Tuesday 21/03/23

1. In MACRO & ENERGY NEWS, Xi Jinping meets Putin, Macron survives and a US firm offers mini-reactors
2. In BANKS NEWS, First Republic’s deal fails to satisfy and Credit Suisse repercussions echo
3. In CONSUMER & CONSUMER GOODS NEWS, UK house prices stay strong, Unilever does a bit of shrinkflation and Foot Locker paints a downbeat outlook
4. In MISCELLANEOUS NEWS, Amazon ditches more staff, China pushes domestic chipmakers, VW has Russia issues, Starbucks new CEO makes a start and India opens to law firms
5. AND FINALLY, I bring you a well-executed wedding theme…

So Xi Jinping and Vlad chat, Macron survives and a US firm offers the UK mini-nukes…

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:

Xi Jinping praises Vladimir Putin’s ‘strong leadership’ in Kremlin talks (Financial Times, Max Seddon) shows that China continues to support Russia one year in to the invasion of Ukraine. They met in the Kremlin yesterday as part of the three-day state visit and they pushed a China-led “peace plan” which followed “principles of fairness”. Ukraine has thus far stopped short of criticising the plan as there is a possibility of a call with China after Xi’s Moscow visit. The real meaning of Xi’s visit to Putin (Financial Times, Gideon Rachman) is an interesting take on the visit, saying that it will reinforce the Russia/China vs the US/allies and deepen the Russia/China relationship. China will present itself as a broker of peace, having just managed to get an agreement of sorts between Iran and Saudi Arabia, but there will be a lot of scepticism about any proposals. China isn’t a neutral and the current “peace plan” makes no mention of a Russian withdrawal from Ukrainian territory, so if Xi proposes a ceasefire Russia can pretend to be interested but everyone knows that Zelenskyy will probably reject it (he will want Russia out) and China/Russia can blame the impasse on Ukrainian intransigence. * SO WHAT? * As things stand currently, it is difficult to gauge how close China and Russia really are and whether China will supply weapons and/or ammo to Russia, as per US warnings (although that probably won’t get publicised if it happens). I really think that Russia needs China more than China needs Russia (although the relationship has been mutually beneficial – like with oil, for instance, where China has bought up cheap Russian oil as the West has sought to avoid it) and so China will be in the driving seat in any negotiations. 

Meanwhile, Emmanuel Macron’s government survives no-confidence votes over pensions reform (Financial Times, Leila Abboud) shows that the French president managed to survive two no-confidence votes brought by his opposition yesterday, meaning that the government edged closer to pushing through its unpopular reforms. One of them was actually very close (only nine votes short), but now the retirement age is set to rise from 62 to 64, as planned. * SO WHAT? * Although Macron appears to have won this battle, he has not won the war as his ability to push through any reforms that are even vaguely controversial looks to be severely compromised. I have to say I wonder how long he can go on like this! Fortunately for him, his opposition is useless – so at least he’s got that going for him 🤣. As for the pension age, I fully understand how everyone feels about this, but the fact of the matter is that a lot of the developed world is facing a pensions timebomb as more of us live longer and have fewer kids. France spends around 13% of its national output on pensioner benefits versus the 10.3% average in the EU. The youth are the ones who essentially fund the oldies in retirement and something has to give. A part of that is the retirement age – and it’s not as if France is the only country doing this! It is possible that the government could cave in to protests – this happened in 2006 when lawmakers tried to push through a less protective labour contract for young people via the 49.3 clause that Macron used this time around.

US firm agrees to sell 24 mini nuclear reactors to UK customers (Daily Telegraph, Howard Mustoe) shows that US-based small nuclear reactor developer Last Energy has signed a deal to sell 24 of its £100m modular power plants to UK customers. Each unit can power 40,000 homes and could be rolled out in 2026 with zero government funding. The company still has to win company approval for designs and locate suitable sites before it all can all go ahead though. * SO WHAT? * It certainly does sound like we are right on track for more nuclear power plants! Sometimes you just have to stand back and wonder at how things have changed so quickly in the last year or two given that nuclear power had been falling out of favour for so many years. The only thing I would say is that I wonder what the government stance is going to be on how to defend SMRs from attack. Will it be a military thing or will private contractors do it? If the latter, there will be huge opportunities opening up in the next few years (maybe Serco, Capita etc? If they don’t do it already, it should be something they think about doing!).

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!

