Wednesday 05/06/24

  1. In MACRO, COMMODITIES & MARKETS NEWS, we look at a shock in India, Germany’s unexpected rise in unemployment, ructions in Turkey, political debate in the UK, challenges facing Mexico’s new president, the latest on oil and short sellers getting burned
  2. In TECH NEWS, UAE wants to get closer to US in AI, we see whether the sellside should fear AI and how publishers are suffering
  3. In REAL ESTATE NEWS, we look at why commercial property values have fallen, LondonMetric’s focus on warehouses pays off and Blackstone considers a rental housing push in the UK
  4. In MISCELLANEOUS NEWS, the Monsanto payout gets slashed, Stellantis and Mercedes-Benz postpone gigafactory plans, Paramount stays open-minded and UK clothing sales to the EU drop sharply
  5. AND FINALLY, I bring you one man’s way of avoiding buying a carrier bag for his grocery shop…

1

MACRO, COMMODITIES & MARKETS NEWS

So there’s shock in India, Germany and Turkey while political debate rages on in the UK, Mexico’s new president faces big issues, oil extends losses and short sellers get burned…

Hi there! Just to let you know, I’m preparing for a major overhaul on Watson’s Daily that will enhance the existing offering. You may not see the updates instantly, but I shall let you know when the big “switch-over” takes place this summer. I think you will love what’s to come!

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:

 

Narendra Modi set to lose parliamentary majority in shock Indian election result (Financial Times, John Reed, Benjamin Parkin, Jyotsna Singh and Chris Kay) shows that the ruling BJP looks like it will lose its parliamentary majority which could see PM Modi have to resort to reliance on smaller allies to ensure his historic third terms in office! Failure to secure a majority will make it difficult for Modi to push through economic policies as he’ll have to get support from other parties. India election strips Narendra Modi of his ‘aura of invincibility’ (Financial Times, Benjamin Parkin, John Reed, Jyotsna Singh and Chris Kay) highlights the fact that this will be the first time that the BJP will lose its majority since 2014 and Narendra Modi’s wobble in India leaves the status quo in question (Financial Times, Lex) suggests that although there may be turmoil in the short term as expectations adjust, the country’s economic growth pathway is likely to continue as its massive infrastructure investment programme should give India a solid foundation.

In Europe, German rise in unemployment three times worse than expected (Daily Telegraph) cites the latest Federal Labor Agency stats which show that German unemployment has risen far more than everyone expected, dampening hopes of an economic recovery in the country. The Ifo Business Climate Index remained flat in May after three consecutive months of increases which fuelled expectations of an economic recovery. Clearly this is something that the ECB will need to take into account when deciding the timing of any interest rate cuts.

Then in Recep Tayyip Erdoğan’s authority to fire Turkey’s central bankers ruled unconstitutional (Financial Times, Ayla Jean Yackley) we see that Turkey’s constitutional court has struck down a part of the decree signed by the President that allowed him to sack central bank governors. He has sacked five central bank governors in five years as his approach to taming inflation of 75% (one of the highest rates in the world) is, shall we say, somewhat at odds with pretty much everyone in the world. The most recent one, Hafize Gaye Erkan, was booted by Erdogan after just eight months! * SO WHAT? * Observers have been heartened by the more recent change in direction of central bank governors like Erkan who have adopted a more conventional approach to tackling inflation than Erdogan. This decision is quite interesting because everyone expected the courts to avoid challenging Erdogan’s authority (he appoints most of the judges in the court after all!), so this decision is a mild positive – and the fact that the current governor is (for the moment, at least!) continuing with the “conventional” way of taming inflation (raising interest rates) suggests that there is no need to panic – yet.

Back in the UK, Rishi Sunak and Keir Starmer clash on tax and immigration in testy TV debate (Financial Times, George Parker, Jim Pickard and Anna Gross) highlights the reaction to last night’s live TV debate between Starmer and Sunak, which was dominated by their respective stances on tax and immigration. Contrary to expectation, polls suggested that Sunak narrowly won this first round in an hour-long debate on ITV. The Conservatives lag Labour in the polls by over 20 point and Sunak’s personal ratings are even worse! The next debate will be on BBC on June 26th.

UK faces £33bn hole in finances or return to austerity, thinktank says (The Guardian, Larry Elliott) cites the Resolution Foundation as saying that the next government is going to have to plug a massive gap in public finances unless it pushes through more severe austerity measures. It said that both Conservative and Labour policy funding pledges were “detached from reality” and that whoever gets into power will have to either raise taxes or cut spending in order to meet debt targets.

Then in Why Nigel Farage’s comeback matters as Tories stare into heavy defeat (Financial Times, Stephen Bush) we see what the effect might be of Nigel Farage returning to the political fray as the new leader of the Reform party. * SO WHAT? * The main takeaway from this article is that Farage could further weaken the Conservatives’ position as Farage is essentially the face of immigration and Sunak’s policies on this are deemed by many not to have worked. Let’s not forget that Sunak was open to welcoming Farage back to the Conservative party not so long ago!

