Tuesday 18/04/23

  1. In MACRO & COMMODITIES NEWS, China’s economy expands, Lagarde warns of US-China consequences, China retaliates while some of its companies relocate and lithium prices weaken
  2. In FINANCIALS NEWS, Apple makes a splash, US banks see withdrawals, EY makes cuts and McKinsey delays starts
  3. In TECH NEWS, Discord looks solid and AI continues to court concern
  4. In IPO & M&A NEWS, China’s Anta raises $1.5bn, Sega Sammy bids for Rovio, we look at the reasons for Merck’s acquisition and takeover fever his the UK – including THG
  5. AND FINALLY, I bring you some very poor dad jokes…

1

MACRO & COMMODITIES NEWS

So China grows, Lagarde warns of US-China repercussions and lithium prices continue to weaken…

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:

Chinese economy expands 4.5% in first quarter (Financial Times, Joe Leahy, Sun Yu and Edward White) highlights a solid performance from China as its GDP growth was powered by strong exports, investment in infrastructure and recovering property prices. The number came in considerably above market expectations of 4% – so this is an excellent start to the year for a country that was held back last year by zero-Covid when GDP growth was an anaemic 3%. The full year target is 5% but China’s momentum is expected to gather pace.

Christine Lagarde says US-China rift to push inflation higher (Financial Times, Martin Arnold) is quite an interesting article that shows the ECB president’s concerns about the effects of ongoing US-China tensions. She reckons that it could push inflation up by 5% and even call into question the supremacy of the dollar and euro as investors spread their bets with increased usage of China’s renminbi and India’s rupee. There are also likely to be more supply chain difficulties.

China starts ‘surgical’ retaliation against foreign companies after US-led tech blockade (Financial Times, Edward White and Kana Inagaki) shows some evidence of what Lagarde was talking about as the article puts together a list of sanctions that China has imposed on western interests. In recent months, it has imposed sanctions on Lockheed Martin and Raytheon, started an investigation into Micron on grounds of “national security”, raided US due diligence firm Mintz and arrested local employees in addition to detaining a senior bod from Japanese pharma firm Astellas and slapping Deloitte with a record fine. China is responding to a US-led “technology blockade”. * SO WHAT? * As

usual, the US wants its own way and just threatens those who don’t fall in line, particularly if they deal with China. However, it seems to me that this is all one-way traffic as the US bulldozes everyone into submission and if it doesn’t actually start playing nice with its allies, I think that they will start to push back because they will want access to resources that China has. I guess we’ll just have to see how things go because Biden is heading into election year next year and he is going to have to walk a tightrope between appearing to have a strong stance on China and keeping allies on their toes.

Chinese company moves some production abroad to escape geopolitics (Financial Times, Primrose Riordan) reflects an interesting side to the whole sanctions thing as the article talks about Chinese companies moving production out of China to get around any potential sanctions. Vanward New Electric is a water heater manufacturer that has said it has felt increasing pressure from US clients to build in countries such as Vietnam and Thailand, given ongoing geopolitical tensions. * SO WHAT? * This is interesting and yet a bit bizarre at the same time in that you’d think if there were sanctions on Chinese companies, there would be sanctions on them wherever they were, even if that wasn’t in China! Still moves by US and European companies to diversify supply chains over the last couple of years have been much more prevalent and permanent in nature. I keep saying it, but I think under Covid, we learned how much we all relied on China manufacturing and since the Ukraine war we have learned how reliant we have become on both Ukraine and Russia not only for agricultural produce but also for things like fertiliser that we need to power our own agricultural industry. The march towards protectionism and de-globalisation continues…

Lithium: spot market prices reflect China’s slowing electric vehicle sales (Financial Times, Lex) highlights the ongoing weakness of the lithium price. This has been a function of the weakening EV market in the world’s biggest car market which has led spot prices for lithium carbonate falling by 64% this year. Lithium carbonate tends to be used for domestically-made EV batteries whereas lithium hydroxide is favoured more for non-Chinese EVs. * SO WHAT? * OK so the spot price has fallen, but I would have thought the long term prospects are good given the move towards electrification so I guess that lithium refiners like Albermarle and SQM should continue to perform over time.