First Republic fails to satisfy and Credit Suisse woes continue…

First Republic’s shares crash more than 46% after downgraded credit rating (The Guardian, Edward Helmore) shows that First Republic’s share price cratered badly yesterday despite a high profile shoring up last week and credit rating agency S&P Global made things worse by downgrading it. At the moment, things are getting so desperate that US officials are now looking at potentially expanding the $250,000 protection on deposits to cover all deposits on a temporary basis because, like at SVB, a large number of First Republic’s customers hold more than this amount at the bank. Wall Street CEOs seek new plan for First Republic (Financial Times, Stephen Gandel, Joshua Franklin, Brooke Masters and Ortenca Aliaj) shows that alternative plans are being mooted after it seems that the $30bn lifeline wasn’t enough to stop a run on regional banks (the irony being that the big banks who have stumped up the cash for the bailout are seeing an influx of deposits!). Row breaks out between Brussels and the Swiss over Credit Suisse rescue deal (Daily Telegraph, Simon Foy and Oliver Gill) shows that the ECB and Bank of England were united in their condemnation of the decision to prioritise shareholders over bondholders in the UBS takeover of Credit Suisse and What are AT1 bank bonds – and why are Credit Suisse’s wiped out? (The Guardian, Richard Partington) does a good job of explaining what bonds were at the bottom of all this latest horror show but the gist of it is that, generally speaking, bond holders take precedence over share holders and although the AT1 bonds are at the riskier end of the spectrum for bonds, they are still bonds and should have been prioritised as such.

Bonds were seen as a safe haven – but they are central to this bank crisis (The Guardian, Toby Nagle) is a really interesting discussion on how bonds have actually proved to be central to all of the problems going on in banking at the moment. First of all it was the bond losses that Silicon Valley Bank suffered that led to them trying to plug the hole by selling off a raft of other assets, which in turn led to customers thinking there were underlying issues, which then led to many of them withdrawing their money at the same time – which ultimately led to the bank’s failure. Then over in Europe, the wiping out of a certain class of bondholders in the UBS takeover of Credit Suisse – contrary to what is normally the case – has led to criticism and a crisis of banking confidence, which is resulting in a hasty rethink. Swiss solve one problem at Credit Suisse, but create another for bondholders (The Guardian, Nils Pratley) argues that it was right for banks and authorities to act quickly when it became obvious that Credit Suisse was in mortal danger, but points out that the solution that involved the decimation of bondholders was not right. * SO WHAT? * This could well be manufacturing a future problem as investors will now believe that regulators can just do what they like and not protect

the rights of certain asset classes like AT1 bonds – which means that investors will sell out of what they’ve got now and not come back unless changes are made.

In Bank turmoil risks swaying ECB’s next rate decision, says Lagarde (Financial Times, Martin Arnold) we see that the ECB may have to pause the upward trajectory of interest rates, having hiked them by 0.5% last week, in order to take into account the impact of what’s going on in the banking sector currently while Financial turmoil will force Bank of England to abandon rate rise, City predicts (Daily Telegraph, Melissa Lawford and Tom Haynes) shows that some analysts are starting to think that previous expectations of a 0.25% rise in the interest rate from the Bank of England are going to have to change and that an increase will have to be abandoned while the US and European banking systems stabilise. Labour calls for review of impact of financial sector uncertainty on UK (Financial Times, George Parker) shows that Labour is pushing for an explanation of what’s going on and what the government’s going to do about the current financial drama that is still unfolding. I think this is expected but kind of pointless because it’s what the government will be doing anyway. Whatever solution the government, lawmakers and authorities decide will have to be robust enough to engender confidence on a longer term basis.

I thought I’d include Why I never invest in bank shares (Financial Times, Terry Smith) because it’s quite amusing (although it’s not meant to be!). The guy who wrote the article is Terry Smith, chief exec of Fundsmith, who says that, despite being a top-ranked banking sector analyst (albeit nigh on forty years ago when the rankings – and job – were less sophisticated!) he never invests in bank shares! His argument is that they are too highly leveraged to make a decent return and that they can be subject to contagion from the actions of their rivals, making things even more unpredictable. Interestingly, he contends that many fintechs are now doing what banks have traditionally done – take deposits, dish out loans and enable payments – but better and without any of the baggage of previous systems and management thinking. Therefore, not only are banks not going to make you money (although you would disagree if you were a momentum investor – they will have made a ton out of trading these shares as interest rates have kept rising), their core business is in danger as well! Interesting stuff – but as I’ve said before I always take articles like this (that are written by investors) with a massive pinch of salt because they are often just talking their own book. It’s just my guess here but maybe Fundsmith didn’t buy banks in the uptick and now he’s going on about just how darn clever he is by avoiding the sector (although TBH, he would have looked more like a genius if he’d said this about two weeks ago rather than just jumping on the bandwagon now 🤣).

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!

