Tuesday 20/02/24

  1. In MACRO & MINING NEWS, the EU election campaign kicks off, Germany looks like it’s in recession, France tightens finances, the Bank of England gets a warning, Birmingham council has to take drastic action, Russia shows resilience, Polymetal secures an exit and Amplats cuts jobs
  2. In BUSINESS, CONSUMER & EMPLOYMENT NEWS, overseas investment in China drops, Saudi Arabia imposes conditions on China’s involvement, it turns out that CGT only applies to the few, Moneysupermarket booms and Forvia announces job losses
  3. In FINANCIALS NEWS, Capital One agrees to buy Discover Financial, we look at which banks could be affected by the motor finance investigation and Santander announces a payout
  4. In MISCELLANEOUS NEWS, the EU launches its TikTok investigation, AstraZeneca makes a big step forward, Bayer slashes its dividend and Currys heats up
  5. AND FINALLY, I bring you an epic croque madame…

1

MACRO & MINING NEWS

So the EU campaign trail starts, Germany’s finances look tricky, France tightens its belt, the UK’s on rocky ground but could recover, Birmingham takes drastic action, Russia proves to be robust, Polymetal heads to the exit and Amplats cuts jobs…

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:

 

Ursula von der Leyen kicks off campaign for second term at Brussels’ helm (Financial Times, Henry Foy and Guy Chazan) shows that the president of the EC is going to be in re-election campaign mode as she goes for another five year term. Since she started work in 2019, she’s guided the EC through Covid, Russia’s invasion of Ukraine and now strife in the Middle East. Her centre-right European People’s party is currently ahead in the polls and, in order to win June’s European parliamentary elections, she now needs to get support from EU leaders and then gain a majority of members of the new parliament. It looks like it’s her election to lose – but she will still need to do some work to get over the line.

Elsewhere in Europe, German recession fear over net zero goals (Daily Telegraph, Chris Price and Szu Ping Chan) shows that Germany’s central bank, the Bundesbank, reckons that the country is “likely” in recession and that the “ongoing period of weakness” will continue for the foreseeable as it tries to deal with strikes (particularly farmers and train drivers), a problematic property sector (house prices saw their biggest fall in 60 years last year!) and its bumpy transition to net zero (a constitutional court banned ministers from accessing coronavirus emergency funds to fund its net zero budget!), not to mention increasingly “cautious” consumer spending. It thinks that the economy will contract for Q1, which would put it into recession after GDP contracted by 0.3% in Q4 of 2023.

Talking of getting thrifty, France tightens budget as economic growth slows (Financial Times, Leila Abboud) shows that the French government has now promised to cut an additional €10bn out of this year’s budget as it adapts to weaker-than expected economic growth. The 2024 budget had already included around €16bn in cuts, mainly from the phasing out of energy subsidies, but additional cuts were needed in order for France to hit its budget deficit reduction target. He did say, however, that taxes would not increase to make up the shortfall.

Back in the UK, Bank of England ‘risks worsening UK recession if no interest rate cuts soon’ (The Guardian, Richard Partington) shows that a former chief economist of the Bank of England, Andy Haldane, reckons that the UK’s recession will get worse if the Bank of England decided to cut interest rates too late. At the moment, financial markets reckon that the Bank will start to cut rates this summer from the current level of 5.25%, but inflationary risks remain in the form of a still-tight jobs market and rising prices in the services sector of the economy. Mind you, Surge in real wage growth ‘will bring recession to end’ (Daily Telegraph, Tim Wallace) shows that some economists believe that we may already be climbing out of recession thanks to wages rising faster than inflation. A near-10% rise in the National Living Wage is due in April and many are expecting wage rises to continue to outpace inflation, reversing a trend that we have been seeing over the last year or so. * SO WHAT? * I have to say that it doesn’t FEEL like a recession to me and when you consider that inflation is falling, real earnings are rising and mortgage rates are trending downwards (making it easier for buyers to dip their toes in the property market) you would have thought that the economy has a decent chance of climbing out of its current rut.

