Wednesday 20/09/23

1. In BIG PICTURE NEWS, we see how EVs could hit the US election, the OECD is down on the UK, UK inflation weakens, Sunak is about to backpedal whilst also facing an oil headache and EU companies continue to rail against China
2. In CONSUMER, RETAIL & LEISURE NEWS, homelessness is on the rise as rents get exorbitant, mortgage bills for many look set to rise, Instacart’s IPO goes well, H&M charges for returns, B&Q’s owner takes a hit, Ocado’s venture with M&S rebounds, Naked Wines looks iffy and Tui extends the holiday season
3. In REAL ESTATE & FINANCIALS NEWS, British Land bucks the gloom, Revolut gets more time and Hargreaves Lansdown benefits from rising rates
4. In INDIVIDUAL COMPANY NEWS, Disney moves forwards, YouTube rises above, Google DeepMind helps drugmakers and Philip Morris thinks about a reshuffle in its pharma business
5. AND FINALLY, I bring you a Terry’s Chocolate Orange faux pas…

So EVs could impact the US election, the OECD slags off the UK again, UK inflation weakens, Sunak faces dilemmas and EU companies have a whinge…

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Why electric cars risk upending the US election (Daily Telegraph, James Titcomb and Howard Mustoe) is a really interesting article that identifies a major political banana skin for US President Biden as he heads into election year next year. He’s put a lot into staking his reputation on his support for a clean energy revolution and being the “most pro-union president in American history”. The problem is that both of these areas are now coming to a head in the US automotive industry as the overall push towards electric cars has now led to workers at America’s “Big Three” – Ford, General Motors and Chrysler owner Stellantis – to stage a mass walk-out on Friday. The strike was called by the United Auto Workers (UAW) union and there is more expected from where that came from. Workers are seeking a 36% pay rise over four years (which is linked to how the companies’ chief execs are now being paid), a 32-hour working week and more holiday. They are no doubt emboldened by the fact that the Big Three posted combined profits of $21bn in the first half of this year! The nub of it all is that workers are concerned that, according to AlixPartners, EVs take 40% less time to assemble their drivetrains versus the drivetrains of cars powered by combustion engines – and this is bound to have a negative effect on their livelihoods. * SO WHAT? * As with all major advances in technology, some jobs will fall by the wayside while new jobs will surface. The immediate problem for Biden, though, is that the carmaking industry is concentrated in a few states (sometimes known as “the Rust Belt”) – and some of them are likely to be crucial to getting the keys to the White House. After all, Biden won Michigan in 2020, a state won by Trump in 2016. To get an idea of how important the industry is in Michigan, a 40-day strike in 2019 tipped its economy into a quarter of contraction! In his bid to win over the all-important Rust Belt in 2024, he may well have to rein in some of his climate ambitions in order to achieve his political ones.

This sounds like something that PM Sunak is having to deal with as Sunak set to push back petrol car ban (Daily Telegraph, Daniel Martin and Dominic Penna) reflects a major potential U-turn for the government as part of a number of measures that are expected to be announced by the British PM that will effectively dilute his net zero policies. He is expected to make a speech to that effect this week and it is thought that he will push the ban on sales of new petrol and diesel cars back from the current deadline of 2030 to 2035! Also, it is thought that the original ban on oil boilers could be delayed from 2026 to 2035 (!) and even then only 80% will be required to be replaced by that date. Plans to fine landlords for not upgrading properties to certain levels of energy efficiency might also be abandoned. Sunak says he remains committed to net zero by 2050. * SO WHAT? * OK so all we’ve got at the moment is rumours, but I think that pushing these deadlines back is going to have a major impact in a number of areas. It sounds to me like this could have a particularly big impact on the automotive industry!

Jaguar Land Rover, for instance, has committed to the electrification of its model line-up by 2025 and one of the reasons that Chinese EVs have been doing so well in the UK is because there’s more of a sense of urgency in the UK to electrify given that our current deadline is 2030 and Europe’s is 2035! I think that pushing back these deadlines is a relatively cheap way (for the government, anyway!) to help affected industries because it means that high costs are not forced upon them at a time of high borrowing costs and squeezed consumers.

