Tuesday 11/04/23

1. In MACRO NEWS, China ups the ante with Taiwan and we look at the positives of the CPTPP
2. In BUSINESS & CONSUMER NEWS, US companies see a massive fall in profits, Europe’s biggest SPAC closes, the first batch of China IPOs under new rules launch, corporate activism hits new highs and supply chain recovery boosts optimism while UK consumer spending rises, first-time buyers focus on smaller homes and Norway sees billionaires depart
3. In TECH NEWS, Apple has hopes for India, Beijing targets tech, ByteDance posts record profits, AI data breaches cause concern and OneWeb/Eutelsat valuations hit reality
4. In MISCELLANEOUS NEWS, Tesla increases China investment, Chinese EVs hit the UK, Teck rejects Glencore’s unsolicited bid and European commercial real estate creaks
5. AND FINALLY, I bring you some travel advice…

So China escalates things re Taiwan and we look at benefits of the UK being in the CPTPP…

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

China escalates military drills near Taiwan and Japan (Financial Times, Kathrin Hille) highlights Chinese sabre-rattling to the south of Japan as the Chinese Navy conducted war games centred around the Shandong, China’s #2 aircraft carrier. It spooked the Japanese enough to scramble fighter jets of its Air Self-Defense Force. This came in response to Taiwan’s recent meeting with US House Speaker Kevin McCarthy (and possibly in the aftermath of its meeting with the Japanese foreign minister last week). The Chinese units were conducting a “joint blockade” of Taiwan. Over in Europe, Emmanuel Macron’s Taiwan remarks spark international backlash (Financial Times, Leila Abboud, Sarah White, Henry Foy and Demetri Sevastopulo) shows that the French president caused alarm in some quarters by saying that Europe should step back from heightening tensions between the US and China over Taiwan and become more independent on things like energy and defence. He was then criticised for being soft on Beijing and critical of the US, especially considering the support Europe has received from the US re the Russian invasion of Ukraine and the fact that China was undertaking military exercises in the straits of Taiwan. The remarks came after a three-day state visit to China.

Then in Why Taiwan matters to the world (Financial Times, Gideon Rachman) we see why protecting Taiwan from China matters. This is a really excellent article that you should read in full if you can!

Anyway, the gist of it is that there are three key reasons to support Taiwan. Firstly, defending Taiwan will maintain political freedom (China’s one-party policy clearly goes against this); secondly, the global balance of power would shift (if China invades Taiwan, the likelihood is that other countries in the region will acquiesce to China and change their domestic and foreign policies to accommodate it – and US influence would dwindle); thirdly, there would be a big impact on living standards all over the world because Taiwan makes over 60% of the world’s semiconductors and around 90% of the most advanced ones. Pretty much all the gadgets we use for modern day living run on Taiwanese chips – and if China invaded and took control, they would have the rest of the world by the short and curlies (much as they do with EV battery materials). Replicating Taiwan’s prowess in semiconductors is not easy, as America is currently finding out. Yes, it is a small island around 100 miles off the Chinese coast with around 24m inhabitants – but it is also so much more than that!

Meanwhile, How Britain left Brexit behind with a new Pacific trade deal (Daily Telegraph, Matt Oliver) touts the benefits of the UK acceding to the CPTPP, giving us a seat at the table of a region that is set to grow in stature. It argues that the CPTPP model of recognising each other’s laws and not restricting foreign companies is an improvement on the EU model – where the bloc passes shared laws – because it allows for more freedom for individual countries. One really interesting development would be if the US joined the CPTPP. If it did, the agreement’s members’ GDP would shoot up from a global share of 15% (including the UK) to 43% (the EU currently accounts for 18%). That would mean zero tariffs between the UK and the US at a stroke – something that years of bilateral talks have failed to achieve! Interestingly, the fact that we are now in the CPTPP means that the US joining could be more likely as all members of the agreement have to support the accession of a new member – and at the moment, it is highly unlikely that China will be in the same position.

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!