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

FINANCIALS NEWS

Apple causes a stir, US banks get hit with withdrawals, EY cuts jobs and McKinsey delays starts…

Apple Makes the iPhone a Home for Savings Accounts (Wall Street Journal, Julia Carpenter and Will Feuer) shows that Apple has announced the launch of a high-yield savings account in the US – in conjunction with Goldman Sachs – which offers to pay out interest that is over 10x the national average! This was first announced last October but was launched yesterday with a 4.15% yield per annum! * SO WHAT? * This is all part of efforts by Apple to further its move into financial services and turn your iPhone into a digital wallet with services like BNPL. The savings account doesn’t have a minimum deposit amount and it is guaranteed by the Federal Deposit Insurance Corp up to $250,000. At the moment, you won’t be able to spend directly from this account – you’d have to transfer it to a checking account or Apple Cash. I think this is a big deal and will provide even more competition in the financial sector. Given that iPhones tend to be expensive you could argue that Apple is providing financial services to a sector of society that probably has more money and is therefore arguably less likely to default – which makes a lot of business sense!

Meanwhile, US banks fall as withdrawals spook markets (Daily Telegraph, Chris Price, James Warrington and Adam Mawardi) shows that State Street’s revelation of major deposit withdrawals at the beginning of the year hit the share price by 18%, which affect other banks in the sector including Northern Trust and BNY Mellon as investors acted on their concern. Stockbroker Charles Schwab also announced that $41bn had been withdrawn from its accounts

in Q1 of 2023. All of this just goes to show that the repercussions of the SVB collapse are continuing – and that they are not quite over yet.

Charles Schwab: counting the cost of riding out a deposit flight (Financial Times, Lex) is pretty interesting as it shows that things aren’t actually that bad for Schwab because although clients withdrew funds from their low-yielding bank deposits, they switched them into the company’s money market funds. Still, the company did borrow from the Federal Home Loan Banking system to give it a better financial buffer – and this is going to cost more for it to finance – but the outlook for long-term earnings remains unclear.

Elsewhere in financial services, EY to cut 3,000 jobs in US after abandoning break-up plans (Daily Telegraph, Adam Mawardi) highlights repercussions from the company’s failed bid to separate its audit and consulting arm (it equates to about 5% of its US workforce and will probably come more from its consulting division) but also reflects a down-sizing in the whole industry. KPMG announced plans in February to cut almost 700 jobs in the US – about 2% of its workforce – and Accenture said last month that it will cut 19,000 jobs over the next 18 months. * SO WHAT? * Until the global M&A and IPO pipeline improves, there are likely to be more cuts as advisory business continues to dwindle. I would expect things to get tighter for other deal-related professions (e.g. law) as well. McKinsey, Bain Delay Some M.B.A. Start Dates to 2024 (Wall Street Journal, Lindsay Ellis) is very much further evidence of this.

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

TECH NEWS

Discord looks solid and AI continues to stir things up…

Discord: subscription revenue sets group chat app apart (Financial Times, Lex) is a very interesting article which talks about how Discord has grown since 2015 when it launched as a place for gamers to communicate. Lockdown powered up its popularity (there were 140m users in early 2021 – and there are now 200m) so its user base is now about a quarter of the size of Snapchat and about half the size of Twitter. However, its main differentiator with Snap, Reddit and Twitter is that it’s not reliant on advertising revenues – it has subscription service called Nitro which offers various tools for up to $9.99 per month. * SO WHAT? * There have been rumours that Discord could do an IPO, but given the tech sell-off and lack of IPO action globally at the moment, you would have thought it would be better to hold off and reconsider in better days. It raised $500m in 2021 at a fat valuation and so it would seem a bit rash to go ahead now when interest in this sort of tech isn’t really there.

Competition authorities need to move fast and break up AI (Financial Times, Sarah Myers West) is the latest discussion on the need to exercise some control over the development of AI and it calls for regulators to come in and be bold in breaking up Big Tech’s advantage, because if it doesn’t go unchecked, Big Tech’s power will actually be cemented by the advent of AI. At the moment AI and Big Tech are inextricably linked because AI development is

heinously expensive – and because of that it is highly likely that those that finance it (Big Tech) are going to want to see some bang for their buck. AI start-ups such as OpenAI, Anthropic, Cohere and Hugging Face are all being bankrolled by Big Tech to a greater or lesser extent and the worry is that if things go unchecked, they could have the AI market sewn up and it would become even harder to control.