And there’s more! Inflation headache for Sunak as oil price hits $95 for first time this year (Daily Telegraph, Tim Wallace) highlights additional challenges that Sunak is facing at the moment – an oil price that seems to be heading towards $100 is potentially going to put upward pressure on inflation at a very tricky time. The Brent crude price breached the $95 mark yesterday, its highest level since November 2022. Funnily enough, as a result, analysts expected a rise in inflation because of these higher fuel costs but UK inflation posts surprise fall to 6.7% (Financial Times, Chris Giles) highlights the fact that UK inflation actually came in lower than expectations in August as it fell from 6.8% in July to 6.7% in August, according to figures released this morning! It was also interesting to note that core inflation (which excludes food, alcohol and energy prices because of their volatility) fell from 6.9% in July to 6.2% in August. * SO WHAT? * This gives the Bank of England’s MPC rate-setting group more food for thought ahead of their meeting tomorrow where they will decide what to do about interest rates! If you take this inflation figure alone it should make the MPC less likely to increase interest rates at this point – but there are many other factors to take into consideration! Maybe the effect of higher fuel prices will kick in next month. FWIW, British economy will be second worst performer in G20 next year, OECD warns (The Times, Mehreen Khan) shows that the OECD continues to slag off the UK economy as its interim forecasts downgraded the UK’s growth projections to being the same as Italy and only going one better than Argentina. The OECD is based in Paris. To be fair, it also downgraded its outlook for the global economy as it reckoned that the combination of high inflation and high interest rates will take its toll on growth prospects. I find this quite amusing because it seems that these European groups that spray out economic forecasts from time to time seem to consistently underestimate the resilience of the UK economy. OK, so things are far from great but I do think that there is a risk to the upside here because everyone expects the worst despite the fact that we’re heading into election year next year. Usually, in the run-up to an election, the incumbent government pulls out all the stops to make things look good so voters support them and so I wonder whether the government will unveil various new measures to stimulate the economy. If that happens, the Europeans are likely to be proved wrong again…

Then I thought that EU companies warn China on EV overcapacity (Financial Times, Joe Leahy) was an interesting article given what I highlighted last week regarding domestic appliance makers and car manufacturers who are getting increasingly concerned about competition from China. This time, we see that the concern is becoming more broad-based as companies point to China’s obliteration of Europe’s solar panel industry as an example of what could be next if nothing’s done to restrict China’s onward march. The EU Chamber of Commerce in China released an annual paper that provides a snapshot of the current state of affairs ahead of a meeting being held in China with EU trade commissioner Valdis Dombrovskis, which is likely to be more difficult than it would have been already, even before the EU announced its probe on China’s EVs. * SO WHAT? * Businesses are mainly concerned that a combination of low domestic demand and over-production of goods means that there’s going to be a massive flood of Chinese exports. This means that western companies will suffer as the overflow will probably undercut their own prices and make already difficult trading conditions even trickier.

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 rents and mortgage bills aren’t looking great, Instacart does well, H&M decides to charge for returns, B&Q’s owner suffers, Ocado does better for M&S, Naked Wines looks iffy and Tui extends the holiday season…

Consumers continue to face challenges in UK homelessness on the rise as rents soar (Financial Times, Jennifer Williams) shows that the UK’s lack of affordable housing coupled with rising demand is putting more people in very difficult situations and the latest data from the ONS shows that rents in the UK are now at their highest since 2016. Years of relatively sluggish activity in housebuilding and fast-rising demand is now coming home to roost. Then Half a million homeowners face Christmas jump in mortgage bills (Daily Telegraph, Ruby Hinchcliffe) cites stats from the FCA which show that 485,000 mortgage borrowers are going to face big increases in their mortgage repayments this Christmas as their fixed-rate deals come to an end. It also expects another spike next April, when more than 180,000 homeowners come of their fixed rate deals. As if we haven’t already got enough to cope with!

On the retail side of things, Instacart shares close up 12% after public market debut (Financial Times, Nicholas Megaw and Tabby Kinder) shows that shares in the online grocery delivery group finished up 12% after an initial spike of 40% when it made its debut on the NASDAQ yesterday. * SO WHAT? * This is good news and will no doubt add to the feelgood surrounding IPOs at the moment. I imagine that more companies will be coming out of the woodwork and be receptive to at least considering their own flotations! This will be music to the ears of all those involved in the IPO food chain – investment bankers, lawyers and accountants in particular.

