Wednesday 24/06/20

1. In MARKETS & MACROECONOMIC NEWS, US indexes tell different stories, European and UK business activity downturn slows and BoJo announces an exit from hybernation
2. In REAL ESTATE NEWS, demand for high rise office space looks vulnerable, Intu’s woes continue and Boots has a showdown with landlords while residential property prices are expected to have a bit of a bump up
3. In INDIVIDUAL COMPANY NEWS, the Wirecard debacle just gets crazier and JD Sports buys Go Outdoors out of administration
4. AND FINALLY, I bring you an unusual home-growing kit…

So US indexes diverge, European and UK business activity improves and BoJo announces UK Independence Day…

The big US stock indexes are telling different stories (Wall Street Journal, Karen Langley) highlights the divergence in performance between the Nasdaq (up 13% in 2020), the Dow Jones Industrial Average (down 8.3%) and the S&P 500 (down 3.1%). The difference between the Nasdaq and the other two is the biggest it’s been since 1983 and the gap between the S&P500 and the Dow is the widest it’s been since 2002, when the Dow was on top. The huge outperformance of a small number of stocks has skewed performance of the Nasdaq and S&P. Given that Apple, Microsoft, Amazon, Google parent Alphabet and Facebook make up about 40% of the Nasdaq and 20% of the S&P, you can see why just looking at the headline numbers isn’t enough. Generally speaking, the S&P has been the index that is seen to be the broadest benchmark, the Dow is very narrow as it only has 30 stocks (it has been dragged down hugely by Boeing’s performance, for instance) and the Nasdaq is all about tech. * SO WHAT? * I just thought I would mention this because there is a lot of froth at the moment in many markets and this goes some way to explaining why that is. The thing is, I don’t see tech stocks getting particularly weaker which means that their continued outperformance could well continue to mask the underperformance of everything else. More than ever it is worth keeping an eye on what’s going on under the hood because just glancing at the surface of what markets are doing is likely to be misleading IMO.

There’s good news in Eurozone business downturn slows as virus restrictions ease (Financial Times, Valentina Romei and Martin Arnold) as the IHS Markit purchasing managers’ index (PMI) for Europe showed that the fall in business activity slowed down in June as lockdown restrictions continue to be lifted – something reflected in the UK in Survey shows record rise in UK business activity in June (The Guardian, Larry Elliott), which says the same thing for us. Interestingly for us, manufacturing started to return to growth in June and there was only a small contraction in activity in the larger services sector. Although activity appears to be picking up, demand is still weak and job losses are rising. Still, at least things are going in the right direction for the moment. This should be helped by Boris Johnson takes England out of ‘national hibernation’ (Financial Times, George Parker), which highlights the latest step in the freeing up of lockdown restrictions. It sounds like this will mean the hospitality sector will be able to open up, but restriction in the number of customers that can be accommodated is still likely to be well below economically viable standards. Gyms and swimming pools continue to face an agonising wait to get the green light. * SO WHAT? * Although this is a tentative step in the right direction economically, I don’t think it’s going to be enough to prevent businesses from going under IF other restrictions continue because they just won’t be able to operate at anywhere near full capacity. The thing is, unless a cure/vaccine is found over the summer, I think there is a risk not only of a second wave – there is the risk of more businesses shutting down for good because by then they will have to pay rent, pay staff etc.etc. On the other hand, I really think that if a cure/vaccine IS found quickly, sentiment, spending and overall activity will just sky-rocket overnight as relief and optimism replace despair and pessimism. Fingers-crossed, eh!

Office space demand is likely to change, Intu’s ‘mare continues, Boots has discussions with landlords and residential prices looks set for a short honeymoon…

There are some interesting things going on in real estate at the moment. London high-rise offices to suffer ‘dramatic’ dent in demand, say experts (The Guardian, Joanna Partridge) shows that experts are steeling themselves for a drop in demand for office space in big city sky-scrapers even when the coronavirus recedes. Many more workers are likely to be working from home and social distancing rules are also going to mean that far fewer employees will be able to use lifts to get to higher floors! * SO WHAT? * At the moment, banks are among those who say that working remotely is going to become a permanent fixture and that crowded commutes are going to be a thing of the past. I’m not so sure about this because I think that, fundamentally, humans are sociable and generally like being around others. I would imagine that a mix of office and remote working will become the norm which should be good for furniture companies and electrical retailers but bad for train and bus companies, for instance. It’s also not going to be great for companies like WH Smith who have built profitable businesses catering to those who travel and commute.

Malls at risk of closing as Intu chases deal with lenders (Daily Telegraph, Simon Foy) shows that mall landlord Intu, which runs 17 sites including Manchester’s Trafford Centre and Lakeside in Essex, is desperately trying to avoid administration as it negotiates with lenders about its £4.5bn debt pile. If it fails, these shopping centres may be forced to shut down and KPMG will oversee administration. Commercial landlords only expect to collect 10-20% of the quarterly rent they are due today – another sign of just how dire things are at the moment. * SO WHAT? * Intu has been creaking under a massive debt load for some time now. This is a huge fall from grace considering it was once in the FTSE100, but its share price has fallen by 95% over the last year and its demise will be a warning to rivals.

