07 January 2016
Week in Brief: BUSINESS AND THE CITY
CHINA SYNDROME: The troubles of the Chinese economy continue to tantalise observers. China has of course a much less transparent reporting regime than most business analysts are used to. Some of the business that grew so fast in the years of the Chinese economic miracle are now having to cope with the impact of weaker markets, more competition, and slow growth; this applies from retail suppliers right up to heavy industry – the problems of steel production are very obvious. What is not clear is the extent to which the Chinese government has been intervening in key financial markets, particularly the stock exchange, and in currency trading. The stock market has borne the brunt of worry, with a series of dives in July and early August bringing new rules on trading to try to impose stability. These did appear to have worked until recently when the jitters recurred, culminating in a temporary closure earlier this week as the market dived; but it reopened with some enthusiastic buying which seemed to bring stability. Where the money for that came from is not so clear, but many observers suspect that this is government money – or at least, government directed money coming from state companies and banks. There is a similar pattern in the currency market, though there it is clear that the central bank is selling dollars to try to hold up the renminbi. The key question for 2016 is whether this relatively subtle support will get the markets into a more stable place whilst the underlying economy recovers, or are the markets fundamentally overvalued, and a downward stock market and a devaluation of the renminbi inevitable? And if so, when?
WINTER BLUES: The major retailers are now starting to release their pre-Christmas trading figures. Both the news released so far, and wider anecdotal evidence, suggests that it has been a bad time for many of them. The weather seems to be the main culprit – though that is what retailers always say – but this time it may be true, with a warm wet mild autumn and, so far, a wet mild winter. This is not what retailers have stocked up for. The stress of holding stock which was not shifting showed up before Christmas with many shops holding sales in what should be a prime selling period.
The first results out were from Next, usually regarded as a market bellwether. They showed an almost static position compared with last year, and the weather was duly blamed, as was the company’s decision not to start its sales until post Christmas; but retail analysts in the City also expressed concern over poor growth in Next’s online business where sales rose just 2%. The company had been targeting 8% plus. Lord Wolfson, the chief executive, who is noted for frank speaking about the business he runs, said that Next had failed to keep up with technological change online and in its catalogue business, and had failed to build on the advantage it formerly had as a result of its early and sophisticated entry into internet trading. He said that it would take two or three years to catch up to where they needed to be, the problems been mainly in stock availability and delivery.
It is a different story round at John Lewis. They reported their Christmas period sales as up 5%, which compared with a very similar uplift the previous year. This they attributed to very strong online sales performance in all sectors but especially fashion. JL have been investing very heavily in their online business and are currently putting a further £500m into refining their stock holding and delivery capabilities. They already control much of their own delivery function in major urban centres, with the further advantage of usually being able to do next day delivery to Waitrose stores for collection. Ironically it is Waitrose that is the weak spot in this performance – food revenues are about 2% down – volumes are up but margins are down, showing that even the middle class favourite is not immune from the price war going on in food retail.
OIL NO CRISIS: Normally conflict in the Gulf sends the oil price sharply upwards and the growing tension between Saudi Arabia and Iran, following Saudi’s execution of an Iranian cleric, might have been expected to reverse the recent further falls in the oil price. But no, yet again the price fell, down to US$35.5 a barrel, a new low. There are several reasons for this – the prime one being that there is now clearly a massive power struggle going on in the Middle East where the Saudis, under their new King, are asserting their supremacy over the region as Iran moves away from its former status as international pariah. One big weapon in this fight is oil; the Saudis are flooding the market to exert pressure on the Iranian economy, a dangerous strategy given that Iran is also a low cost producer and the Saudis have huge and expensive social programmes which they need to fund to avoid civil unrest. But another reason is that there is so much oil in storage facilities that any attempts to restrict supply would in the short term be unsuccessful anyway. There is practically nowhere to keep the stuff and the mild western hemisphere winter means that usage is at unusually low levels. Shipping rates are rising fast – to the relief of many shipowners – even though costs of operating ships are falling (lower oil and steel prices) and the reason for that is that as onland storage tanks are full the oil producers are having to use ship tankers for storage. It is hard to see how the supply can be increased much more given these limiting factors – though any outbreak of actual hostilities might unnerve oil traders – so it seems unlikely that the price can fall much further. But that is what the market has been saying since the price was around US$70 a barrel.
STACK IT HIGH (TWO)…: Ken Morrison may be a bit surprised by the activities of his new investment, J Sainsbury plc. It announced this week that it had quietly approached Home Retail Group, the owners of retail catalogue chain Argos and DIY retail shed owner Homebase, to suggest a merger. Quite why Sainsbury thinks this might be a good deal is not clear to the stock market – it adds nothing to earnings and both businesses have been struggling, Argos because of competition from the internet trading and Homebase as Britain’s love for DIY seems to be fading. At least Sainsbury knows a bit about Homebase – it used to own it. But whatever the motivation for the attempted bid, it has got nowhere so far – Home Retail say that it fundamentally undervalues the enterprise. Now Sainsbury must decide whether to go formal with a proper bid, or walk away.
HIGHER AND HIGHER: It is two years now since the mountain state of Colorado legalised the sale of marijuana in various forms, a new, yet not new, product which promptly stumbled blinking into the high plains sunlight and became the subject of regular retail business. Since then business has been brisk. US$550m turnover in 2015 is the best informed guess, compared with $313m in 2014 – itself a pretty good start for a new concept. Four other states have followed Colorado into this new world, but as first starter Colorado seems to be reaping the benefit. However, says our reporter dozing in the sunlight and thinking he might file his copy tomorrow, competition has been serious and a bit of a price war is currently going on, with special offers available (even a “buy one, get one free”) and less good quality product being offered at well cut prices. The growth now seems to be in products suitable to use in vapourisers but, as well as the traditional rolling stuff, retailers are selling sweets and bars and even (can this be true?) weed pecan pies.
What is certainly benefitting is the Colorado tourist trade which is seeing a big upturn in visitors, often weekend visitors from Texas, California, and Chicago. That is good for all sorts of local businesses and for local tax revenues, so even the legislators are happy.
KEY MARKET INDICES: (at 5th January 20165; comments refer to change since 23.12.15; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.37% (rising).
Euro€: 1 mth -0.15% (falling); 3 mth-0.09% (rising); 5 year 0.15% (steady)
US$: 1 mth 0.63% (falling); 3 mth 0.68% (falling); 5 year 1.66% (rising)
Currency Exchanges:
Euro/£: 1.37, £ steady
$/£: 1.47, £ falling
$/Euro: 1.07, € steady
Gold, oz: $1,073 slight rise
Aluminium, tonne: $1,477 steady
Copper, tonne: $4,646 falling
Oil, Brent Crude barrel: $35.50, further fall
Wheat, tonne: £111, steady
London Stock Exchange: FTSE 100: 6,137 (rising). FTSE Allshare: 3,438 (rising)
Briefly: The markets resumed after the Christamas break pretty much in the same patterns as before; copper fell further (please note we now quote copper and aluminium in US$) as did oil, and the UK stock market was a bit more perky.