Then in H&M is latest fashion retailer in UK to charge to return online purchases (The Guardian, Sarah Butler) we see that the world’s second biggest apparel retailer (Zara’s owner Inditex is #1) has decided to charge for returns. It will charge £1.99 to return goods that are not damaged or faulty – and that will apply to items returned in stores or by post. Interestingly, the customer can avoid paying the fee if they sign up to H&M’s free membership loyalty scheme. * SO WHAT? * It’s not surprising that things have come to this given how free returns have been so widely abused for years by so many. Although I think that much more can be done to help customers to pick the right sizes first time the level of returns has become so ridiculous that something had to be done. It’s good that

more retailers are doing this because it means that consumers won’t just switch to other stores, but you do wonder whether everyone’s going to just pull a button off or damage the goods in some way in order to avoid the £1.99 charge. Also, will customers react well to being effectively forced to join a loyalty scheme? We’ll have to wait to find out.

Elsewhere, B&Q owner hammered by poor weather and cost of living crisis (The Times, Isabella Fish) shows that Kingfisher just cut its full-year profit guidance thanks to wet weather (fewer people doing DIY), the cost of living crisis (people not being able to afford to do DIY) and a sluggish housing market (people tend to do a bit of DIY when they are selling or when they’ve just moved in). The company, which also owns Screwfix, says that “good growth” in the UK and Ireland has not been able to make up for weaker trading in Poland and France, where consumer confidence is at decade lows.

On a more positive note, Ocado’s venture with M&S delivers rebound in sales (The Times, Isabella Fish) shows that the 50-50 joint venture with M&S (called “Ocado Retail”) reported sales coming in above expectations and volumes returned to positive territory for the first time since the pandemic. This is welcome news as the venture has had a tricky time of it of late. On the other hand, Naked Wines’ future in doubt as sales stall (Daily Telegraph, Daniel Woolfson) shows that the online wine retailer could go bust as turnaround efforts just aren’t working. It reported a loss of £15m over the year to April 3rd thanks to too much stock and too few customers. * SO WHAT? * What a nightmare! I guess that there is virtue in having physical stores – as Majestic has found – particularly when it comes to customer loyalty. If you’ve ever been to a Majestic you’ll know that they actually have proper customer service where staff actually HELP you get what you want! You just don’t get that online…

Meanwhile, in leisure, Tui extends Greece and Turkey season to November after extreme summer heat (The Guardian, Julia Kollewe) shows that the travel operator has decided to extend the holiday season for these popular destinations to accommodate increased demand for travelling in the cooler autumn months. Interestingly, Tui said that demand for the usual final month of the season, October, was 8% higher than it was last year! Summer bookings were at 96% of the levels they were at pre-Covid and winter bookings are now 15% higher than they were than last year despite prices rising by 4%. You would have thought this would be great news for the hospitality sector in particular!

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!

British Land bucks the trend, Revolut gets more time and Hargreaves Lansdown benefits by not doing anything…

British Land: surprising resilience of retail parks offers bright spot (Financial Times, Lex) shows that British Land has highlighted a rare bright spot in the gloomy world of commercial property as out-of-town retail parks seem to have held up unexpectedly well against a difficult economic backdrop! It lifted its forecasts for rental growth by a third at its retail parks potentially signifying that there’s light at the end of the tunnel after a disastrous few years. * SO WHAT? * British Land has the biggest retail park portfolio in the UK, so this should act as a buffer to weakness in other areas…

In financial news, Revolut granted extension on annual results for second consecutive year (Financial Times, Siddharth Venkataramakrishnan and Laura Noonan) shows that the UK fintech has been given more time to publish its annual results as it wait on the news of whether or not its application to get a UK banking licence has been successful. The original results had been

due to be published in September, but Revolut has been given an extension until the end of December. * SO WHAT? * The company has been hit by senior exec departures, falling valuations and damaging revelations of fraud-related losses in the US. This delay will give Revolut some wiggle room but, conversely, you do wonder whether the banking licence application is more likely to be turned down BECAUSE of the delay in its reporting and other problems.