US companies hit hurdles, Europe’s biggest SPAC shuts, China IPOs cause a kerfuffle, boardroom activism increases and companies get more optimistic while UK consumers spend more, first-time buyers go small and Norway leaks billionaires…

US companies face biggest decline in profits since Covid shutdowns (Financial Times, Jaren Kerr) highlights Wall Street forecasts that predict the sharpest drop in profits since the early stages of the pandemic thanks to inflation powering a margin squeeze and concerns about a potential recession. Analyst estimates compiled by FactSet shows that companies on the S&P500 are expected to post a 6.8% drop in Q1 earnings versus the same quarter a year ago. The current earnings season kicks off this Friday with US banks. It is interesting to note that this pessimism appears, at first glance, to run counter to the fact that the S&P has gone up by over 6% since the start of the year – but then only 20 stocks have been responsible for almost 90% of the rise, so things may not be as rosy as they first appear, particularly as 78% of companies have issued negative guidance during Q1, which is a lot more than usual. It is thought that SMEs may also suffer as a result of the recent banking crisis as their access to capital may become more restricted as lenders get more cautious.

Europe’s biggest Spac to be wound up (Financial Times, Sarah White and Adrienne Klasa) really does signal the end of an era as Pegasus Europe, run by LVMH founder Bernard Arnault and ex-UniCredit head honcho Jean Pierre Mustier, is going to be wound up after failing to find a suitable target in the financial services sector! It will return capital to its investors at the beginning of May, pending shareholder approval. * SO WHAT? * I imagine that SPACs will return again at some point (maybe they will have a subtle name change as SPACs now have a bit of a negative image thanks to some spectacular failures), but the fact that the one that raised €484m with such high-profile leaders at the height of SPAC-hype in 2021 is now shutting down shows that SPACs now look like a spent force.

In First batch of IPOs under new China listings rules surge on debut (Financial Times, Hudson Lockett and Cheng Leng) we see that ten IPOs that launched yesterday on the Shanghai and Shenzhen stock exchanges under the new streamlined listing rules skyrocketed by an average of almost 100%! The new rules mean that companies can list without first getting regulatory approval and the 44% ceiling on first-day gains was abolished. China IPOs: fizzy pops will fade as reforms bed in (Financial Times, Lex) reckons that the massive first day move was thanks to the removal of the share price ceiling and perception that mainland Chinese stocks have been somewhat undervalued. Pricing is expected to get better once everyone gets used to the “new normal”. * SO WHAT? * Price rises like that on the first day must be very annoying for the companies that floated as they will no doubt be thinking that they could have achieved a better initial valuation and pocketed more money. However, I guess this is a new system and it takes a bit of getting used to. It’ll be interesting to see how far the prices fall (if at all) in subsequent trading sessions but this stellar performance is likely to attract more companies to market!

Boom time for boardroom raiders as activism hits record highs (Financial Times, Ortenca Aliaj) is an interesting article which shows that activist investors have had their busiest quarter ever in Q1 this year as they have taken advantage of weaker share prices. “Boardroom raiders” – who take stakes in companies they think are undervalued and can be improved – went a bit quiet at the height of the pandemic but they’ve come back again in high-profile campaigns targeting companies such as Salesforce and Disney.

The most “active” activist investor over Q1 was Align Partners, a South Korean firm which launched eight campaigns over the time period, but the old favourites – including Elliott Management, Icahn Group and Trian – have all been active. * SO WHAT? * It’s interesting to see who does what when share prices fall, isn’t it! Companies can consolidate (to cut costs whilst getting a bigger footprint), do share buybacks to put a floor under their share price if they think it’s fallen too far – or perhaps suffer an assault by activist investors who want to impose their will to squeeze more out of the company (among other things). I do think that increased activist activity also implies that there is at least some optimism in the market as these investors don’t want to back what they think will be a losing horse!

Supply chain recovery feeds optimism among companies (The Times, Mehreen Khan) cites the latest business trends survey from BDO, which reported another jump in output powered by falling energy prices and the ongoing recovery of supply chains which has helped with costs and reduced delays. With the prospect of falling interest rates on the horizon adding to the mix, there seem to be more reasons to be cheerful these days!

