Tuesday 28/01/20

1. In CORONAVIRUS & MACRO NEWS, markets take fright, US drug companies pitch in and Germany’s economy fails to climb out its current rut
2. In RETAIL NEWS, US retailers and restaurants go bankrupt and British Land predicts decimation
3. In INDIVIDUAL COMPANY NEWS, Air India comes onto the market, Casper gets humble for its IPO and Amigo Loans is up for sale
4. In OTHER NEWS, I bring you an amazing blind painter…

So the coronavirus spooks markets, US drug companies contribute to the cause and Germany’s economy remains in a rut…

Coronavirus fears rattle shares and oil market (Financial Times, Hudson Lockett, Joe Rennison and Philip Georgiadis) shows how the spread of the coronavirus is causing investor panic as they sell out of affected areas. International car makers including Nissan, PSA and Renault said they were planning to pull all foreign staff from plants in affected areas yesterday and manufacturing hub Suzhou has delayed the return to work of migrant labourers for up to one week. Chinese authorities have extended the lunar new year holiday by one week in further efforts to contain the virus; Shanghai, China’s financial capital, has ordered companies not to return to work until February 9th; the Indian government is preparing for a “possible evacuation” of its citizens; Germany’s foreign minister and UK health secretary Matt Hancock are also talking about doing the same. Coronavirus might tip slowdown into slump (Daily Telegraph, Tom Rees) highlights the fact that the impending negative impact on China’s economy is happening at a particularly sensitive time as economic growth is at its weakest for almost thirty years right when consumers traditionally tend to spend a lot for Lunar New Year celebrations and after a two-year bruising trade war with the US. Meanwhile, US drugmakers ship therapies to China, seeking to treat coronavirus (Wall Street Journal, Jared S. Hopkins) shows that the likes of AbbVie, Johnson & Johnnson and Gilead Sciences are among a number of US drugmakers sending antiviral drugs to China to see

whether they can be used to contain the spread of the coronavirus. There are no approved drugs or vaccines anywhere in the world that specifically target the coronavirus, but health authorities are willing to try anything to arrest the outbreak while scientists around the world try to come up with something (but this could take months). * SO WHAT? * The spread continues and, at the moment, the only guide that everyone has as to how this may all pan out is what happened in the aftermath of SARS. You can see more in my most recent edition of Watson’s Monthly. Although this is going to sound inappropriate for me to say, putting the human impact aside and concentrating on the economics for a moment, I would have thought that this outbreak will strengthen America’s bargaining position in the ongoing US-China trade talks because China may be more willing to be flexible on terms in order to get its economy bouncing back more quickly. Anyway, it’s early days yet and the death toll continues to rise…

In German economy shows few signs of recovery as gloom deepens (Daily Telegraph, Tim Wallace) we see that, according to the closely-watched IFO survey of German business confidence, although Germany’s manufacturing sector is showing signs of stabilising, weakness may have spread out to services and construction. Concerns over the ongoing US-China trade war and the possibility of this morphing into a subsequent US-Europe trade war are thought to be largely to blame. * SO WHAT? * Germany is Europe’s biggest economy and so when things aren’t firing on all cylinders there, the whole of the continent suffers. Again, this is probably good news for US trade negotiators as having a weakened Germany will make their lives much easier when they start to engage in proper trade chat with the Continent. 

US retailers and restaurants go bankrupt and British Land adds to UK retail gloom…

Scale of US retail upheaval laid bare as bankruptcies grow (Financial Times, Alistair Gray) cites sobering reports by credit insurer Euler Hermes and real estate consultants Green Street which show that about 10% of listed US retailers have gone bankrupt since 2008, the value of shopping malls has plunged by almost a third and that roughly half of the department stores in malls are to close with further losses of 500,000 retail jobs by 2025. This stands in stark contrast to Amazon, which is expected to detail its performance over the festive period this week – founder Jeff Bezos has already described it as being “better than ever”. The report by Euler Hermes said that online shopping had squeezed margins across the sector and that pricing pressure continues to intensify. In the UK, One in five shops might disappear, says British Land chief executive (Daily Telegraph, Sebastian McCarthy) highlights the grim assessment of retail landlord British Land’s chief exec that there is still more gloom to come in British

retailing, but sounded quite a philosophical note when he said that he thought that although there would be fewer shops, they will actually be better at serving their customers.

