Thursday 31/01/19

  1. In MACROECONOMIC NEWS, the Fed keeps rates on hold
  2. In CAR NEWS, VW develops its EV platform, Ford’s China JV underperforms, Tesla announces profits and UK car production hits new lows
  3. In CONSUMER/RETAIL NEWS, UK consumer borrowing falls, Alibaba revenue growth slows, McDonald’s benefits from coffee and burgers and Caffe Nero makes an acquisition
  4. In TECH NEWS, Facebook reports a huge profit boost
  5. In OTHER NEWS, I bring you a Game of Thrones study. For more details, read on…



So the Fed leaves rates on hold…

Fed keeps US rate on hold amid fears of slowdown (Daily Telegraph, Tim Wallace) is a headline that does what it says on the tin. Chairman of the Federal Reserve Jerome Powell seems to have changed tack somewhat since the end of last year when he was hinting at more interest rate increases for 2019 and, in true verbose Fed style, said that “In light of global economic developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the large target range for the federal funds rate may be appropriate to

support these outcomes”. Why use a few word when many will do, eh ????? * SO WHAT? * This is an interesting development that will calm nervy markets and Trump will no doubt take credit somehow for “controlling” the wayward Jay Powell in his previous enthusiasm for raising rates (although the Fed Chair is supposed to be independent) as he specifically attacked Powell’s original stance last year. America has been able to raise rates because of the strength of its economy, but other countries have been quite some way behind on this (the Eurozone is still on 0%!). In theory, this pause may give others time to catch up, but with a global growth slowdown on the cards I would argue that raising rates in many countries is not really going to be an option.



VW continues to develop its new generation EV platform, Ford’s China JV hits a sales drop-off, Tesla announces decent results and the UK sees record lows for car production…

Volkswagen’s plan to kill off Tesla (Financial Times, Patrick McGee) is a really interesting article that takes a look at the company’s MEB platform that will become the company’s main building block for 50 different models by 2025. It will be used for the majority of its electric vehicles and will have a wide-ranging impact on the whole organisation in addition to the supply chain and quality. VW is throwing €30bn at electric car development over the next five years and the key thing about the MEB “skateboard chassis” is that it is designed specifically for EVs and is not one that was adapted from the design of a traditionally-powered car platform to shoe-horn in the batteries. * SO WHAT? * VW believes in this platform so much that it thinks it could become the industry standard and it is in talks with many other carmakers – including its new BFF Ford – to supply it to them. This could be HUGE news because, until now, car producers have tried to differentiate their offering by making proprietary powertrains, but trends are changing such that batteries are likely to become commoditised with the differentiation coming elsewhere in things like electronic and infotainment features. As Chris Borroni-Bird, an ex-GM and Waymo exec, put it, “If you don’t have to spend so much money on architecture [the chassis], you could refocus your efforts on electronics, user experiences, and autonomous systems”. There are some huge potential dangers here as well, though, because if the electric car remains a tiny niche product VW will have to wear billions in losses and if there are glitches the number of car recalls could be massive. FWIW, I believe that there will be a lot more collaboration (and mergers) between manufacturers than there used to be as they pool resources to develop a new generation of vehicles. Still, the development of decent charging networks and more efficient batteries will be key for EVs to go mainstream IMHO.

Ford’s China joint venture suffers 54% fall in sales (Financial Times, Tom Hancock) is a rather dramatic headline that is yet further evidence of the slowdown in

vehicle sales in China as Chongqing Changan Automobile announced a sales drop of 54% – with unit sales at their lowest level since 2012. If you include sales of its own brands, sales actually fell by an eye-watering 93% last year. * SO WHAT? * Ford has suffered more than other manufacturers on its China exposure because it was relatively late to the party (and thus didn’t benefit as much from the boom times). It launched a new JV in 2017 with Anhui Zotye Automobile in a bid to boost its EV lineup as it plans to launch 15EVs in China by 2025 but in the meantime Changan has suffered by a sudden downturn in SUV sales due to a combination of more appealing offerings from its competitors and the evaporation of a tax break policy. Ford really is getting a kicking at the moment. Doing things like reviewing its JVs and cutting costs may be short-ish term fixes, but they don’t really solve the underlying problem of falling sales.

