Wednesday 07/06/23

1. In MACRO NEWS, we look at the Ukrainian dam breach and its consequences, the World Bank touts its views and Australia gets a shock interest rate rise
2. In CONSTRUCTION & REAL ESTATE RELATED NEWS, UK construction activity increases, we look at why the housing market rebound may not last, how Paragon shows that the buy-to-let market isn’t dead yet and why big companies want to downsize office space
3. In FINANCIALS NEWS, Sequoia splits out its China business, ESG funds see record outflows and a deal drought leads to consolidation among investment banks
4. In INDIVIDUAL COMPANY NEWS, Microsoft/Activision seek a way forward, PGA caves to the Saudis in consolidation with LIV and Asos gets abandoned by suppliers while Frasers Group ploughs more in
5. AND FINALLY, I bring you the ten types of magic…

So a Ukrainian dam is breached, the World Bank outlines its thoughts and Australians get a surprise interest rate rise…

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:

Floods hit Ukraine after Kakhovka dam breached (Financial Times, Max Seddon and Christopher Miller) highlights yesterday’s breach of the dam that spans the Dnipro river in southern Ukraine, which is resulting in the displacement of tens of thousands of people in surrounding areas. The Zaporizhzhia nuclear power plant relies on waterflow from the dam to cool its reactors but at the current time there is no evidence that the plant’s safety has been affected. Ukraine blames Russian terrorists for the breach and Russians blame Ukraine for a “deliberate act of sabotage…to deprive Crimea of water”. Military briefing: Russia has most to gain from Ukrainian dam breach (Financial Times, Christopher Miller and Max Seddon) says that the breach will restrict Kyiv’s options in a much-anticipated counter-offensive and Dam breach gives Russia a new weapon in Ukraine war (Financial Times, Ben Hall) says that the latest move demonstrates that Moscow is eminently capable of escalating the war by attacking its infrastructure. With that in mind, UK defence group Chemring reports order surge driven by Ukraine war (Financial Times, Sylvia Pfeifer) highlights a big boost in orders for the first half of the year as defence spending rose and the company’s order book swelled by 113% as sales of its materials and components for various missile systems, explosives and

propellants racked up (although its profits actually fell thanks to contract delays). The Ukraine war and a build-up of military readiness in the Asia-Pacific region have, unsurprisingly, been the main drivers behind the surge. Chemring: new capacity investment will deliver bang for the buck (Financial Times, Lex) highlights the company’s resultant growth prospects which have been patchy in the past compared to bigger companies like BAE Systems. * SO WHAT? * Unfortunately, Ukraine’s misery and Asia’s fear is good news for defence companies around the world as countries replenish their supplies and/or arm themselves in anticipation of conflict. I suspect the orders will keep on rolling in…

Meanwhile, Poorest countries are biggest losers from economic shocks, says World Bank (The Guardian, Larry Elliott) cites findings in the World Bank’s latest global economic prospects report which show that the cumulative effects of Covid, Russia’s invasion of Ukraine and the mass hiking of interest rates by central banks are most damaging to poorer countries because it makes their debt (usually denominated in dollars) much more expensive. The report also said that the global economy was going through a rough patch (although it upgraded its 2023 growth forecasts and said that there would not be a second recession in the space of three years) and would slowdown in the second half of the year. Young poorer than parents without ‘miracle’ (Daily Telegraph, Szu Ping Chan) highlights another part of the report which says that urgent action needs to be taken to arrest and reverse current trends which will lead to young people suffering in future compared to previous generations.

Then in Shock rate increase in Australia (The Times, Mehreen Khan) we see that the Reserve Bank of Australia increased interest rates by 0.25% to 4.1%, adding that there may be more where that came from as it continues to battle inflation. Markets had expected rates to remain unchanged for this month.

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!

UK contruction strengthens, there’s caution in the residential rebound, Paragon shows that there’s still life in buy-to-let and big companies rethink office space…

There were some interesting developments in the real estate space as UK construction activity rises at fastest pace in 3 months (Financial Times, Valentina Romei) cites the S&P Global/CIPS construction PMI which highlights a rebound in construction activity thanks to commercial property demand more than compensating for the sharp drop-off in house building. Why the housing market rebound is a false dawn (Daily Telegraph, Melissa Lawford) piles misery onto the prospects for residential property as it observed that although there seemed to be a brief period of respite as mortgage approvals rose in February and March which helped house prices recover in April and May, mortgage approvals then fell once more as new data published yesterday also showed that house building weakened for the sixth consecutive month in May to its lowest level since spring 2020 when there was virtually zero construction. Paragon’s record profits ease fears about the buy-to-let market (The Times, Ben Martin) highlights a strong half-year performance from Paragon Banking Group, one of Britain’s biggest mortgage lenders to landlords, which suggests that there’s still life in the buy-to-let property market. In fact, its results were so

good that it decided to raise full year forecasts! Meanwhile, Big firms to shed office space as employees demand flexible work (The Times, Tom Howard) shows that, according to a survey by property agent Knight Frank, around half of the world’s biggest companies are planning to cut office space over the next few years as hybrid working evolves into becoming a permanent fixture in our lives. The trend of the biggest businesses was to take less space, but have higher quality. * SO WHAT? * I thought it was interesting to see that construction of commercial property is picking up (and I wonder whether that’s because there’s higher demand for better quality/more environmentally-friendly properties) as it suggests that there is demand for it; I think that it’s too early to tell whether the recent wobble in the residential property market is going to continue (because we’re just in peak sales season so I think I’d like to see how the next couple of months goes before reading the sector its last rites!); the Paragon thing is pretty interesting as its performance is a bellwether of the buy-to-let market as a whole and it seems the professional investors are not particularly phased by current goings-on (whereas I would argue that private individual landlords who buy maybe one or two properties as an investment may well have been turned off) and the matter of office space is not surprising as this trend has been emerging throughout lockdown anyway. The problem is that it is creating a two-tier office property market where demand for prime, environmentally-friendly properties are in hot demand whereas everything else that’s older and needs upgrading is getting left behind.

