Thursday 28/09/23

1. In CURRENCY & OIL NEWS, we look at why sterling is weakening and the consequences of China nearing “peak oil”
2. In FINANCIALS NEWS, private valuations come under scrutiny, Binance withdraws from Russia and space insurance becomes increasingly necessary
3. In REAL ESTATE NEWS, Evergrande faces another clampdown, UK commercial real estate landlords take a hit, Zoopla confirms the house price trend and mortgage payers make tough choices
4. In INDIVIDUAL COMPANY NEWS, Meta launches AI chatbots, McKinsey makes another opioid payout, Ford and GM come to a major crossroads, Lululemon and Peloton play nice and H&M sees profits rise
5. AND FINALLY, I bring you something quite pointless but impressive…

So we look at why sterling’s falling and what the consequences would be of China reaching peak oil…

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I was talking yesterday about the falling value of sterling and Why the pound is in freefall – and what it means for Sunak ahead of the election (Daily Telegraph, Tim Wallace) does a good job of explaining why! The Pound’s value has dropped by 3% against the dollar so far this month and it’s continuing to trend down largely because of interest rates. Higher interest rates bring in money from around the world as investors seek better returns for their money – and this puts upward pressure on currency (because more people want it). The feeling now is that interest rates in the UK have peaked or are very close to their peak – and that means that investors are looking elsewhere for returns and therefore selling out of sterling, which is making its value fall. Remember that it

wasn’t so long ago that markets were pricing in a peak UK interest rate of almost 6.5%! Sterling is also weakening because economic growth rate expectations for the UK are particularly low, especially when you compare them to the US. The Bank of England reckons the UK economy will grow by just 0.5% this year, 0.5% next year and then a paltry 0.25% in 2025! That does not compare favourably to, say, the US which is looking to grow by around 2%, 1.5% and 1.8% over the same time period! Investors will therefore be more inclined to put their money in the US – so that means that we are seeing downward pressure on the pound and upward pressure on the dollar. However, as you know, economists can change their projections at the drop of a hat – so we’ll just have to wait and see how right they are!

I thought that What ‘peak oil’ will mean for China (Financial Times, Greg McMillan) was a really interesting discussion about what a peak in China demand for oil would mean for the world economy following remarks made last month by one of China’s most powerful oil execs – the chief exec of CNOOC – that China’s demand for oil would reach its highest point this year. This isn’t what the IEA is thinking will happen – it doesn’t expect China demand to peak until 2030 after plateauing in 2027 – but when you consider that China demand for oil has trebled over the last two decades, the conversation about what happens after the growth ends needs to be had! * SO WHAT? * China’s rapid take-up of EVs is one of the main drivers of this peaking out and it is leading to a shift in China’s energy mix, which is expected to gravitate towards coal and renewables. Given that China continues to be a major driver of global demand for oil, a peaking out will no doubt lead to lower prices – unless OPEC and friends cut production even more!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Private market valuations come under the microscope, Binance exits Russia and space insurance becomes increasingly necessary…

In UK regulator to launch review of private market valuations (Financial Times, Laura Noonan) we see that the FCA is going to launch a review by the end of the year of valuations in private markets to make sure they are legit and aren’t being pumped up unnecessarily. Valuations and how they are arrived at are very opaque and they can depend on a lot interpretation that just isn’t looked at as closely as they are in publicly quoted companies, for instance. M&A/IPOs: lies, damn lies and private asset valuations (Financial Times, Lex) emphasises the point that there is a lot of room for bias in valuing private assets and that they should at least be valued conservatively. * SO WHAT? * I think that the FCA is right to look into this but I just don’t know how they’re going to make it  any less opaque. Still, some kind of co-ordinated approach by the US and UK would be good – but I’d emphasise that this needs to be done in concert because tightening the regs over here and not tightening them over there is just going to lead to an even bigger exodus of companies from here as they seek out looser regulatory regimes that give them more latitude.

Then in Cryptocurrency exchange Binance to exit Russia (Financial Times, Anastasia Stognei and Nikou Asgari) we see that Binance, the world’s biggest cryptocurrency exchange, is selling its business in the country to CommEx for an undisclosed sum – and will have no buy-back options. It will cease all exchange services and business operations in the country in the next few months. CommEx is a bit of an unknown quantity given that it was only launched yesterday! All we know about it is that it is backed by an unnamed “top-tier crypto VC”. Dodgy or what, no?!?

