Tuesday 20/11/18

1. In MACROECONOMIC AND MARKETS NEWS, we see the tough situation facing investors at the moment as markets fall
2. In TECH NEWS, Tencent ventures outside China to avoid the freeze, Xiaomi turns a profit and Apple cuts production
3. In MEDIA NEWS, traditional TV continues its terminal decline and the Disney/Fox deal gets Chinese approval
4. In INDIVIDUAL COMPANY NEWS, Renault-Nissan’s Carlos Ghosn faces the music
5. In OTHER NEWS, I bring you a Christmas puzzle. For more details, read on…

So investors are facing tough times as markets fall…

Turmoil everywhere for investors…and it’s not about to get better (Daily Telegraph, Tom Rees) does a decent job of summarising the main reasons behind current investor jitters that have sent the markets tumbling. There’s the US-China-rest of the World trade war, a slowing-down of global growth and a perceived weakening of demand – particularly from China – that has depressed commodity prices, while currency crises in Argentina and Turkey have sown doubt in emerging markets. Interest rates are trending up (well they are in the US and the UK – the ECB still has European interest rates stuck at zero) and fiscal stimulus is expected to wear off going into next year. If you couple that with a resurgence in Europe for populist parties

that threaten the stability of the eurozone (e.g. Italy’s populist coalition government rejecting EU demands related to its budget) and throw in the uncertainty of Brexit for good measure, jitters seem perfectly understandable! 2019 looks like it could be a rocky ride.

More specifically, US markets slump as tech stocks drop and trade war fears return (The Guardian, Dominic Rushe) highlights the tech sector-led downfall in markets as Facebook fell by 5.7%, Apple 4% and Amazon 5% as FAANG stocks are all in bear market territory as they have dropped by over 20% since recent highs. Indexes had gained a bit last week on hopes that the US-China talks were going in the right direction but then that all evaporated when the two sides clashed at the Asia-Pacific Economic Cooperation summit over the weekend where no-one could agree on a joint declaration on world trade – the first time this has happened for 30 years. Talks are continuing between the US and China ahead of the G20 meeting planned for later on this month.

In tech news, Tencent tries to get around the China freeze, Xiaomi turns a profit and Apple cuts iPhone production…

Chinese gaming and media giant Tencent has had its wings seriously clipped by the Chinese government recently, so Tencent looks to counter China freeze with Sea deal (Financial Times, Louise Lucas) heralds a welcome deal for the company with the Singapore-based Sea to publish and distribute its online games in south-east Asia. Sea’s digital entertainment arm, called Garena, now has the right of first refusal to sell Tencent’s mobile and PC games in Indonesia, Taiwan, Thailand, the Philippines, Malaysia and Singapore for five years. Sea is 34% owned by Tencent and already distributes some of its games – including Arena of Valor and League of Legends. * SO WHAT? * This will go some way to mitigate the logjam caused by the Chinese government that has not approved the commercial licences of any new games since March, leaving around 7,000 games in limbo as publishers can still launch but are unable, crucially, to make money from them. The government has had a crackdown on online games as part of a drive to tackle shortsightedness in children as well as “gaming addiction” and the current freeze in new titles is expected to last until next year. The freeze has effectively chopped 40% off Tencent’s share price since its January peak.

Xiaomi earnings boosted by higher smartphone sales (Wall Street Journal, Dan Strumpf) highlights good news for device maker Xiaomi as it announced a third quarter profit after a difficult few months. The company’s share price has been dragged down by the wider tech sell-off and is now 16% below the price it floated at in its Hong Kong

listing earlier this year. Revenues were up by a healthy 49% due to stronger smartphone sales and it is seeing increasing success with higher-priced models sending the average selling price of its phones to 1,052 yuan ($152), which is an increase from the 903yuan its was at a year ago. * SO WHAT? * Xiaomi is the worlds fourth-biggest handset vendor (and smartphones still account for its largest proportion of sales) but it also makes internet-connected gadgets like rice cookers, air purifiers and scooters and is trying to increase its share of sales from internet services. It sounds to me like it is doing a great job and, given that its smartphones continue to be popular in China, India and Southeast Asia, it seems to me to be well-positioned in the key growth markets in the world. Given that its price points are way more realistic for these countries than Apple’s (you can probably only buy an Apple Watch strap for the $152 average selling price of one of Xiaomi’s phones!) I think that its prospects are looking very good.

