Thursday 24/11/22

1. In MACRO & ENERGY NEWS, European business confidence plumbs new depths, Uniper’s bailout is going to cost double and Rolls-Royce appeals for SMR funding
2. In REAL ESTATE NEWS, China boosts its property sector, UK commercial property values fall and Virgin axes 5% deposit mortgages
3. In LEISURE, RETAIL & EMPLOYMENT NEWS, we see how much train driver strikes will cost the leisure industry and online retailers see the bubble burst while Pets At Home and Halfords falter as some employers take on new staff and Johnson Matthey makes big cuts
4. In INDIVIDUAL COMPANY NEWS, Deere does well but De La Rue has a ‘mare
5. AND FINALLY, it’s about time for a bit more Pomplamoose mash-up action…

So the OECD is damning on the UK, European gas prices rise and the FTX repercussions keep on coming…

📢 It’s Thursday, so it’s time for the one hour weekly Zoom call for SILVER and GOLD subscribers! Click HERE to access the joining details. *** THIS CALL WILL RUN FROM 6PM TILL 7PM ***. As usual, during this call, I will do a round-up of the week’s news and then open it up to questions from you. After that, depending on how much time we have, we will also debate the following:

• Do you agree with public sector strikes? Why? How do you think this will affect the economy?
• Is now a good time to invest in ESG funds? Why?

You can just listen into the debate if you want to, but I thought I’d give you the heads up on topics for if you would like to engage. You will definitely get more out of this call if you take part in the debate, though 😜!

📢📢 Also, NEXT WEEK WILL BE OUR FINAL MONTHLY ROUNDUP OF THE YEAR! This is the roundup of business and financial markets I do every month with Jake Schogger from the Commercial Law Academy, who gives his legal viewpoint on the news. You need to register for this event and you can do so HERE. My next roundup will be in January and will be my review of 2022 and preview of 2023. Details of that will follow soon!

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:

European business confidence hits rock bottom (Financial Times, Peggy Hollinger) cites the findings of the European Round Table for Industry lobby group and Conference Board, the US think-tank, which indicate that business confidence in Europe has plumbed new depths in the second half of 2022, with a third of the region’s biggest industrial companies bracing themselves to curtail or rein in operations because of sky-high energy prices and a slowdown in demand. Even US business leaders are down on the bloc’s prospects as they are predicting a deep EU recession for the next 12-18 months versus a short shallow one back home. * SO WHAT? * This isn’t surprising at all. However, as I keep saying, I think the

key to Europe’s fortunes is how the Ukraine war ends and who is then in charge of Russia. If it’s Putin (or someone equally/more hostile to the West) I think that is priced in to expectations already, but if it ends in a way that the West is able to reasonably re-engage with Russia, I think there will be a massive boom in activity, freeing up of supply chains, an easing in any industry that uses loads of electricity (because energy supplies from Russia will flow again) and more investment generally as continental Europe in particular can breathe a collective sigh of relief. Who knows what will happen???

Meanwhile, Uniper reveals near-doubling of bailout cost to €51bn (Financial Times, Patricia Nilsson) shows that the cost of saving German utility company Uniper is going to be up to €25bn more than had previously been thought! Its massive losses (it reported losses of €40bn only a few weeks ago!) come from being tied to long-term supply contracts with customers that were in place before the invasion of Ukraine and that they now can’t get out of. The company says it thinks it will continue to bleed cash until 2024. * SO WHAT? * This will be Germany’s biggest corporate bailout since it rescued the banks with €480bn in the wake of the 2008 financial crisis. Expensive though it is, the alternative (of letting it implode) would have sent massive shockwaves through the whole of Germany’s economy – and particularly its manufacturers. Painful. Whoever did their sums here on how much this is going to cost needs to go back to school 🤣 – or maybe they did this on purpose to get the government to commit to helping first, then revealing the true size of the problem to make it difficult to back out!

