Wednesday 16/10/19

1. In MACRO NEWS, we look at the latest on Brexit, the jobs market wobble and trouble in Catalonia
2. In FINANCIALS-RELATED NEWS, JPMorgan beats Goldman, Citi has China plans and fund manager Woodford shuts down
3. In INDIVIDUAL COMPANY NEWS, Johnson & Johnson remains upbeat despite everything
4. In OTHER NEWS, I bring you world leaders on horseback…

So Brexit talks continue, UK jobs take a hit and Spain has Catalonia troubles…

In UK and EU remain locked in race to broker Brexit deal (Financial Times, Jim Brundsen, Sam Fleming, Mehreen Khan, Michael Peel and George Parker) we see that both sides continue to negotiate against the clock to secure a Brexit deal, with EU chiefs warning that it won’t be possible unless BoJo gives more concessions. Mid-cap stocks surge amid hopes of Brexit breakthrough (Daily Telegraph, Louis Ashworth) shows that investors were getting all a-flutter about the prospect of a deal and sent the FTSE250 up by 1.34% as they invested in UK-centric sectors like retailers, landlords, high street lenders and restaurants. The pound also strengthened to a five-month high versus the euro and a four-month high versus the dollar. * SO WHAT? * It’s all noise and bluster at the moment, so we’ll just have to see what (if anything) is actually decided as there are still major hurdles to negotiate. Although the FTSE100 represents our biggest companies, many of them are heavily reliant on profits earned abroad so the FTSE250 is seen to be a more accurate measure of how the UK is doing.

Meanwhile, UK’s robust jobs market dented amid big fall in employment (The Guardian, Phillip Inman) cites the latest figures from the Office for National Statistics which show that the number of people in work fell by the sharpest rate in four years in August due to Brexit uncertainties. In

addition to that, the trend in rising average weekly wages weakened and the number of job vacancies have also fallen. * SO WHAT? * I don’t think that this is exactly surprising given all the uncertainty at the moment – I actually think it’s MORE surprising that things have been quite as robust as they have been given the backdrop. Everyone is waiting for Brexit clarity – and then things can get moving once more IMHO.

As if Spain wasn’t having enough of a headache at the moment as it approaches its fourth general election in four years on November 10th, What next for Catalonia after Supreme Court judgement (Financial Times, Daniel Dombey) highlights the discord that has ensued since the Supreme Court sentenced Oriol Junqueras, the former leader of the Catalonian government, to 13 years in prison on Monday “for sedition and misuse of public funds” connected with the illegal 2017 vote on independence. Eight of his colleagues were also sent to prison for between nine and 12 years. Heated protests resulted, especially at Barcelona airport, where over 100 flights were cancelled and over 130 people were injured. * SO WHAT? * Pedro Sanchez, Spain’s caretaker PM, wants the separatists and other Catalans to talk to each other, but the separatists aren’t having any of it. Sanchez had sought to form a government with separatist MPs in the current parliament, but gave up and decided to chance his luck with yet another general election. The funny thing is that Spain’s economy has been a highlight in a very sluggish Europe of late, but all this political impotence could well put it at risk if it carries on for much longer. The drama continues…

JPMorgan beats Goldman, Citi wants more in China and Neil Woodford suffers the ultimate humiliation…

JPMorgan earnings leave Goldman in the shade (Financial Times, Laura Noonan) gives JPMorgan bragging rights over Goldman Sachs as it turns out that record investment banking fees helped it to outpace its rival, which was itself weakened by a chunky 27% fall in profits due to tech investments in things like WeWork and Uber. * SO WHAT? * Yesterday was a big day for US banks reporting their results. JPMorgan was the best performer, beating analyst expectations, and while Goldman was hit by some of its investments, investors will probably be looking forward to the unveiling of its strategic plan in January as well as benefits flowing through from its investments in its Marcus brand and Apple credit card.

Citi plans to take full ownership of Chinese securities business (Financial Times, George Hammond) heralds what could be a historic development as the American bank is pushing to take full ownership of its securities business in China. It is now unwinding its existing local joint venture with Orient Securities (in which it has a 33% stake) with a view to taking full ownership next year, taking advantage of the relaxation of regulations which, until now, have forced western financial institutions to partner up with a local. From next year, the limits on foreign ownership of securities business and fund management companies are to be abolished. * SO WHAT? * This sounds like a decent enough move strategically as China is one of Citi’s top three Asian markets for its investment banking business. I get the impression that foreign companies have been wary of putting too much into their Chinese

businesses given political risk (that they get used as pawns in trade negotiations, for instance) and potentially revealing too much about their secret sauce to “outsiders” – so getting 100% control could well be useful and could persuade them to invest more, which would probably result in faster growth.

Neil Woodford to close down investment funds (The Guardian, Kalyeena Makortoff and Julia Kollewe) heralds tough news from the embattled former star fund manager as he was fired from his flagship fund and quit as manager of the last two funds. It signals the end of an era which started in 2015 after he formed his own fund following 25 very successful years at Invesco Perpetual as a high profile portfolio manager. Rise and fall of investing game’s star player (The Times, Ben Martin) charts his fall from hero to zero and Clearance sale begins as fund liquidates stock (The Times, Tom Howard) shows the impact on his remaining fund holdings – Eve Sleep, in which he holds a 31.2% stake, fell by 23% and Synairgen, in which he holds a 20% stake, fell by 13.5%. * SO WHAT? * At the end of the day, the writing was on the wall when everything started to collapse around four months ago when Woodford was forced to prohibit fund withdrawals. His main problem was that he had too many illiquid stocks (stocks that are hard to sell easily) in his portfolios, which made liquidating them much harder when investors started to get antsy and ask for their money back. As a fund manager, no-one worries about this when things are going well, but this can quite quickly turn into a bit of death spiral as investors all start to hit the exit button at the same time and in increasing numbers. Illiquid stocks are generally riskier investments but give more upside potential – but sudden investor redemptions can make things very tricky as the fund manager can’t sell them fast enough. Active fund managers will be under more pressure now given that Woodford was supposed to represent “best in breed” and passive funds will no doubt take advantage and take even more money as investors decrease their risk appetite.

Johnson & Johnson talks a good game…

Johnson & Johnson raises outlook, beats profit estimates (Wall Street Journal, Patrick Thomas and Peter Loftus) shows that J&J is talking a good game for 2019 despite facing a ton of lawsuits regarding allegations that its baby powder causes cancer, that it contributed to the ongoing US opioid crisis and that its antipsychotic drug

Risperdal caused irreversible breast enlargement in men. Despite all this it unveiled decent quarterly results that were above market expectations on the back of gains in its consumer and pharmaceuticals divisions. * SO WHAT? * Talk about putting a brave face on things! The litigation issues are piling up and putting a big cloud over the company’s prospects but if it manages to get past this and draw a line under them, it would seem that it has enough underlying momentum to get back on track. Drug distributors in talks to settle opioid litigation for $18bn (Wall Street Journal, Sara Randazzo) implies that things may be going this way for the opioid accusations, but there are still plenty of other things to worry about for now.

And finally, in other news…

Sometimes, we need a bit of motivation to get us going. Although our own Boris Johnson does little to help pep up the nation’s spirits, this isn’t the case for all world leaders – just check out Kim Jong-un channels hardman hero Vladimir Putin as he rides on horseback in bizarre snaps (The Sun, Neal Baker https://tinyurl.com/yxbas43d). There are just some things that you can’t unsee…