Tuesday 10/09/19

  1. In MACRO NEWS, Putin’s party loses a lot of ground, UK recession fears recede and BoJo fails again
  2. In CONSUMER/RETAIL NEWS, PPI claims hit £50bn, US retailers abandon Chinese suppliers and Primark suffers margin pressure
  3. In AUTOMOTIVE NEWS, India sales dive, South Korea’s GM workers stage a strike, Ford gets downgraded to “junk” and Geely buys into Volocopter
  4. In INDIVIDUAL COMPANY NEWS, Apple and Foxconn get into trouble in China, Intu buyout rumours buoy the share price and the FDA warns Juul on safety claims
  5. In OTHER NEWS, I bring you a Newport greasy spoon…

1

MACRO NEWS

So Putin’s party loses ground and fears of a UK recession seem overdone…

Putin’s party loses more than third of seats in Moscow poll (Financial Times, Henry Foy) shows that Russia’s ruling party, United Russia,  has just lost over a third of its seats in the Moscow City council election following a summer of protests against worsening living standards, government corruption and the heavy-handed treatment of political opponents. Voter disgruntlement has increased as Putin implemented pension reforms that increased the retirement age by five years and hiked up VAT as household incomes fell for the fifth year in a row. * SO WHAT? * I doubt this is really going to register with Vlad as this is a local election result, but it can be seen as a barometer of how the broader electorate is feeling. Parliamentary elections aren’t due until 2021 and he is supposed to hand over power in 2024 (chuh, right! I suspect he’ll try to do a Mugabe and find ways to cling onto power for as long as possible!), so now is probably as good a time as any to introduce unpopular reforms – the memory of which he probably hopes will fade before voters

next come to the polls.

Meanwhile, UK recession fears recede after surprise economic growth (The Guardian, Larry Elliott) cites the latest figures from the Office for National Statistics which show that the risk of the UK falling into recession have lessened as July saw a 0.3% increase in economic output. The services sector, which accounts for about 80% of the UK’s GDP, and manufacturing sector saw activity increase by 0.3% while construction had an uptick of 0.5% in July following contraction in the previous quarter. * SO WHAT? * OK, so this is just one month’s data – but it could have been worse. It seems that we’re OK for now, but Brexit is obviously brewing in the background.

Boris Johnson loses second attempt to hold snap general election (Financial Times, George Parker) heralds the latest bump in the road for BoJo as opposition MPs blocked his second go at holding a snap general election on October 15th. Parliament is now suspended for five weeks and so an election can’t now take place until November at the earliest. BoJo, in the meantime, will have to go to the EU summit on October 17th-18th to negotiate a new Brexit agreement without the threat of no-deal (although he has threatened to ignore the new law denying him the no-deal option). The drama continues…

2

CONSUMER/RETAIL NEWS

Late PPI claims prove painful, US retailers abandon Chinese suppliers and Primark’s margins get squeezed…

PPI bill hits £50bn as Lloyds and Barclays increase their provisions (Daily Telegraph, Harriet Russell) shows that a massive rush of PPI claims skidding in before the August 29th deadline has tipped the banking industry’s final PPI bill to over £50bn. Lloyds and Barclays are among the banks that have had to increase their provisions for payouts as their previous assumptions had been based on 190,000 claims per week until the August deadline versus the actual number of 6-800,000 claims per week last month! * SO WHAT? * Tricky, but then again at least the banks can see light at the end of the tunnel. OK, so they’ve had to rein things in a bit by this but they will bounce back. You might be wondering why I put this story in the “Consumer/retail news” section – well it’s because I think that there will be a windfall effect going into the end of this year as people spend the money they receive. Now I don’t know the size of the average claim, but I am assuming that it’ll range from a few hundred quid to a few thousand so I would assume that people may well want to spend it! Given house prices these days, I would have thought that anything to do with home improvements will benefit (= DIY retailers and probably tradespeople themselves as they get more business) plus possibly electrical goods retailers as successful claimants upgrade TVs and other normally big ticket items. Who knows – maybe even car sales may see an increase as people use the lump sum as a deposit – they could certainly do with the boost! I am really going to sound like an old man now, but I remember at the end of the 90s that many people got “windfalls” as building societies went through a spate of demutualisation, resulting in their account holders suddenly getting their hands on “free” shares, which they duly sold. It was happening so frequently that people were rushing around opening accounts at any building societies they could to get access (they were referred to as “carpet-baggers”) although most places got wise to this pretty quickly and only allocated shares to customers who’d had accounts open for a certain amount of time. The rough “windfall” figure around this time was about £1,000 – and DIY retailers and electrical retailers did indeed do quite well from it. I am assuming that history will repeat itself, with

