Tuesday 04/09/18

  1. In MACROECONOMIC NEWS, Italy flirts with recession, Argentina takes extraordinary measures and Turkey hints that it might increase interest rates
  2. In INDUSTRY NEWS, coal is looking surprisingly perky, shipbuilding could be close to a turnaround but UK manufacturing is looking sluggish
  3. In INDIVIDUAL COMPANY NEWS, China’s Meituan Dianping is looking for a chunky valuation, France’s Casino and the UK’s Footasylum get a kicking
  4. In OTHER NEWS, I bring you some victorious air guitar moves. For more details, read on…



So Italy nears recession, Argentina puts in special measures and Turkey hints at using interest rates…

Italy edges to recession as it spoils for fight with Brussels (Daily Telegraph, A Evans-Pritchard) highlights trouble in Italy as its economy has slowed right down over the summer period and the industrial sector is a whisker away from recession which could tip the country’s already parlous state over the edge. IHS Markit’s manufacturing index is showing Italy teetering just above the boom/bust line as capital outflows are on the increase. In addition to that, Bank of America believes that Italy’s GDP growth for the third quarter could be close to zero, ratings agency Fitch put the country’s debt rating on negative watch last Friday and then there’s widespread unease regarding the new government’s push for tax cuts and increased welfare spending that is highly likely to put it on a collision course with the EU. * SO WHAT? * The EU will have to tread very carefully from here because Italy is the economic bloc’s third biggest economy and if it treats it too harshly by forcing it to comply to fiscal rules to the letter, it could inadvertently send Italy – and potentially the EU – into a tailspin. The bloc has survived the Greek crisis and is about to go through Brexit – it will NOT want to have to deal with a major Italian problem.

In Argentina unveils austerity programme to stem crisis (Financial Times, Benedict Mander and Robin Wigglesworth) we see that Argentina’s president Mauricio Macri yesterday unveiled a new austerity programme to placate international investors and bailout lenders as he admitted that the country faced an “emergency” following market panic on the collapse of its currency. The Peso has fallen by a massive 50% versus the dollar so far this year, but Macri’s actions thus far have failed to stem the slide and he conceded that “we believed with excessive optimism that we could go along fixing things bit by bit. But reality shows us that we have to move faster”.

Buenos Aires will increase taxes and cut bureaucracy to hit more aggressive targets to lower the deficit. * SO WHAT? * This sounds like Macri is moving in the right direction, but the currency fell further in trading yesterday as sceptical investors showed that they needed more convincing after several false dawns. Argentine currency crisis spreads to politics (Financial Times, Benedict Mander) shows just how far Macri’s star has fallen since his unexpectedly strong performance in the midterm elections 10 months ago and how far he will have to climb if he is to even stand a chance in next year’s presidential elections. He is going to have to stem a full-blown currency crisis and rampant inflation as well as political and social unrest in order to achieve this, but his approval ratings have been relatively robust throughout and a realistic opponent has yet to emerge. Mind you, as Medley Global Advisors analyst Ignacio Labaqui put it “The scenario is very fluid and there is a long time to go before the elections. Any electoral predictions at moments like this are an exercise in science fiction”.

In further developments in emerging markets, Turkey’s central bank hits at rate increase as inflation rises (Financial Times, Laura Pitel and Adam Samson) signals a potentially major shift in the central bank’s thinking thus far as it stated yesterday that its “monetary stance will be adjusted” after new data showed that inflation had risen to 17.9%. Turkey’s president Erdogan is a self-confessed “enemy” of high interest rates, so if the central bank raises them it will be at odds with his wishes. Even his newly appointed finance minister, son-in-law Berat Albayrak, seemed to hint that things might be going this way when he said that Turkey needed a “fully-fledged fight against inflation” in an interview with Reuters. * SO WHAT? * Everyone knows that the central bank just HAS to raise interest rates in order to stop its currency from sliding into oblivion but Erdogan’s influence casts a very long shadow. The longer it takes to implement, the higher it will have to be to get sceptical investors onside. In the meantime, some kind of solution between the US and Turkey re the release of Andrew Brunson (the American pastor accused by Turkey of espionage) in return for the US dropping an investigation into Halbank (a state-owned bank that is accused of breaching trading sanctions with Iran) could go a long way to help the situation. Given that such an agreement is looking very unlikely at the moment, a decent interest rate rise has got to be the way forward IMHO. 



In industry-related news, coal appears to be in rude health, shipbuilding looks like turning a corner and UK manufacturing growth hits a new low…

Coal shows resilience in global comeback (Wall Street Journal, Neanda Salvaterra) cites the latest stats from the Energy Information Administration (EIA) which show that Asian and African countries are expected to increase their use of coal in power generation through to 2040, despite climate change concerns and a tapering off of financing for projects related to the dirtiest of fossil fuels. US exports of coal more than doubled last year, showing that demand remains strong and Trump rhetoric about reversing US rules on emissions isn’t going to do any harm to the industry either. 38% of the world’s electric power generation last year was down to coal – the same level as 1998 – according to a report by BP and strengthening demand for the fuel has boosted business for the likes of companies such as Glencore. * SO WHAT? * Clean fuel ideals seem to be at odds with reality in some regions – for instance, Nigeria (which is Africa’s biggest economy) has loads of coal but 54% of the country’s 190 million citizens don’t have access to electricity so they are working towards a mix of the current hydroelectric dams and natural gas alongside coal. China and India continue to fuel (see what I did there) demand for coal, Vietnam is looking at quintupling its coal capacity through to 2035 and Bangladesh wants to up its use of coal in power generation from the current 2% to 50% by 2030. Given that the cost of constructing a coal-fired plant is roughly half that of constructing renewable energy facilities, you can understand the dilemma. As Nigeria’s minister of power, works and housing Babatunde Fashola put it, “I think it’s simplistic to begin to separate renewable energy from fossil fuel. What the world really needs is to achieve a balance”.