Then in Bankrupt Birmingham council takes drastic steps to balance the books (Financial Times, William Wallis) we see that Birmingham’s council is going to have to take some drastic action make some headway with its funding crisis. It is going to be forced to sell £750m worth of assets and cut spending on public services by a whopping £300m to make some kind of dent in its massive debt pile. It will also have to jack up council tax by 21% over the next two years from April. The County Councils Network, which represents the biggest local authorities in England said yesterday that almost all of its 36 members would have to raise council tax by the maximum permitted amount of 5% (Birmingham had to get special permission to raise its council tax by 21%!) in April despite the government coming up with £500m in emergency funding last month. This sounds like a very nasty situation that is not going to get better any time soon…

Further afield, Resilience of economy frees Putin’s hand to crush dissent (Daily Telegraph, Eir Nolsøe) observes that, despite all the sanctions, Putin is actually overseeing a growing economy. Its GDP grew by 3.6% last year after contracting by only 1.2% in 2022, according to data released by Rosstat earlier this month. The IMF now reckons that Russian GDP will grow by 2.6% this year – way more than is expected for the UK, France and Germany (but then the IMF got the last two years’ predictions on Russia completely wrong, so you can’t trust their “expertise” too much 🤣!). It seems that a better-than-expected performance of the economy and his control of dissent (what a coincidence that opposition leader Navalny died just before the election and anti-war candidate Boris Nadezhdin didn’t quite have enough support to get on the ticket 🤔) as well as widespread fear and a solid propaganda machine is actually working pretty well for Putin! China, India, Turkey and some Eastern European countries have helped Russia greatly by buying its oil and gas amid ongoing sanctions elsewhere. * SO WHAT? * I guess that economists over-estimated the effect that sanctions would have on Russia. What they have done, though, is forced Russia to shift its trade flows enormously (pre-war Russia’s biggest trading partner was Western Europe, now it’s non-Western countries), meaning that the effect of sanctions will actually diminish over time. That being said, money being spent on war isn’t going on innovation and improving productivity and lots of young men are dying, which may lead to not enough children being born (obviously this is more of a long-term problem but it is still something to consider).

In mining news, Polymetal secures $3.7bn deal to exit from Russian business (Financial Times, Anastasia Stognei and Courtney Weaver) shows that Polymetal, which had been one of the world’s most profitable gold miners until recently, has managed to find a buyer for its Russian business that it said would protect it from nationalisation. Polymetal intends to sell the business to Mangazeya Mining, a Russian producer of precious metals, subject to shareholder approval at a meeting next month. If that goes through, the deal could close as early as next month! * SO WHAT? * This highlights just how difficult it is for companies to extricate themselves from Russia at a decent valuation as it is a tough ask to find a buyer that doesn’t come under western sanctions on the one hand but would also get approval from Moscow on the other. Although the company reckoned that it should have got a better valuation, it no doubt thought that it was better to get a deal now than wait and potentially get a worse deal (or no deal) further down the line. Mangazeya is one of Russia’s 20 biggest gold miners.

Then in Anglo American Platinum to cut jobs in South Africa as metals prices slide (Financial Times, Harry Dempsey and Monica Mark) we see that Anglo American Platinum (aka “Amplats”) is going to cut 3,700 jobs in South Africa as part of a cost-cutting drive to turn things around. This represents almost 20% of its workforce but the pressure is on because there was a 71% drop in profitability thanks to the plunging platinum group metal (PGMs) prices which are commonly used in the exhausts of petrol and diesel vehicles. Mining giant Anglo American owns 79.2% of Amplats and it is focusing on platinum group metals and diamonds which have been struggling particularly badly. Despite this, Amplats announced a dividend, which obviously angered unions. * SO WHAT? * The shift to EVs is hitting demand for platinum group metal prices given that EVs don’t need catalytic converters. Amplats makes about 40% of the world’s PGMs. This is a pretty interesting development particularly as it comes ahead of Thursday’s annual results meeting for Anglo American.