Meanwhile, Apple suppliers suffer with uncertainty around iPhone demand (Wall Street Journal, Yoko Kubota, Takashi Mochizuki and Tripp Mickle) contends that Apple’s decision to launch more models than usual (the XR, XS and XS Max) is making it harder for them to predict the number of components it needs, which has led to the company cutting production orders for all three models. Apparently, forecasts for the “lower”-cost XR have been particularly problematic as the company slashed its production plan by about a third of the 70m units it had originally asked suppliers to assemble between September and February. * SO WHAT? * Having Apple as your customer is a double-edged sword. It’s great if you get the volume, but they have a tendency to chop and change their forecasts at will and component companies don’t have the luxury of alternative revenue streams like Apple does, leaving them highly exposed to iPhone unit sales. The (expensive) smartphone slowdown continues…

In media news, traditional TV continues its death spiral and the Disney/Fox deal gets Chinese approval…

Outlook for traditional TV goes from bad to worse (Wall Street Journal, Drew Fitzgerald and Benjamin Mullin) paints a picture of the ongoing decline of  “traditional” cable or satellite TV as customers continue to abandon in their droves as over 1m US customers cancelled their subscriptions in the past quarter – one of the biggest drops on record. Incumbents have tried to partner up with streaming services and digital start-ups in an attempt to stem the tide, but it is having limited effect at the moment. Satellite operators such as AT&T’s DirecTV ad Dish Network have lost the most customers overall and attempts to provide more appealing streamlined offerings

in “skinny bundles” aren’t enough to offset the numbers of cord-cutters. * SO WHAT? * This trend is continuing and I suspect it will do so for some time to come. However, I believe that there will be a time when viewers reach peak subscription fatigue as more media companies try to get on the streaming bandwagon. I think that we are eventually going to go full circle and return to fatter bundles as customers try to simplify their consumption and companies that have gone it alone find that the pot of gold they were seeking at the end of the independence rainbow wasn’t quite as big as they thought.

Talking of which, Chinese approval keeps Disney-Fox on track to close early (Wall Street Journal, Erich Schwartzel) signals an early Christmas present for Disney as Chinese regulators approved the deal without conditions, which means that the $71.3bn deal could close earlier than expected.

In individual company news, Carlos Ghosn gets the boot and causes unease in Renault-Nissan…

Nissan will sack chairman after arrest (The Times, Adam Sage) is big news as Carlos Ghosn, the man behind the global partnership between Renault, Nissan and Mitsubishi, has been arrested over allegations that he has hidden millions of pounds of revenue from the Japanese tax office. He faces a maximum sentence of ten years in prison and a fine of ten billion

yen (almost £70m) if he is tried and found guilty. * SO WHAT? * Oh how the mighty fall. Ghosn has long been feted as the saviour of the Japanese car industry when he rescued a Nissan that was on its knees in the late 1990s. I suspect that Japan will want to make an example of him and use his behaviour as an excuse to put pressure on non-Japanese execs who give themselves fat pay packages. He has done a lot of good work, but all that could come crashing down and there is now speculation that the whole alliance between Renault, Nissan and Mitsubishi could unravel.

…And finally, in other news…

I thought I’d leave you today with this: There’s a star hidden among over 150 Christmas trees in this brain teaser – can you spot it? (Insider, Talia Lakritz https://tinyurl.com/ycu9nkch).

As always, thank you for reading Watson’s Daily!