Then in Rolls-Royce calls for formal funding talks over small nuclear plants (Financial Times, Nathalie Thomas and Sylvia Pfeifer) we see that the engineering company is now badgering the government for a formal funding plan for its Small Modular Reactor (SMR) business in order for help it reach its target of making these things operational by the early part of the next decade. Rolls-Royce says that SMRs are important because they are able to offer a reliable source of generation due to the more unpredictable supply from weather-dependent renewables. As things stand currently, it says that building the first SMR will cost £2.5bn, but that figure will drop to about £2bn once they get going. * SO WHAT? * I think that it’s completely understandable that Rolls-Royce is pushing so hard for funding given how expensive the tech is and the need to ensure that the government doesn’t flake at a later stage. It does sound exciting – and for Rolls-Royce, if it all goes well, this is most definitely a technology that they could export! Given that nuclear power plants don’t have the best of perceptions among the general populace, you would probably be quite relieved if you saw Rolls-Royce’s name on the side of such a plant, wouldn’t you?!

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!

China’s banks aim to boost the property sector, UK commercial property values fall and Virgin pulls 5% mortgages…

China’s state banks seek to boost property sector with $30bn in credit lines (Financial Times, Cheng Leng and Thomas Hale) highlights the launch of a co-ordinated effort among China’s state-owned banks to bolster the finances of the country’s embattled property developers as they announced over $30bn of new credit lines yesterday. Bank of Communications announced support for Chinese developer Vanke and Midea Real estate, which implies that there is support for (unsurprisingly) the less dodgy end of the real estate developer spectrum! Bank of China and the Agricultural Bank of China were among the other banks to offer credit lines to the likes of Vanke, China Overseas Land and Investment, China Resources Land, Longfor and Gemdale. * SO WHAT? * The fact that support for Vanke in particular was so strong shows the opportunity that could be out there for real estate developers who survive the massive shake-out. I just wonder, though, whether extending credit is really kicking the can down the road to buy more time and whether this is just a distraction from the real problem of the debts of companies like Evergrande, which has liabilities of about $300bn.

Back home, Commercial property values tumble as spooked lenders retreat (Financial Times, George Hammond) shows that

commercial property has been a bit of a rollercoaster this year as it all started off on quite a positive note only to see this slide throughout the year as borrowing costs and utility bills skyrocketed while business sentiment (and therefore demand for property) diminished. * SO WHAT? * All signs seem to be pointing to a correction in the property market – and last month’s record fall in the MSCI UK property index – which follows shops, offices and warehouses – was a case in point. The 6.5% fall was even bigger than the monthly falls during the 2008 financial crisis. Offices are particularly vulnerable. If you can access the full version of this article, you should – particularly as it has a brilliant chart that shows the change in commercial property deals.

Things continue to get trickier in the residential property market, as per Virgin pulls 5pc deposit mortgages (Daily Telegraph, Rachel Mortimer), which highlights further difficulties for first-time buyers in particular as Virgin Money became the latest bank to cease lending to borrowers with smaller deposits. It has pulled all of its 5% mortgages and Help to Buy deals for new borrowers “temporarily”. * SO WHAT? * If this isn’t a big fat sign of pessimism for market prospects, I don’t know what is! New buyers in this market are going to have to be extremely brave, reckless or focused on the very long-term IMO.

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!

It’s all going on at the moment in the world of leisure, retail and employment…

Christmas rail strikes to cost pubs and restaurants £1.5bn (Daily Telegraph, Daniel Woolfson) puts a price on how much planned rail strikes are going to impact the hospitality industry in the crucial run-up to Christmas. Pre-pandemic, pubs made 25% of their December sales in the equivalent week that the RMT is staging a walk-out. The end of the biggest week is the World Cup final. Then there’s the Royal Mail strike scheduled for the run-up to Christmas. As if things weren’t bad enough already! I would also suggest that all of these strikes are going to dent the UK’s appeal as a tourist destination as well as getting around our small island will become too much of a hassle, so our hotels and related businesses will also suffer.

In retail news, Bubble bursts for investors in online retailers (The Guardian, Sarah Butler) highlights the plight of the likes of Deliveroo, THG, Victoria Plumbing Virgin Wines and Music Magpie who have all had disastrous performances since their much-hyped flotations while Made.com has gone into administration. All of them floated with high hopes that consumer spending behaviour had changed forever – only to be hit by supply chain problems, rising costs and increasingly thrifty customers. Made.com customers face losing their cash (Daily Telegraph, Hannah Boland) shows just how bad things may turn out to be for all those Made.com customers. How gutting would this be – you’ve spent good money on a big ticket item and not only are you not going to get it, you won’t get your money back on it either! Just to give you an idea of scale, from an average order of £246 a typical customer will get just £5 of it back. Shocking. Caveat emptor indeed.