Following on from what I said yesterday about Mexico’s newly-elected president, Five challenges facing Mexico’s Claudia Sheinbaum (Financial Times, Christine Murray and Michael Stott) shows that she is going to have to address some major challenges. Namely, she will need to address the fiscal deficit, rising crime rates, keeping the relationship with the US intact (something that will be particularly pertinent if Trump wins), solving the financial nightmare of the massively indebte stated energy firm Pemex and, finally, how to follow such a charismatic leader who at least appeared to have the common touch! A tall order indeed!

In commodities news, Oil extends losses as Opec+ and weak US data unnerve traders (Financial Times, Lukanyo Mnyanda) shows that oil prices continued to fall thanks to weak US economic data (manufacturing activity was weaker than expected) and speculation that OPEC+ members were getting ready to raise production.

Then in Hedge fund short sellers burnt by flurry of UK takeover bids (Financial Times, Costas Mourselas) we see that hedge funds are getting increasingly sensitive about betting against UK stocks after being burned by short positions blowing up in their faces. Millennium Management, GLG and Gladstone Capital Management have recently been caught out by having short positions in Hargreaves Lansdown, Darktrace and Keywords Studios as the companies found themselves at the end of takeover offers that sent their share prices in the opposite direction to what the hedge funds were expecting. * SO WHAT? * Valuations of UK small and midcap stocks are so cheap now that bid interest is already building. This makes the area an absolute minefield for the hedgers who like to short particularly as a manager of one hedge fund said that private equity firms were sitting on roughly $1.2tn of “dry powder” – money that is just sitting around, waiting to be used in deals.

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!

2

TECH NEWS

The UAE wants to get closer to the US on AI, sellsiders worry about ChatGPT and publishers suffer from the evolution of search traffic…

UAE seeks ‘marriage’ with US over artificial intelligence deals (Financial Times, Chloe Cornish) is an interesting article which shows that the UAE is looking for further collaboration with the US over AI, saying that the recent deal with Microsoft buying a $1.5bn stake in Abu Dhabi’s G42 was only the start of a deeper relationship between the two countries. Abu Dhabi’s investment vehicle MGX has been in recent talks with San Francisco-based OpenAI over its chip development plans as it, like Saudi Arabia, is trying to wean itself off oil revenues. * SO WHAT? * The UAE can provide access to a LOT of capital but I would suggest that there’s no guarantee that they won’t change their mind further down the road and hitch their wagon to the Chinese. If that happens, efforts by the US to cut the Chinese out of the equation will have come to nothing. At the moment, the UAE seems to be pledging its allegiance to the Americans but the Saudis seem to be more interested in keeping their options open with investment in China as well.

Meanwhile, Who will prevail in ChatGPT vs the Sellside? (Financial Times, Lex) looks into concerns from analysts at investment banks about whether AI will take over their jobs. A recent draft paper showed that AI outperformed financial analysts on predicting the direction of future earnings quite comfortably. What was particularly impressive was that context was stripped out, leaving predictions based purely on balance sheets and

income statements – and even company names and years were anonymised. * SO WHAT? * Naysayers will obviously predict that this is the beginning of the end for the profession but a more positive spin on this would be that if you use AI to do the “grunt” work and minimise human error a combo of AI and human know-how should result in more accurate and comprehensive forecasts. The only thing I’d say about this is that if everyone uses the same AI to do the same thing, surely everyone will come up with the same conclusions and there will be no differentiation. We’ll just have to wait and see what happens!

Meanwhile, AI ‘poses threat’ to publishers that depend on search traffic (The Times, Katie Prescott) highlights the potentially devastating effect of the rise of AI chatbots on companies that rely on search traffic for their income. The rising use of chatbots such as ChatGPT and Claude, which give users full answers to questions rather than links to websites suggests that the traditional search engine model’s days are numbered. Recent research by Gartner showed that generative AI would reduce traditional search engine volumes by 25%  by 2026. * SO WHAT? * While we have seen deals signed between big AI players and big news publications/organisations, I think that those who are below the top tier are going to find things very difficult and will need to give up, adapt the way they make their money or just resign themselves to a slow death. When economies start to pick up, ad spend is likely to increase and may make things somewhat less painful for organisations to create content. However, that will only paper over the fact that AI is going to affect their business model forever.

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!

