Tuesday 14/04/20

1. In MACRO, MARKETS & OIL NEWS, the Eurozone bailout has Italian wobbles, Brexit talks are set to resume, Goldman gets positive and the oil production cut underwhelms while Trump talks things up
2. In INDUSTRY TRENDS, China’s venture capitalists go shopping but diamond production, phone roaming, ad spending and PC sales fall
3. In RETAILER NEWS, Amazon hires even more and UK supermarkets tread a fine line while apparel retailers and small pharmacies face tough times
4. AND FINALLY, I bring you some uplifting news of companies helping in the crisis…

So Europe faces a tough week, Goldman gets more positive and Trump tries to rally support for oil production cuts…

Rift fears as eurozone virus bailout fund is sunk (Daily Telegraph, Ambrose Evans-Pritchard) highlights Italy’s dissatisfaction with the current bailout deal on the table that is supposed to drag Europe out of the coronavirus mire. European finance ministers hailed last week’s deal – after huge amounts of debate – as a historic breakthrough, but the mayor of Stazzema in Tuscany sent a letter to Germany’s Angela Merkel that encapsulated Italy’s anger by saying “The next victim of Covid-19 will be Europe unless there is more solidarity between states”. Will Germany step up, I wonder, as the European north-south divide continues to widen?

While this is all going on, Brexit negotiators try to pick up pieces as talks resume (Financial Times, Jim Brunsden) highlights the resumption of Brexit (remember that?!?) talks tomorrow between Michel Barnier and David Frost. They will decide on new dates for subsequent rounds of virtual negotiations as the three rounds that were supposed to have happened by now have clearly gone by the wayside. Apparently, the call is not expected to cover the possibility of a post-Brexit transition period extension going beyond the end of this year. * SO WHAT? * I do wonder whether negotiations will be more flexible on either side as talks will probably take a back seat as measures to combat the coronavirus outbreak continue to take precedence. This may lead to both sides concentrating less on scoring points off each other and more on getting something done with concessions being won on either side – but maybe this is just a pipe dream! Anyway, given what’s been going on, an extension to the withdrawal agreement (which should have been negotiated and approved by the end of June under the current terms) looks increasingly likely and the two sides will have to negotiate a “financial contribution” payable for the UK if it wants continued access.

Goldman declares US is past worst (The Times, James Dean) shows that equity strategists at the bank believe that stimulatory actions taken by the government and the Federal Reserve have been enough to avoid further equity market weakness – as long as there is no secondary outbreak. Market rout reopens big gaps between winners and losers (Financial Times, Richard Henderson) highlights the difference in share price performance between “winners” and losers across 20 industry groupings of the S&P500 as being the biggest – 42% in March – since records began in 2005. The weakest performers were energy equipment companies (suffering from weak oil price fallout) and banks (suffering from a low interest rate environment and potential exposure to increasing bad loans etc.), while the “best” (or, “least bad”) performers were telecoms and healthcare equipment companies. * SO WHAT? * Given that the quarterly earnings season will be kicking off again with America’s big banks this week, we will see hard figures that will give us a more accurate picture of what’s going on in corporate America. We’ll soon see whether we’re in a bear rally (an unsustainable share price bounce in a falling market) or in the early stages of recovery.

In Historic oil production cuts ‘will not halt slump in demand’ (The Guardian, Jillian Ambrose) we see that the production cuts announced to great fanfare over the Easter weekend (10m barrels a day, which equates to around 10% of the world’s oil supply) have underwhelmed the market. The historic agreement between Opec and non-Opec countries fell short of what many believe is needed to boost the oil price from recent lows against the current economic backdrop but then Trump hints at more curbs to oil output as deal tanks (Daily Telegraph, Tom Rees) shows Trump trying his best to talk the prices up. He tweeted (of course!) that “The number OPEC+ is looking to cut is 20m barrels a day, not the 10m that is generally being reported”. This is, of course, classic Trump – just thowing enough 💩 around to see whether it sticks. It’s actually not a bad idea from his point of view because if oil prices rise as a result, then he can say to oil producers that this is the level they need to cut and if they don’t, he can just say “I told you so” if oil prices either continue to stagnate or fall. At the moment, it looks like the market has taken his outburst with a pinch of salt…

China’s venture capitalists look to be on the verge of a shopping spree but the prospects for diamond production, roaming revenues for telcos, ad spending and PC sales look bleak…

China’s venture capital funding rallies after coronavirus lockdown (Financial Times, Mercedes Ruehl and Ryan McMorrow) cites data from the Asian Venture Capital Journal which shows that Chinese start-ups and tech companies managed to raise over $2.5bn in March – six times the $410m raised in February – as investors sought out coronavirus bargains. Although this is a strong monthly figure, venture capital financing actually fell by over 50% over the first quarter (but then, that’s hardly surprising is it!). One recipient during March was online education start-up Yuanfudao, which got $1bn from a consortium of investors including giant Tencent. * SO WHAT? * This is interesting to see – but I suspect that governments and regulators around the world will be wary of Chinese companies using their cash to buy into strategic overseas assets.

