Tuesday 28/01/25

China’s manufacturing output falls before Lunar New Year holiday (The Times, Jack Barnett) cites the official PMI for China’s manufacturing sector and it indicated a contraction ahead of the Lunar New Year holiday. The sharper-than-expected decline in manufacturing output was at least partly due to workers travelling back to their family homes outside the big cities ahead of this major holiday. China’s National Bureau of Statistics also released figures which showed that profits for industrial companies took an annualised hit of 3.3% in December, which was a bit better than November’s 4.7% drop but profits fell across the whole of 2024, the third consecutive year of contraction. * SO WHAT? * Stats like this make me even more suspicious of how China magically managed to hit its GDP growth forecast last year of 5%! It just doesn’t seem right!

In EU renews Russia sanctions after Hungary drops veto threat (Financial Times, Henry Foy and Paola Tamma) we see that the EU has committed to keep going with sanctions against Russia shortly after the US reiterated that it would stick with its own sanctions. Hungary’s pro-Russia PM, Viktor Orbán, decided not to veto the sanctions after all, following his threat to let EU sanctions lapse at the end of the month. Trump’s administration said that additional measures would be applied if there was no agreement reached to end the war “soon”. The sanctions need to be renewed every six months. Staying on the subject of war, Lithuania and Estonia pledge to meet Donald Trump’s 5% target on defence spending (Financial Times, Richard Milne and Marton Dunai) highlights the two Baltic countries’ intentions to become the first NATO countries to spend more than 5% of their GDP on defence, a significant uplift on current spending levels. Interestingly, NATO is expected to jack up its defence spending target from the current 2% to 3 or 3.5% when it meets at its June summit. As things stand currently, 23 out of NATO’s 32 members met the 2% spending target last year but Spain, Italy and Belgium spend less than 1.5% over last year. * SO WHAT? * This will be great news for defence companies but I do wonder whether they will have to spend a lot of money on increasing production capacity as governments around the world increase their defence spending budgets for the long term. If that’s the case, it could be a drag on profits.

Elsewhere, German demand soars for Russian LNG via European ports (Financial Times, Alice Hancock and Shotaro Tani) shows that Germany is still buying loads of Russian LNG via other EU countries despite turning away direct shipments of it. Clearly Germany is finding it incredibly hard to wean itself off Russian gas, but it doesn’t want to look like it’s letting the side down (although it very much is!). I bet Germany’s not the only one taking advantage of the known difficulties of tracking it all once it gets delivered into the European network…

Meanwhile, in the UK, Discounts on furniture and fashion push down retail prices (The Times, Isabella Fish and Jack Barnett) cites the latest data from the BRC and NielsenIQ which shows that shop prices weakened by 0.7% year-on-year in January, something that was at least partly due to discounting on furniture and fashion. Annual food price inflation also weakened. The BRC said that falling prices aren’t likely to continue for much longer as the higher costs of last year’s Budget will start to kick in (and be passed on to consumers)…

Then in UK on course to miss 2030 clean power targets, says report (Financial Times, Rachel Millard) we see that Britain is on track to fall way short of its targets for developing new solar and wind power despite the government’s ambitions, according to a report by consultancy Cornwall Insight. Ministers have lifted restrictions on onshore wind in England, given planning permission for new solar farms and boosted available subsidies for renewable energy while the National Energy System Operator has also reduced the time it takes to connect to our electricity grid, but there’s clearly still a long way to go in order to hit our targets! The Department for Energy Security and Net Zero dismissed these forecasts and reiterated its believe that “clean power by 2030 is achieveable”.