Then in Hargreaves Lansdown makes £270m from clients’ cash balance (Daily Telegraph, Charlotte Gifford) we see that Britain’s biggest stockbroker has earned an impressive £268.7m in profits from customers’ cash deposits in 2022-23 – a huge increase from the £50m it earned in the previous year! The amount of money it generated in interest from customers holding small amounts of cash to take advantage of buying opportunities was almost as much as the money it earned from its platform fees! * SO WHAT? * What a brilliant way to earn money – do nothing and watch it all just roll in! I think that this is customer money and that at least the majority of this should be returned to the customers themselves. Still, as long as this is around and interest rates are high, I’m sure these companies will hang on to these revenue streams for as long as possible!

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!

Disney makes plans, YouTube sits pretty, Google DeepMind sees pharma possibilities and Philip Morris considers a business reshuffle…

In a quick scoot around some of today’s other interesting stories, Disney to Invest $60 Billion in Theme Parks, Cruises Over Next Decade (Wall Street Journal, Robbie Whelan and Alyssa Lukpat) highlights Disney’s plans to expand its theme parks, cruises and resorts by almost doubling investment in a division (the Parks, Experiences and Products division) that accounts for the company’s main source of profits! * SO WHAT? * This is a major change in direction for a company that has been relying most recently on income from its cable TV business to subsidise riskier bets on more expensive things like streaming. The cable business is now generating less profit and so the PEP division is being seen as the company’s main financial engine. I think that this could be pretty interesting although I would imagine that it will take some time before we see the benefits come through.

Then in YouTube: lucrative ad-sharing model puts platform ahead of rivals (Financial Times, Lex) we see that the online platform continues to keep its nose ahead of rivals thanks to having the most generous revenue sharing policy of any social media company where it allows creators to earn 55% of ad sales generated (although Russell Brand’s been cut off that for the time being…). This should enable it to stay ahead of the competition despite heavy competition from TikTok and Reels.

Google DeepMind: drug developers seek a structural advantage from AI (Financial Times, Lex) is a really interesting article which highlights another major potential use of AI – that it will be able to improve productivity in the world of pharmaceuticals and drastically reduce drug development costs by accelerating drug discovery. * SO WHAT? * Morgan Stanley research reckons that AI could reduce pre-clinical development costs by up to a whopping 40%! Examples of AI companies in this field include DeepMind’s own Isomorphic Labs, InstaDeep (bought by BioNTech for $682m) and Recursion (which attracted a $50m investment from Nvidia). Although these companies’ involvement doesn’t guarantee success they is certainly huge potential!

Then in Marlboro Maker Hits Reset on $2 Billion Bet on Medicine (Wall Street Journal, Ben Dummett and Jennifer Maloney) shows that efforts by Philip Morris International (PMI) to expand in the world of healthcare are hitting a rocky patch to the extent that it is looking at options including selling a stake in its biggest pharmaceuticals division. Back in 2021 the tobacco behemoth bought three pharmaceutical companies in an apparent effort to diversify away from cigarettes but it seems that this reliance has been a hard habit to break. Tobacco companies make these lofty promises but at the end of the day they just sell cigarettes – and that’s what they do best!

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…

When I was a uni student in Japan, my Japanese best mate amused himself by often subjecting me to weird food and gauging my reaction to it. I can’t remember all of the things he got me to try, but ones that stick in the mind are deep-fried intestines (very chewy – like eating rubber bands) and chicken cartilage (crunchy and just not nice – I often used this as a forfeit in drinking games subsequently!). I got him back when he came over to the UK by giving him a jar of Marmite and not telling him how much to use on toast. He slathered it on and I particularly enjoyed watching his face as he bit in. I did a few other things as well (the emotional scars ran deep and I was keen to return the favour of gastronomic discovery) but that’s perhaps for another day! Time has mellowed my feelings of revenge over time 🤣 and so I’m actually thinking of doing something nice for him and sending a package of UK snacks – you know, stuff that you can only get here – after he brought me a whole load of Japanese snacks at a recent reunion! I’m thinking Nobby’s Nuts, pork scratchings, Monster Munch, Wheat Crunchies, Percy Pigs, Double Deckers – and a Terry’s Chocolate Orange! I might even be nice and tell him the right way to eat it – something that this person didn’t do: Brit horrified after watching American girlfriend eat chocolate orange for first time (The Mirror, Niamh Kirk). What she did is actually quite understandable I think!