In consumer news, UK consumer spending rises but still lags behind inflation (Financial Times, Daria Mosolova) cites the latest data from Barclays which shows that consumer spending increased last month – with household and DIY goods benefiting in particular as consumers looked to spruce up their houses ahead of summer – although it is still not growing quite as quickly as inflation. 88% of respondents to Barclays’ survey said that they were still worried about utility bills, almost two-thirds said they were buying fewer clothes and 62% of respondents said they had cut down on eating out to save money. * SO WHAT? * These stats are particularly notable because Barclays represents about 50% of all credit and debit card transactions nationwide – so this is all real and not conjecture! It’ll be interesting to see  how much spending increases from here as I get the impression that all the doom and gloom of last year is being replaced by cautious optimism…

UK first-time buyers opt for smaller homes as higher mortgage rates bite (Financial Times, Joshua Oliver) reflects a current consumer trend where first-timers are electing to buy smaller properties rather than continuing to rent given how rents are booming (they have shot up by around 20% in the last three years alone!). The majority of first-timers bought a one or two-bedroom property in Q1 for the first time since 2010! Estate agents Hamptons observed that purchases by first-time buyers were a much more robust category than other categories, which meant that the share of properties bought by them reached a record high of 27%. No doubt high rents are going to keep this trend going.

Then in Norway counts the cost of its new wealth tax as billionaires flee to Switzerland (Daily Telegraph, Charlotte Gifford) we see that around 50 billionaires and millionaires – with a collective net worth of around £3bn – have ditched life in Norway to head to Switzerland because wealth taxes went up in November. More have left since then than the total number who left since 2009! Norway is one of only a handful of countries to still have a wealth tax (along with Spain and, interestingly, Switzerland!) that takes money based on the global net worth of its citizens. Funnily enough the tax take from the wealth tax only accounts for 1% of the country’s overall take! This is now becoming such a thing that Norway is now considering charging an “exit tax” when individuals emigrate! * SO WHAT? * What happens here will no doubt be considered by the Labour party in the UK as it is looking at a number of ways of raising tax from the wealthy…

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!

We look at Apple’s India aspirations, Beijing’s tech retaliation, ByteDance’s success, AI wobbles and what’s going on with OneWeb/Eutelsat…

For Apple, India Is the Next China (Wall Street Journal, Megha Mandavia) shows that India is slowly become Apple’s “next China” as it it opened its first physical store in the country last month while it continues to grow its manufacturing base there. Having a sales outlet in the country where it is also manufacturing makes for a very smooth supply chain, a model that has worked in China over the last ten years or so. Apple’s market share in India was as low as 1% in 2019, but it is on track to go above 5% this year – although there’s still a long way to go to reach 22% market share in China. * SO WHAT? * There are some impressive stats to fire up excitement about the prospects for Apple in India! It’s the world’s second biggest smartphone market (it has a 12% market share), but smartphone penetration is still below 50% which means that there is tons of room for upside, particularly if Apple can focus on getting its costs down. At the moment, you would have thought that pricing is holding it back as the average price of a smartphone last year was $206, excluding taxes, versus $898 for an iPhone – although it is possible to get one for $500 if you include discounts. Given problems in China and the ongoing uncertainty of US-China trading relations, it is a VERY good idea for Apple to have a foot on either side of the Himalayan border.

Beijing chooses targets carefully as it goes on offensive in US chip wars (Financial Times, Eleanor Olcott and Richard Waters) highlights the balance that China is having to strike between retaliating against US sanctions on the one hand and not going too far on the other, in order to not shoot itself in the foot. I said last week that the CAC is investigating US chipmaker Micron Technology due to security concerns, but it seems that Micron’s tech could be easily replaced by competitor chips if the government decided to ban it. However, experts are suggesting that further retaliation is likely to be limited given that China still needs AI chips made by the likes of Nvidia, Intel and Qualcomm. Even if Micron was shut down in China, the impact would be limited as its product could just be diverted elsewhere.

Then in ByteDance posts record profit despite TikTok losses (Financial Times, Eleanor Olcott and Ryan McMorrow) we see that

TikTok’s parent company announced record underlying profits for last year – overtaking those of Tencent and Alibaba for the first time ever! This was despite rising losses at TikTok while ad revenues soared. * SO WHAT? * TikTok still faces the prospect of being banned in the US and if it was, it would hurt. Although ByteDance generated about 80% of its revenues in China last year, TikTok is seen as a great future profit driver.

