Tuesday 08/11/22

  1. In MACRO & OIL NEWS, China exports fall and Covid repercussions hit cruise ships and Apple while Jeremy Hunt looks at raising inheritance tax and Shell does a biofuels deal
  2. In REAL ESTATE NEWS, US investors splash out on UK commercial property, offices rethink their space requirements, house prices drop and owners face negative equity
  3. In RETAIL NEWS, Walgreens buys Summit Health, Joules searches for funding and Made.com’s founder’s bid is rejected
  4. In MISCELLANEOUS NEWS, Foxconn invests big in Lordstown, lithium companies invest in Teesside, Ryanair hits profit and law firms rein in hiring
  5. AND FINALLY, I bring you Chris Martin in a pub…

1

MACRO & OIL NEWS

So China’s zero-Covid policy continues to have repercussions, Jeremy Hunt looks at news ways to raise taxes and Shell does a biofuels deal…

Chinese exports shrink as Xi’s strict zero-Covid laws squash output (Daily Telegraph, Szu Ping Chan) cites Chinese customs data which shows that exports contracted by 0.3% in dollar terms versus the previous year, which was way worse than economists had been expecting. They had forecast an average growth of 4%. It was particularly shocking as it came just after the previous month’s 5.7% growth and it represents the first fall in Chinese exports since March 2020. * SO WHAT? * This is going to sound like a conspiracy theory but I find it very worrying that China looks like it is trying to distance itself at least from the West. Exports to the EU dropped by 9% in October and those to the US fell by 12.6% (although that’s not all going to be on the China side, TBF) and I recall writing over lockdown that China was building PERMANENT vaccine centres (while we have been using tents and other temporary structures). China’s President continues to tighten control on its people by cracking down on things like education-tech and gaming for minors in the name of “common prosperity” whilst cementing his position in the top job by getting rid of dissenters and changing the rules. It also seems to me that he’s using the zero-tolerance Covid policy to control his people. If he can control the narrative by cutting out foreign media (he has), it leaves the way clear to pump out propaganda and it’s only a matter of time before he invades Taiwan. Europe is tied-up with the Ukraine war and an energy crisis and the US can’t do anything because Biden is powerless to do anything drastic. Russia is highly likely to be a staunch ally if China DID invade Taiwan because Russia now relies heavily on China for trade AND the argument for Russia invading Ukraine won’t be that dissimilar to China invading Taiwan. It is a very delicate situation at the moment. I really hope that I am wrong on this!

So the repercussions continue in Cruise ships desert China as Beijing reaffirms zero-Covid commitment (Financial Times, Chan Ho-him) as even “cruises-to-nowhere” (= no destination = no need to disembark before returning home) are banned while cruise bookings elsewhere are approaching pre-pandemic levels. Industry observers reckon that recovery for the cruise sector in China and Asia will now be pushed back to 2024 as a result of China’s ongoing stance on Covid because cruise lines generally have to plan at least a year in advance. * SO WHAT? * The Asia-Pacific region had accounted for up to 20% of major cruise lines’ global

revenues prior to 2019, so this is a real pain for the cruise lines. It is unclear when operators such as Royal Caribbean and Carnival will return – and a lot of it will depend on whether the zero-Covid thing actually changes.

Apple warns of iPhone shortages at Christmas (Daily Telegraph, Gareth Corfield) is the unsurprising conclusion that Apple has drawn over the impact of its Covid-related Foxconn factory problems in China as it said that it expects lower iPhone14 handset production, due to Foxconn being one of the main contractors and Foxconn/Apple: dire effects of zero-Covid policy will widen (Financial Times, Lex) points out that there may be a permanent shortage of workers as the disgruntled ones stay away and recruitment of replacements looks likely to be more difficult given the negative PR. It also suggests that it’s not just going to be Apple that suffers – all China-based manufacturers and customers could have the same thing happen to them if there are Covid outbreaks. * SO WHAT? * The uncertainty continues – but I would have thought that if/when China does ease its Covid policies, there will be a huge uplift and collective sigh of relief because I think that investors will then assume that the country will return to more predictable growth once more.