the windfall coming this time around from PPI rather than building society demutualisation…

US retailers accelerate shift away from Chinese suppliers (Financial Times, Alistair Gray) highlights the fact that US retailers are abandoning Chinese suppliers at an accelerated rate as a result of Donald Trump’s trade tariffs and are now switching their sourcing to countries such as Vietnam, Cambodia and Thailand. Retailers had been doing this already over the last few years as labour costs (which was why they went there in the first place) have been rising, but Trump’s latest moves have given them reason to quicken the pace. Retailers such as Carter’s (children’s clothing), American Eagle (teen retailer), Vera Bradley (luggage and handbags) are among those who have outlined plans to reduce their reliance on China but Morris Goldfarb, who runs G-III Apparel (which owns brands including DKNY and Andrew Marc) cautioned against complete abandonment as he said that “Once you get your production out of China…you can’t bring it back. Those factories will go out of business…you still need to keep a foothold [in China], until we fully recognise the depth and term of the problem”. * SO WHAT? * The mass-migration continues to other countries in the region. TBH, this is not a bad thing IMO because having your supply chain overly skewed to one country is not a good practice because if something goes wrong (in this case, tariffs), it can really b*gger things up for quite some time. I guess it’s always about finding the right balance between cost efficiencies, having “areas of excellence” and being too exposed to one country or region. I think that companies have a tendency to drift production upwards in lower-cost countries and then reach a point a few years down the line where those cost benefits no longer exist. I believe we have now reached such a point with China…

In Primark owner feels the pinch as sterling hits profit margins (The Times, Alex Ralph) we see that profit margins at the Associated British Foods-owned apparel retailer look vulnerable as a stronger dollar and weaker pound are increasing the cost of goods. The company said that it would not pass the price increases on to shoppers – but obviously this will come at the expense of profit margins. It would instead look to cut material costs to claw back some of the margin. * SO WHAT? * Primark has been somewhat of a success story on an embattled UK high street. Although this news is clearly disappointing, I don’t think it is disastrous – and the fact that parent company ABF kept its full year assumptions unchanged is cause for some relief.

3

AUTOMOTIVE NEWS

India sees weak car sales, South Korea’s GM goes on strike, Ford gets downgraded and Geely invests in Volocopter…

The nightmare for automobiles continues in India car sales slump 41% as downturn deepens (Financial Times, Benjamin Parkin) as the latest figures from the Society of Indian Automobile Manufacturers unveiled the fifth consecutive month of double-digit losses. The main reason behind this nightmare is the chaos in India’s shadow banking sector which accounted for over half of the credit used for vehicle purchases. * SO WHAT? * This massive drop-off has forced automakers to cut staff, close/limit production and reducing the number of contractors. Sales of two-wheelers and commercial vehicles have also fallen and there has been increased pressure on the government to do something about the situation. India’s finance minister announced a number of measures last month to boost customer lending for new cars and to encourage government agencies to buy new cars, but clearly these initiatives have not started to feed through yet.

GM Korea workers stage first full strike in more than 20 years (Financial Times, Song Jung-a) heralds the first strike at GM in South Korea for over twenty years as they demand higher wages and protest against the company’s restructuring plans. Three plants will shut down in a strike that will last until the end of tomorrow. * SO WHAT? * Good luck with that. GM can just point to how the whole industry is suffering globally and how it needs to make cuts to survive an uncertain future – so asking for a wage hike and no job losses is going to be a big ask IMO. This is just more evidence of the hardships being faced by the automotive industry generally.

