17 March 2016
Week In Brief: BUSINESS AND THE CITY
NUCLEAR FUSION: The doubts over whether the proposed new nuclear power station at Hinkley Point will ever get built continue to grow. Although Chancellor George Osborne and Prime Minister David Cameron have both said that building the power plant is vital for the UK’s future electrical power needs, the company who has agreed to build it, the French group EDF Energy, is increasingly riven by dissent on the subject. EDF is 85% owned by the French government but run at arms-length; nevertheless the French President, Francois Hollande, has publically urged the company to get work underway. However, the management of EDF is very concerned about the economics of the construction project – which takes them into new areas of technology. The Finance Director of EDF resigned over the project last week, citing concerns over its effect on the EDF balance sheet, and his views and worries are said to be widely shared on the board, including among the trade union representatives on the board. Several directors have pointed out that it would make much more sense to supply the power over the existing cable from France to England, from whence it can be distributed via the National Grid. Indeed, a new cable is currently been laid from Southampton across the Channel, which would pretty much guarantee continuity of supply. EDF has adequate capacity to do this, and the cost would be very much less (in spite of the UK Government price guarantee to Hinkley Point, at more than twice the current average cost of production in the UK).
In the UK, environmentalists are also expressing concern over building a large nuclear plant, using relatively untried technology. And at the other end of the spectrum, the energy industry itself is pointing up the advantages of building much smaller nuclear stations using current technology, which are said to be safer and can be built more quickly and closer to energy users to cut transmission loss. Whatever the eventual decisions, the UK is entering a dangerous period – the closure of the coal fired power stations, now mostly shut-down, and the similar approaching fate of many oil fired ones, will leave the country with a potential energy deficiency by the end of this decade.
STRUGGLE ALMOST OVER: It’s been well rumoured (or the City’s worst kept secret) and the possible other bidders seem to have melted away, but finally it looks as though the deal is done. The London Stock Exchange Group and Deutsche Borse, the German exchange, will announce their £20bn merger by the end of this week, and seek respective shareholder approvals. If approved, as expected, that will create a European central exchange on the scale of the largest USA and Far eastern competitors; and with particular strengths in derivatives trading, now seen as the big growth area in exchange traded instruments. The main office of the new exchange will remain in London, but with very substantial operations in Frankfurt. Senior executive roles will tend to alternate, at least initially, between German and British executives. But there will be job savings, especially in IT, as much duplication and rationalisation of systems takes place – which is likely to cut “hundreds” of jobs.
This is one of several deals in play in the exchange sector at the moment. Also in London, the Baltic Exchange, which specialises in the shipping sector, is believed to be in talks with two potential Far Eastern buyers, and Deutsche Borse itself has just sold its US options business to Nasdaq, the New York based exchange. With the internationalisation of so many financial products it seems inevitable that the exchanges through which the products pass will follow suit.
STRUGGLE INTENSIFIES: The London Stock Exchange may be moving into a bigger bolder world, but life is not so good for the traditional stockbrokers who in the public mind (wrongly) are the main players on the exchange. The traditional sector has in fact been in retreat for many years, since the “Big Bang” reforms which went live in 1987. The investment banks have gradually taken on much of the brokers advisory and flotation roles, and also large lumps of their trading activity, but also the private investor has become a rarer animal. Where he exists he often just wants a cut price execution only services with no advisory angles – which is what traditionally put the marmalade on the stock brokers’ toast.
The latest broker to report troubles is Panmure (formerly Panmure Gordon), one of the oldest independent brokers, whose Chairman and Chief Executives have both just resigned in the face of falling profits and turnover. Many of its rivals have disappeared over the last 30 years or so, even Winterflood, owned by successful investment bank, Close Brothers, and one of the most successful mid-market brokers, has recently reported a declining performance. It is hard to see what will reverse this – most brokers have lost their commercial public clients to the big investment banks, and their private clients to electronic trading – which the brokers have no natural advantage in. They cannot match the cost savings of big rivals in trading on a huge scale. Most brokers are now looking for mergers -which may buy them time, but probably nothing more, or to sell out to a big financial services group. This is not so easy either. Most banking groups have already got their own trading divisions and the only justification for buying in smaller rivals is to get their client relationships. Trouble is, most clients have already gone anyway. We shall have to think of a new name for the stockbroker belt soon.
MORE LEARNING REQUIRED: This week is National Apprenticeship Week. The re-creation of the apprenticeship system is generally regarded as one of the government’s successes in getting young people into work and learning vocational skills on the job. Funded by a payroll tax on large employers, around 3 million young people should have been through or be in an apprenticeship by 2020. But one group of people who do not seem to benefit as they should are young women, who are badly represented in the scheme, especially in engineering and construction openings. Now the government is being urged to take positive action to redress that, by publishing statistics and “naming and shaming” employers who do not take positive action to correct the imbalance.
SCOTS REVERSAL: CoStar, a property research group, says the UK investment into Scottish commercial property dropped by 46% last year – although overseas investment was up, so the amount of money going into Scottish property was overall 4% up on 2014. CoStar think that this is mainly due to British investors’ increasing concerns that Scottish independence may soon be back as a political possibility, a topic that overseas groups buying in Scotland may not be so aware of – or they may see that the political risks of investing in Scotland are in reality less than in other parts of the world in which they buy property.
EUROPEAN COCKTAIL: Gruppo Campari, the Italian eponymous drinks manufacturer, is buying the French owner of Grand Marnier, who make cognacs and armagnacs, famous for its name product, featured in a long running series of allegedly seductive advertisements. The deal values the Grand Marnier group at €684m, but will take place over six years in a series of acquisitions from the controlling family and their supporters. Buy and imbibe responsibly… .
KEY MARKET INDICES: (as at 15th March 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.67% (stable); 5 year 0.97% (rising).
Euro€: 1 mth -0.27% (falling); 3 mth -0.22% (falling); 5 year -0.3% (falling)
US$: 1 mth 0.73% (steady); 3 mth 0.73% (steady); 5 year 1.35% (rising)
Currency and other Exchanges:
£/Euro: 1.28, £ steady
£/$: 1.42, £ steady
Euro/$: 1.11, € steady
Gold, oz: $1,253 slight fall
Aluminium, tonne: $1,532, slight fall
Copper, tonne: $4,993, slight fall
Oil, Brent Crude barrel: $38.35, slight fall
Wheat, tonne: £101, falling
London Stock Exchange: FTSE 100: 6,175 (steady). FTSE Allshare: 3,386 (slight fall)
Briefly: A very quiet week in volatility terms, no great movers to report on; just very minor giving up of recent gains in commodities. The long term sterling and US$ rates continue to slowly edge up, but from low bases. Worth noting is that currency trading spreads are widening as traders protect returns.
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