Tuesday 26/06/18

1. In MACRO & MARKETS NEWS TODAY, the EU and China fight back on tariffs and equity markets continue to be powered by Faangs.

2. In UK HIGH STREET NEWS, suggestions are made regarding the future of city centres and estate agent Countrywide has a ‘mare.

3. In INDIVIDUAL COMPANY NEWS, Uber tries to save its London business.

4. In OTHER NEWS, I bring you a rather unfortunate magazine cover. For more details, read on…

So Trump’s tariffs have European and Chinese consequences and market performance continues to rely on FAANGS…

US trade war with Europe revs up as Harley- Davidson shifts production (Financial Times, Shawn Donnan, Jim Brunsden, Peter Campbell and Peter Wells) shows early consequences of Trump’s tariffs as Harley- Davidson said that it would move some manufacturing out of the US to avoid retaliatory EU tariffs. It said that it would increase production at its facilities in India, Brazil and Thailand to avoid paying taxes of up to $100m. Harley-Davidson is the first US manufacturer to cut domestic production in response to EU tariffs and Trump was obviously quite annoyed as he said in a tweet yesterday: “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. Taxes just a Harley excuse – be patient!”. Trump has been threatening 20% taxes on ALL imports of cars manufactured in the EU.

China’s Xi tells CEOs he’ll strike back at US (Wall Street Journal, Lingling Wei and Yoko Kubota) shows that China isn’t taking Trump’s actions lightly either and is likely to turn to measures other than tariffs to fight back as US exports to China only amounted to less than $200bn last year. It is likely that China’s retaliatory measures will include things like US companies having to undergo increased inspections, longer delays of regulatory approvals and a potential goal of getting Chinese consumers to avoid US products. Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington observed that “Apple’s $30billion market in China for iPhones, the largest in the world, could quickly collapse. Similarly, General Motors sells more cars in China than in the US, sales that could easily be disrupted by the Chinese government”. * SO WHAT? * How long is this p!ssing contest going to go on for?!? As I have said on previous occasions, I can see why Trump is trying to shake things up on the trade front because China does generally tend to take the mick in many ways (flouting patents, stealing valuable technology and copying it – all under the guise of local joint ventures – flooding markets with artificially cheap product because of its ridiculous overcapacity etc.etc.) and it has taken full advantage of being the world’s growth driver over some 

very lean years for everyone else. America’s economy is currently in a strong enough position to threaten in negotiation and you could argue that this is the time that Trump will be able to get the best deal – but still, the collateral damage could get increasingly painful. Conversely, WHEN this trade war comes to an end, I suspect that stock markets will skyrocket – but it does depend on how long this painful period lasts. If it goes on for too long, the skyrocketing could come too late for companies and industries that suffer terminal injuries as a result of Trump’s actions. FWIW, I think that Harley-Davidson’s actions are wholly understandable and, TBH, probably quite easy to do. It’ll be interesting to see how quickly other US manufacturers follow suit.

Equity investing in 2018 is all about momentum led by the Faangs (Financial Times, John Authers) is a really interesting article that highlights just how influential these “new” tech stocks are in dragging up the performance of the entire index. Generally speaking, stock selection is made on value (buying stocks that look cheap versus their

fundamentals) and momentum (buying stocks that are seeing upward movement and avoiding those that are on a continuous downer). Value has not been doing very well in the last few years versus momentum – and this momentum has been powered by the Faangs (which consists of Facebook, Amazon, Apple, Netflix and Google parent Alphabet). Their collective influence has in fact been so great that, without them, the US stock market would have fallen for the year so far! Expensive stocks keep getting more expensive and cheap stocks are getting cheaper as more and more investors jump on the momentum bandwagon. * SO WHAT? * When this kind of thing happens, people get twitchy and investors get severe bouts of FOMO (Fear Of Missing Out) despite being faced with very expensive fundamental valuations. A lot of people will probably draw comparisons with the dot-com boom of the beginning of this century, but I have to say that – expensive valuations aside – this is different. Back then, I remember having conversations with investor clients along the lines of “I know it’s expensive, but the fact is that everyone wants a piece”, which makes you feel uneasy because you know momentum can’t last forever, especially because these valuations were based on projections of what revenues these companies

