Wednesday 17/01/24

1. In BIG PICTURE NEWS, China faces a critical year, the ECB holds off on rate cuts, Shell sells its Nigerian business and halts Red Sea shipments (with implications on interest rates) as insolvencies rise and City law firms fall down the pecking order
2. In FINANCIALS NEWS, Goldman Sachs and Morgan Stanley have their lowest profits in four years while Panmure Gordon and Liberum decide to merge
3. In RETAIL & CONSUMER NEWS, Uniqlo sues Shein, M&S/Ocado get a nice boost, Hugo Boss sees revenue rise but profit shortfall and UK annual wage growth slows
4. In MISCELLANEOUS NEWS, Apple edges Samsung, Vodafone signs an AI deal with Microsoft and Fujitsu says it will pony up
5. AND FINALLY, I bring you some tenpin bowling genius…

So China has a crucial year ahead, the ECB resists rate cuts, Shell sells its Nigerian business and stops Red Sea shipments as insolvencies rise and City law firms fall…

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:

Just a quick word to say that podcasts will be starting again very soon – don’t worry!

China’s economy faces ‘critical year’ to dispel deflation and revive confidence (Financial Times, Joe Leahy and Chan Ho-him) cites Premier Li Qiang’s speech yesterday at the World Economic Forum in Davos where he said that China’s GDP grew by an estimated 5.2% over the course of last year, which was slightly better than the official target of 5%. Many economists are now concerned about 2024 growth and a Reuters poll indicates a GDP growth rate of 4.6%. * SO WHAT? * I guess that a solution to China’s real estate debt problems and related repercussions just isn’t in sight at the moment. If you couple that with China’s crackdown on foreign businesses and ongoing China-US tensions and trading restrictions, many investors are deciding to give it a miss. The only way that China can get out of this rut is, as I’ve said before, to make some big policy statements that everyone can get behind because the piecemeal approach that Beijing has been adopting thus far doesn’t seem to have worked particularly well IMO.

Nearer home, ECB resists spring interest rate cut as price expectations ease (Financial Times, Martin Arnold) shows that the ECB is trying its best to resist pressure to start cutting interest rates this spring. Recent data points have emboldened investors who reckon that inflation has been sufficiently tamed by higher interest rates that the ECB can start cutting them! * SO WHAT? * The ECB meets next week to discuss rates so it’ll be interesting to see what the balance of opinion is and whether the market is getting too far ahead of itself. The risk is that if the ECB cuts rates too early then they might have to put them back up again if the economy shows signs of overheating (and this would eat away at the ECB’s credibility). Cut them too late and you risk damaging growth prospects for the economy.

In oil news, Shell agrees to dispose of Nigerian business for $1.3bn after 68 years (Financial Times, Tom Wilson) shows that Shell has just become the latest international oil group to exit the Niger Delta region. It’s going to be bought by a consortium of local and international companies (collectively known as

“Renaissance”) and follows the departures of ExxonMobil, Eni, Equinor and Addax who have been selling onshore oil assets in the country for the last two years due to oil theft, violence and environmental damage. Shell isn’t leaving Nigeria completely, but this does represent the majority of their presence there. A sale of the business still needs to be approved by the Nigerian government. Meanwhile, Fuel inflation fears as Shell halts Red Sea shipments (Daily Telegraph, Melissa Lawford, Matt Oliver and Szu Ping Chan) shows that the company has suspended all Red Sea shipments for an indefinite time period following the US and UK counter-strikes on Houthi targets in Yemen last week and Why the Red Sea crisis hails a new era for interest rates (Daily Telegraph, Szu Ping Chan and Matt Oliver) shows that instability in the region – and the growing opinion that it will be prolonged – is likely to push up prices of oil and gas products because shipping costs will have to rise to avoid the region. Higher costs will undoubtedly be passed onto the customer and this will push inflation up. If that happens, then there’s less of an impetus to cut interest rates and if THAT continues to be the case then there’s a risk that growth could be stifled because higher borrowing costs will put potential borrowers off.

In business trends news, Insolvencies reach 30-year high as interest rates soar (Daily Telegraph, Tim Wallace) cites data from the Insolvency Service which shows that business insolvencies hit new highs thanks to the deadly combination of higher interest rates, cost-of-living and pandemic impact. Over 25,000 companies became insolvent last year, which is higher than the 22,000+ in 2022 and the 24,000 in 2009! * SO WHAT? * It may well be that we’re seeing this bump because support measures brought in under Covid kept tricky companies going for longer than they would otherwise have done and higher interest rates have exposed those who over-reached themselves financially. For now, it doesn’t look like the pace of insolvencies will relent any time soon. Instability in the Middle East is also likely to push costs up, which will make an already difficult situation even harder!

