.com/yamvlsqh). HE WAS ON A BREAK!!!