Tuesday 21/07/20

1. In MACROECONOMIC & COMMODITIES NEWS, the EU has a breakthrough on the bailout package, Chevron buys Noble Energy, Halliburton cuts costs and some say gold could hit $2,000
2. In VACCINE NEWS, the UK buys shed loads while GSK and AstraZeneca place their bets
3. In CONSUMER TRENDS & RETAIL NEWS, UK households are nervous about spending but house prices rise, as do secondhand car sales. Walmart mulls the sale of Asda and M&S cuts jobs
4. In FINANCIALS NEWS, Ant Group approaches its IPO and Julius Baer makes big profits
5. AND FINALLY, I bring you a profitable DIY tip…

So a deal is struck at the EU summit, Chevron buys Noble, Halliburton cuts and the gold price could go further…

EU leaders strike deal on recovery fund after marathon summit (Financial Times, Sam Fleming, Jim Brunsden and Mehreen Khan) shows that Europe’s leaders have managed to overcome their differences to agree on a €750bn post-pandemic bailout package. The fund will include €390bn of grants to weaker member states, which is smaller than the original €500bn earmarked for this purpose. At least they managed to hammer something out!

Chevron agrees to $5 billion takeover of Noble Energy (Wall Street Journal, Cara Lombardo and Christopher M.Matthews) highlights a major all-paper bolt-on acquisition (i.e. no cash will change hands and it does the same sort of stuff and therefore just adds to existing business) by Chevron at a 7.6% premium to Friday’s closing price. The acquisition will give Chevron more presence in the DJ Basin in Colorado and Permian Basin (the Permian Basin is the biggest oil field in the US) covering West Texas and New Mexico while also giving it access to eastern Mediterranean and West African assets. * SO WHAT? * A lot of oil companies have been having problems since the pandemic as oil prices weakened significantly. This means that, for the companies left standing, it may be tempting to

buy struggling rivals. However, at the moment, it seems that we are yet to see an avalanche of deals forthcoming. Having said that, I am sure they will start to pick up again when confidence starts to gather momentum.

Talking of struggling oil companies, Halliburton takes severe cost-cutting action as it sinks to $1.7bn loss (Financial Times, Myles McCormick) shows that Halliburton, one of the world’s biggest oilfield service providers, announced a painful $2.1bn writedown yesterday due to the ongoing repercussions of a low oil price. Analysts believe that many companies are going to have to make big writedowns on their balance sheets like this for the rest of the year. * SO WHAT? * Oilfield services groups drill wells, install pipes, supply sand and make roads for the oil majors and so when those oil companies decide to cancel or mothball projects (usually due to low oil prices), oilfield services companies feel the pain particularly keenly. I suspect that investors will applaud the company’s willingness to get this out of the way early, but then again there’s no guarantee that it won’t get worse from here. Still, you would have thought that the “worst” writedown is now out of the way.

Moving on to a commodity of a different colour, Gold may top $2,000 in safety flight (Daily Telegraph, Tom Rees) shows that some analysts believe that the price of gold could breach the $2,000 per ounce this year for the first time ever as economic uncertainty continues. Savers tend to buy gold when things are going badly as it is seen as a “safe haven” investment. The gold price has risen by 23% since the lows of March and we are now seeing levels not reached since 2011.

The UK loads up while GSK and AstraZeneca place their bets…

Britain signs up for 90m doses of German and French vaccines (Financial Times, Joe Miller and Clive Cookson) shows that the UK government is getting involved in putting bets on various vaccines in the hope that at least one of them works out. It was one of the first to buy supplies of a vaccine developed by Germany’s BioNTech and America’s Pfizer and it also committed to buy supplies of a vaccine being developed by France’s Valneva, which works in a different way. This follows the government’s agreement to buy 100m doses of the vaccine being developed by Oxford University and AstraZeneca. * SO WHAT? * According to the WHO, 23 coronavirus vaccines are in clinical trials at the moment, with over a hundred more being in earlier stages of development. Everyone is trying not to get too excited as many treatments fail the clinical stage, but at least there appears to be some hope! Coronavirus vaccines: top shots (Financial Times, Lex) takes a look at some of the vaccine candidates on offer currently and says that, from a company’s point of view,

making money from vaccines is very difficult due to the high risk of failure, the costs of getting them approved and moving markets. This is why it’s wise for governments and investors to back different horses in order to make it to the finish line.