Korea’s shipbuilders look to rising tide of orders (Financial Times, Song Jung-a) heralds what could

potentially be a new dawn for an industry that has suffered enormously in the last few years as the country’s three biggest shipbuilders – Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries – are looking at a global recovery after years of restructuring and balance sheet clean-up. They are not out of the woods just yet – Hyundai Heavy is still planning on sacking 2,000 people at its offshore energy platform business and the sector is still reporting operating losses – but analysts expect a general return to profitability next year on the back of a 30% rise in new orders for high-end vessels (e.g. large container ships, oil tankers and LNG transportation vessels) for the first seven months of this year. Korean shipbuilders won 42% of new commercial ship orders in the same time period versus China on 32.8% and Japan on 10.5%, according to stats from market researcher Clarksons. * SO WHAT? * This is great news for the Korean shipbuilders, but although they’ve got the lion’s share of new orders right now, they will no doubt be wary of China’s rise in this area, as Hyundai Heavy vice-president Chang Kwang-pil said “China has become a big threat to us. They are catching up faster than expected, but they still lack technology on eco-friendly and energy-efficient ships, which will drive growth in the future”. Analysts think that Korean shipbuilders are 5-10 years ahead of their Chinese counterparts technologically and Chang observed that “Shipbuilding is a labour-intensive industry so it is difficult to compete with China on price. So differentiation through technology has become more essential for us. We may lose to China on volume but we will never lose our hegemony in the higher end of the market”. I’d be careful saying the word “never” there – the Japanese used to think this way and they’ve been overtaken in all sorts of things! All I’d say is enjoy it while it lasts, keep innovating and keep a very very close eye on China’s shipbuilders.

Meanwhile, back in the UK, Manufacturing growth hits 25-month low amid Brexit and trade fears (The Guardian, Phillip Inman) shows that British manufacturers are looking a difficult autumn in the face as Trump’s trade sanctions start to filter through to our exports. The latest IHS Markit/Cips purchasing managers index (PMI) survey shows that growth slowed in August to its lowest level since July 2016 because of a slowdown in exports – and if this trend continues, our manufacturing sector could remain in recession for the rest of this year. Not good.



In individual company news, Meituan Dianping seeks a high valuation, Casino slumps further and Footasylum gets a shoeing…

You’re probably used to Chinese tech companies demanding high valuations ahead of stock market flotations – so here comes the latest one: China startup Meituan Dianping seeks $55 billion valuation in Hong Kong IPO (Wall Street Journal, Julie Steinberg and Stella Yifan Xie). Meituan Dianping is one of China’s most popular internet start-ups and is due to launch its IPO in Hong Kong this week. $55bn is a chunky valuation for a company that only started in 2015 (!) via a combination of two online platforms and it now sells discount vouchers like Groupon, does online reviews and restaurant listings like Yelp and offers food-delivery services like Grubhub. It also sells movie tickets and offers hotel and other travel services but the company has yet to turn a profit. It is hoping to raise up to $4.5bn in the IPO. * SO WHAT? * Observers will be watching this very closely as sentiment on tech flotations has cooled slightly of late, as evidenced by the initial disappointment of mobile phone company Xiaomi’s flotation in July. Bulls on Meituan believe the IPO will be more positively received than Xiaomi’s because the

former is better placed to capitalise on China’s fast-growing internet consumer economy than Xiaomi, which is perhaps dowdier in comparison because it’s more about hardware. Meituan has some impressive backers, but I am concerned about its current profitability. However, if this goes well, I’d expect more tech flotations as those waiting in the wings will want to take advantage of any uptick in sentiment.

There are a few bits of disappointing news in retail today as Casino shares fall further after credit rating downgrade (Financial Times, Robert Smith) shows that shares in the French supermarket continued to go south as its credit rating was cut by S&P due to debt concerns, plunging the company further into junk territory. It lost 10% on Friday and a further 3% after news of the downgrade yesterday as its shares have fallen by a whopping 48% since the start of this year. Mind you, Footasylum given a kicking by investors after downgrade (Daily Telegraph, Ben Woods) highlights the MASSIVE 51% fall in the fashion retailer’s share price yesterday as it announced another profit warning against a backdrop of difficult trading conditions and narrowing margins. This 51% comes shortly after the 52% fall it suffered when it announced its previous profit warning in June, leaving its shares languishing at 40.9p versus the 164p price it floated at in October last year. What a mess! Despite all this, the company said that it will press ahead with plans to increase the size of its existing 66 sites and even add another 6 shops by December. Head in the sand or stroke of genius?? I’m erring towards the former given its dismal performance.



…And finally, in other news…

Do you sing karaoke into your hairbrush/showerhead and play to sell-out concerts in your mind? Well maybe this could be for you: Nanami “Seven Seas” Nagura wins 2018 Air Guitar World Championships in Finland (SoraNews24, Krista Rogers https://tinyurl.com/yaueezun). She’s got some moves! If you’re interested in participating in next year’s competition, then have a look at http://www.airguitarworldchampionships.com/en/entry/). YOU ROCK!!!

As always, thank you for reading Watson’s Daily!