Wednesday 07/09/22

1. In MACRO, COST-OF-LIVING & CURRENCY NEWS, Truss addresses energy, PwC’s report warns of a wage hit, Sturgeon moves on rents and evictions and the Yen hits new lows
2. In CONSTRUCTION & REAL ESTATE NEWS, UK construction activity fell, Berkeley cuts back and the sale of TikTok’s office boosts the London market
3. In INDIVIDUAL COMPANY NEWS, VW hits Porsche resistance, Juul pays out, Travis Kalanick builds another empire and EY closes in on separation
4. AND FINALLY, I bring you some potato waffle ideas…

So Truss maps out her energy strategy, real wage cuts loom, Sturgeon takes action and the Yen hits new lows…

Liz Truss takes office with vow to steer Britain out of energy storm (Financial Times) marks the new PM’s promise for a massive energy bailout for families and businesses that is going to cost a lot to finance. Jefferies analyst Ahmed Farman described the incoming energy relief package, which is being drawn up by new chancellor Kwasi Kwarteng, as the “largest welfare programme in the UK’s recent history”. Truss intends to cap household energy bills at around £2,500 versus the current cap of £1,971 and what would have been £3,549 from next month if things had been left as they were. This will all be funded by increased government borrowing. The battle to pay for £170bn energy bills freeze (Daily Telegraph, Tim Wallace and Rachel Millard) emphasises the size of the task in hand, pointing out that the cost of freezing bills for households and businesses could be in the region of £170bn over two years – which is more than double what the furlough scheme cost in the pandemic! Various options are suggested in this article – but they all involve the government borrowing even more and, let’s face it, the last few years haven’t been cheap. It borrowed over £300bn in 2020-21 and almost £150bn in the last financial year. They could recoup the cost via higher bills in the future (but that only works if energy prices come down in future), via higher taxes (but Truss has already pledged to cut taxes, to cancel the planned jump in corporation tax and slash VAT and green levies) and/or fast-track development of new oil rigs to extract the 15bn barrels of oil left in the North Sea (we consume about 1bn barrels a year and an increase in production would yield more tax revenues). Truss fracking ambitions fuel climate opposition (Daily Telegraph, Eir Nolsoe) highlights opposition to the PM potentially allowing onshore fracking to help push energy prices down for consumers. The climate change committee has said that gas reserves are too small to make much of a difference – but would come at a very high cost. For now, though, Hopes for energy price freeze delight investors (The Times, Alex Ralph) highlights strong share price performances for retailers, pub groups and banks as Liz Truss came to power thanks to her promised commitment to provide emergency energy support for households and businesses. * SO WHAT? * OK, so the devil is in the detail that is still being hammered out but it is possible that the package could also help to take the edge (and peak?) off inflation and even recession (although a recession is still widely believed to happen).

Meanwhile, Workers ‘face wage cut’ without government help (The Times, Mehreen Khan) cites the earth-shattering conclusions of a report from PwC (they are not earth-shattering – pretty much everyone is saying the same thing). It says that workers will see their wages drop by £2,000 in real terms by the end of this year and energy prices rise to almost £7,000 in 2023 without government help. UK economics consulting lead at PwC, Nick Forrest, amped up the drama by saying that businesses and consumers could potentially see the highest inflation rate in fifty years and the biggest fall in real wages since records began before the end of the year. * SO WHAT? * I think that anyone could have told you this – but it is useful to have some figures. I’d say just throw this into the pot with all the other reports saying exactly the same thing. We’ll need more detail from the government but the pressure continues to build on the government to do something after spending the last seven weeks looking for a new leader.

North of the border, Sturgeon to freeze rents and ban evictions in face of crisis (Daily Telegraph, Rachel Mortimer) shows that Scotland’s First Minister has made some drastic announcements to address the cost-of-living crisis. An emergency rent freeze will come into force in Scotland immediately in both the private and social rental sectors and will go on until at least March 31st next year. Sturgeon announced the measures in the Scottish Parliament yesterday afternoon. * SO WHAT? * Some are arguing that doing this will disincentivise landlords and potential landlords as it will effectively cap their upside – which would lead to fewer rental properties which would, in turn, lead to higher rents. Rents in Scotland rose by 12.3% in the year to July thanks to a shortage of rental properties. I would suggest that although the latest moves aren’t a long-term solution, it does buy some breathing space that could be used to formulate a proper longer-term plan.

Then in Japanese yen hits 24-year low against dollar (Financial Times, Leo Lewis) we see that the Yen has hit its lowest level versus the dollar since August 1998! It is now ¥142.97 against the Dollar. Great for American tourists going to Japan (although Japan still has a lot of restrictions on incoming tourists) and Japanese exporters (it makes their goods “cheaper”). The finance minister says that he doesn’t want it to be this weak, but it doesn’t look like he’s doing anything about it.