Back home, Jeremy Hunt plans stealth raid on UK inheritance tax in Autumn Statement (Financial Times, Jim Pickard, Daniel Thomas, Laura Noonan and John Paul Rathbone) shows that the Chancellor is continuing to search for ways to plug the gaping hole in the UK’s finances and keeping inheritance tax bands unchanged is just one way to raise some cash without seemingly doing anything (because more people will be caught in the net due to rising inflation). Just to give you an idea, tax receipts from inheritance tax have shot up from £2.3bn in 2009 to £6bn in 2021-22 due to house prices going through the roof. Speculation continues as to what other measures will be revealed in the upcoming Autumn Statement.

Then in Shell in biofuels bet with deal to buy 3bn litres of ethanol (Financial Times, Emiko Terazono) we see that Shell is putting more money into biofuels by buying 3.25bn litres of ethanol made from sugar cane waste under a deal with Raizen, its Brazilian joint venture. * SO WHAT? * Last year, biofuels made up 3.6% of global transport energy demand, according to the International Energy Agency – but it is expected that this figure will rise as governments try to reduce emissions from cars.

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!

2

REAL ESTATE NEWS

The Americans take advantage of a strong dollar, offices rethink usage and residential is looking vulnerable…

In US investors splurge $1bn on offices and shops in London (Daily Telegraph, Riya Makwana) we see that American investors have ploughed $929m on commercial property including offices, shops and warehouses in London between July and September, according to Savills. This is nigh on double the amount invested in Q2. Meanwhile, investment from Hong Kong, Singapore and Germany is down. It was also interesting to see High energy bills push UK businesses to reassess office use (Financial Times, George Hammond) as it seems that there is a trend now of offices putting more people into smaller spaces and fewer floors to save on electricity bills! Property consultancy Lambert Smith Hampton reckons that the cost of occupying office space is now at its highest level, driven up by 13% over the past 12 months thanks to rising food, building materials and printing prices. Energy bills have also doubled over the past year! * SO WHAT? * I think it’s interesting to note that while Covid changed the way we look at office hygiene – and the practicality of working from home – skyrocketing energy bills have forced many companies to make real efforts to become more energy efficient. Given the profound circumstances that we have experienced these things, you would have thought resulting behaviours have a reasonable chance of continuing for the long term.

Meanwhile, in residential property news, House prices tumble at their fastest pace in nearly two years (The Times, Tom Howard) cites the latest data from Halifax which shows that house prices fell by 0.4% last month, the steepest monthly drop since February 2021! It said that this was the third month in the last four that has prices had weakened. The mini-Budget dented things quite badly and Negative equity is stalking the suburbs. Who’s most at risk? (Daily Telegraph, Tom Rees and Melissa Lawdford) highlights rising fears among younger buyers on riskier mortgages and buy-to-let landlords – even in the ‘burbs – that double digit house price falls could put them into negative equity (when a home is worth less than its owner borrowed to pay for it – and if they sell while it is “under water”, they will still owe the mortgage lender the difference!). The article suggests that those most at risk are younger buyers with little equity in their property, those on shared ownership deals and some buy-to-let landlords. On a geographical basis, homeowners in the most expensive parts of the UK, mainly London and the south east, are exposed because they will have had to borrow more money to buy the properties which, combined with sharper property price swings and rising mortgage rates could prove to be disastrous. However, homeowners in the cheapest areas like the north east, are exposed because of their smaller deposits and smaller cash buffer to counter big price swings.

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!

3

RETAIL NEWS

Walgreens goes shopping while Joules’ and Made.com’s troubles continue…

In the US, Walgreens unit to buy Summit Health (Wall Street Journal, Laura Cooper) shows that a division of Walgreens Boots Alliance has agreed to buy the private equity-backed Summit Health (which is the parent company of CityMD, which runs urgent-care centres) in a deal that is worth around $9bn that will help enhance its move into medical care. Health insurance company Cigna will also be investing in the combined company. * SO WHAT? * It seems that this is just the latest deal in the current trend where healthcare providers are looking at ways to get closer to their patients. For instance, Amazon bought primary care operator 1Life Healthcare for about $4bn in July and CVS Health Corp bought home healthcare company Signify Healthcare in September for $8bn. I guess that cross-selling opportunities are pretty good in this arrangement but I suspect there will come a point where competition may become an issue (although I don’t think we’ve reached that yet!).