Meanwhile, in “bricks-and-mortar” retail, Pets at Home profits are curtailed by energy costs (The Times, Tom Saunders) shows that the company’s profits are leaching away thanks to the rising utility bills resulting from keeping their pets warm overnight. Underlying pre-tax profits dropped by 9.3% in the half-year to October versus the same period last year, but presumably that would have been a difficult comparative given the lockdown pet boom. That said, sales and its veterinary business are doing well and subscription plans are also rising. * SO WHAT? * Pets at Home could be seen to be quite defensive for a retailer as pet owners tend to be more willing to forego food for themselves rather than for their pets so the dip in

performance in an economic downturn is not as steep as it is for some other retailers. Still, the scope for upside will be limited for a while I suspect.

Living costs put brake on Halfords profits (The Times, Russell Hotten) highlights the bike and car parts retailer’s warning that full year profits will be at the lower end of the range due to rising costs and increasingly cash-strapped customers reining in spending on discretionary items. Although its vehicle service business, Autocentre, is performing well, shop sales have been hit hard by tricky economic circumstances. CEO Graham Stapleton said that he had gone for a cautious outlook because it is so difficult to forecast what will happen to consumer spending. * SO WHAT? * I think that most people who thought of buying a bike for commuting probably already bought it under lockdown and “sporty” users may either make do with what they have or make smaller upgrades to what they already have and so I think there will be limited upside in this side of the business. However, I am very bullish on the car maintenance side of the business both in the short term (people hanging onto cars longer because they can’t afford new) and the longer term (switch to EVs requiring EV specialist mechanics).

Meanwhile, there were some interesting developments on the employment front in Halfords targets over-50s as it seeks to fill 1,000 roles (Financial Times, Arjun Neil Alim) as it wants to attract retirees and women as UK businesses fight over skilled workers. It is set to offer apprenticeships to the over-50s and wants to take on more women, ex-offenders and disadvantaged youth over the next 12 months in its growing services business. EasyJet looks to over-45s in cabin crew recruitment drive (The Guardian, Joe Middleton) highlights another recruitment drive, this time in the airline industry, but then UK manufacturer Johnson Matthey to axe 15% of senior management (Financial Times, Oliver Telling) shows how one FTSE250 manufacturer is still very much in cost-cutting mode. * SO WHAT? * I think it’s interesting that some employers are now targeting an older demographic for their workforce. I have long thought that there is overall age-ism in many industries which seem to dismiss the idea of having someone older – but inexperienced – as a new joiner. Given the current lack of local workers and those coming in from abroad since Brexit I think this makes a lot of sense – but it’ll be particularly interesting to see whether this persists or whether companies will slide back into the default of putting emphasis on employing at the younger end of the scale.

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!

Deere profits, De La Rue has money problems…

In a quick scoot around other interesting stories today, Deere’s profit, sales rise as supply chain delays recede (Wall Street Journal, Bob Tita) shows that farm and construction equipment supplier Deere & Co is expecting strong sales performance to continue into next year thanks to supply chains easing. It is particularly upbeat on sales of large farm equipment, its biggest division, where it reckons sales next year will rise by 15-20% versus this year! Higher prices for farm commodities are prompting more farmers to buy more equipment. * SO WHAT? * Given that the Ukraine war has shown everyone just how much we all rely on Russian and Ukrainian agriculture, many countries have had a wake-up call regarding their own food independence. As a result, I would expect investment in the industry to continue to rise around the world, necessitating more orders for the likes of Deere & Co!

Then in Currency maker De La Rue warns on profits after restructuring charges (Financial Times, Daniel Thomas) we see that De La Rue, which literally makes money, warned on full year profits because of big restructuring charges and slagged off its own accountants EY for including a “warning” on its accounts. EY warned of a “material uncertainty” about the company as a going concern in its audit statement. De La Rue dismissed this robustly (of course they would!) but given how many dodgy audits have been coming out of the woodwork on a seemingly constant basis, EY is just probably trying to protect itself. This clearly doesn’t reflect well on De La Rue, though, which is why it has been so vociferous in its denial…

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…

It’s been a while, but I think it’s about time for another great example of a Pomplamoose mash-up. How do they do this?!?