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

BUSINESS, CONSUMER & EMPLOYMENT NEWS

Foreign investment dries up in China, Saudi Arabia imposes conditions on letting China in, China’s decent start could boost luxury, CGT only applies to the few, Moneysupermarket gets a boost and Fornia announces job losses…

Overseas investment in China at lowest level for 30 years (The Times, Jack Barnett) shows that overseas investment in China grew at its slowest pace for 30 years over 2023, according to numbers from the State Administration of Foreign Exchange. It’s not been helped by its struggle to recover from lockdown, rising youth unemployment, a nasty property crisis and ongoing sanctions. Meanwhile, ‘Strings attached’: Saudi Arabia steps up demands in tech deals with China (Financial Times, Eleanor Olcott) shows that Saudi Arabia is giving China a taste of its own medicine as it is forcing leading Chinese tech companies to invest in the kingdom in order to access huge deals. Alibaba and SenseTime have already managed to secure deals worth hundreds of millions of dollars in the last three years in return for setting up JVs. In some cases, Chinese companies are being forced to share their technical expertise with the locals in a move reminiscent of what China used to do foreign companies a couple of decades ago. * SO WHAT? * Given that Saudi Arabia has tons of money and wants to develop non oil-related revenue streams at a rapid pace, this certainly seems to be the way to go. It is also worth noting that China’s weak domestic market is probably making them more willing to have to concede more than they would normally while Saudi Arabia knows that it is one of the biggest growth stories in town with funds to match and that it will understandably use its advantages to extract the most benefit for itself.

I thought I’d mention China’s new year splurge could give luxury a fresh start (Financial Times, Lex) as a follow-up to yesterday’s news on consumer spending because it considers the impact on luxury goods companies. Apparently, Chinese shoppers accounted for over a third of the world’s luxury goods consumption prior to the pandemic so luxury players like Kering will be particularly keen to entice them back. That being said, demand has been growing for premium products with fashion,

lifestyle and jewellery segments experiencing record growth rates last year. Research by Bain said that the Chinese luxury market grew by over 10% last year and some estimates say that Chinese luxury consumption could reach up to 40% of the world’s total by 2030! However, the big cloud hanging over all of this is China’s problematic real estate sector where a lot of wealth is tied up.

Then in consumer news, Capital gains tax paid by small share of UK population, research shows (Financial Times, Sam Fleming) we see that less than 3% of UK adults paid CGT in the decade to 2020, according to a paper by the University of Warwick and London School of Economics. The report was based on anonymised tax records and showed that CGT gains were massively concentrated on both a regional and income basis. * SO WHAT? * The main conclusion here is that UK politicians could boost levies on CGT without offending too much of the electorate (although you could argue that the very voter who are more likely to vote Conservative would be more likely to be among those affected by a rise). This is clearly something that Jezza will be considering ahead of next month’s budget…

Elsewhere, Rise in premiums boosts Moneysupermarket (Daily Telegraph, Michael Bow) highlights a great performance by the price comparison website which posted record sales thanks to a deluge hits from drivers wanting to avoid big increases (about 35% on average!) in their car insurance premiums. Homeowners also faced big rises in their home insurance and consumers have been very keen to shop around for the best rates – which is obviously where Moneysupermarket comes in! It takes a flat fee every time a policy is purchased via its referral. Clearly everyone is keen to reduce their spending where they can and they are being much less blasé about such things compared to how they were.

Then in employment trends, Autoparts Giant Forvia to Cut Up to 10,000 Jobs Amid Global Shift to EVs (Wall Street Journal, David Sachs) shows that Forvia, one of the world’s biggest auto parts suppliers, is going to cut about 13% of its headcount as part of a plan to save around $540m in costs! Forvia specialises in car interiors and emissions systems. Ouch. But it’s not alone in its suffering while the automotive industry shifts to EVs…

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

FINANCIALS NEWS

Capital One agrees to buy Discover Financial, we see which banks are getting caught up in the UK motor finance investigation and Santander announces a payout…

CapitalOne agrees to buy Discover Financial for $35bn (Financial Times, James Fontanella-Khan and Joshua Franklin) highlights a major all-share deal that will bring together two of America’s biggest credit card companies. * SO WHAT? * This will mark one of the industry’s biggest deals since the 2008 financial crisis! They are two of the biggest credit card lenders behind JPMorgan Chase and Citigroup. Discover also has a payment network, which means that it also rivals Visa and Mastercard. The US banking sector is still really fragmented but consolidations have had a patchy record of success depending on how well the companies integrate. This deal is a monster, so it will still have to pass US antitrust regulators – but if it does the companies reckon the deal will close by the tail end of this year or the beginning of next.

