2 July 2015
Week in Brief: BUSINESS AND THE CITY
BULGING WALLETS: The British Chancellor, George Osborne, has advised British tourists going on holiday to Greece to prepare for banking chaos as a Greek default on its external debts seems more and more likely. The Chancellor’s advice is to carry all the cash needed for vacations as it is unlikely that it will be possible to obtain cash locally, with most cash machines empty and banks closed. The cash will of course need to be in euros as foreign exchange bureaux are frequently closed (though those of us who travelled in Europe forty years ago and more will remember that the mighty dollar was always well received). The travel insurance industry, though, threw a dampener on the Chancellor’s advice by issuing its own – a reminder that in most cases travel insurance covers a maximum theft loss of about €200. Time to buy shares in manufacturers of money belts perhaps.
GOOD NEWS FOR BORROWERS: Though less so for savers and pensioners. The chief economist of the Bank of England, Andrew Haldane, has suggested that interest rates should stay at their present levels for a further extended period. This follows a number of suggestions that sterling rates should begin to rise, reflecting continuing economic recovery and rising real wages. Some of these suggestions have come from Mr Haldane’s own colleagues on the Bank of England’s Monetary Policy Committee which advises the Bank on interest rate policy. Mr Haldane does not agree with his colleagues and their inflationary fears. He says that, although wages are clearly rising, that is no inflationary pressure at this point. What is more worrying, he says, is that there is still a real fear in the country of a return to recession coupled with bad news from Europe and elsewhere, which, together, could damage UK confidence and bring about the very slowdown that is feared. So, he argues, it is better to continue to boost the economy and risk overstimulation, which can be dealt with if and as it arises. In any case, he says, the strength of sterling will in itself tend to depress inflationary pressures. He even expressed the possibility that rates could fall further – in line with the Euro.
GROCERY SUCCESS: Ocado, the on-line grocery retailer, is finally starting to look like a serious contender in the crowded food retailing market, where conventional shop based retailers are fighting for market share and grappling with high fixed costs from their enormous supermarket estates. Ocado has no shops, delivering to customer’s doors in sophisticated vans where different products can be carried in specialist compartments. The business has from its inception concentrated on quality of service, including delivery at pre-agreed times and no quibble replacement of damaged goods. The delivery drivers will even put the order in customer’s cupboards and fridges if desired. That reputation has been bought at a cost but it seems to be paying off, with the number of customers rising 30% in the last year, and sales up 16% in the first half (to end May) of this year. This enabled the business to make a profit of £7.2m on revenue of £508m, not great, but a better return than some of the traditional opposition.
The risk to Ocado is that if the property based food retailers really got their act together on quality and spread of service they could crush Ocado – which is very aware of this danger. They originally had a tie-up with Waitrose, but suffered a setback when Waitrose set up their own delivery business in competition – and then dropped Ocado. However, Ocado were then able to form an alliance with Morrison’s, who were slow into the on-line food revolution – and short of the capital and technology resources to compete there. The word is that that alliance is doing very well, so well that Ocado are now looking at moving into European markets on a similar model, maybe with a retailer such as Carrefour, the French based food retailer.
PICTURE THIS: One comparatively unsung success of the UK is its film industry. For many decades in the doldrums and low profile, it remained active by making TV series and low grade movies; however, the combination of Gordon Brown’s tax incentives, and the UK becoming a centre of excellence for film and sound technology, gave the sector a major boost. A big beneficiary of that has been Pinewood Studios in Buckinghamshire which has a number of very large film stages and some impressive editing back-up. That has long made it the venue for the making of the James Bond franchise, and produced another long running money spinner in the Harry Potter series. It has also made some of the Star Wars series and, perhaps more surprisingly, given their huge facilities in California, it also makes movies for Disney.
Now it has raised £30m for expansion of the studio, following on a rise of 17% in revenues last year. Profits are under a bit of pressure because of the continuing investment into film, and now game, technologies with the full year forecast at £2.8m, down from £4.2m the previous year. This is far from the whole picture – Pinewood is at the centre of a network of specialist businesses who all provide facilities and services to the film industry and are a major employer (and earner of foreign exchange) mostly situated to the west and north-west of London.
MORE TROUBLE WITH CREDITORS: It’s half a world away and not a sovereign state, but in the Americas another major default by a government is feared. This is in Puerto Rico, the USA island territory which is not a state and yet almost a state. Recent investigation of the territory’s debts have revealed that Puerto Rico is fast approaching insolvency and lacks the resources to make large repayments which fall due soon. Total debt is calculated at US$72bn, which is getting on for the same burden per head as Greece and is significantly higher than any USA state. The head of the government has called for cuts in public spending and for all citizens – there are 3.5 million of them – to prepare to make sacrifices. This is unlikely to go down well with a population which has seen a gradual drift of enterprise, capital, and younger (and more economically productive) people to the USA. Puerto Rico has a very anomalous position within the USA – governed by it at a federal level and subject to Washington regulation but without representatives in the Senate or House of Representatives. Puerto Ricans have long wanted to regularise this and in 2012 a majority voted to try to achieve full USA statehood. This financial crisis in unlikely to help them achieve that aim any time soon.
KEY MARKET INDICES: (at 30 June 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.56% (steady); 5 year 1.58% (slight fall).
Europe€: 1 mth -0.11% (rising); 3 mth -0.3% (slight rise); 5 year 0.40% (falling)
US$: 1 mth 0.21% (steady); 3 mth 0.41% (easing); 5 year 1.72% (easing)
The Euro remains surprisingly steady given current political turmoil. Sterling longer term rates seem to have settled in a new trading range. Dollar spreads remain very high in short maturities.
Currency Exchanges:
£/Euro: 1.41, steady
£/$: 1.57, £ steady
Euro/$: 1.12, € slightly weaker
Gold oz: $1176, slight fall
Oil, Brent Crude: $62.014, continuing to fall slightly.
London Stock Exchange: FTSE 100: 6,579. FTSE 350: 3,650
The crisis in Greece has finally impacted trading; the stock exchange has seen a drop of about 5% in the last few days as the real possibility of “Grexit” and consequent economic dislocation becames apparent.