‘I didn’t give permission’: Do AI’s backers care about data law breaches? (The Guardian, Alex Hern and Dan Milmo) airs the debate of AI systems and how they are trained. The material used to train these systems is taken from a number of sources and the issue of data protection is becoming an increasingly serious issue. Italy has actually banned ChatGPT because it sees no legal basis for its to collect and store the vast quantities of data, the Canadian privacy commissioner followed up with an investigation on similar concerns and the UK’s Information Commissioner’s Office is also considering further action. There are already lawsuits going on with companies including Midjourney and StabilityAI for allegedly violating “the rights of millions of artists” by using their work to train their models. Why a fake Pope picture could herald the end of humanity (Daily Telegraph, Matthew Field) refers to the AI-generated photo of the Pope wearing a white puffer jacket being the physical embodiment of why AI is so scary. A lot of the AI tools that are currently being developed have no accountability at the moment but are already being incorporated into many businesses. * SO WHAT? * There is a very real possibility of a regulatory crackdown here. Models are developing so quickly and the potential for errors and damage is vast when there is an absence of any safety net or guidelines. It’s difficult to know who will take the initiative, though!

OneWeb/Eutelsat: sky-high terminal cost brings valuation down to earth (Financial Times, Lex) is a really interesting article about OneWeb, satellites and the Low-Earth Orbit (LEO) business that is currently dominated by SpaceX’s Starlink. It now has 3,500 satellites up in space versus OneWeb’s rather more pedestrian 618 – and then there’s Amazon with its Project Kuiper with no satellites (but given that Amazon’s its backer, this is bound to change!). OneWeb needs scale, hence its merger with France’s Eutelsat but there is a long way to go yet before it can call itself a major player in the race to get the internet everywhere on earth!

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!

Tesla doubles down on China, Chinese EVs come to the UK, Teck scoffs at Glencore’s offer and European commercial real estate teeters…

In a quick scoot around some of today’s other interesting stories, Tesla boosts China investment with plans for Shanghai battery factory (Financial Times, Hudson Lockett and Edward White) shows that Tesla is still very much committed to China as it unveiled plans to build a factory in Shanghai that will produce its Megapack energy storage system used to store renewable energy for electricity grids. Construction is due to start in Q3 of this year with production due to start in Q2 of 2024. Product will be shipped globally. Musk is keen to expand the energy storage business up to the level of his car making operations. Exciting times!

Chinese electric cars race to arrive on British forecourts (The Times, Robert Lea) cites a report by Auto Trader which highlights the influx of up to 25 Chinese-built electric car marques to the UK from next year. Car dealers are busy signing distribution agreements but I think that it will take a while for any of them to take too much market share as I think it takes car brands years to gain the trust of a nation. Skoda, for instance, used to be a long-

running joke – but its cars now get consistently highly rated. The incoming Chinese tidal wave may, however, force other car makers to cut their prices, though…

Teck criticises ‘unsuitable’ Glencore (Daily Telegraph, Callum Jones) shows that the Canadian miner that was subject to an unsolicited bid from mining giant Glencore has rebuffed the latter’s advances, despite the fact that it came in at a 20% premium to where its shares had been trading pre-announcement. I suspect we haven’t seen the end of this yet!

European commercial real estate: the cracks are starting to show (Financial Times, Joshua Oliver) is a very interesting read as it looks at the current landscape for commercial property which shows falling office demand at a time where borrowing costs are rising. It is interesting to note that this situation is different to the financial crisis of 2008 where office demand was weak but central banks were racing to cut interest rates in order to breathe life back into the economy, meaning that borrowing costs were falling. The market is likely to be tricky, particularly as borrowing costs are set to be higher for some time yet. Having said that, those with access to cash may well be able to pick up some bargains and perhaps then refinance further down the line when rates are lower to deploy their money elsewhere…

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!

…in other news…

It seems that everyone is going on holidays these days – so here’s some advice for you: ‘Magic window’ you need to know before booking any flight to save money (The Mirror, Milo Boyd). Bon voyage!