Meanwhile, UK workers exposed to risks of AI revolution, warns TUC (Financial Times, Delphine Strauss) shows that unions including the TUC are getting increasingly worried about workers being replaced with AI and are calling for “guard rails” to be put in place to safeguard jobs. At the moment, it seems that the UK is going down the “light-touch” road regarding AI legislation – in contrast to the EU approach of going in hot with sweeping imminent regulation. ChatGPT is on the money with financial advice test (The Times, Jon Rees) highlights AI’s progress as ChatGPT is now able to decipher what the Federal Reserve says (no mean feat!) and it is showing signs that it can interpret news headlines to pick stocks! Its progress really is frighteningly rapid! Mind you when you consider Google chief warns AI could be harmful if deployed wrongly (The Guardian, Dan Milmo) it really does highlight how we are at a real crossroads at the moment regarding AI. Cynics may say that Sundar Pichai is getting behind a delay in AI progress that was called for recently in an open letter because Bard is currently inferior to ChatGPT but I think that whatever way you look at it, guidelines and rules are sorely needed!

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

IPO & M&A NEWS

China’s Anta flies in a placement, Sega Sammy bids for Rovio and the UK goes takeover-tastic…

In a quick scoot around some of today’s other interesting stories, Chinese sportswear group Anta raises $1.5bn in Hong Kong placement (Financial Times, Eleanor Olcott) shows that the Chinese owner of France Salomon and Canada’s Arc’teryx brands managed to raise a useful $1.5bn in a placement in Hong Kong today and will use the money to pay down debt and bolster its balance sheet. * SO WHAT? * This just goes to show that there’s life in the Hong Kong market and enough corporate confidence to approach it to raise money. What with the recent rule change on IPOs and news of China growth, you would have thought that momentum is building…

In Sega Sammy launches €706mn offer for Angry Birds maker Rovio (Financial Times, Leo Lewis and Tim Bradshaw) we see that the Japanese games maker has made a bid for Rovio Entertainment at a price that is 20% below the price Rovio floated at five-and-a-half years ago. * SO WHAT? * Rovio – like many before it – was really a one-trick pony. But what a pony that was! Still, I would have thought that Sega would be a good home for Rovio as it could use its experience of developing character IP with Sonic and it would also chime well with Sega’s push into mobile gaming.

Merck/Prometheus: Big Pharma must swallow bigger premiums (Financial Times, Lex) follows on from what I said yesterday about Merck’s big deal and just underlines how cash-rich pharma

companies looking to beef up their pipelines are willing to gamble big on investments that are potentially risky (Prometheus’s antibody treatment for inflammatory bowel disease has not yet been fully approved, for instance!). We may well see more of this, particularly from pharma companies who’ve made it big from Covid vaccines.

Takeover fever fuels £4bn dealmaking spree (The Times, Helen Cahill) heralds a bit of blip (or is it a turnaround??) for the UK market as it points out that listed public companies on the LSE are subject to takeover bids worth £4bn at the moment! Private equity investors are looking to bid for THG (which we’ll come onto in a minute), Network International and John Wood Group. Other firms attracting bids are Dechra Pharmaceuticals (from Swedish PE company EQT), Hyve (from Providence Equity Partners) and Industrials Reit (from Blackstone).  Apollo bid puts a rocket under THG shares (The Times, Isabella Fish) highlights a preliminary takeover approach and THG/Apollo: online retailer’s value in the eye of the beholder (Financial Times, Lex) highlights the immediate effect on the once-hyped-now-embattled THG as its share price shot up by 40% on news of the bid from private equity firm Apollo, which has until May 15th to firm up a final offer. I think this company, previously known as The Hut Group, desperately needs some outside help so a PE company may just hit the spot. It isn’t a done deal yet, however, and A short history of THG bid approaches (Financial Times, Bryce Elder) shows that we have been here before. We’ll just have to wait!

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…

I thought I’d leave you today with some very poor dad jokes! Enjoy! Some toilet humour may be involved…

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Some of today’s market, commodity & currency moves (as at 0633hrs 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 **
7,880 (+0.10%)33,987 (+0.3%)4,151 (+0.33%)12,158 (+0.28%)15,790 (-0.11%)7,498 (-0.29%)28,659 (+0.51%)3,393 (+0.23%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$81.185$85.165$2,000.481.238861.09402134.3621.1323929,573

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