Tuesday 19/04/22

1. In MACROECONOMIC NEWS, China feels the effect of lockdowns and the UK heads towards recession
2. In M&A NEWS, Twitter gets interesting, Asda’s buyers make a ton and SPACs hit legal challenges
3. In CONSUMER & RETAIL-RELATED NEWS, potential surge pricing could prove problematic, families face wages squeeze, streaming subscriptions fall, retailers plan to raise prices and gyms target retail space
4. In MISCELLANEOUS NEWS, South American farmers try to ease the shortfall, Rivian complains about the EV battery shortage and Bank of America has a positive revenue outlook
5. AND FINALLY, I bring you something interesting on battery tech and a Paul Potts moment…

So China feels the lockdowns and the UK slides…

Shanghai lockdowns put brakes on China’s growth (The Times, Arthi Nachiappan) puts figures on the economic impact of recent strict lockdowns in China. The World Bank cut its global GDP forecast by 0.9% to 3.2%, with the IMF also chiming in about a slowdown in the post-Coronavirus recovery. China’s GDP rose by 4.8% in Q1, which was below the annual target of 5.5% but above the 4% of the final quarter of 2021. Although January and February were good, shutdowns then hit, with expectations now that the negative impact will extend into the second quarter. The IMF is expected to downgrade its official forecasts today when it releases its global economic outlook report.

It’s not looking much better over here either in Britain could fall into recession this summer, say experts (The Guardian, Richard Partington), which suggests that a number of economists are predicting a major slowdown in

the face of the biggest tightening of household incomes since the mid-1950s. Analysts are now saying that economic activity could also be reduced by the extra Bank Holiday we are getting this year from the Queen’s platinum jubilee celebrations. Figures due out later this week from the ONS are expected to show a fall in retail sales in March as households “get used” to much higher costs. * SO WHAT? * I don’t think any of this is surprising at the moment, but I would say that a lot of the ultimate outcome will also depend on how long the Russia/Ukraine war goes on for and how it ends. As I have said before, if Putin is somehow removed and a new pro-western regime is born from the ashes, I think there could be a huge global economic relief boom as restrictions lift, new agreements are made etc. If that happens, I think that recession can be avoided, but sadly I don’t things will be as neat as that. If there is anything less than this, I also think that a recession is highly likely (that is, two consecutive quarters of economic contraction).

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!

The Twitter battle hots up, Asda’s buyers make a ton and SPACs take some heat…

Things with Twitter got quite interesting at the end of last week as the company threatened to create a poison pill to fend off further takeover advances but now Apollo Global considers participating in a bid for Twitter (Wall Street Journal, Cara Lombardo, Laura Cooper and Miriam Gottfried) shows that one of the world’s biggest buyout firms has now thrown its hat into the ring in the whole Twitter debacle and voiced its willingness to back a bid from either Elon Musk or another private equity firm like Thoma Bravo. Twitter is expected to reject Musk’s offer and is due to report earnings on April 28th, an occasion that offers the chance for it to retaliate. Twitter: Musk should focus on knockout bid, not fighting poison pill (Financial Times, Lex) suggests that, rather than concentrate on the “injustice” of Twitter adopting a poison pill, he should just up his offer if he really wants to get control of the company. The current poison pill arrangement will be triggered if anyone buys more than 15% of the company, upon which time other investors will have the right to buy a whole load of new shares on the cheap, thus diluting Musk’s stake in the current case. * SO WHAT? * Given the rate at which private equity firms in particular are hoovering up assets, you do wonder whether the high profile nature of the battle for Twitter will encourage other companies to look at the possibility of adopting poison pills to prevent any nasty and unwanted approaches. It’ll be interesting to see how this one pans out and whether poison pills get more widely adopted.

Meanwhile, Asda’s private equity backer takes 20-fold return (Daily Telegraph, Oliver Gill and Simon Foy) shows that TDR Capital has made an absolute killing from last year’s purchase of Britain’s third-biggest supermarket via

financial jiggery-pokery along with co-purchasers the Issa brothers. The takeover was hugely funded by debt and it seems to have worked out pretty nicely for the parties thus far. * SO WHAT? * It’s all good at the moment, but I think that the real test will come if things start to take a turn for the worse. The current filings suggest that the Issa brothers are more exposed, if things go wrong, than TDR. Supermarkets tend to do quite well in inflationary environments and I guess that, out of the “Big Four”, Asda is seen as being the most budget-friendly. It could, as a result, do reasonably well in a backdrop where people are reining in household spending.

Then I thought it was worth mentioning A court battle that has raised concerns about Spacs (Financial Times, Sujeet Indap) because it highlights current sentiment towards the once-hot SPAC route to market. 2020 and 2021 saw loads of SPAC deals being done in Wall Street and Silicon Valley but as time has worn on, the once-attractive lustre has faded. 613 SPACs came to market in 2021, but so far only 57 have arrived this year, according to Dealogic data, as many SPAC targets have been purchased only to see their shares crater following flotation. Lawyers and regulators have been taking an increasing interest in SPACs and a court case being brought in America is being watched closely by others to see what happens in the event of SPAC failure – whether the structure is overly skewed towards the SPAC sponsor versus the ordinary investor and whether they are fairly incentivised or not. * SO WHAT? * It seems to me that, increasingly, investors are now swerving SPACs given their inherent risk and the fact that the sponsors still gain so much from churning out deals of questionable quality. Also, from a “target” point of view, it also seems that bids from private equity or rivals are taking higher priority. I wonder whether SPACS will disappear altogether within a year or two?!?