What a day it was yesterday! ‘Sputnik moment’: $1tn wiped off US stocks after Chinese firm unveils AI chatbot (The Guardian, Dan Milmo, Amy Hawkins, Robert Booth and Julia Kollewe) highlights a momentous development where news of yesterday’s launch of a chatbot from Chinese start-up DeepSeek hit the general consciousness, decimating share prices of AI names across the board (the “Sputnik moment” refers to when Russia shocked the US by putting the first satellite into orbit). According to Nvidia suffers historic $600bn slump as AI bubble pops (Daily Telegraph, Alex Singleton), Nvidia’s resulting share price fall wiped over $600bn off its valuation which is the equivalent to the total value of a third of the FTSE100 and more than that of ExxonMobil, which is the biggest oil company in the US! Asia tech stocks slide in wake of Wall Street rout (Financial Times, Leo Lewis and Arjun Neil Alim) shows that SoftBank, Arm, Disco, Advantest and Furukawa Electric all saw hits to their share prices while shares in Chinese tech companies like SMIC boomed. How small Chinese AI start-up DeepSeek shocked Silicon Valley (Financial Times, Eleanor Olcott and Zijing Wu) gives us the story of how DeepSeek, founded by hedge fund manager Liang Wenfeng, released its R1 model yesterday along with a paper on how to build an LLM on a budget that can learn and improve itself without supervision. In 2021, Liang started buying a load of Nvidia GPUs for his AI hobby whilst still running his quant trading fund High-Flyer. In 2023 he launched DeepSeek with a vision to develop human-level AI and his engineers knew how to get the best out of the chips despite them not being the most cutting edge ones, thanks to US restrictions. Liang used the money he earned from his hedge fund to pay his engineers top whack for the best AI talent – to the extent that DeepSeek developed a reputation as the biggest payer for AI engineers in China. What really caught everyone’s attention, though, was that it used “old” Nvidia H800s and spent $5.6m – yes, that MILLION, not billion – to train a model that has 671bn parameters for a tiny fraction of what it cost OpenAI and Google to train its models. Despite all this, the DeepSeek model’s performance is comparable to that of ChatGPT and it’s free, versus OpenAI charging $20 per month for its o1 model! Here’s what the sellside is saying about DeepSeek (Financial Times, Alphaville) brings out some other interesting facts – that DeepSeek said that it took two months and less than $6m to develop the model versus OpenAI’s annual budget of over $5bn. Meta’s last major AI model cost $60-70m to train and the tech team at Peel Hunt reckon that hosted versions of DeepSeek could cost just 5% of the equivalent OpenAI price. Separately, DeepSeek hit with ‘large-scale’ cyber-attack after AI chatbot tops app stores (The Guardian, Dara Kerr) highlights a “large-scale malicious attack”

that hit DeepSeek last night, prompting it to limit registrations and just be available to existing users. Registrations are now open again. * SO WHAT? * One of the “dangers” of DeepSeek’s success is that it is open source. This means that it shares its groundbreaking discoveries and doesn’t hoard them in order to make a ton of money. However, the problem is that anyone can access it, including bad actors who could use it for nefarious purposes. DeepSeek’s success could also mean that there is far less of a need for massive cloud provision so potentially the huge cloud investment trajectory could slow down significantly. Of course, it is possible that the $6m cost is an exaggeration and that it managed to sneak in some advanced chips somehow – but the fact remains that the bubble has burst. China syndrome hits basking Big Tech with DeepSeek arrival (The Times, Alistair Osborne) just highlights the rather embarrassing timing of this announcement as it comes just a week after Stargate was unveiled and, even if you don’t believe the Chinese claims, it does question received wisdom thus far that bigger is better and that more is more. FWIW, I reckon that big spenders in this area are going to start questioning the value of their investments and really push for results more urgently than they would have done before. They will want to get more updates and have more specifics as well – no more throwing money at Sam Altman and just trusting that he’ll get the job done, no-questions-asked. DeepSeek changes rules of AI’s great game (Financial Times, Lex) suggests that DeepSeek could potentially take some customers away from the US hyperscalers (like Alphabet, Amazon, Microsoft and Meta) but at the very least, it shows that having the best model isn’t as important as one that’s reliable and “good enough”. As this article says “not every driver needs a Ferrari”. Also, I do think that this gives the rest of the world hope that it IS possible to build something impressive in AI without having the deepest pockets, as per DeepSeek defies America’s AI supremacy (Financial Times, Lex), which points out that French start-up Mistral initially demonstrated the ability to put together more efficient models and suggests that the world will be a better place for having more credible AI players rather than being dominated by a few American companies. The UK could yet be at the cutting edge of AI 😜. It seems that now, that the question is less about who will develop the best AI models and more about who can best apply them to real-world tasks. Whatever happens now, the playing field is much more level than it appeared to be last week.

WH Smith sale plan could turn some areas into ‘postal deserts’, says union (The Guardian, Sarah Butler) highlights concerns expressed by the Communication Workers Union regarding the sale of WH Smith’s high street shops, that some communities could turn into “postal deserts” because 200 post offices operate from WH Smith’s outlets. Modella Capital, owner of Hobbycraft is one interested bidder and HMV owner plots bid for WH Smith’s high street shops (Daily Telegraph, Daniel Woolfson) identifies another one, Putman Investments, while Hilco and Alteri are also potential candidates. Don’t mourn the passing of WH Smith – it’s been a soulless rip-off for years (Daily Telegraph, Ben Marlow) sounds a rather unsympathetic note, observing that it’s been in terminal decline for quite some time, but that there’s a danger that the disappearance of another major high street name will prompt others to do the same. * SO WHAT? * I think that the most amazing thing about this company is that it’s managed to last this long! Pretty much everything it sells is better done elsewhere. There are better – and more specialised places – to buy cards, stationary, sandwiches and confectionary, so there is not much left to make you go there! At least with its travel business, where it has outlets at airports and train stations, they have a captive audience and no competition. I wonder whether Boots will find inspiration from this and do the same…