Meanwhile, the nightmare continues in Joules in talks with founder over emergency funds (Daily Telegraph, Hannah Boland) as the apparel retailer is seeking a cash injection to repay a £5m loan due later this month. The company is also speaking to other strategic investors whilst also not ruling out a CVA. * SO WHAT? * If it enters into a CVA, then it would be able to conduct negotiations with landlords about cutting its rent but the company has just become yet another casualty of weakening consumer confidence and the effect this is having on disposable income. Consumers have been spending less on apparel in general, which has forced retailers to sell stock at sale prices just to shift it, which has also impacted on margins.

Then in Founder’s bid for Made.com fails (Daily Telegraph, Hannah Boland) we see that Ning Li failed in his attempt to save the company and now it faces going into administration. He put the offer into PwC last week but it was finally rejected yesterday. It looks like the company will be broken up and bidders including Next and Frasers Group are in the frame to cherry-pick the bits they want.

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!

4

MISCELLANEOUS NEWS

Foxconn buys into Lordstown, lithium groups choose Teesside, Ryanair takes off and law firms rein things in…

In a quick scoot around other interesting stories today, Foxconn plans to invest $170million in EV truck maker Lordstown Motors (Wall Street Journal, Sean McLain) shows that the world’s biggest consumer electronics contractor is putting more money into Lordstown Motors, the controversial EV start-up that almost ran out of money last year. The two also announced plans to jointly develop their first electric vehicle together, although we didn’t get any more detail than that. The investment is subject to approval by the federal government’s Committee on Foreign Investment in the US, aka Cfius, which is expected to take about three-to-four months. If that goes OK, it will take Foxconn’s stake in Lordstown to 18.3%. * SO WHAT? *Foxconn’s move into automotives continues!

Staying with the theme of EVs, Lithium groups choose Teesside in boost for UK battery industry (Financial Times, Harry Dempsey and Jennifer Williams) shows that two battery materials start-ups, Green Lithium and Altilium Metals, are planning to build facilities in Teesside just as uncertainty clouds the future of Britishvolt. * SO WHAT? * This is great news for a region that has high unemployment but, as you know, anything can happen when it comes to battery tech! It is far from a nailed-on success and you would have thought things are getting more difficult for EV production in the UK what with Britishvolt’s financing and credibility problems, BMW announcing that electric Mini production will go to China and Arrival’s production going to America. We’ll just have to see how things go!

Elsewhere, Ryanair half-year profits soar to record £1.2bn amid strong demand (The Guardian, Jasper Jolly and Gwyn Topham) highlights a boom in profits to a record €1.4bn for the first half thanks to strong demand following a solid summer. It also reported more traffic at higher fares than the same period for 2019. * SO WHAT? * The easing of pandemic restrictions across Europe has been the main driver of this success and chief exec Michael O’Leary is now confident that the company’s strong performance will continue into next year as rivals like Lufthansa, IAG and Air France are all cutting capacity. I think it is somewhat surprising that the company has not seen more impact from ongoing pressures on household incomes.

Then in Global law firms scale back hiring as slowdown begins (Financial Times, Joe Miller and Kate Beioley) we see that profits at many of the biggest international law firms are falling rapidly due to an increase in costs and a drop in the amount of M&A and IPO-related business. While billable hours declined by less than 1% over the quarter, payroll expenses have shot up by almost 11% and overheads by almost 13% – all leading to lower profitability. * SO WHAT? * If lawyers are seeing this, accountants and management consultants will also be seeing the same thing. Investment banks aren’t the only ones involved in these transactions! Some are talking about cutting headcount, but it may be too early for that yet. I would have thought there will still be a lot of work in restructuring and insolvency and if the Ukraine war ends with someone more amenable to the West than Putin there could be a massive M&A and advisory bonanza as companies rush back to Russia.

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!

5

...AND FINALLY...

…in other news…

Imagine for a moment that you’re in a pub. Imagine that when you’re in this pub, you strike up a conversation with Chris Martin of Coldplay and there just happens to be a piano in the room – and then you’d get THIS. OMG!

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Some of today’s market, commodity & currency moves (as at 0634hrs 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 **
7,300 (-0.48%)32,827 (+1.31%)3,806.8 (+0.96%)10,475.25 (+0.85%)13,534 (+0.55%)6,417 (unch)27,870 (+1.20%)3,064 (-0.43%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$91.459$97.612$1,670.181.148130.99993146.7701.1481919,774

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