09 June 2016

Week In Brief: BUSINESS AND THE CITY

SHELLING OUT:  Shell Group completed its purchase of BG Group three months ago and has now completed a major review of what it has bought, and how that and Shell’s existing business will fit together.  It justified the purchase from the beginning by the opportunities it gave to cut costs across the two businesses, which, whilst coming from different roots, had developed very similar profiles.  BG began in gas extraction and later moved in to oil pumping and supply and competed with Shell in many locations across the globe.  That means some easy wins in cost cutting – indeed, Shell management says that in the first year of the merged business they expect to cut more than US$4bn of costs, off a total of US$40bn; that is much more than was forecast in the takeover documents.  In addition, Shell says it can make very significant cuts in investment spending – that, it says, should be capable of being cut by 35% to US$29bn.  And on top of all that, it expects to sell some US$30bn of surplus assets over the next two years or so, with at least US$6bn of that coming this year.

There is some pressure from shareholders to do this – the deal to buy BG was largely financed by debt which has risen to 26% of total capital assets.  This is not a major worry in these times of low interest rates, but with uncertain dollar interest rates, and the price of oil still below $50 a barrel, the Shell board would sleep easier if they can get that debt reduced.  So the next phase of focussing the business will be close attention to cash flow, and a rigorous attention to the quality of businesses.  North Sea oil is likely to be on the disposals list, given its declining reserves and cost of extraction, but the natural gas business is seen as an exciting opportunity, and the North and South American offshore businesses are seen as core holds.  The chemical manufacturing business, which gives opportunities for added value and enhanced margins, is also likely to see new investment.

GLOBAL AMBITIONS:  Having settled where it should sit (London), HSBC is now accelerating its internal review of its businesses.  Earlier this week it announced that it was to restructure its investment banking division to integrate it more into the corporate areas of the bank, so that major corporate clients get a “one stop” service, with HSBC specialists able to take an overview of client’s whole business and offer services and products that have no frontiers, either functionally or geographically.  That should enable the bank to become core advisor to many of its target clients and customers, an ambition which many international banks have held out, but which few have achieved.   Samir Assaf, who heads the Global Banking division, says that everybody should benefit; the bank by being able to take a holistic view of client’s businesses, customers by getting faster decisions and a more focussed service, and the bank’s staff by being able to build better relationships.  The investment banking division has seen about 1,000 job losses over the last year, but Mr Assaf does not expect any more.  He does expect to be able to cut costs, by around US$1bn over the next couple of years or so, but without any significant job losses or remuneration cuts.  His target is to get HSBC into the top five investment banking groups in the world; the bank is of course very strong in Asia, and has achieved much in Europe, and will do more there, but sees emerging markets as the real possibility.  HSBC has a background of engaging with ambitious and driven Far Eastern entrepreneurs and thinks the skills learnt there will give it a strong understanding of emerging business in Africa, eastern Europe, and South America.

NASTY SMELL:  The fall-out from the Volkswagen emissions scandal is far from exhausted.  Although VW have borne the brunt of regulator’s wrath, and their sales have been suffering accordingly, though, it is said, not as badly as VW feared, investigations in Europe have fingered other car manufacturers for dubious practices in engine management.

The naughty car makers seem to be mainly German, including Opel, Mercedes, and other VW brands such as Audi, but this may reflect a more vigorous approach by German regulators than in other countries. The German regulator, KBA, has tested some Fiat cars, built in Italy, and found that they too had had sophisticated modifications made to engine management systems.  “Sophisticated”, in this context meant that the systems were adjusted to defeat the normal testing regime.  Both Fiat and some of the German companies have said though that the adjustments were to minimise engine wear and to make engines as efficient as possible in unusually hot or cold weather.  So complex has this argument become that it seems likely that the regulators will have to design completely new ways of testing engines, and for the time being harmonise testing regimes across Europe.

DIGITAL MOVES IN HOUSING:  The way residential property is sold and bought in the UK is changing ever faster; as we covered here a few weeks ago, the way to display property now is not in the estate agents high street windows, but on line, through Rightmove, Zoopla, and PrimeLocation.   But this will not be the end of the selling revolution – increasingly technology means that everything about houses is readily available online, including floor plans, school maps, and video walk rounds of the desirable residence.  Now arriving: fixed price agents who simply load up all this information and offer a display service at a low fixed price – the home owner makes the viewing appointments and does the selling.  Fees are typically about a third, or less, of the conventional, agent led, method. Countrywide, the UK’s largest residential agent sees the way the wind is blowing and is introducing such a service itself, in several of its brands.  It is a trial at the moment, but Countrywide say it is a selling package that is here to stay – the trial is just as to how well the technology serves the customer, not the principle.

TIGHTENING THE BELT:  Not every top tycoon gets endless rises and spectacular bonuses.  Burberry Group, the leading listed British fashion retailer, has cut the pay package of its chief executive, Christopher Bailey to a mere 25% of what he got last year, cancelling his bonus as profits fell 7% (not too appalling you might think, but the share price fell 35%).  Poor Mr Bailey, not only this, but he has to do two jobs – Chief Executive and also Chief Creative Officer (a design function that is, not an accounting approach).  Let’s hope he can get by for a year on his £1.1m salary and £800k in pension and other allowances.

KEY MARKET INDICES:  (as at 7th June 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.62% (steady); 5 year 0.80% (falling).

Euro€: 1 mth -0.29% (steady); 3 mth -0.27% (falling); 5 year -0.16% (falling)

US$: 1 mth 0.47% (falling); 3 mth 0.53% (falling); 5 year 1.21% (falling)

Currency Exchanges:

£/Euro: 1.28, £ weakening

£/$: 1.45, £ steady

Euro/$: 1.14, € strengthening

Gold, oz: $1,248, slight fall

Aluminium, tonne: $1,547, slight rise

Copper, tonne: $4,705, rising

Oil, Brent Crude barrel: $48.80, steady

Wheat, tonne: £110, rising

London Stock Exchange: FTSE 100: 6,273 (rising). FTSE Allshare: 3,449 (rising)

Briefly: May has gone and June has seen some greater volatility (so far) than last month. Wheat is up as speculators consider this year’s likely harvest, and copper, which has seen very weak trading, recovered quite smartly, though still well below the magic USS5,000 level. The opinion polls on the UK referendum show continuing strength to the “Leave” vote, almost certainly the reason for the new weakness of sterling. US$ interest rates reversed into sharp falls.

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