UK house prices remain robust, Unilever does shrinkflation and Foot Locker gets downbeat…

UK house prices defy gloom with an average £3,000 rise (The Guardian, Rob Davies) cites the latest data from Rightmove which shows that average house prices have risen contrary to gloomy expectations. Demand is still strong, there’s not an excess of supply and mortgage rates are trending down as lenders scrap for business. That said, many property experts still predict a general weakening trend in property prices this year, particularly as more owners come to the end of their fixed-rate deals and more properties come onto the market.

In consumer goods news, Unilever cuts Magnum packs by a quarter but prices stay the same (Daily Telegraph, Daniel Woolfson) shows that the brand has indulged in more shrinkflation to given consumers the perception that they’re not putting prices

up when, effectively, they are. Boxes of Magnums will now have only three ice creams per box rather than four but will still cost the same as before! This is the second time they have been downsized – they were previously 110ml each, but were shrunk to 100ml in July last year. The outrage! Unilever is clearly not alone in doing this – it is just a sign of the times IMO!

Then in Foot Locker Expects Sales, Profit to Fall in Coming Year (Wall Street Journal, Dia Gill) we see a chastened sneaker and athleisure retailer outlining a downbeat outlook as it announced store closures, the ditching of certain businesses and rising overheads. The company is treating this as a “reset” year and reckons that it’ll be back on track in 2024. * SO WHAT? * The chain has made efforts to wean itself off reliance on Nike, a brand which has previously accounted for up to 70% of its overall sales! It is trying to nurture better relationships with other brands such as Adidas, New Balance and Puma. It’ll be interesting to see how Nike is doing currently…

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!

Amazon cuts more, China pushes domestic chip makers, VW has good and bad news, Starbucks gets a new chief and India opens to law firms…

In a quick scoot around some of today’s other interesting stories, Amazon to lay off another 9,000 staff (Daily Telegraph, Gareth Corfield) shows that the Great Tech Cull is continuing, after Amazon cut its headcount by 18,000 just a couple of months ago in January. The cuts will fall on AWS, HR, tech, advertising and Twitch divisions. He blamed the current uncertain macroeconomic backdrop. How momentum has changed!

China gives chipmakers new powers to guide industry recovery (Financial Times, Qianer Liu) is an interesting article that shows China is trying to nurture a number of domestic chip and equipment companies (like SMIC, Hua Hong Semiconductor, Huawei, Advanced Micro-Fabrication Equipment Inc and Naura) via easier access to subsidies and more control over state-backed research in order to better weather tightening US controls on advanced tech exports. Additional government funding will be made available and they will get higher priority in state-backed research projects. * SO WHAT? * Given the tetchy relationship between the US and China, this is unsurprising! Mind you, it is also an admission that previous subsidisation of the tech sector has not worked and a new approach is needed. I suspect that there may well be some cultural clashes between public and private sector, but I imagine advances will be made!

VW’s plans to pull out of Russia at risk after assets in country are frozen (Financial Times, Patricia Nilsson and Anastasia Stognei) shows that VW’s Russia exit plan has hit a speed bump as the carmaker it had been working with over there, Gaz, filed a lawsuit against it. The court then froze VW’s assets in various Russian ventures. This doesn’t bode well for other Western companies that still have assets in Russia…

Meanwhile, there was happier news for VW in Lamborghini SUV, the Urus, is a hot rod for profit (The Times, Robert Lea) which highlighted the huge success of its Urus SUV sales which drove the VW-owned Italian marque to new levels of profitability! Aston Martin will be hoping for its own DBX-powered revival!

Elsewhere, Starbucks’s New CEO, Laxman Narasimhan, Takes Coffee Chain’s Helm (Wall Street Journal, Heather Haddon) shows that the training wheels are off now for the new Starbucks CEO as Howard “the boomerang” Shultz (my nickname for him as he keeps returning as CEO 😁) officially stepped back from the role yesterday to let Narasimhan take the reins. It’ll be interesting to see how the company is taken forward from here as he takes charge at a tumultuous time with labour relations having gone through a very tetchy period…

Then in India lifts ban on foreign law firms (The Times, Jonathan Ames) we see that the Bar Council of India is now allowing overseas lawyers to set up in India after decades of lobbying against a ban on foreign law firms operating there. DLA Piper and Baker McKenzie are among those vying to do business over there! It’ll be interesting to see how quickly foreign firms set up shop there…

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…

It’s very difficult to have a wedding that is truly unique. This one certainly sounds memorable, though: Couple’s ‘amazing’ Harry Potter-themed wedding with Sorting Hat reading out guests seats (The Mirror, Ariane Sohrabi-Shiraz).