Monday 14/10/24

BTW, Watson’s Daily is going to be 10 years old next month! I thought I’d mark it by having a beverage or two at Brewdog in Soho on Thursday November 7th. I’ll let you know timings and finer details, but if you want to say hello, that’s where I’ll be! It’s been quite a wild ride so far and Watson’s Daily has come a long way since the days when I used to write it in my freezing basement with only mice for company 😁 (and no – that isn’t a joke)! Thank you to everyone who has helped over the years – subscribers and Watson’s Daily ambassadors! There would be no Watson’s Daily without you 😍

Headlines like EY delays start dates for graduates because of slowdown in deals (Financial Times, Stephen Foley) are always a bit ominous because no-one likes hearing about big companies pushing back start dates for their grad intake – but here we are. It has decided to postpone start dates for its elite strategy adviser Parthenon due to the lack of deal flow (advising on such things is its bread-and-butter). Management said that the relative lack of M&A and private equity activity has led to this. The likes of EY, PwC, KPMG and McKinsey have all been adversely affected but it seems like EY is the only one (or perhaps the first one) to react as others seem to be clinging onto the hope that deal activity will bounce back. * SO WHAT? * It seems that many agree that the deal pipeline is improving – the problem is that it’s taking longer to come to fruition that they’d anticipated. I wonder whether we’re seeing company-specific ripples from EY’s failed attempt to split the business into accounting and consulting as well as, perhaps on a broader basis, business reticence in the face of a new UK government, a US presidential election, political sea-change in Europe and heightening geopolitical tensions in the Middle East (and possibly China – see below). EY-Parthenon will pay out some lump sums to those affected but this is the second consecutive year where it’s delayed start dates. It’s also cut the number of internships for next summer.

Why London’s flotation business may finally be rising again (The Times, Ben Martin) is an interesting article that gives some substance to the general feeling that the IPO pipeline is improving as it mentions imminent listings including Applied Nutrition (which makes protein and energy drinks and could be valued at £500m), Ebury (a payments business which is aiming for an IPO next year where it could get a valuation of around £2bn) and, of course, Shein (which could be worth around £50bn, but hasn’t 100% committed to an LSE listing just yet). * SO WHAT? * Although it feels like the LSE has been particularly hard done by (especially as it seems that there has been a steady flow of companies quitting the index to go to New York, or just go private), there have been pretty slim pickings in IPO terms for Europe as a whole. Still, panic has been

taken seriously enough for the FCA to loosen its listing rules, despite grumblings from some investors. Reeves’s forthcoming budget could have a huge impact on IPOs because if it (contrary to expectations) results in a tide of feelgood, markets could embark on a sustained upward run – and this will get companies fighting over each other to list! She could equally kill it stone dead though. We won’t have to wait much longer to see, though!

There’s been a lot of recent hysterical newsflow about millionaires quitting the UK in a huff because of rising taxes, but One million top taxpayers pay more than two fifths of all income tax (Daily Telegraph, Szu Ping Chan) shows why that could potentially be quite damaging as data from HMRC shows that high rate taxpayers on the top 45% tariff will now pay over 40% of Britain’s overall tax revenues! This means that we’re heavily reliant on just 1m workers (or 2% of the working population)! The £124bn in income tax that is predicted to flow in this year is more than that raised by corporation tax, as well as that raised from fuel duties, council tax and business rate put together! * SO WHAT? * I thought that Carl Emmerson, the deputy director of the IFS, made a very interesting point that I’ve not heard before – that taxing a small number of people more deeply can change their behaviour (e.g. they decide not to take that new job/promotion or emigrate etc.) whereas taxing EVERYONE a little bit more is likely to cause frustration for many but not behaviour changes. Brexit-fleeing bankers have been betrayed by Paris – they won’t make that mistake again (Daily Telegraph, Matthew Lynn) shows that those who had decamped to France in the aftermath of Brexit may be having second thoughts about their move as PM Barnier’s about to stiff them for a load of tax. I would say that although there’s a lot of hysteria surrounding the number of millionaires who will or will not be leaving the UK, it is also possible that some may actually come back (although maybe this is wishful thinking!). It seems to me that a new UK government may give returners more stability and certainty (although, again, this will depend on what Reeves comes up with in the Budget!

Meanwhile, Cut the regulations and we’ll help Britain to grow, banks tell Reeves (The Times, Isabella Fish) shows that the heads of HSBC, Lloyds, Santander, NatWest and Barclays have got together to say that they can support the government’s economic growth plans as long as they are not battered by more regulations (and, presumably, more windfall taxes!). They are, as an industry, appealing for more regulatory “stability and predictability”. Get in line, bankers! Everyone and their dog is calling for more certainty here!

