Wednesday 23/10/24

BTW, Watson’s Daily is going to be 10 years old next month! I was going to mark it by having a beverage or two at Brewdog in Soho but unfortunately the Tube strike means that this won’t be possible. I’ll try and reschedule, taking into account the disruptions – so please keep watching this space!  Anyway, 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 😍

Strong US economy and ‘Trump trade’ drive dollar rally (Financial Times, Ian Smith, Harriet Clarfelt and Will Schmitt) highlights the cumulative effects of strong economic data and investors betting on Trump winning the next month’s presidential election (a Trump win = tariffs on imports = higher inflation = higher interest rates = stronger currency). However, IMF warns Trump trade tariffs could dent global economy as it upgrades UK outlook (The Guardian, Phillip Inman) reflects the IMF’s concerns while Donald Trump accuses UK Labour party of interference in White House race (Financial Times, Lauren Fedor and Lucy Fisher) draws attention to more weirdness from Donny T who just filed a legal complaint against the UK’s Labour Party, accusing it of “illegal foreign campaign contributions and interference”. Apparently, the Labour party sent strategists to help with Harris’s campaign – so clearly if he wins, it’s not going to go well for the UK!

As for the UK, Britain handed biggest growth upgrade in G7 days before Budget (Daily Telegraph, Szu Ping Chan) highlights the latest World Economic Outlook report from the IMF which decided to more than double the UK’s GDP growth forecasts it made just six months ago from 0.5% to 1.1% – the biggest upgrade of a G7 economy this year! The IMF urged more rapid cuts in interest rates and said that UK economic growth will “accelerate” over the next few years as others – including the US – start to slow. * SO WHAT? * Given how spectacularly useless the IMF economists have been so far in predicting the fate of the UK economy, I’m not putting much store by their growth prospects either! That being said, you do wonder whether this is going to make it harder for Reeves to convince everyone about this doom-and-gloom narrative that she and Starmer have been pushing stacks up.

The English county facing the biggest financial ‘black hole’ (Financial Times, William Wallis and Clara Murray) highlights ongoing nightmare that many UK councils are facing – and takes the woes of Hampshire as an example. Last month, Unison forecast that the county’s budget deficit would be the biggest in the country in 2025-6 and Hampshire’s council leader reckons it’s going to get worse. Public services like waste recycling centres, libraries, highway maintenance, school traffic controllers, cultural and community grants, street lighting and winter services are all going to see cuts. Local authorities are meeting in Harrogate this week at their annual conference and the mood is not good. * SO WHAT? * The Local Government Association wants Reeves to deliver a “sustained increase in overall funding that reflects current and future demands for services” and cover the £6.5bn black hole it reckons councils will need until 2027. It also wants the government to stop controlling where grants are spent. Something clearly needs to be done here, but I think it’s gone past just throwing money at it – there needs to be root-and-branch reform on how finances are structured, how they are delivered and how the effects are monitored. Easy to say, difficult to do!

Meanwhile, London living wage to rise by 6% as low-paid workers struggle (The Times, Richard Tyler) cites the Living Wage Foundation’s recommendation to increase the overall living wage by 5% so that people are paid at least £12.60 per hour and the London living wage to go up by 6% to £13.85 an hour. The government-appointed Low Pay Commission reckons that the statutory minimum rate for adults aged 21 needs to rise by 5.8% to £12.10 an hour next April while the current rate for 18-20 year-olds also needs a boost. The government is due to make a decision to take these recommendations at the end of this month. * SO WHAT? * This is obviously great news for workers, but we’ve already seen that some areas in particular have been struggling badly to attract and retain workers as it is (e.g. social care, hospitality etc.) so putting an extra financial burden on them is going to be difficult. That being said, it would be a lot easier to take if the UK economy continues to gather momentum. All eyes are obviously on the Budget!!!