And if you were still harbouring thoughts that the car industry is actually in rude health, Ford’s credit rating slashed to ‘junk’ (The Times, Robert Miller) shows that even dim-witted credit agency Moody’s has decided to downgrade the company’s credit rating to Ba1 on concerns that Ford chief Jim Hackett’s plan to turn the thing around won’t work. Moody’s analyst Bruce Clark said that the downgrade reflected “the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan”. * SO WHAT? * This is a bit of a pain for Ford because it means that servicing its debt will now be a bit more expensive – something it could really do without given that it’s trying to turn things around. Moody’s (and other credit rating agencies, for that matter) always seem to be supreme at telling everyone what they already know and this move will just increase the pressure on the embattled car company.

Geely takes stake in German flying taxi start-up Volocopter (Financial Times, Sylvia Pfeifer and Peter Campbell) signals the Chinese carmaker’s investment in a minority stake of German flying taxi start-up Volocopter, which hopes to bring its VoloCity all-electric aircraft to a commercial launch within the next three years. Apart from acting as a sugar daddy, Geely will be working with the company to launch air taxis in Chinese cities. * SO WHAT? * OMG. Seriously. Given that it’s nigh on impossible to get permission to fly a freakin’ drone within spitting distance of human habitation these days, I fail to see how operating flying taxis will happen in the next three years. Surely the first passengers in these things will be those who have more money than sense and a death wish?? Sounds great but I really think that pigs might fly before taxis do (and I’m sure scientists are getting ever closer to the former)!

4

INDIVIDUAL COMPANY NEWS

Apple and Foxconn face time on the naughty step, Intu gets boosted on rumours and the FDA warns Juul…

Apple and Foxconn broke Chinese labour law to build new iPhones (Financial Times, Louise Lucas) highlights a bit of a problem for the two companies ahead of Apple’s launch event tonight as it admitted that it breached Chinese labour law by employing over 50% of its workforce assembling the iPhone as contractors. The law states that it cannot go above 10%. Other claims in a report compiled by China Labour Watch about worker compensations and hours were refuted by Apple. * SO WHAT? * I may be wrong here, but the fact that this law was breached for quite some time and by quite some margin would suggest that authorities were willing to turn a blind eye but are now getting their own back on Trump’s tariffs by suddenly taking notice. No doubt we shall hear more about this as time goes on…

Intu buoyed by buyout talks (Daily Telegraph, Alan Tovey) shows that shares in the retailer landlord that owns malls such as Lakeside in Essex and The Trafford Centre in Manchester shot up by over 20% in early trading yesterday on rumours that property investor Orion was going to buy it. There was no official comment (or denial) of such intentions by either side. * SO WHAT? * Given the carnage of the UK retail landscape currently, I think that bid rumours will be the only thing to power retailer landlords at the moment. No doubt the share prices of other landlords will rise as investors try to bet who might be a nice bid target.

FDA warns Juul about marketing products as safer than cigarettes (Wall Street Journal, Jennifer Maloney) puts further pressure on companies making cigarette alternatives as the powerful Food and Drug Administration accused Juul of overstepping the mark when it said in marketing that its e-cigarettes are “totally safe”. The pressure and investigations continue to ratchet up on the industry…

5

OTHER NEWS

And finally, in other news…

I’ll just leave you today with a headline that needs no introduction: Fanny’s faggots haven’t gone down well after Google bans advert (Metro, Richard Hartley-Parkinson, https://tinyurl.com/y6jg3pam). A marketing ploy, surely??

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Some of today’s market, commodity & currency moves (as at 0900hrs 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 **
7,236 (-0.64%)26,836 (+0.14%)2,978 (-0.01%)8,08712,226 (+0.28%)5,589 (-0.27%)21,392 (+0.35%)3,021 (-0.12%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$58.1600$62.8800$1,491.191.231341.10441107.321.1149910,276.82

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