Elsewhere, Diamond sector grinds to halt as India’s lockdown bites (Financial Times, Benjamin Parkin and Henry Sanderson) highlights one of the consequences of Indian PM Modi’s national lockdown as India is responsible for 90% of all diamond cutting and polishing. This is mainly by carried out by artisans in the city of Surat – which is now deserted as migrant workers fled to their rural homes. * SO WHAT? * India’s lockdown means that the demand for rough diamonds has fallen off a cliff and won’t pick up again until it is lifted. India has been carving a niche for itself in the diamond industry over the years by buying rough diamonds from companies like De Beers in southern

Africa and Alrosa (the world’s biggest diamond miner) of Russia and then polishing them up to sell in finished jewellery globally. The industry’s massive reliance on India has exposed problems with the current supply chain and now that things have dried up, many related companies will find themselves in jeopardy. Optimists say that demand will shoot up once lockdown lifts as couples decide to get hitched (?!) but pessimists say that recovery in demand is likely to take time – 18months to two years – given that diamonds are not essential items and that people may well be financially less well off than they were before all this happened. 

In other industry trends, Fall of the roaming empire: telecom groups face revenue loss as travel collapses (Financial Times, Nic Fildes) cites data from Juniper Research which estimates that widespread bans on international travel could punch a $25bn hole in mobile phone company revenues this year. Although they’ve done OK so far because they are protected by their subscription model and the fact that they are an “essential” service, it is thought that this could be the beginning of the end for roaming charges. Ad giant Publicis warns of unprecedented spending pullback (Wall Street Journal, Nick Kostov and Suzanne Vranica) highlights a common phenomenon when economies get weaker – that ad spending tends to fall as a “non-essential” cost and so agencies such as Publicis will suffer as a result for some time and PC sales fell sharply in latest quarter, hit by logistical challenges (Wall Street Journal, Maria Armental) shows that PC shipments fell in the first quarter of the year as supply/logistical challenges meant that rising demand from increased numbers of people working-from-home was not met. Although companies are expected to rein in expenses once this all dies down, they may also have to buy PCs to bring their remote infrastructure up to speed for if this happens again. Lenovo was #1 in shipments, followed by HP and then Dell. The top three vendors have a combined market share of over 50%.

Amazon employs even more and supermarkets face a moral dilemma while apparel retailers and pharmacies face tough times…

Amazon to hire 75,000 more workers to cope with demand (Financial Times, Dave Lee and Alistair Gray) signals the e-tailing giant’s intentions to hire even more staff in order to meet customer demand. This will bring the number of employees worldwide to just under 1m globally! It also announced plans to relax restrictions on “non-essential” products imposed in mid-March. * SO WHAT? * This will be music to the ears of the unemployed as well as third party sellers who account for about 60% of sales via Amazon.com. Many of these third party companies have been locked out as goods other than household staples and medical supplies have been blocked in order to concentrate on banging out essential items.

Stockpiling panic might not save supermarkets from profits slip (Daily Telegraph, Laura Onita) is an interesting article which discusses the moral dilemma that UK supermarkets currently find themselves in. You may recall that Tesco recently decided to pay a dividend to investors despite criticism that it was basically using taxpayer money to fund it (retailers are currently “enjoying” a business rates “holiday” which still applies to big companies, such as supermarkets, that arguably don’t need it). They will say that they still need the “holiday” because they are taking on costs to keep the nation going by not furloughing people (sounds tenuous to me – although they are incurring costs by hiring more people), not claiming any other government handouts (they don’t

need to – they are making more money now than they ever did at Christmases!) and supporting food banks and charities. * SO WHAT? * Supermarkets claim that business is still cutthroat and that margins are still wafer thin so they need all the help they can get. Also, although food sales are strong, clothing and fuel sales remain weak. Still, they are doing pretty well overall at the moment and if they wanted to enhance their standing, they have the option of not taking the handouts – although I suspect that no-one wants to be the first to do so! 

On the other hand, Clothes retailers face £15bn of write-offs as stock lies unsold (The Times, Ashley Armstrong) cites analysis by Retail Economics and Alvarez & Marsal which shows that fashion retailers could be facing massive write-offs as they sit on a mountain of stock that can’t be sold. * SO WHAT? * Trend-focused chains like River Island, Topshop and New Look could be particularly vulnerable as their clothes risk falling out of fashion by the time they can actually sell them, Primark is suffering because it doesn’t sell online and even the normally impressive Inditex, which owns Zara, said last week it would take a €300m write-down on the value of its inventory. For these places, a relaxation in lockdown can’t come fast enough. But even when it does, the discounts will be big and wide-ranging in order to run down inventories. Great for customers, not so great for the retailers.

Elsewhere on the high street, Pharmacies call for emergency cash to stay afloat (The Times, Callum Jones) highlights the plight of pharmacies who are asking for government support despite seeing a huge surge in demand. Some pharmacies are seeing their costs rise – even having to hire security guards – and the Pharmaceutical Services Negotiating Committee, the industry body, is currently in discussions with the government to secure funding.

And finally, in other news…

There’s a lot of sad news about coronavirus at the moment, so I thought I’d highlight something positive in The superhero firms helping out in the coronavirus crisis (The Guardian, Anna Tims https://tinyurl.com/uq5qy6w) which shows you what some companies are doing to help in the fight against the coronavirus. There’s some incredible ingenuity at work! 👍👍👍