In Halfords warns that budget fears make near-term outlook ‘uncertain’ (The Times, Emma Taggert) we see that Halfords is bracing for impact as it said that uncertainty about the economy and potential tax changes have led to consumers delaying spend on big ticket items although it acknowledged that there were “pockets of improving consumer sentiment”. Bike business performance was pretty meh while the Halfords Autocentre service and repair business, which is responsible for 40% of the company’s sales, proved to be more resilient. * SO WHAT? * As I keep saying, I think that the bike business got lucky during Covid as everyone suddenly bought bikes – something that no-one could have foreseen. Prior to that I got the feeling that we had reached “peak bike” following the boom we saw around the London Olympics. However, I believe that the car business is where it’s at for Halfords because more consumers hanging on to older cars for longer (because they don’t want to take the EV plunge yet and because they’re still too expensive) means that there will be higher demand for maintenance. Halfords should play on its name and enjoy a degree of trust from a public that’s sceptical about maintenance at car dealerships (too expensive) and independents (possibly dodgy?) and continue to train their workforce how to maintain EVs so that they are ready for the inevitable influx. I personally think that it should reduce its exposure to “commuter”/everyday cycling because I think that’s going to be dead for at least a few years as many people buy one bike and stick with it forever (so if they bought over Covid they’re already sorted) and if they discover that they haven’t, in fact, used it as much as they thought they would, they’ll flood the second-hand market. If Halfords stays with biking, I think it should go higher end where the big margins are and, more importantly, triathletes/competitive cyclists are more willing to spend more money on multiple bikes (e.g. time-trial, cyclo-cross, triathlon, “hack” etc.). I also think it should try to stick with maintenance because you can earn a decent margin on that as most people haven’t got a clue when it comes to fixing puncture/replacing inners etc. and it’s a reason to get people into the stores where they might buy something.

In hotels, Holiday Inn reveals growth despite slump in China (The Times, Jessica Newman) shows that InterContinental Hotels Group (IHG), which owns that Holiday Inn and Crowne Plaza brands, managed to report an increase in revenue per available room (aka REVPAR) on a global basis despite weaker performance in China. That said, it was below consensus estimates and weaker than the previous quarter. The company said that the China weakness was due to tricky comparatives versus the previous year because that was unusually high thanks to a boom in travel following the end of lockdowns. * SO WHAT? * Despite all this, IHG sounds pretty confident

and reckons it’ll hit market expectations. Its share price has increased by over 45% since this time last year, so the valuation is arguably a bit toppy. Having said that, its confidence in China stood out and, geopolitical storms notwithstanding, a growing global economy should be good news.

On the high streets, McDonald’s Quarter Pounders Linked to Deadly E. Coli Outbreak (Wall Street Journal, Victoria Albert) shows that McDonald’s had some shocking news – that McDonald’s Quarter Pounders have been linked to an E.coli outbreak that has infected at least 49 people, hospitalised 10 of them and killed one across 10 states, according to the Centers for Disease Control and Prevention. The company reckons that it could be down to slivered onions from a single supplier that serves three distribution centres and is racing to remove the affected menu items. * SO WHAT? * The fact is that this is rare occurrence for McDonald’s which has robust supply chain and food-safety practices. Rivals, including Wendy’s and Chipotle, have had their own issues in the last few years and Chipotle in particular took years to recover from resulting negative sentiment. Although McDonald’s saw its share price drop by over 6% in after-hours trading, I would have thought that this could be short-lived given the speed of its reaction – but then again, this may give investors impetus to sell out given that things were slowing down before this anyway (it reported its first fall in quarterly same-store sales since the beginning of the pandemic just in July). Not ideal and absolutely tragic for the elderly person that died (but it must be said that they had underlying health conditions).

Then in Starbucks Suspends Guidance as Sales Slump Persists (Wall Street Journal, Heather Haddon) we see that the world’s biggest coffee shop chain’s new CEO has called for a dramatic overhaul of the business after finding major issues in some of its biggest markets. Brian Niccol said it needs to review prices, change its marketing and provide what its customers want in a coffee shop (does he mean toilets?!?). Its China business needs a good going over as well. The company reported an undershoot in earnings and sales for Q4 and suspended guidance for the next fiscal year. * SO WHAT? * This is classic kitchen-sinking from a new CEO who has a lot of expectations put on him given how well he did at turning Chipotle around in his previous role. FWIW, I think he needs to drop prices, cut the faff of the over-complicated menu and make these places cosy again! China is something he also needs to work on in order to regain momentum. He’s new, but it sounds like he’s on the right path so we’ll just have to wait as it’s too early to see any broad-based improvements at the moment!