Then in US groups push City law firms out of top ten earners league (The Times, Jonathan Ames) we see that, according to research by Legalease, publisher of the Legal 500 directory and Legal Business magazine, big British City law firms have been pushed out of the top ten in the global earnings league tables by American firms. Anglo-US firms DLA Piper (3rd) and Hogan Lovells (15th) did quite well but Allen & Overy (12th) was the highest-placed City law firm. Kirkland & Ellis was comfortably top dog on fees with Latham & Watkins coming in second. * SO WHAT? * I would have thought that this has got at least something to do with the lack of deal flow in the UK in particular – and I’m not sure that’s going to get all that much better given that we’ve got an election due at the end of the year and that in itself could cause a lot of uncertainty, meaning that activity could grind to a halt. If this lack of deals persists, I would have thought that there will be more consolidation among those companies in the deal food chain and job losses. You’ll see below that UK brokers Panmure Gordon and Liberum are doing precisely this, for instance!

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!

Goldman Sachs and Morgan Stanley take profit hits while Panmure Gordon and Liberum get together…

Goldman Sachs and Morgan Stanley report lowest profits in 4 years (Financial Times, Joshua Franklin and Stephen Gandel) shows that both investment banks had a tough 2023 as they experienced slowing momentum in their respective investment banking and bond trading businesses. In addition to the impact of the lack of deals, Goldman Sachs was hit with costs related to exiting retail banking. Dealmaking optimism may not be strong enough to sustain Goldman Sachs rally (Financial Times, Lex) shows that although optimism about a comeback for investment banking has been gaining momentum, the reality may be quite different. Markets have rallied recently on hopes that interest rates have peaked and it is possible that this could prompt a rise in M&A activity – however, it is unlikely to hit the peak of deal making we saw in 2021 (where it made $21.6bn) and analysts are expecting $12.1bn in net income. * SO WHAT? * The fact of the matter is that Goldman Sachs is highly geared to deals – and although the prospects in 2024 may be better than they were in 2023, no-one really expects a deluge at this stage. That being said, if the Middle East situation stabilises, the Ukraine war ends and the Chinese government announces a sizeable set of

measures to get the country buzzing again, the situation could change considerably! Now I’m not saying that any or all of those things will happen but any moves in that collective direction could be the catalyst needed to prompt better deal flow.

Meanwhile, closer to home, City brokers Panmure Gordon and Liberum to merge (Financial Times, Ivan Livingston) shows that the two small/mid-cap UK specialists have agreed to merge as the IPO and deal drought continues. The enlarged broker would create a business with over 250 clients that would make it the biggest adviser to UK-quoted companies. Panmure’s CEO will lead the new entity while Liberum’s founder will move upstairs to being chairman in the 50-50 merger. Panmure Liberum’s defensive deal will struggle to buck UK bearishness (Financial Times, Lex) highlights the defensive nature of this deal and that desperation pushed the two together. As with the broader M&A landscape in general, the immediate prospects don’t look particularly great. * SO WHAT? * The small-midcap space in UK broking has been tricky for a while now, hence the desperation for consolidation. Cenkos merged with FinnCap in March last year while Deutsche Bank bought Numis in April. It remains to be seen as to who’s now going to win in the battle for advisory fees and trading revenues!

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!

Uniqlo sues Shein, M&S boosts Ocado, Hugo Boss is a mixed bag and wage growth slows…

Uniqlo sues Chinese fast fashion giant over bag ‘copy’ (Daily Telegraph, Adam Mawardi) shows that Uniqlo is fighting back against Shein allegedly copying its popular banana-shaped shoulder bag. Shein’s knock-offs look very similar to Uniqlo’s £15 bag, according to the lawsuit filed in Tokyo. The “round mini-shoulder” bag became a big hit after gaining a growing TikTok following. The hashtag uniqlobag attracted millions of views while Vogue described it as the “hottest product of the year so far” in April 2023! The bag has become Uniqlo’s best selling bag ever! * SO WHAT? * Shein is notorious for copying other companies’ products with relative impunity and seems to be constantly knee-deep in lawsuits. You do wonder when something is going to be done about their blatant policy of ripping off other companies’ designs (allegedly). I think that litigation risk should be something that investors take seriously when it decides to do an IPO this year because Shein’s been able to fly under the radar – relatively speaking – for quite some time now. I think it would be very interesting if they had to face a class action lawsuit because that would bring everything out into the open!