Oxford Street suffers fresh blow as Microsoft shuts flagship store (Daily Telegraph, Pui-Guan Man) shows that Oxford Street is going to lose a major tenant as Microsoft announced it would be closing its flagship London store next month, six years after it opened. Microsoft said that this is due to its focus on digital growth. * SO WHAT? * This is a bit of a pain given that NikeTown was temporarily shut down and Ikea had delayed the launch of its flagship store in the old Topshop building until spring. Earlier this month, Westminster City Council revealed that a number of other retailers are not going to be renewing their leases either – and they include Zara, River Island, Urban Outfitters, Swarovski and Bershka. It really seems to be losing its lustre, doesn’t it! On a positive note, Abercrombie & Fitch and HMV have already moved in or are moving in. Still, having gaping holes where flagship stores used to be on such a famous street isn’t a good look…

In consumer trends, Streetwear brands get kicked to the kerb (Financial Times, Lex) does a really good job of giving us a current snapshot of where we’re at with streetwear at the moment! VF Corporation sold Supreme to EssilorLuxottica last year for less than 75% of what it bought it for in late 2020, LVMH sold its stake in Off-White and Puma recently unveiled disappointing earnings. * SO WHAT? * The problem is that it’s more difficult for smaller brands to pivot to the latest trends than larger brands with more firepower, which goes some way to explaining why Shein does so well. 

On the plus side, Dr Martens finds its stride after US slump (The Times, Isabella Fish) shows that the footwear brand is showing signs that it may have pulled itself out of the rut it found itself in as it saw a much-needed decent performance over the Christmas period. Revenues were down but at a slower pace than before and the company seems to have addressed the underperformance of its US business. There is, however, a lot of scepticism surround this turnaround…

In leisure news, Ryanair profits bounce back in Christmas rush (The Times, Robert Lea) shows that the budget airline put in a better-than-expected performance over the recent quarter thanks to stronger-than-expected Christmas demand. It also managed to put the spat it had with travel operators – including Tui, On the Beach, lastminute.com and Expedia – behind it. Ryanair will, however, still face turbulence from late deliveries of Boeing aircraft as the latter’s ongoing safety and production issues continue. This is because the larger planes would have helped them to carry more passengers and therefore earn more money.

Then in Starbucks cracks down on freeloaders to reverse sales decline (Financial Times, Gregory Meyer) we see that the coffee shop is going to be changing policies from Monday to eliminate freeloaders. Customers who don’t make purchases could be asked to leave as the company makes efforts to boost sales. Sounds like it makes sense to me, although this is going to make the workers’ lives more difficult, I would have thought…

In a quick scoot around some of today’s other interesting stories, Wall Street bets Tesla’s 2025 sales will miss Elon Musk’s target (Financial Times, Kana Inagaki and Stephen Morris) shows that analysts are expecting Tesla’s vehicle sales to grow at a much reduced pace this year than Musk’s forecasts as Trump ditches Biden’s EV mandate. Then in Tesla takes EU to court over tariffs on EVs made in China (The Guardian, Jasper Jolly) we see that the company is contesting the European Commission’s decision to impose tariffs on all imports of Chinese EVs from June in the courts. * SO WHAT? * It sounds to me like Tesla is having a tricky time in both the US AND China at the moment. Given rising competition and rocky trading conditions, you wonder whether Musk should just sell Tesla. His new BFF Trump is not making life easy for him in the US by reining in EV ambitions and Tesla’s strength in China continues to diminish. The problem is Musk IS Tesla – and if he leaves by selling up, that company will be in danger. I think that he would either need to sell to a competitor or make sure he employs an outstanding candidate to lead the company.

Universal Music Shares Jump After Agreement With Spotify (Wall Street Journal, Maitane Sardon) highlights a decent rise in Universal’s share price after the label said that it had signed an agreement with Spotify for recorded music and publishing in the US and other countries. * SO WHAT? * Details weren’t released but this sort of agreement is renewed periodically and is

something that hangs over the streamers in particular. At least that’s done and dusted now, so all parties can move forward!

Amazon asks permission to launch drones in north-east of England (The Guardian, Sarah Butler and Mark Sweney) shows that Amazon is serious about pushing forward with drone deliveries from its warehouse in Darlington, County Durham, in a same-day drone delivery service to be known as Prime Air. It’s asking the Civil Aviation Authority to use the airspace around its warehouse on the edge of town in the first instance. * SO WHAT? * This sounds like fun but I am sceptical about the practicality and cost of this service. We’ll just have to see how this goes!

Meanwhile, Rents in UK start to fall for first time in more than five years (The Times, Tom Howard) cites the latest stats from Rightmove which show that rents across the UK – outside London – have started to weaken for the first time in over five years! Rents had been driven upward because of the lack of supply versus strong demand but it looks like this might have turned a corner. The picture is different in London, though, where rents have reach another record level of £2,695 per calendar month on average. That has got to hurt!

Do you remember the first time you had ravioli? I don’t – but comedian Nish Kumar does! He has quite an apt description 🤣