Tuesday 07/08/18

  1. In MACROECONOMIC NEWS TODAY, the US reinstates economic sanctions on Iran
  2. In HEALTHCARE-RELATED NEWS, China drug scandals highlight supply chain weaknesses and Spire has a profit warning
  3. In UK CONSUMER SPENDING NEWS, alcohol and food provide a summer sales boost and UK car sales turn a corner
  4. In M&A NEWS, IWG craters on the collapse of takeover talks and a Deutsche/Commerzbank combo could save both companies
  5. In OTHER NEWS, I bring you the tasering of Ed Balls. For more details, read on…



So the US goes ahead with punishing Iran…

US reimposes economic sanctions on Iran (Financial Times, Demetri Sevastopulo, Mehreen Khan and Najmeh Bozorgmehr) shows that Trump has now followed through on his threats and has just reimposed the tough economic sanctions on Iran that had been lifted as part of the 2015 nuclear deal which the US officially withdrew from in May. The sanctions will prohibit Iran from using US currency and bring a stop to trading in cars, metals and minerals



(including gold, steel, coal and aluminium). They will also, crucially, prevent Iran from buying US and European aircraft. Trump has said publicly that he is willing to meet Iranian president Hassan Rouhani, but Rouhani has said that no talks will be held with sanctions in place. * SO WHAT? * Iran is in turmoil currently, what with rampant inflation, rising unemployment and a currency (the rial) falling by 50% versus the dollar this year. The Iranian regime may well be forced to the negotiating table despite their current protestations. European companies that have been falling over themselves since the 2015 accord to do business in the country are obviously going to be put in a tricky spot, but in theory they will be allowed to sue the US government for compensation according to the EU. This sounds like a complete mess at the moment, so we will have to just monitor developments as they happen.



In healthcare-related news, Chinese drug scandals shine a light on supply chain weakness and Spire announces a profit warning…

Following on from yesterday’s story on the evolution of Chinese pharmaceuticals companies, we learn that it isn’t all roses as China drug scandals highlight risks to global supply chain (Financial Times, Tom Hancock and Wang Xueqiao) takes a look at the effects recent drug safety scandals -involving lax controls at Chinese drug manufacturers – have had around the world given that Chinese manufacturers account for over 40% of the global production of active pharmaceutical ingredients (API). The European Medicines Agency (EMA) and the US Food and Drug Administration (FDA) issued warnings over a cancer-causing ingredient used in a blood pressure medication, supplied by Chinese company Zhejiang Huahai, which then led to a drug recall. Then there was the announcement that thousands of sub-standard vaccine doses had been sold in China, where Changsheng Biotech was accused of falsifying data during the production of rabies vaccines. The number of warnings that the FDA has issued to Chinese pharmaceutical manufacturers has increased from five in 2014 to 22 last year. Indian companies also get

regular warnings but Chinese companies have been on the end of more than their Indian counterparts for the last two years. * SO WHAT? * This just goes to show how reliant drug manufacturers have become on Chinese API producers. TBH there’s only so much that non-Chinese bodies like the EMA and FDA can do given their relative lack of staff in China, but authorities there are very keen on pushing their biotech industry to the forefront and have made moves, such as introducing a regulatory framework similar to that of developed countries, in order to improve things. Investing in Chinese biotechs, then, is still a bit of a crapshoot (but then again biotechs generally are) but given public backlash on the latest scandals, it will be wise to avoid them for the time being, although they will be worth looking at once more further down the line. At the end of the day, the global pharmaceutical industry needs the Chinese API manufacturers to succeed because there aren’t many alternatives!

Spire issues profit warning after NHS spending cuts (Daily Telegraph, Ayesha Javed) highlights a share price fall of over 20% to hit a record low for the UK’s second largest healthcare company after spending cuts at the NHS dealt a body blow. The NHS had been using Spire to help make up for shortages of beds and staff, but it has been cutting back latterly in a bid to cut costs. * SO WHAT? * There’s not much Spire can do in the short term to stop the rot because the NHS shows no signs of loosening the purse strings any time soon, although it said that it plans to move more towards the private sector and cut costs. Talk about the dangers of having too much exposure to one client!



In UK consumer spending-related news, we look at food and car sales…

Heatwave food sales hide trouble elsewhere on high street (The Guardian, Larry Elliott) shows that although food spending saw its sharpest increase in five years last month – with supermarkets, pubs and shops selling fans and other cooling equipment – it effectively cannibalised non-food sales. As the British Retail Consortium’s chief exec Helen Dickinson warned, “Total sales growth slowed as the heat laid bare the underlying weakness in consumer spending. Sales of non-food products struggled – three months into an extended period of summer weather, demand for many seasonal purchases has slowed while the heat has kept shoppers away”. She added that traditional high street retailers were also experiencing the double-whammy of weakening footfall and rising business rates and said that “Although changing consumer behaviour means we will have fewer shops in the future, the reality is that if we want to support a positive reinvention of our high streets, business rates cannot go on increasing”. * SO WHAT? * I think I mentioned this last week when Greggs and Next both said that they had been helped by landlords being willing to reduce rents on new contracts – that business rates need to be the next thing the government look at in order to help struggling retailers. If private operators are reducing the rent, you know that they are scraping the bottom of the barrel because this is the last thing they will want to do. The government needs to step up here otherwise our retailers will just disappear.