General Motors raises profit guidance thanks to ‘resilient’ consumers (The Times, Louisa Clarence-Smith) highlights some good news for the automaker as it managed to lift its full-year profit guidance thanks to robust demand for trucks and SUVs. EV profitability is improving thanks to rising sales and growing market share and it was also interesting to note that its new range of SUVs are more profitable than the previous versions. * SO WHAT? * This sounds like progress for a company that has had its share of negative news lately. Getting those costs down whilst keeping an eye on the margin is absolutely vital here but it sounds like the company’s doing a decent job.

Senior VW executive deported from China (Financial Times, Patricia Nilsson and Edward White) sounds an alarming note as VW’s chief marketing officer and head of product strategy for China, Jochen Sengpiehl, has been sent back to Germany after being detained in China for around 10 days for allegedly testing positive for cannabis and cocaine after returning from a holiday in Thailand. China has a criminal conviction rate of around 99%. * SO WHAT? * There aren’t loads of details about this at the moment, but this does have the whiff of a stitch-up as part of a wider effort to put pressure on foreign companies in China. This is particularly tricky for VW at the moment as it continues to lose its grip on what has been its most profitable market. No doubt we’ll have to wait to watch further drama unfold…

In a quick scoot around some of today’s other interesting stories, HSBC splits bank amid growing tensions between China and the West (Daily Telegraph, Adam Mawardi) highlights that new CEO’s decision to embark on a major revamp of the bank by splitting it into East and West in order to simplify its geographical governance structure. “East” will comprise of the Asia-Pac and Middle East while “West” will contain its UK, continental European and Americas business. HSBC’s new CEO has only spring cleaned his supertanker (Financial Times, Lex) points out that the bank is still headquartered in the UK despite making almost 60% of its profits in Asia and it has, thus far, managed to resist outside pressure to separate the Asian business from the rest of its operations. It contends that the resulting structure, although more streamlined, still doesn’t satisfy with regard to the overall strategic direction. * SO WHAT? * I also find this a bit confusing given that HSBC always wants to tout itself as a global bank. Maybe it’s doing this as a compromise so it doesn’t have to completely carve out the Asian business, whilst also making it potentially harder for UK politicians (as an example) to stick their oar into the Asia business. More detail on strategy would be good though otherwise I can see the bank being in limbo as investors try to guess its next move…

Arm cancels Qualcomm’s chip design licence amid legal dispute (Financial Times, Michael Acton) highlights a big legal spat between Arm and US chipmaker Qualcomm as Arm has told Qualcomm that it will cancel its chip design licence. Arm says that Qualcomm used its IP without its permission, something that Qualcomm strenuously denies. The dispute will go to trial in December. Get that popcorn ready as this one’s going to be a real humdinger given the parties involved!

Boeing-made satellite breaks up in space (Daily Telegraph, Matt Oliver) shows that the aeroplane maker just can’t catch a break at the moment as now, a Boeing-made satellite just exploded in space! The satellite was owned an operated by Intelsat providing telecoms, broadcasting and other services to us earthlings. What a shambles!

Netflix Backs Out of Plan to Develop Blockbuster Videogame (Wall Street Journal, Sarah E. Needleman and Jessica Toonkel) highlights the shutting down of the streaming giant’s “Triple-A” game business where it was looking to develop games based on some of its successful franchises. Triple-A games are generally designed for consoles and gaming computers and can costs hundreds of billions of dollars to develop due to their complexity and it seems that Netflix has now decided to ditch that and concentrate on casual games that are easier, quicker and cheaper to produce. * SO WHAT? * Netflix began its foray into videogames in 2021 as part of a strategy to keep users on its platform in between their favourite shows (e.g. “Squid Games” and “Emily in Paris”) and wants to make efforts to monetise them via ads and in-app purchases. It is also worth noting that Netflix has been testing out the ability of players to stream its games via the cloud to smart TVs and other devices. I think this could be pretty exciting for the future!

Meanwhile, Tokyo Metro Shares Surge in Trading Debut (Wall Street Journal, Kosaku Narioka) shows that Tokyo Metro (the subway operator) had a strong market debut in Japan’s biggest IPO for almost six years! It raised around $2.3bn and opened 36% up. This should be good for market sentiment!

I bet you’ve never seen these pasta shapes before! Who knew?!?