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!

Sequoia splits, ESG funds slim down and the deal drought takes it toll on investment banks…

As US-China tensions continue, US venture capital giant Sequoia to split off China business (Financial Times, Kaye Wiggins, Ryan McMorrow and Arash Massoudi) shows that the famed VC giant, which specialises in ploughing money into fast-growing tech start-ups (it was an early investor in ByteDance and Alibaba, for instance!), announced that it would split off its China business from its US operation and run it as a “completely independent” entity with a different name – HongShan. Sequoia will also split off its Indian and south-east Asia business into a separate group with all the changes expected to take place by March 2024. * SO WHAT? * This signals a new dawn for what has been one of the most successful US-China investing alliances but I guess that geopolitical developments have made life much harder, meaning that keeping the businesses separate could potentially limit the impact of any restrictions imposed on their operations. The fact that there’s been a general tech slowdown as well won’t have helped things either as the value of their investments will have taken a bit of a pasting.

Elsewhere, Worst month ever for ESG funds as British investors pull £300m (Daily Telegraph, Melissa Lawford) shows that ESG

funds took their biggest ever monthly hit in the form of withdrawals in May as investors, spooked by market gyrations and booming inflation, decided to take their money out of ESG funds in a shift of focus away from ethical investment to concentrate more on returns. * SO WHAT? * This is particularly notable because it is only the second time in five years where investors became net sellers of ESG equity funds! I guess that means more money going into the defence sector then!

Then in Deal drought raises stakes for boutiques (Financial Times, Ivan Levingston and James Fontanella-Khan) we see that the worst start for dealmaking in ten years is expected to result in further consolidation among investment banks as specialists are cherry-picked by bigger banks. Most recently, Mizuho bought US investment bank boutique Greenhill & Co while Deutsche Bank bought UK broker Numis – but there is probably more to come. Bigger banks have benefited from higher interest rates and therefore have the funds to shop for smaller entities that may be looking for sugar daddies to bail them out/prop them up. * SO WHAT? * This is not surprising and it will be interesting to see who buys who now and whether there is much in the way of employees jumping ship. If you are a bank with deep pockets and want to broaden your business quickly, acquisition could be the way to go – particularly if you want to buy advisory expertise.

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!

Microsoft/Activision aims to please, the PGA caves in and Asos sees suppliers abandon while Frasers Group piles in…

In a quick scoot around some of today’s other interesting stories, Microsoft seeks ‘solution’ on Activision deal (Daily Telegraph, Gareth Corfield) shows that Microsoft is making conciliatory noises regarding the terms of its proposed $69bn merger with Activision Blizzard after it was blocked by the CMA. Microsoft’s president, Brad Smith, met with Rishi Sunak yesterday and adopted a much less aggressive stance versus the one he took immediately after the CMA’s decision. He went from slagging off the UK and the CMA in April to saying that he was “bullish on the United Kingdom as a great place to live, to learn, to build” 🤣. * SO WHAT? * If Microsoft makes concessions here, I think it could be a big win for the CMA if it accepts them. It could potentially take the initiative back from the European regulators who waved the merger through and show that the CMA is not to be messed with. We’ll just have to wait to see how that turns out…

Then in Saudi Arabia to spend billions on shock merger of PGA Tour and LIV Golf (Financial Times, Samuel Agini, Arash Massoudi, Sara Germano and Sujeet Indap) we see that the PGA Tour and Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, have come to an agreement whereby the latter

will inject a rumoured $3bn of cash into the enlarged entity that will also encompass the DP World Tour. I suspect that this will put people like Rory McIlroy and Tiger Woods in a bit of an embarrassing position as they clearly backed the wrong horse in the form of the PGA Tour! Money talks, so no doubt everyone will get back onside (unless, of course, someone decides to do something independently).

Then in Asos suppliers cut ties over insurance and profits fears (The Times, Isabella Fish) we see that the online retailer’s suppliers have started to cut ties after credit insurers withdrew cover due to the company’s weakening profits. This is just the latest bad news for the retailer that got unceremoniously booted out of the FTSE250 last week. That said, Mike Ashley’s Frasers Group raises stake in Asos to nearly 9% (The Guardian, Sarah Butler) shows that the wiley old deal-maker is continuing to sniff around the ailing online retailer as it turns out that Ashley’s company has taken its stake in Asos up to almost 9%. If he increases it much more, he’ll be forced to clarify whether he’s going for a takeover or not, but there will be others interested in snapping it up. Frasers is currently Asos’s third biggest shareholder.

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!

…in other news…

How many types of magic are there? Well there are ten, according to this bloke who demonstrates them!