It doesn’t sound like things are going that well in America’s casual dining sector either in Village Inn, Bakers Square restaurant chains file for bankruptcy (Wall Street Journal, Jonathan Randles) as the two restaurant chains’ parent company, American Blue Ribbon Holdings, filed for bankruptcy yesterday after years of ongoing losses. Other recent casual dining casualties have included Marie Callender’s and Houlihan’s Restaurant + Bar. American Blue Ribbon said that it struggled with higher labour costs and the drag of unprofitable locations. * SO WHAT? * It goes to show that it’s not just the UK consumer that’s changing the face of the high street – retailers and casual dining venues are suffering from the evolution of US consumer tastes as well. The evidence just keeps mounting up and it seems to me that experience is where it’s at if you are a restauranteur or shop that wants to survive consumer evolution. Some will be better equipped (more proactive management, perhaps with a smaller store estate and less financial baggage etc.) than others to go the distance, but the mounting evidence shows that there is absolutely no room for complacency.

Air India goes on sale, Casper tones down its IPO ambitions and Amigo Loans wants to find friends with cash…

In New Delhi launches fresh attempt to sell Air India (Financial Times, Stephanie Findlay) we see that the Indian government is launching another attempt to privatise its struggling national airline two years after a failed bid. The government is offering potential buyers sweetened terms compared to last time and has identified March 17th as a deadline. The sale will be for 100% of the carrier, which operates domestically and internationally, in addition to budget unit Air India Express and AISATS, the airport services company. Air India and Air India Express have about 12% of domestic market share. * SO WHAT? * The offer this time is for 100% of the airline – the government wanted to keep a stake of 24% two years ago – and the buyer will “only” have to take on $3.3bn in debt rather than the $5.1bn it had in 2018 – so it does look like more of an attractive prospect now than it did before. It also wants control to stay within India, which means that a foreign airline will only be allowed to purchase up to 49%. This is all part of a broader plan for the government to sell stakes in five state-owned companies to raise cash generally and attract foreign investment.

Value of ‘bed in a box’ Casper slashed as it plans flotation (Daily Telegraph, James Titcomb) shows that US company

Casper Sleep has effectively accepted a valuation of 40% less than its previously implied valuation at a funding round in order to drum up demand for its Initial Public Offering (IPO). Somewhat alarmingly, the company loses 25% of revenues to returns (it offers a 100 day return policy), refunds and discounts and spent over a third of total revenues on sales and marketing for the first nine months of last year. * SO WHAT? * Investors seem to be less willing these days to turn a blind eye to lack of profitability and hype – and then there’s the problem that everyone and their dog seems to be doing “bed in a box” as the barriers to entry seem to be rather low. Just to give you an idea of how bad things are in this segment at the moment, Eve Sleep, whose shares listed at 101p in 2017, saw its shares trade at 1.7p yesterday! Last year, Eve Sleep and Simba Sleep’s proposed merger fell through and it looks like investors are thinking that the online mattress boom is past its peak as they aren’t products with a quick replacement cycle.

Then in Amigo for sale after founder forces return to boardroom (The Times, Ben Martin) we see that the founder of Britain’s biggest guarantor loan company has put it up for sale only eighteen months after its disastrous flotation where it was priced at 275p a share. Its shares traded at 19.5p yesterday. James Benamor’s Richmond Group said that it would be willing to its 60.66% controlling stake as it looked at various options as part of a business review. As things stand, Provident Financial (a “doorstep lender”) and Newday (a sub-prime credit card lender) are likely bidders. It is also possible that the company will become so cheap that Benamor will take it private by buying it himself.

And finally, in other news…

I thought I’d leave you today with something rather amazing in Blind Bulgarian artist finds a way to keep painting (Reuters, Angel Krasimirov https://tinyurl.com/rxem9dp). He really is incredible.