The banks exposed to a UK probe into motor finance (Financial Times, Akila Quinio and Peter Campbell) is an interesting article that develops the motor finance story further in that it identifies those parties who could be most affected by what some are now describing as the banking sector’s “next PPI”. Lloyds Bank shares have fallen by about 10% since an investigation by the FCA was announced into motor financing while those in Close Brothers have almost halved! Until the FCA banned it in 2021, banks

offering car finance let car dealers set their own interest rates on repayment plans (they were known as “discretionary commission arrangements” or DCAs) which could undercut the bank’s preferred rate – but it could also set it above the rate to earn a bigger commission. At the moment, it’s too early to gauge the potential size of the banks’ exposure but it is generally thought that the exposure won’t be as big as it was with the PPI scandal because car finance makes up about 5% of household lending. Barclays, Close Brothers and Santander UK are expected to face compensation costs – as it Lloyds Bank which has the most exposure. It is also worth noting that it won’t just be the lenders who suffer here – automotive manufacturers like Ford and VW also make decent profits from their respective financing businesses. * SO WHAT? * When you consider that over 90% of new vehicle purchases in the UK are via some kind of leasing agreement over around three years you can see how much publicity this is going to get if the FCA decides that compensation needs to be paid!

Then in Santander pledges shareholder payout after bumper profits (The Times, Ben Martin) we see that Spanish bank Santander, the owner of Santander UK, announced that it would return almost €1.5bn to shareholders in the form of a share buyback and a dividend hike of 50%! It was able to do this because it reported last month that higher interest rates in its European markets boosted its annual net profits next year to their best levels ever!

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

MISCELLANEOUS NEWS

The EU opens its investigation on TikTok, Astrazeneca makes a big step forward, Bayer decimates its dividend and Currys gets spicy…

In a quick scoot around some of today’s other interesting stories, EU opens investigation into TikTok over online content and child safeguarding (The Guardian, Dan Milmo) shows that the EU is now investigating whether the social media platform has breached rules outlined in the Digital Services Act which govern online content, including the safeguarding of children. Companies that breach the DSA face the threat of fines of up to 6% of their global turnover! Everyone will be watching closely at how this develops!

There’s good news in AstraZeneca unveils successes in treatment of lung cancer (Financial Times, Ian Johnston) where the pharmaceutical giant said that its lung cancer treatment, Tagrisso, showed a “statistically significant and highly clinically meaningful” improvement in preventing the progression of lung cancer when caught at an early stage.

Then in Bayer slashes dividend by 95% as it steps up effort to cut debt (Financial Times, Olaf Storbeck) we see that the German pharmaceuticals and crop sciences group has decided to virtually eliminate its dividend in an effort to make a dent in its debt levels eight years after its problematic purchase of Monsanto. Its full year results are due out on March 5th, but this is going to hurt!

In retail, Currys shares soar as Chinese online retailer enters takeover battle (The Guardian, Jasper Jolly) shows that the market was getting very excited by a potential bidding war for the electricals retailer as its share price shot up by 36% in trading yesterday, Why Currys became next target for foreign swoop (Daily Telegraph, James Warrington) points out that it has become an attractive target because the current share price implies that it is now worth way less than its annual turnover but the problem is that it continues to face stiff competition, particularly from online retailers but Battered Currys is an odd candidate for a bidding war (Financial Times, Lex) reckons that the company is right to hold out for more money after it rejected Elliot Advisors’ initial offer.

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 know I showed you a video of this guy last week, but I do like “Andy cooks” and thought that this croque madame looked pretty amazing!

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Some of today’s market, commodity & currency moves (as at hrs 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 **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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