Elsewhere, Space needs a sustainable insurance industry (Financial Times, Peggy Hollinger) highlights an area that I must admit I’ve never really considered before! Recent satellite launches have had problems and caused some big losses, leading to more talk of what to do about premiums. When you consider that space claims could total around $1bn this year versus premium income of just $600m, you can see why there’s concern! * SO WHAT? * Although lots of insurance companies have already exited the market the likely proliferation of things like low earth orbit satellites (LEO) as part the global networks of Musk’s Starlink or the UK’s OneWeb means that this is an area that can’t be ignored. At the moment, the majority of satellites are not insured but in future the need for insurance is bound to increase as customers rely increasingly on assets in space!

Want to engage with myself and the team at Wats12on’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Evergrande gets in deeper, UK commercial property landlords take a hit and Zoopla confirms the house price discount trend while mortgage payers continue to face tough choices…

Evergrande bosses under house arrest (The Times, Richard Spencer) shows that the Evergrande nightmare continues as Chinese authorities have now rounded up a number of its top execs after months of efforts to prevent contagion to other sectors. Its founder and chairman is under house arrest – as is its former chief exec – and its former CFO has been formally detained. This is in addition to ten of Evergrande’s financial and wealth management subsidiary managers recently being arrested. * SO WHAT? * This is drastic action, but is probably of little comfort to those who bought apartments off-plan (a common thing in China) but now have to pay mortgages despite their homes not being built as developers ran out of funding. As things stand currently, it looks like efforts to prevent Evergrande from total collapse have failed and rival Country Garden is another developer that’s having finance problems. The tough times continue…

Meanwhile, back home, £420m drop in landlords’ value ’caused by WFH’ (The Times, Tom Howard) follows on from what I said yesterday about Meta reducing its office space requirements as research from Jefferies reckons that a significant chunk of value has been knocked off UK’s biggest office landlords as the WFH trend has led to a “rental recession”. Office utilisation is falling and landlords are losing pricing power because tenants are just shedding excess office space. * SO WHAT? * Companies including

British Land, Land Securities, Derwent London and Great Portland Estates are among those who are particularly vulnerable to the trend and they all lost ground in trading yesterday as the market digested the Meta news and recent research which showed that London office valuations had already lost almost 20% over the last year. How low can they actually go, though? The WFH effect can’t go on forever – and I actually think that as the labour market loosens WFH is likely to normalise at one or two days a week. More companies are stipulating that staff come in to the office now so it will be interesting to see how things develop over the next year or so. Have markets and valuations over-reacted??

Meanwhile, in residential property, Buyers tempted back by biggest home discounts in four years (Daily Telegraph, Alexa Phillips) cites Zoopla research which shows that discounts to asking prices have been increasing, something echoed from findings published by Rightmove last week. Zoopla says that buyers are, as a result, starting to dip their toes back into the property market. * SO WHAT? * This sounds like a moderately positive sign but in reality affordability needs to ease before we see a real sustainable rebound in activity. That said, there has been some recent evidence that the “affordability ratio” has been showing signs of improvement. Those with families are finding affordability increasingly difficult, though, as per Childcare costs ‘soaring by £600-plus a month’ as firms insist on return to office (The Guardian, Joanna Partridge) which highlights rising childcare costs as the trend of more people going into offices has created a surge in demand for childcare.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Meta introduces chatbots, McKinsey makes another opioid payout, Ford and GM come to a tipping point, Lululemon and Peloton play nice and H&M announces profits…

