Tuesday 11/12/18

1. In MACROECONOMIC NEWS, May has a ‘mare, UK growth stutters, the French central bank slashes growth forecasts and Macron caves to protester demands
2. In RETAIL NEWS, US retailers shake things up and Dunkerton hankers for a return to Superdry
3. In INDIVIDUAL COMPANY NEWS, China helps Qualcomm, Interserve starts down the Carillion path and ISS sacks 20% of its workers
4. In OTHER NEWS, I bring you cockroach farmers and Baba Vanga’s predictions for 2019. For more details, read on…

So May and Macron cave on either side of the Channel…

Theresa May to restart EU negotiations after aborting Brexit vote (Financial Times, George Parker, Laura Hughes and Alex Barker) heralds continued economic uncertainty as May was forced at the last minute to cancel the House of Commons vote on her Brexit plan (which was due today). She will now run around Europe to see if she can squeeze any more concessions from the Europeans. The pressure continues to intensify as Carolyn Fairbairn, director-general of the CBI business lobby said that “This is yet another blow for companies desperate for clarity. Investment plans have been paused for two-and-a-half years. Unless a deal is agreed quickly, the country risks sliding towards a national crisis”. The drama continues…

Meanwhile, Economy cools after summer heatwave (The Times, Gurpreet Narwan) shows that the UK economy slowed in the three months to October due to sluggish activity in manufacturing and construction, according to the latest figures from the Office for National Statistics. This comes after a strong performance in the previous quarter which was boosted by higher consumer spending due to the unusually warm summer. John Hawksworth, chief economist at PwC, stated the bleedin’ obvious when he said “Until [Brexit] is resolved, the UK economy is likely to remain in the doldrums as businesses will be reluctant to invest and households may also be reluctant to commit to big-ticket items”.

Pound falls as Brexit fears hit business (The Times, Patrick Hosking) highlights a weakening of the pound following the vote news yesterday to 20-month lows as markets and businesses digested the news. Hardly surprising.

Hopping over the Channel, French central bank cuts growth forecast in half amid protests (Daily Telegraph, Anna Isaac) shows that the Banque de France has had to adjust its forecasts to take into account the impact of the Gilets Jaunes protests and issued a statement saying that “Services activity has slowed under the impact of the movement. Transport, the restaurant and auto repair sectors have gone backwards”. It now predicts GDP growth of 0.2% for the last three months of the year versus the previous prediction of 0.4%.

Macron pledges tax cuts, minimum-wage boost to placate protesters (Wall Street Journal, Stacy Meichtry and Noemie Bisserbe) shows a seemingly contrite version of Macron as he said he planned to “take the pulse of the country” by meeting mayors across the country to talk about governance, taxes, climate change, public services and immigration. He also announced a rise in the minimum wage by €100 per month, starting in 2019 “without costing one euro more to employers” and a roll-back of a recent tax increase affecting some pensions and suggested making overtime pay tax exempt.

* SO WHAT? * It looks to me like Europe is in a right state at the moment – the #1 economy (Germany) is having a leadership crisis and faces continued pressure from the rise of the far-right, the #2 economy (France) is having some major wobbles at the moment with Macron’s steamrollering p!ssing off the electorate and the #3 economy (Italy) has a ragbag coalition of extremists in charge threatening to upset the EU applecart with its fantasy-filled budget that will get it into even more debt than it’s already in. Macron’s caving to protester demands now is going to make any kind of future reform even more difficult – if not impossible – as anyone opposing him will have been emboldened by the success of the Gilets Jaunes. Having said that, he had to do SOMETHING – but still, he’s made his job harder.

US retailers shake-things up and Superdry’s co-founder sounds like he wants to return…

US retailers shake up supply chains as tariffs bite (Financial Times, Alistair Gray) looks at how US retailers and consumer goods companies are re-jigging their supply chains in order to protect profits margins as tariffs start to bite in the US-China trade war. Some of this has involved switching sourcing to other countries and leaning on suppliers for better terms and then there are others who have been rushing shipments through to avoid additional tariffs that will come into force next year. * SO WHAT? * The shake-up is not only time-consuming, it is also having an effect on profitability. For instance, Ohio-based discounter Big Lots announced yesterday a downward revision in its full-year forecast which sent its shares down by 23%, which was partly due to higher inventory levels. Gary Friedman, chairman and chief exec of luxury home furniture retailer Restoration Hardware observed that “China is the biggest, most sophisticated manufacturing country in the world – there’s no one close. You can’t shift all this business to these small countries without massive 

dislocation risk”. Even if other Asian countries have the skills to manufacture what’s needed, they just don’t have the capacity that China has. It sounds like it’s only a matter of time before the cost of these complications get passed on to the consumer.