Diesel car sales are still going backwards (The Times, Robert Lea) cites the latest data on new car registrations from the Society of Motor Manufacturers and Traders (SMMT) which show that diesel sales fell by ANOTHER 25% last month and are down by 30% for the year to date. Sales of new diesel vehicles are down by 40% in the two years since the government crackdown on diesels in the ongoing aftermath of the VW emissions scandal. Having said that, July showed an uptick in new vehicle registrations overall by 1.2% versus the same month last year. At their peak, diesels accounted for 45% of total sales – they now account for 32%, whereas sales of hybrid and electric vehicles were up by 20% last month and now have a 6.5% share of all sales. * SO WHAT? * I think car manufacturers only have themselves to blame for this. The writing has been on the wall since major European cities started to ban diesel cars a few years ago. They need to stop bleating about it and get on with making cars that are better for the environment. As I keep saying, IMHO, exposure to battery technology and battery-related materials is the key to less potentially volatile share prices as you are then exposed to a broad base of manufacturers. Here is what I said about how investors may want to play this in the 2018 preview I produced at the beginning of this year: “chemicals companies that make batteries and battery-related materials such as Belgium’s Umicore, the UK’s Johnson Matthey and Germany’s BASF. If, however, you DO want exposure to electric cars as well, copper is a key material used in lithium ion batteries, motors, inverters and charging points and could thus be an area of growth. Some observers believe that the demand for copper is going to double over the next 20 years if electric vehicles go mainstream, so if you agree then companies like SolGold, Ivanhoe Mines, Nevsun Resources and Atalaya Mining are purer copper plays than commodities giants such as Rio Tinto. Bear in mind, though, investing in such companies is not simple as there are so many variables involved!”.



In merger and acquisition news, IWG loses it and a Deutsche/Commerzbank combo could be the phoenix rising from the flames of German banking…

In IWG shares plunge as it ends takeover talks (Daily Telegraph, Rhiannon Curry) we see that serviced office provider IWG (which used to be known as Regus) has walked away from talks with three major private equity firms (Starwood Capital, TDR Capital and Terra Firma) before a bid deadline on Wednesday because it thought that the offers that were on the table weren’t high enough. Shares in the company fell by 20.5% in response to the news, which put it back down to the level it was at before news of the talks emerged. Just to make things a bit worse, the company announced a 33% fall in pre-tax profits * SO WHAT? * This just goes to show how competitive things are becoming in the world of serviced offices as IWG has had to work harder to compete with upstarts such as American company WeWork, which has been

encroaching on its turf. It is talking a good game what with the expansion of its “younger” Spaces brand, but as analyst Andrew Brooke at RBC Capital Markets said “With the company continuing to embark on an aggressive expansion plan, and credibility still low, we believe it will be some time before the market will give the benefit of the doubt”.

The shotgun marriage that could revive Deutsche Bank (Daily Telegraph, Iain Withers) is a really interesting article that puts forward a potential solution that would help two of Germany’s ailing banks – that Deutsche Bank and Commerzbank could get together to form a bigger, stronger entity. Deutsche’s Chief exec Christian Sewing recently appointed one of its investors, New York-based private equity firm Cerberus which has a 3% stake, to the board to advise on strategy and some are now suggesting that a combination of Deutsche and Commerzbank (in which Cerberus also has a stake) could create a German banking behemoth with combined revenues of €35bn. * SO WHAT? * Although this might look good theoretically, analysts are sceptical as the team at Keefe, Bruyette & Woods (KBW) believe that cost cutting would be very messy and that an integration of two complex lenders would be too difficult. Still, it is something that hasn’t been dismissed out of hand and, given the troubles that both banks have had in the last couple of years, they could just decide to go ahead and do it anyway.



… And finally, in other news…

I’m not normally one to endorse TV programmes in Watson’s Daily, but I have to say that if you want to get an interesting perspective on what Americans think of President Trump, you really should watch Travels In Trumpland on BBC2 at the moment. There is one bit in it, however, that some people might enjoy more than others as per Ed Balls tasered: Former Shadow Chancellor stunned in shock police video – watch here (Daily Express, Rory O’Connor https://tinyurl.com/y9spqvjy). This is good, but I have to say it’s not quite as good as the taser scene in The Hangover: https://tinyurl.com/yd57zk66. This cracks me up every time!

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