In a quick scoot around some of today’s other interesting stories, Meta launches AI chatbots for Instagram, Facebook and WhatsApp (Financial Times, Cristina Criddle and Hannah Murphy) shows that Facebook’s parent is to launch AI-driven “persona” chatbots on its Facebook, WhatsApp and Instagram platforms. This will enable developers to make their own versions of AI assistants, which Microsoft thinks will encourage more user engagement. 28 chatbots will take on characters voiced by celebs and beta versions will be launched in the US from Wednesday with more to be rolled out over the next few weeks. Perhaps even more excitingly, there will be an additional feature – to be launched next year – that will enable those who don’t code to create their own bots! Other things that were announced at Meta’s Connect development conference were its new VR/AR headset – the Quest 3 that will go on sale next month for $499.99 (a “bargain” when compared to Apple’s Vision Pro Headset that is to come out next year and cost the somewhat premium price of $3,499!) and the next version of the Ray-Ban smart glasses. * SO WHAT? * The AI thing sounds like it could be very interesting but I’d have to say that I’d want to see more examples of it in action to convince me that it’s more than just a gimmick that you’d abandon after a short while. As for the headset, it’s still too big IMO to be of universal appeal and the sunglasses sound good, although they’ll not be for everyone!

McKinsey pays out another $230m to settle opioid cases (Financial Times, Andrew Edgecliffe-Johnson) shows that the management consultancy is paying out another big lump sum in order to settle most of the remaining claims that it was responsible for boosting opioid sales (which it still isn’t admitting to). This will bring the total related payout to over $870m. Thousands of claims were brought together from municipalities, school districts, tribes, parents and others into a class action. * SO WHAT? * No doubt the firm wants to put this whole opioid crisis thing behind it – and throwing a lot of money at it will no doubt make it all go away. It won’t go away to the victims and their families though…

Then in This Ford vs. GM Feud Could Shape the Future of EVs in America (Wall Street Journal, Andrew Duehren) we see that Biden’s forthcoming decision regarding a $7,800 tax credit on EVs will be crucial to the broader success of EVs across America! Starting from next year, would-be buyers of EVs will not be able to

use this $7,800 tax credit to buy cars that contain components from countries that the US classifies as being a “foreign entity of concern”, which basically refers to Chinese batteries and materials. Biden is shortly going to decide how strictly this is going to be interpreted. * SO WHAT? * This is going to be tricky because if he decides on a strict interpretation hardly anyone is going to be able to use the tariff to buy EVs but if he interprets it too loosely Republicans and other China critics will pounce on it as a potential backdoor for Chinese companies to dominate the US battery industry. Ford is trying to get around this with its proposed Michigan gigafactory by licencing the tech from CATL (but it has just suspended development, presumably pending Biden’s decision) and argues that a looser interpretation should be used. Arch-rival GM wants a strict interpretation, presumably because it isn’t investing in any Chinese battery firms. Although this is being seen in many quarters as Ford vs GM, Biden’s decision could actually have an impact on how many EVs are sold in the US for the next decade! It could also have an impact on next year’s election as Michigan is in a swing state and Ford’s gigafactory could create thousands of jobs.

Then in Lululemon and Peloton End Their Feud (Wall Street Journal, Sabela Ojea) we see that Lululemon and Peloton are to enter into a partnership that will enable each one to concentrate on their own respective core businesses. Lululemon will discontinue sales of its Studio Mirror home fitness device by year-end and funnel those customers to Peloton’s online fitness classes. * SO WHAT? * Peloton’s share price popped by 15% while Lululemon’s remained largely unchanged on the news. Peloton has been struggling of late with a slowdown in demand for its equipment and its foray into apparel just didn’t really gain traction. Lululemon moved into fitness equipment when it bought Mirror for a whopping $500m in 2020 at the height of the workout-from-home trend – but this has since failed miserably. So it seems that both companies dabbled in each other’s businesses and they both failed! Peloton will now sell co-branded Lululemon apparel online and offline. I think that it makes strategic sense for both sides to stick what they’re best at and I think that they should benefit from combined expertise and a shared customer base.

Meanwhile, H&M profits leap despite September sales slump (The Times, Simon Freeman) shows that the market reacted positively to it announcing a fivefold jump in operating profit for Q3 (last year’s number included the one-off cost of its exit from Russia). Its cost-cutting efforts are going well and it continues to focus on profitability and inventory control. * SO WHAT? * It looks like the company is moving in the right direction although it still has a way to go in order to catch up with arch-rival Inditex, the owner of Zara and other brands.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

I think that everyone has talent – but it’s just whether we go through our lives constantly searching for it or whether we happen to be fortunate enough to stumble on it! Surely this talent must have been discovered whilst being inebriated…it is impressive and yet pointless at the same time 🤣