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!

Consumers and retailers alike continue to face hurdles while gyms broaden their reach…

We all know that utility bills are skyrocketing at the moment but Surge billing risks opening the door to extreme price shocks (Daily Telegraph, Matt Oliver) shows that a type of tariff being mooted by British utility companies and the government at the moment – “surge” or “dynamic” pricing – could result in a lot of very nasty shocks. On this type of tariff, people will pay more for electricity at peak times and less outside this (so charging an EV overnight would be cheaper than charging it through the day, for instance). This sounds logical enough, but in America, 29,000 households on “dynamic” energy tariffs got bills of thousands of dollars over just a few days following an Arctic storm in February last year. * SO WHAT? * The UK energy regulator, Ofgem, will get legal powers to switch people over to surge pricing next month but there are lingering concerns about what could go wrong, particularly following that spate of power generation companies going bust fairly recently. Although this is clearly important right now in an environment of rising utility bills – it will get even more important as the mass-adoption of EVs grows.

Consumers continue to face challenges as per Families to face bigger wages squeeze (Daily Telegraph, Tom Rees) shows that some economists reckon that the fall in real pay is likely to get worse as 200,000 workers re-join the jobs market as immigration rises and sufferers of long-Covid return. The jobs market saw an exodus of candidates over the pandemic and the number of vacancies remains high. It is interesting to note that although the unemployment rate has returned to pre-pandemic levels of 3.8%, the number of candidates has dwindled because of more people retiring, becoming students to bolster qualifications or being long-Covid sufferers.

In the meantime, consumer behaviour is changing as per Streaming subscriptions in decline as UK households cut budgets (The Guardian, Mark Sweney), which cites the latest Kantar Worldpanel stats that show the number of homes with services such as Netflix, Amazon and Disney+ fell over Q1. * SO WHAT? * This is clearly a function of households trying to reduce their discretionary spend. As I have said for some time, I believe that Amazon will not suffer as much from subscriber attrition as its rivals because a subscription to Amazon Prime includes so many more services than just media entertainment streaming. I think people will increasingly swap their subscriptions on a monthly basis as this is a very easy way of reducing monthly bills.

Then in Retailers plan to raise prices and slash ranges as surging costs bite (Daily Telegraph, Matt Oliver) we see that 40% of retailers are planning to raise prices due to increasing costs, according to a survey by BDO. Many businesses has made inflation assumptions of 3-5% for this year when doing their planning, but this has clearly underestimated inflation being 7% currently (and rising). Clearly, these costs are going to be passed onto consumers. Meanwhile, Gyms snap up prime spots in UK’s retail centres (Financial Times, Ian Johnston) shows that the UK leisure and fitness businesses are using the opportunity of cheap high street rents to expand. Anytime Fitness, the UK’s #3 fitness operator, announced 20 extra gyms over 2022 last week while #1 operator PureGym said that it was seeing much lower rents at attractive sites than pre-pandemic and is planning to open 30-40 sites in 2022, with #2 The Gym Group planning on opening 28. * SO WHAT? * Given that budget gyms’ staff costs are minimal, cheap rents have a major impact on profitability. Also, it seems that landlords are more willing to have a mix of tenants and like gyms because they encourage people to stay in retail parks for longer.

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!

South American farmers see opportunity, Rivian complains of battery shortage and Bank of America is looking good…

In a quick scoot around other interesting stories today, ‘Destructive hunger’: South America’s farmers seek to head off global food crisis (Financial Times, Michael Pooler, Bryan Harris and Lucinda Elliott) shows that South American farmers are thinking of changing their crop mix to fill the gap being left by Ukraine and Russian farmers’ current inability to grow wheat. * SO WHAT? * Brazil has already exported more wheat this year than it did in the whole of 2021 but farmers will probably want to wait a bit longer to see what happens with the war before committing to changing the way they farm.

Elsewhere, Rivian CEO warns of looming electric-vehicle battery shortage (Wall Street Journal, Sean McLain and Scott Patterson) shows that there are increasing worries about an electric battery shortage that may even get worse than the ongoing chip shortage. CEO RJ Scaringe said to reporters last week that current battery production is less than 10% of what will be needed in 10 years’ time, meaning that “90% to 95% of the supply chain does not exist”. This is just the latest such warning coming from the industry as makers scramble to secure supply of raw materials.

Then in Bank of America offers rosy revenue outlook as lending rebound boosts results (Financial Times, Imani Moise) we see that the Bank of America is upbeat about its earnings outlook because it will benefit from higher interest rates and a resurgence of lending. * SO WHAT? * This is particularly notable because it is the ONLY major US bank to announce an increase in revenues for Q1.

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…

Regular readers of Watson’s Daily will know that I bang on a bit about swappable batteries in EVs. Well this is a video on swappable and wireless battery charging technology. However, if that’s not your bag how about this brilliant BGT performance! I think that this guy is better than the original artist whose voice – I’m sorry, I know this will be an unpopular opinion – I find quite annoying. This guy is much smoother and less forced IMO.