would get in the future. Yes, I know that that’s how it works generally, but many of these companies were running at a big loss or weren’t even producing anything at all – whereas the Faangs of today are all producing very real revenues (although admittedly, many of them were in the red for years). I suspect that we are getting very close to the stage that some bright spark invents a “new” way of valuing tech companies based on some kind of whizz-bang maths, they’ll give it some fancy acronym-based name and everyone will adopt it to justify their buying of such expensive stocks. When that sort of things starts to happen it is usually time to head for the hills because valuation then becomes something based on complete BS…

In news about the UK high street, there are suggestions for new-look city centres and estate agent countrywide has a shocker…

More offices ‘can help to revive high street’ (The Guardian, Larry Elliott) is one of the conclusions reached in a report published by thinktank Centre for Cities which made the observation that evolving consumer behaviour that is negatively impacting our high street (resulting in increasing numbers of shop closures) needs to be addressed by changing the mix of retail, residential and office space in town centres. According to the report, successful city centres have a high proportion of their commercial spaces dedicated to offices (up to two-thirds in places like Bristol and Manchester), with retail outlets making up only 18% of this, with retail being helped by having large numbers of office workers to sell to (really? Maybe they will be telling us that bears sh!t in the woods as well). On the other hand, underperforming city centres have a lower proportion of offices making up their commercial space and are struggling as a result – for example, in Blackpool and Newport over 40% of commercial space is accounted for by retail versus less than 25% for offices. The thinktank recommended that cities with relatively high levels of shops should shift this 

mix towards having more office and residential. In places with weak demand for offices and homes, some demolition would be needed so that the land could be used to “improve the public realm”. * SO WHAT? * Unsurprising conclusions but the subject matter is very relevant given the current rate of shop closures. Action needs to be taken reasonably quickly as we could end up with empty high streets. I think this is particularly pressing given the continued demise of department stores in particular which occupy vast city centre locations where redevelopment is likely to be difficult and costly. Developers and councils might be reluctant to embark on anything major without the involvement of the government.

In Estate agent struggles to put house in order (The Times, Tom Knowles) we see that shares in the UK’s biggest estate agent, Countrywide, fell by a massive 30% after the company announced it would be asking for money to cut its debt. Countrywide owns 50 high street estate agency brands including Hamptons International, Bairstow Eves and Bridgfords and blamed a difficult housing market for its fourth profit warning in eight months. As Anthony Codling, an analyst at Jefferies put it, “The underlying second-hand housing market is dreadful and there is little to be done when homeowners stop moving. If times are hard for Countrywide, we can only imagine how the rest of the market may be struggling”. * SO WHAT? * Some have said that the company has suffered due to the rise of online competitors such as Purplebricks, but many others say that its troubles are actually self-inflicted and that its rising debt has been due to falling profitability, a lengthy period of buying up letting agents and the large amount of money that was thrown at its ultimately abandoned digital business. Given that the company is likely to want to raise about £125m (the debt currently stands at around £200m) and that market conditions aren’t the best, begging the market for cash is going to be a tough ask..

In individual company news, Uber makes a bid to keep going in London…

Uber seeking London private hire licence to keep it on the road (Daily Telegraph, James Cook) highlights the beginning of a hearing that started yesterday to get Uber its private hire operator licence to operate in London for the next 18 months following a September decision by TfL NOT to renew its licence. * SO WHAT? * If it wins, it will continue to operate as normal, but if it doesn’t, the service won’t disappear overnight as they will no doubt go through an appeals process.

…AND FINALLY, IN OTHER NEWS…

There are times when you wonder what goes on in people’s minds – especially when what they do can be very public: Arsenal’s new manager Unai Emery might want a word with the club’s magazine designer (Metro, Tanveer Mann https://tinyurl.com/yayklu4t). This is a classic. Maybe the designer was a Chelsea or Spurs supporter…