If all this stuff on vaccines gets you wondering, GSK shown up by AstraZeneca yet again (Financial Times, Cat Rutter Pooley) shows that AstraZeneca is currently leaving GSK choking on dust as it continues to make ground on its coronavirus vaccine despite it not being a vaccine specialist! GSK announced yesterday that it was paying £130m for a 10% stake in CureVac, a German group that’s also working on other vaccine candidates, but given that GSK is an £83bn market cap company, this is chump change. * SO WHAT? * AstraZeneca’s share price is up by 40% over the last year whereas GSK’s is flat, but its recovery has been six years in the making. GSK is doing all the right things under the leadership of chief exec Emma Walmsley but it still has a way to go. It’s difficult to judge which one has more upside potential – and I guess it will come down to who develops the most effective treatment first! Given recent newsflow, though, you would have thought this is more priced into AstraZeneca’s share price than GSK’s at the moment.

UK households remain cautious on the one hand but house prices and secondhand car sales rise while Walmart considers other ways of ditching Asda and M&S cuts jobs…

In Job cut fears holding back household spending (The Times, Gurpreet Narwan) we see that the latest survey by IHS Markit shows that pessimism is rife among households despite the economy reopening. At the moment, they are more focused on paying down debt and boosting their savings – but then again, Gloom goes out the window as house prices lift (Daily Telegraph, Melissa Lawford) highlights the fact that asking prices in July are now at a new high, according to Rightmove. There are reports of a big uptick in buyer demand, which implies that there will be a rise in completed transactions over the next few months – and if that happens, prices are likely to go up. In addition to this, UK public transport fears drive more online demand for used cars (The Guardian, Jasper Jolly) shows a big hike in used car sales as people continue to swerve public transport to limit their exposure to the coronavirus. There has been particularly strong demand for smaller cars worth less than £5,000 and now dealers are buying from private individuals to boost their stock. * SO WHAT? * It’s interesting to see that the picture really is mixed at the moment. I guess that those who have been fortunate enough to hang on to their jobs through the pandemic have more money to spend and are able to make bigger ticket purchases – but it remains to be seen as to how long this will last. IMO, if we get a vaccine this side of

Christmas, activity will continue to snowball as confidence increases of a recovery. On the other hand, if no vaccines are on the horizon until at least next year, I would expect activity to calm down after a relatively frenzied few months over the summer!

In retailer news, Walmart restarts talks on selling Asda (The Guardian, Sarah Butler) shows that US retail giant Walmart is having another crack at offloading Asda after its most recent attempt to hive it off to Sainsbury’s failed. It said that it was in conversation with a number of third-party investors, but nothing has been sorted out yet. A number of private equity groups threw their hat into the ring earlier this year, but the bidding process stopped in April as the coronavirus pandemic gripped the UK. The talks are now ongoing. * SO WHAT? * As it happens, now is probably not a bad time to sell as supermarkets – including Asda – have seen sales skyrocket during lockdown. Having said that, costs have increased and growing profits is notoriously difficult in this most competitive of sectors. Still, it may be seen to be attractive as an investment due to its relative stability, but I’d be willing to bet that any PE buyer is just going to chop stores and jobs if and when they buy.

The gloom continues in M&S cuts 950 jobs in another blow for ‘radically changed’ high street (The Times, Louisa Clarence-Smith) as the retailer announced more job cuts in the latest M&S overhaul. The cuts will be made at HQ as well as the property and store management divisions. Middle management also seems to be in the crosshairs and it seems that operating in extreme circumstances has given the company a clearer picture of what it could potentially do without. * SO WHAT? * This is obviously very bad news for employees, but given the problems that the company is having, it is unsurprising that it is joining others on the high street in making deep and painful cuts to survive.

Ant makes a splash and Julius Baer makes big profits…

$200bn float for Alibaba’s payment arm (Daily Telegraph, Matthew Field) heralds the imminent flotation of Chinese mobile payments giant Ant Group (which used to be known as Ant Financial and was originally part of Alibaba) with a dual listing in Shanghai and Hong Kong. The timing is not yet finalised, but the group is thought to be valued at $200bn and 10% of its shares are likely to be on offer in the sale that will be one of the largest ever floats by an Asian company.

Elsewhere, Julius Baer profits soar as turbulent markets lift trading activity (Financial Times, Owen Walker) shows that heavy trading by the bank’s wealthy clients has resulted in record profits for the Swiss private bank. * SO WHAT? * This would seem to reflect similar activity reported last week by American banks including Goldman Sachs and Morgan Stanley who benefited from clients trading market volatility.

…in other news…

I thought I’d leave you today with a DIY tip from the guy who won the first series of Big Brother in Simple trick with your front door can add thousands to the value of your home (The Mirror, Paige Holland). If you are selling your abode in today’s rising market, why not make a bit more money?!?