Talking of retail landlords, Boots and landlords in rent payments standoff (Daily Telegraph, Rachel Millard and Oliver Gill) highlights ongoing talks between Boots (which has stayed open throughout the outbreak, but seen sale tank because of lower footfall and other restrictions) and their landlords (who argue that Boots should pay rent because they have been able to stay open). * SO WHAT? * These conversations aren’t going to be easy and there are strong arguments for both sides. However, I would say

that Boots may be in the slightly stronger position here as current guidance seems to protect retailers more than landlords plus their ongoing threats to just close shops down are very real. If Intu goes into administration, I am sure that their rivals will do anything to avoid the same fate.

On the residential property side of things, Summer honeymoon predicted for house prices before redundancies bite (Daily Telegraph, Melissa Lawford) cites Zoopla’s latest market forecasts which suggest that house prices will rise for the next three months due to pent-up demand held-back by lockdown, but then they will drop over the rest of the year as unemployment starts to rise at the tail end of furlough. Sales in northern cities are strongest, powered by buy-to-let investors, while sales in Cambridge fared particularly badly – down by 61% versus the February rate. * SO WHAT? * I do think that the housing market is going to be patchy going into the end of this year because of the reasons that Zoopla suggested, but I do wonder whether we will see the market changing as people are increasingly given the option of working from home. I have said, in the past, that if I was Prime Minister (and that’s not likely to happen, BTW!) I would try to force companies to at least give their staff the option of working from home because I believe that it will help work-life balance (can see the family more, can pick up and drop the kids off etc.), cut the need for an environmentally-unfriendly commute AND mean that house prices stand a chance of evening out a bit across the country as employees feel less of a need to live close to work. If WFH becomes more of the default for the British workforce, it may mean that housing market activity picks up as people decide to ditch the city life and live in the ‘burbs in a bigger house (home office space much easier to come by) with bigger rooms!

Meanwhile, for the real estate agents themselves, Rightmove counts cost of estate agents in ‘financial shock’ (The Times, Simon Duke) shows that they are continuing to have a terrible time. Unsurprisingly, the number of agents listing on their website has dropped over the lockdown – by almost 4% – and online-only brokers have been the worst hit. Rightmove said it will offer a 60% discount for August and a 40% discount for September to its agency customers in England, with bigger discounts in Wales and Scotland. * SO WHAT? * Rightmove, which was started in 2000 by Countryside, Connells, Halifax and Royal & Sun Alliance, makes its money by charging estate agents a monthly fee for listing homes on its portal. Clearly things have been difficult, hence the willingness to offer discounts. No doubt all concerned will be praying for an uptick in the market otherwise things will just get even worse for all concerned. Rightmove certainly seems to be a good gauge of the overall health of the real estate market.

Wirecard gets worse and JD Sports buys back Go Outdoors…

Ex-Wirecard chief Markus Braun arrested (Financial Times, Olaf Storbeck, Dan McCrum and Stefania Palma) highlights the latest development in the whole Wirecard saga as the founder has just been arrested on suspicion of false accounting and market manipulation and Wirecard scandal leaves German regulators under fire (Financial Times, Olaf Storbeck and Guy Chazan) shows that the finger-pointing has already started in earnest. I get the feeling that this is just going to run and run as the scandal gets worse by the day.

Following on from what I said on Monday about Go Outdoors going into administration, JD Sports buys Go Outdoors back in £56.5m pre-pack deal (The Times, Robert Miller) shows that JD Sports bought it back. What this means is that it’s highly likely that there will be tons of job losses, although it said it would do its best and would also keep the majority of its 67 stores. * SO WHAT? * This pre-pack administration malarkey is a bit weird in that it is a process that allows companies to put businesses into adminstration and then buy them back again, whilst enabling it to write off some debt. In this case, it means that the new venture is free of some of the lease agreements which it said would never decrease and will thus give the company a bit more financial flexibility to move forward.

…in other news…

We’ve all come to make new discoveries during lockdown. Some people have learned languages, picked up new (or dusted off old) musical instruments and even taken up gardening. Here’s something that would be quite nice (and a bit random) to have over here: Oh shiitake! How to grow your own with Japan’s super-easy mushroom cultivation kit (SoraNews24, Casey Baseel https://tinyurl.com/y824y386). I’d definitely be up for that! BTW, for those of you who are new(ish) to Watson’s Daily, I am half-Japanese, speak Japanese, went to uni and worked in Tokyo for a few years – and I still have an affection for the place! This is why you may see more stories about it here than you might elsewhere! Just sayin’…