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 construction activity slips, Berkeley cuts back and TikTok’s building sale gives a little boost…

In UK construction falls in August as high prices weigh on demand (Financial Times, Valentina Romei) we see that activity fell, according to the S&P Global/CIPS UK construction purchasing managers’ index, contracting for the second month in a row as rising prices dented demand for housing, commercial building and civil engineering – and the expectation is that this will continue as raw material prices keep going up. Soaring costs prompt Berkeley to cut plans for building homes (Daily Telegraph, James Warrington) reflects this as one of London’s biggest housebuilders said that it will slow down expansion plans and be more selective in new developments thanks to higher raw material costs. It is suffering from higher energy, labour and materials costs and is cautious on the current “volatile” economic backdrop. * SO WHAT? * Concerns about the economy and rising costs do not make for a

heady mix and it doesn’t look like things are going to improve any time soon. Berkeley itself has actually done OK but its share price has fallen by 16% since the beginning of the month as investors get increasingly nervous about the whole sector and particularly the impact that rising interest rates will have on borrowing costs.

On the commercial property side of things, TikTok office sale boosts faltering London market (Financial Times, George Hammond) reflects a rare moment of positivity as office developer Helical said that it had sold TikTok’s HQ for almost £160m, which shows there’s still life in the high-end office market while the rest of the market is going a bit meh. * SO WHAT? * The market has been falling off of late as investors have been shying away due to rising interest rates and inflation. New sustainable buildings that are in good locations and have good amenities are still hot – but other buildings that need some upgrading to meet tighter environmental standards are getting less attractive, particularly as the cost of upgrading is going up. Also, if we do head into recession and companies start cutting staff, you do wonder whether demand for space is going to go down anyway.

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!

VW faces resistance, Juul pays up, Travis Kalanick builds another empire and EY edges closer to splitting…

Volkswagen drives into danger with plan for blockbuster Porsche sale (Daily Telegraph, Gareth Corfield) shows that VW is meeting with some resistance as it is aiming to raise money with a top valuation via a Porsche IPO whilst at the same time keeping all the voting rights. Porsche is the most profitable part of the group, hence why VW is trying to sell it so that it can raise the most money. * SO WHAT? * Some key investors – like T Rowe Price and Qatar Investment Authority – are already looking to commit and it is the sort of thing retail investors might be interested in. I would say that a good indication of how things are going would be if the current four-week “expression of interest” phase ends up being extended. If it doesn’t have to be, I’d say that the demand is hot. I just think it’s questionable timing as we look over the precipice of recession and that VW is just trying to have its cake AND eat it by offering a thin sliver of exposure (it’s only floating 12.5% of the shares) with zero voting rights, so shareholders won’t have a say. There is a risk here that if it doesn’t float now, it’ll have to wait for a long time for market conditions to improve – but if it DOES float now, VW might have to make concessions about the price (make it lower) and/or the voting rights.

In Juul to pay $438.5million to settle probe over Underage vaping (Wall Street Journal, Jennifer Maloney) we see that the former vaping giant has now agreed to pay at least $438.5m in a settlement involving over 30 states for marketing its products to underage users. It will also be banned from portraying people under the age of 35 (?) in its marketing and product placement etc. * SO WHAT? * Juul is a shadow of its former self. Will it just go up in smoke after this development – or will this settlement mark a new, unencumbered beginning. If so, I’d argue it needs to knock out some new products…

Travis Kalanick expands ‘dark kitchens’ venture across Latin America (Financial Times, Dave Lee and Michael Pooler) is an interesting article that shines a light on the former co-founder of

Uber and what he’s up to these days. Over the last few years, he has built up a sizeable US-based food and convenience foods business called CloudKitchens by buying up “dark kitchens” (kitchens usually in urban areas which prepare food solely for takeaway), using his experience as the former chief exec of Uber Eats. He has also bought up properties to prepare delivery and pick up takeaway food, called Pik N’Pak. * SO WHAT? * Kalanick has tried to keep a low profile whilst building the business up given his controversial reputation but given that CloudKitchens now has over 4,000 employees globally that will be increasingly difficult to do. I do wonder how this will do going forward, though, as both of these businesses depend on cash-rich, time-poor consumers – just as the world is facing recession. I would have thought this will give Kalanick a decent opportunity to shed any fat from his business and hunker down until the good times return again.

Elsewhere, EY bosses near decision to proceed with audit and consulting split (Financial Times, Michael O’Connor) highlights that the company is getting closer to splitting its two main divisions, which is likely to result in big payouts for audit partners and the flotation of its advisory business. The whole idea is to avoid future conflicts of interest that hold it back from winning work. If this went ahead, there would be a partner vote held sometime between November and January. * SO WHAT? * The idea of splitting up Big Four accountancies has been knocking around for ages – and pressure has been ratcheting up with the rise in the number of cases where dodgy audits have been blamed for corporate collapse or not forwarning of corporate collapse. Put bluntly, the “old” model is that company A gets Big4 B to do an audit. The implication is that if Big4 B does a nice audit on company A, company A goes back to Big4 B when it needs consultancy services (which earn the big bucks). There have been instances in the past that this makes Big4 B look unnecessarily kindly on company A’s figures on the audit resulting in business failure or huge losses – which has led to pressure for them to split consultancy and audit businesses to take out any talk of impropriety. All of the Big Four have been debating whether or not to do this with some being more for it than others.

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…

Ah potato waffles. That frozen guilty pleasure that isn’t ice cream 😁. Who knew that they could be so “waffley-versatile”: Chef divides opinion after making bruschetta-style dish using Birds Eye potato waffles (The Mirror, Amber O’Connor). This does look rather fancy, but hey – why not! This man is an artist using a blank potato canvas to make his creations sing 🎶