Issue 43: 2016 03 03:Week in brief Financial

03 March 2016

Week in Brief: BUSINESS AND THE CITY

NEWS, the word in pink on a grey background

LESS THAN DELIGHTED: If HSBC thought that its decision a few days ago to keep its head office in the UK would be well received it must now be feeling disappointed.  The Government and the Bank of England welcomed the decision, which no doubt brought a warm glow to the board who tussled so hard with the decision, and spent, it is rumoured, getting on for £40m in specialist advice on the matter.  But investors were much less pleased.  The share price underperformed the market this week as bank shares rose – HSBC’s rising a very little.  Analysts commented that HSBC seemed in the end to have gone for the easy option, in staying in the UK, still home turf for much of senior management, though HSBC is now increasingly international in the senior talent it employs.  What principally annoyed investors was what they saw as a missed opportunity to move to a low tax domicile which would increase profitability, and to a more friendly business environment to cut some regulatory costs.  A second concern was that, given that the banks largest and most profitable operations are in the Far East – also seen as its future best prospect for growth – not moving back east could suggest a lack of enthusiasm for the area which would be badly received by customers.  It is believed that a third or more of HSBC’s shares are held by Far Eastern investors, who might also not be keen on the continuing UK domicile.

HSBC’s roots from its foundation by Scottish merchants in the mid C19th are eastern, and bold – it was a bank prepared to do things that other banks might not, and to be strongly supportive of customer relationships in bad times and good.  Something of that spirit still lingers on, and the domicile issue is perhaps a proxy for the ongoing internal debate between the conventional modern clearing bankers who have run the bank in recent years, and the bolder spirits who admire the more entrepreneurial approach suggested by such as Michael Sandberg and Willie Purves, chairmen from 30 and 40 years ago.

SUPERMARKET CORNER: Supermarket wars continue.  Latest move in the struggle is WM Morrison who in an unexpected manoeuvre signed up with giant online retailer Amazon to sell Morrison products through its website, and to use its very sophisticated delivery systems to get the goodies to the customers.  Morrison was very late into online delivery services after its rival big players had got that part of their offer up and working.   Eventually Morrison signed with Ocado, the online delivery specialist, whose relationship with Waitrose had not blossomed as expected.  As Amazon has not (yet) a fresh and chilled delivery service (books delivered cold are not popular) the Morrison/Ocado tie up will continue, and in fact be expanded to a second regional distribution centre now under construction.  The Amazon deal is another success for Morrison CEO David Potts, a year or so into the job, and rapidly resolving a number of Morrison’s long standing problems.  Ocado put a brave face on things, calling the arrival of Amazon in the delivery bay a “win-win arrangement which allows both of us to grow faster”.  The market was not convinced and Ocado shares fell 8% – they are now 30% down over the last year.  The winner though appears to be Amazon who can now get an overall national branding for its food service, and a base for expansion.  It seems also likely that Amazon will further invest into its logistics arm – in major population centres it is now moving to one hour delivery of popular lines and with a bit more technology that is likely to include cold, iced and frozen groceries.  The easy way to jump to that capability fast would of course be to buy Ocado…

HOT ON THE STREETS: You may think that not only are the streets full of Uber taxi’s hoping for fares, but also crowded with push-bikes and scooters with large insulated boxes weaving their way at high speed.  You are right; the food delivery business has taken off with a vengeance – so much food is waving about behind furiously pedalling cyclists on their way to home customers, it is surprising that anybody is to be found eating in restaurants.  It is a brilliant concept – charge a modest fee to both restaurant and diner to get food from the menu from one to the other at high speed.  And, so our geek at the keyboard says, the technology to make it all happen – menus, pricing, charging, monitoring delivery, is relatively straightforward – in fact, rather like the Uber systems.  So there are a lot of new entrants in the food movement business.  Just Eat, the largest European operator, has just published its 2015 results and they show that sales are 50% up, with over 96 million orders taken last year.  That drove revenue up to a total of £247 million, but profit performance shows that Just Eat is now having to really fight for those orders – profits actually fell to £34.6m from £57.4 in 2014.  This though was not as bad as it might seem – adjusted revenues were actually £40m after making some accounting adjustments to better reflect the true trading position.  Most of the revenue is from the UK business, but Just Eat is in now in growth mode in Italy and Spain, and also in Australia, New Zealand, and Canada, amongst other operations getting under way.   But competition is hot in the UK – its rivals are Hungry House and Deliveroo – and a host of local firms with technology and fit riders on bikes.  That will mean that growth slows and profits fall, so the fight is to develop new delivery zones where brand loyalty can be built fast, both in smaller UK locales, and across the world.  Having been a stock market darling, the market is now putting the bite on the share price of Just Eat, dropping from a peak of 500p to 345p, though now recovered to around 400p.

DOG TRIES TO EAT DOG: The London Stock Exchange is said to be in talks with Deutsche Borse to merge their operations – Deutsche being the operator of the Frankfurt Stock Exchange.  But now a new contender has emerged – Intercontinental Exchange, a big operator of various exchanges in the USA, and also of Liffe (derivatives), Trayport (energy futures), and IPE (oil products) in the UK. It is also rumoured that another American operator, CME Group, may be arriving at the London Exchange door for a chat soon.

TECHNOLOGY CRASHES: It happens only too frequently to your pc and laptop, so why not to the highly computerised driverless car?  Because it is programmed not to, said Google, as trials of Google’s no-driver fleet began in California. Well, maybe they should have turned them off and back on again. As one of its fleet came out of a side road into heavy traffic, it was programmed to expect polite drivers to give way.  Trouble was, nobody had programmed an approaching bus driver to be polite.  He drove on, Driverless Google colliding with him.  Back to the programming station; and more talks with the California Highway Authorities who are somewhat cynical about the whole thing.
KEY MARKET INDICES:
(at 1st March 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (falling); 5 year 0.75% (falling).
Euro€: 1 mth -0.18% (steady); 3 mth -0.11% (steady); 5 year -0.09% (falling)
US$: 1 mth 0.71% (falling); 3 mth 0.73% (steady); 5 year 1.15% (steady)
Currency Exchanges:
£/Euro: 1.28, £ rising
£/$: 1.39, £ falling
Euro/$: 1.09, € falling
Gold, oz: $1,221 slight fall
Aluminium, tonne: $1,585, slight rise
Copper, tonne: $4,704, slight rise
Oil, Brent Crude barrel: $35.75, rising
Wheat, tonne: £104, steady
London Stock Exchange: FTSE 100: 6,097 (rising). FTSE Allshare: 3,346 (rising)
Briefly: Commodity prices continue to edge upwards, as does the oil price now into a new mid US$30’s trading range. In spite of Brexit concerns markets are actually currently steady; the UK stock market continues to slowly rise, the currency market seems settled in the new trading ranges, and sterling interest rates are falling – though there is comment that this might be the next area for instability.

 

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