Tesla looks to keep profits rolling (Wall Street Journal, Tim Higgins) highlights the company’s announcement of a £140m profit for the fourth quarter and founder Elon Musk went on to say that his company is now targeting a profit in every quarter. This is going to get increasingly difficult to do as Tesla plans to reduce its car prices (to boost demand) just as the federal tax credit for EVs starts to tail off. Musk reckons that he needs to sell between 360,000 and 400,000 cars this year in order to remain profitable. * SO WHAT? * Musk seems to be doing all the right things at the moment to ensure survival as he is cutting costs, selling more vehicles and investing in production capacity. The Model 3 is clearly going to be the main driver for the company at this stage, but he’s also got another model – the Model Y compact SUV – waiting in the wings for mass-production in 2020 that shares 75% of its components with the Model 3, meaning that production costs will be relatively low. Still, I think it’s going to be a question of timing – will he be able to get the company to survive independently for long enough to be successful or will he have to merge with another manufacturer?

The downbeat trend continues in Biggest brake on car production since 2007 (The Times, Robert Lea) as the latest data from the Society of Motor Manufacturers and Traders shows that car production in the UK had its worst year-on-year fall since 2007 at a time when investment in the UK automotive industry has also been drying up. Britain is the 11th biggest car manufacturer in the world and the fourth biggest in Europe after Germany, Spain and France with Jaguar Land Rover, Nissan and Mini making up 75% of production. * SO WHAT? * Not great, but this is more evidence of the general slowdown in automotive sales.



UK consumer borrowing falls, Alibaba shows slowing revenues, McDonald’s perks up on a diet of coffee and burgers and Caffe Nero buys into another chain…

Brexit blamed for fall in consumer credit growth to 4-year low (The Guardian, Richard Partington) highlights the trend of shrinking credit growth – now at its lowest annual growth rate for four years at 6.6% according to the latest stats from the Bank of England – as households tighten the purse strings. The Bank said that credit card borrowing was particularly weak and Howard Archer, chief economic adviser to the EY Item Club, observed that “Heightened concerns over the economic outlook amid Brexit uncertainties and the very low household savings ratio are seemingly limiting willingness to borrow”. * SO WHAT? * The UK economy is largely drive by consumers so if they’re not spending wages that are outpacing inflation or money that they haven’t got (on credit), then things could get very painful – as it won’t just be retailers who get hit from all this household budget tightening.

Alibaba revenue growth ebbs as Chinese shoppers exercise caution (Financial Times, Louise Lucas) shows that it’s not just the UK consumer that’s getting increasingly reluctant to spend as the Chinese e-tailing

behemoth saw its lowest revenue growth rate for three years. Still, at 41% growth, it was still comfortably more than China’s overall 16% year-on-year retail sales growth for November and the company’s net income was ahead of consensus estimates. * SO WHAT? * Alibaba generates over 90% of its sales in China and so is seen as a bellwether for the market. Yes, growth is still pretty chunky but if a company like Alibaba is experiencing a slowdown, you would have thought that smaller players will be feeling it even more.

Other than that, Coffee and burgers have McDonald’s sales sizzling (The Times, James Dean) show the fast food chain publishing its 51st consecutive quarter of growth in the UK and Ireland as the parent company beat consensus estimates despite increasing competition in the American market. Results were boosted by sales of popular items on the Saver Menu as well as its coffee from its McCafe brand.

And on the subject of coffee, Caffe Nero buys slice of coffee chain (The Times, Dominic Walsh) heralds the coffee chain’s broadening of its presence across Wales, the Midlands and Southern England after buying a majority 70% stake in the Coffee#1 chain from SA Brain, the Welsh brewer and pub operator. This will give Nero an additional 92 shops plus an additional brand to add to Harris+Hoole and Aroma. Coffee#1 will operate as a standalone business.



Facebook puts the bad press to one side to announce strong results…

Facebook defies crises with huge leap in profits reported (Daily Telegraph, Margi Murphy, Olivia Field and Olivia Rudgard) shows that the tech giant shrugged off bad press to announce revenues that outperformed consensus estimates. Interestingly, in the final quarter of 2018, when it was going through GDPR issues and fallout from the

Cambridge Analytica scandal, it still managed to see revenues up by 30% year on year and the number of daily active users increased by 9%. Separately, Microsoft announced a 12% increase in quarterly revenues due to a strong performance from its cloud division and increase in revenues from LinkedIn and its Office software products. * SO WHAT? * As I have said before, I believe that although there was definitely some froth in valuations of the FAANGS last year, the fact is that they provide us with stuff that we need in areas where there are high barriers to entry and so I think that any apparent weakness is only temporary.



And finally, in other news…

Today, I thought I’d leave you with this key bit of research: Which Game of Thrones characters will survive Season 8? Scientists calculated the odds (Mental Floss, Jennifer Fabiano

Some of today’s market, commodity & currency moves (as at 0828hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq *DAX *CAC-40 *Nikkei **Shanghai **
6,942 (+1.58%)25,015 (+1.77%)2,681 (+1.55%)7,18311,182 (-0.33%)4,975 (+0.95%)20,773 (+1.06%)2,585 (+0.35%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)