Elsewhere, M&S range lifts Ocado to record sales jump (Daily Telegraph, Daniel Woolfson) shows that the surge in the number of M&S products sold on Ocado’s website has helped to power

Ocado Retail to record sales over the Christmas period! The positive trading update bumped Ocado’s share price up by 6% yesterday. Ocado Retail now stocks about 90% of M&S’s total food range. * SO WHAT? * This should keep the wolf from the door as Ocado Retail came in for criticism from the M&S chairman over the summer for underperforming expectations.

Then in Record revenue at Hugo Boss tempered by profits shortfall (The Times, Isabella Fish) we see that the company’s share price fell sharply yesterday as it unveiled lower-than-expected profits despite also posting record revenues. Full year sales hit record levels and there was strong performance across all of its key regions. Its full year results will be released in early March. No doubt Frasers Group will add to its shareholding on any weakness…

In consumer trends, UK annual wage growth slows to 6.5% (Financial Times, Delphine Strauss) shows that UK wage growth lost momentum in the last quarter of the year which suggests that inflationary pressures have eased by more than the Bank of England had been expecting in its most recent forecasts. This now means that wages have outpaced prices for five months in a row! Everyone will be watching to see whether this means more spending turning into higher prices, prolonging inflation (and therefore higher interest rates) or whether it means that we’ll see interest rate cuts sooner rather than later because they’ve already “done their job”.

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!

Apple edges Samsung, Vodafone does a deal with Microsoft and Fujitsu offers to pay up…

In a quick scoot around some of today’s other interesting stories, Apple tops Samsung as world’s largest smartphone maker by volume (Financial Times, Tim Bradshaw) shows that Apple because the world’s #1 smartphone maker by volume last year bring an end to Samsung’s 12-year supremacy! Apple was the only handset maker to enjoy annual unit growth last year, according to research group IDC, although this was in the worst year for the last ten years for the smartphone market as a whole. Samsung is due to unveil its flagship Galaxy S24 this week.

Vodafone and Microsoft strike $1.5bn AI deal (The Times, Alex Ralph) highlights a new strategic partnership between the two companies that will involve Vodafone investing in Microsoft’s AI and cloud services over the next decade to improve its customer service. The two companies have an existing relationship and Microsoft will invest in Vodafone’s “internet-of-things” platform which is due to be spun out into a separate company in April.

Fujitsu admits for first time it should help compensate Post Office victims (The Guardian, Rob Davies) shows that Fujitsu said that it will pay victims of the Post Office scandal after the company’s European boss, Paul Patterson, admitted that the company had known about the IT system being faulty since the 1990s! The exact amount, though, has yet to be decided…

In Elon Musk Seeks More Sway Over Tesla Ahead of AI Advancements (Wall Street Journal, Rebecca Elliott and Mauro Orru) we see that Musk has said to Tesla’s board that he wants a bigger pay package with more shares and greater control over the company as its makes more inroads into robotics and AI. He wants to control about 25% of the company but he currently “only” owns 13%, but he is still its biggest shareholder. He had to sell chunks of his shareholdings in 2021 and 2022 to finance his purchase of X. * SO WHAT? * This just sounds like Musk doing Musk things and rattling cages. Musk leaving Tesla would be disastrous for the share price – and that wouldn’t be good for him OR the company given he’s the biggest shareholder! Maybe this is why the share price didn’t really react that much to the news.

Then in Eli Lilly’s heavyweight status looks set to last (Financial Times, Lex) we see that the company whose valuation has been sent into the stratosphere thanks to hopes for its obesity treatment drug looks likely to benefit for quite some time to come. It had been famous for Prozac but then lost its way for a while as big drugs went off-patent. Eli Lilly is now the world’s most valuable drug maker, having overtaken Johnson & Johnson last year! 2023 was all about Wegovy and Ozempic (made by Novo Nordisk) and 2024 could be all about Tirzepatide (made by Eli Lilly and also known as Mounjaro and now Zepbound). Expectations are high for this treatment which got FDA approval as an obesity treatment in November last year! The treatable market is massive and Eli Lilly may get the edge over Novo Nordisk as its treatment is deemed to have more efficacy – plus it’s cheaper! And if that wasn’t enough to get excited about, Eli Lilly has a promising drug in the pipeline for Alzheimer’s! It’s all looking good for Eli Lilly at the moment…

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…

There’s a lot of skill on display in this tenpin bowling video! My fave was the “smooth operator” 😁! What about yours?