Superdry co-founder steps up campaign to return (The Guardian, Jasper Jolly) is a very juicy-sounding headline, don’t you think? Only months after getting remarried, Superdry’s co-founder looks like he’s hankering for a return by voicing his concerns in a retail analyst note from Liberum thus: “The interaction between stores and the internet is going to be so fundamental to the future of retail. Consumers have adopted the internet and, by doing so, have moved away from the limitations of the high street and towards a world of unlimited choice. The premise here is if one does not participate in this world you will get left behind”. * SO WHAT? * Basically, Dunkerton’s beef is with Superdry’s current strategy of slimming down its product line-up, but it doesn’t seem to be working as the company’s share price has fallen by over 60% this year. Dunkerton still owns 18% of the company and only fully quit earlier this year to turn around and say, after a profit warning in October, that he would be willing to return “in any capacity” (a la Steve Jobs??) to help get the company back on track. This could get interesting!

China gives Qualcomm a boost, Interserve hits the skids and ISS makes drastic job cuts…

Blow for Apple as China bans iPhone sales in Qualcomm row (Daily Telegraph, James Titcomb) is a story that’s doing the rounds of the broadsheets this morning as the Fuzhou Intermediate People’s Court granted two injunctions against Apple subsidiaries in China forcing them to block imports and sales of iPhones from 2015’s iPhone 6s to last year’s iPhoneX as part of a patent fight between Apple and Qualcomm. * SO WHAT? * Apple and Qualcomm are engaged in legal battles around the world currently over royalties and patents and this is just the latest development. Apparently, Apple should be able to get around this as the ruling is not believed to apply to the latest version of iOS, so it is conceivable that they could keep selling them there anyway. Still, Apple’s shares fell by 2% yesterday down to levels below which it started the year. Apple just isn’t doing its usual thing in China and remains particularly vulnerable to the current US-China trade war.

Another story that’s hitting many of the business pages is Will Interserve be the next Carillion? (Daily Telegraph, Jack Torrance) as Interserve – the contractor that cleans

hospitals, provides catering to prisons and builds roads – announced that it was in rescue financing talks, prompting a slide of over 70% in its share price when the news came out yesterday morning. It employs 75,000 people worldwide, 45,000 of whom are in the UK. Interserve, like others such as Kier and Capita, has been suffering from rising costs of labour and materials and a trend of banks reducing their exposure to the sector making it more difficult and more expensive to get credit. * SO WHAT? * Interserve is in a lot of trouble currently, hence the comparisons with Carillion – and it lacks enough scale to raise cash from shareholders via a rights issue. A restructuring will need shareholder approval but the fact that Carillion’s fate is still very much at the forefront of everyone’s mind could mean that they – and the government – will be more accommodating towards efforts to help it survive, however dilutive it may be to existing shareholders.

Talking about outsourcing, Danish cleaning group ISS to axe 100,000 jobs (Financial Times, Camilla Hodgson) heralds a dramatic development for the 117-year old Danish company as it announced plans yesterday to focus on key markets and quit 13 countries including Thailand, Brazil, Israel and the Czech Republic that will mean 20% of its 490,000 staff will lose their jobs – although these businesses will be sold off. The company blamed the hit it has taken from acquisitions and disposals as well as adverse currency movements.

And finally, in other news…

I thought I’d leave you with something a bit creepy today. What do you think of Bug business: cockroaches corralled by the millions in China to crunch waste (Reuters, Thomas Suen and Ryan Woo https://tinyurl.com/y9hpdcvg)? Yeeeeeuck!!! I HATE cockroaches!!!

AND FINALLY, when we could all do with a bit more certainty in our futures, we could probably do worse than turning to Blind mystic Baba Vanga’s 2019 predictions – after foreseeing 9/11 and Brexit (The Mirror, Neil Murphy https://tinyurl.com/yblmj666). Spooky!