European carmakers plan dozens of cheaper models to survive ‘EV winter’ (Financial Times, Kana Inagaki and Sarah White) shows that European carmakers are scrambling to fend off the onslaught of the Chinese as a slew of cheaper EVs are set to hit the market next year – the year when new EU emissions targets take effect. VW, Stellantis, BMW and Mercedes-Benz have all had to slash earnings forecasts due to a combination of weak European demand and increasing inventories in the US. Fun fact: Renault is the only major European carmaker that has not issued a profit warning recently! Barclays analyst Henning Cosman reckons that global carmakers are due to launch over 100 EV models this year in Europe and another 70 in 2025 (although that’s if they don’t postpone them of course!). * SO WHAT? * It’s really tough in the automotive industry right now and it’s not a given that things will improve next year either! If you were being pessimistic about things, you could say that the European makers are going to get smashed by Chinese makers who can withstand price cuts that will build them market share whilst at the same time having to face potentially big fines for not selling enough EVs to fulfil the European quotas. If you were being more optimistic, if the policymakers listen to their pleas to postpone the regime due to come in next year, having this flood of cheaper European EVs on the market could potentially give the industry the spark it needs to get back on track.

Meanwhile, Used EVs Sell for Bargain Prices Now, Putting Owners and Dealers in a Bind (Wall Street Journal, Sean McLain) highlights the sharp fall in used EV prices, which is quite the change in circumstance versus two years ago when used were selling at a premium to new due to supply chain problems. Dealers are now left wearing rising inventories and have had to resort to discounting. Used EV prices have fallen way faster than used petrol/diesel cars and Tesla owners

are suffering the most because of the dramatic price-cutting the maker has made in order to shift stock. This was made worse by Hertz, which had bought up a ton of Tesla vehicles in a failed EV strategy, who dumped a big chunk of its Tesla fleet onto the second-hand market. * SO WHAT? * I wonder whether Tesla owners will buy EVs from other makers when they change their cars given how he has repeatedly pulled the rug from under their feet on price cuts. His recent behaviour regarding X and social media in general may also put people off buying anything associated with him (although it may also win him new fans!) – but then again, I don’t own a Tesla and can’t really compare it to what else is on the market at the moment. Another danger mentioned in this article was the huge shift in the way people are buying cars in the US – at the beginning of this year, 16% of EV sales are dealerships were leases – but now that figure is 80% as consumers don’t want to be exposed to the massive depreciation. You could argue that, for dealers and makers alike, that this could be creating a big problem down the road when a load of lightly-used formerly-leased EVs come onto the used market.

In Rapid rise of LNG trucking pushes China to peak diesel (Financial Times, Ryan McMorrow, Tina Hu and Edward White) we see that cheap LNG is pushing Chinese truckers to switch to rigs that use it. This is further weakening oil demand and contributing to a “catastrophic” sales fall for the China division of Germany’s Daimler Truck. Daimler Truck has honed the art of making efficient diesel engines and this switch to LNG has hit it hard. * SO WHAT? * This switch has been dramatic! In 2022, LNG trucks made up 9% of China’s heavy-duty truck sales from January to August – they now make up a whopping 42%, according to data from CV World. Buyers are choosing LNG over diesel because it’s cheaper (at the moment, 23% cheaper!). Poor old Daimler!

In a quick scoot around some of today’s other interesting stories, China starts large military drills around Taiwan (Financial Times, Kathrin Hille) shows that China’s sabre-rattling again around Taiwan just days after a National Day address by Taiwan’s President Lai Ching-te. Beijing views the President as a “dangerous separatist”. Supporters of Lai and foreign observers viewed his speech variously as being a “gesture of goodwill towards Beijing” as well as being “restrained and moderate”. Will things heat up as military forces elsewhere are caught up in the Middle East and US attentions are now on the presidential election?

In China’s Instagram-like Xiaohongshu hits $1bn in quarterly sales (Financial Times, Eleanor Olcott) we see that China’s answer to Instagram has seen its revenues blow through $1bn in Q1 of 2024 thanks to the ramping up of advertising from retailers targeting Gen Z women! Xiaohongshu (which translates as “Little Red Book”) is China’s fastest-growing social media platform and is emerging as quite a rare success in a sector plagued by bankruptcies and evaporating valuations. * SO WHAT? * It has aspirations to list in Hong Kong but it’s waiting to get the green light from Beijing – something that may be tricky because it holds tons of user data on Chinese consumers which may stop them from getting it. Investors are hoping that Beijing will relax its stance on overseas listings (others waiting for approval to list overseas include Lalatech Holdings for an IPO in Hong Kong – and Shein for one in London).

Firms facing higher energy bills for two more years (The Times, Emma Powell) cites forecasts from Cornwall Insights which suggest that businesses will remain high for businesses for another two years. They have been paying way higher bills than they did pre-crisis and it has obviously been painful. It reckons that energy bills for households will also remain higher than they were pre-Covid as Ofgem lifted the price cap. Although more renewables are coming it’ll take a few years before they’ll be able to kick in.

Then in Mulberry rejects Frasers Group bid (The Times, Isabella Fish) we see that Mulberry’s biggest shareholder, Challice (which holds a 56.1% share and is controlled by Singaporean billionaire Ong Beng Seng and his wife) said that it has “no interest in either selling its Mulberry shares to Frasers or providing Frasers with any irrevocable or other undertaking”. * SO WHAT? * I think that Mike Ashley smells blood here, hence the offers. However, this should prompt Challice into action to help turn things around at the luxury fashion brand otherwise Ashley will be waiting with a killer low-ball offer if things continue to get worse at the company. 

As you probably know, I coach kids rugby at my local club (and have been doing so for about 6 years now!). Anyway, if they could string a try together like this I think that I would be a very happy man!