3

REAL ESTATE NEWS

We consider the reasons behind commercial property price weakness, LondonMetric wins and Blackstone looks into UK rental housing…

Why commercial property values have hit the floor (The Times, Tom Howard) is a really interesting article which highlights continued low valuations of real estate companies that have exposure to commercial property. Morningstar data shows that shares in London-listed landlords are trading at an average discount of 24% to their Net Asset Value (NAV) – another way of saying what their buildings are worth. Values of commercial property have been buffeted over the last few years by higher interest rates and companies like Hammerson (shopping centres) and Great Portland Estates (London offices) are seeing particularly large discounts to their NAV – they are both trading at around 44% discount to NAV! Even the bigger ones like British Land and Land Securities are suffering. Mind you, LondonMetric’s bet on warehouses pays off as other sectors falter (The Times, Tom Howard) highlights one winner in the field of commercial property as rents for LondonMetric’s inner-city warehouses boosted profits. The boom in demand for warehouse space in Britain has meant that a warehouse tenant that took out a lease in 2019 and renewed it last year now has to pay 40% more! * SO WHAT? * Commercial property won’t be in the doldrums forever

but I think that demand for high grade office space and urban warehouses will continue because many tenants want more eco-friendly places to work that tempt their employees away from their home desks and rising levels of e-commerce mean that customer expectation of swift delivery necessitates product being closer to the ultimate destination.

Meanwhile, Blackstone in UK rental housing push with £580mn Vistry deal (Financial Times, Joshua Oliver) shows that US private equity firm Blackstone has reached a deal with the UK housebuilder to buy around 1,750 new homes for rental purposes as they see opportunities in the UK’s poorly-served rental market. This will be its second major transaction with Vistry in just eight months, bringing a total of £1.4bn and funding over 4,500 homes. Just to give you an idea of scale, the UK’s biggest listed rental landlord, Grainger, manages around 10,000 homes. * SO WHAT? * The UK has traditionally relied on private landlords but economic turmoil and rising interest rates in recent years have scared many off, leaving a shortage of rental properties in the UK. This has opened up opportunities for money managers to sweep in with their deep pockets and desire for stable returns. Vistry has benefitted from this trend as it has differentiated its business model by pre-selling homes as part of partnerships meaning that they are not left wearing huge stocks of properties that they can’t sell.

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!

4

MISCELLANEOUS NEWS

Monsanto gets good news, gigafactories are postponed, Paramount leaves the door open and UK clothing sales to Europe drop sharply…

In a quick scoot around some of today’s other interesting stories, Monsanto’s Weedkiller Payout Slashed to $400 Million From $2.25 Billion (Wall Street Journal, Ben Glickman) highlights an important development in the ongoing legal battle linked to allegations that its weedkiller, Roundup, is linked to causing cancer. Bayer, which bought Monsanto back in 2018, was ordered earlier this year to pay $2.5bn in damages by a Philadelphia court but this has now been drastically reduced. Monsanto says it will continue to contest the Philadelphia decision in the Superior Court. * SO WHAT? * This is just an example of a war of attrition between Big Corporate and victims and potentially shows that those with the deepest pockets tend to win in the end. Monsanto has blown up in the face of Bayer ever since the acquisition in a deal worth $63bn and it has already had to pay out damages in a number of cases. The struggle continues…

In Stellantis and Mercedes-Benz pause gigafactory plans as electric car sales slide (Daily Telegraph, Matt Oliver and Adam Mawardi) we see the latest repercussions of what happens when EV sales weaken – the Automotive Cells Company (ACC) JV between both European carmakers has halted construction on battery plants in both Germany and Italy. The ACC had planned to develop three EV gigafactories across Europe. * SO WHAT? * This is a major development but not entirely surprising given the disappointing take-up of the vehicles. I wonder whether we will see more of this…

Meanwhile, Paramount leaves door open for new offers (The Times, Louisa Clarence-Smith) shows that the president of Paramount Global, Shari Redstone, has left the door open to other offers for the business as she said that she’s unhappy with the offer from Skydance. Redstone’s family controls 77% of Paramount’s voting shares. I think that this is just a tactic to squeeze more money out of the bidders. Wouldn’t it be funny if Skydance called their bluff and walked away 🤣

Then in UK clothing sales to EU plummet as Brexit red tape deters exporters (The Guardian, Phillip Inman) we see that exports of clothing and footwear to the EU have dropped sharply since Brexit according to a new report by consultancy Retail Economics and online marketplace Tradebyte. Many of the worst-affected companies were small and mid-sized businesses which cope less well with all the red tape. A separate report published yesterday by the thinktank UK in a Changing Europe found that although exports of goods had dropped, services exports had increased by almost 30% versus February 2020. Still, something needs to be done about the companies that have been suffering since Brexit – but I guess that’s just one of the things for the next government to worry about.

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!

5

...AND FINALLY...

…in other news…

There are times when you do a grocery shop and realise that you’ve forgotten to bring one of your growing collection of bags from an array of supermarkets you’ve collected over the years. Most people then resign themselves to the fact that they will have to add to this collection – but not this man. His ingenuity is impressive but I still think he should have just splashed out on a couple of bags 🤣!

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Some of today’s market, commodity & currency moves (as at hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)