25 August 2016

Week in Brief: Business and the City

 

CITY SHOCK HORROR:  For traditional City of London earners it may be the first swallow leaving for winter… closely followed by the second.  Woodford Investment Management have announced that they are abolishing bonuses for all staff in their specialist investment management business.  Woodford, founded and chaired by Neil Woodford, after he left Invesco in 2014, has only 35 staff – but £14.3bn under management – and feels that it is too easy to get distracted by short-term performance targets if employees are thinking about how to maximise their annual bonus.  To bring congruency between the interests of investors and those who are managing their money, Mr Woodford feels that the best course is to pay salaries only and assess employees against long term qualitative targets.  Bonuses, he says, do not influence behaviour – or if they do, they encourage the wrong sort of behaviour.

Nor is he the only one to think this – his announcement was followed by Daniel Godfrey, another leading light in the investment management business and former chief executive of the Investment Association, the industry trade body, who is setting up a new fund to open early next year, also saying that his fund will not pay bonuses, for the same reason.  Instead, both firms will increase salaries to take account of the loss of bonus income but then expect staff not to need further motivation.  What is interesting is that Woodford consulted its staff before making the change, and says that they all agreed with it.  It remains to be seen though how they will react if their peers in other firms are seen to be getting much higher remuneration via bonuses, and if they then vote with their feet.

Bonuses have been frowned on by various City regulators because they are thought to encourage short termism, but most regulators have also acknowledged that if carefully designed they can bring the rewards to staff alongside those to investors – and shareholders.  And a further advantage is that if business gets bad, then costs can rapidly be cut by turning off the bonus tap.  This though applies more to banks where staff costs are a very significant part of total costs, rather than investment managers where salary costs are low compared to the overall earnings profile.

WINTER DRAWS ON:  The strains on Britain’s electricity supply industry do not seem to be worrying corporate UK too much.  As we outlined here a few weeks ago, the National Grid, which has overall responsibility for the supply and demand for electricity being kept in balance, invited applications from large users to receive payments in return for being willing to cut their power usage if demand exceeded supply this winter – as it did last winter when cold weather coincided with several power stations having to close down for works.  The scheme was widely regarded as a success and National Grid expected to repeat it this winter.  However, users have shown a lack of interest in signing up this autumn, and so the idea has been dropped.  The true reason seems to be that users have not been offered enough compensation for cutting their take off the grid at peak times – even for non-peak sensitive users it can be very inconvenient to cut use at short notice.  That means the Grid will be dependent on having reserve power stations ready to switch on for peak coverage – which is a very expensive.  In turn, the power station owners have to maintain their stations, ensure they have large stocks of coal (nearly all reserve stations are coal powered) – and hope they work when the “Start” switch is pressed.  The consumer will be a winner in a mild winter – no standby payments to make and no costs for the reserve network – but could be a loser in icy weather – not only big payments to make, but quite possibly electricity cuts anyway.   Better check those woolly socks…

KICKING IT AROUND:  The Chinese government continues to make known its displeasure at the further delay to the commissioning (or otherwise) of Hinkley Point nuclear power station, but if there is to be a cooling of investment into the UK it is yet to hit:.

Liverpool Football Club, an icon for many football fans, which was bought by the American commodity trader and baseball investor John Henry six years ago and is now rumoured to be being sold to a Chinese investor, China Everbright Group, following what is becoming an increasingly familiar trail from Peking to the gates of English regional football clubs.  Mr Henry, though professing himself a football fan, has done very well financially with Liverpool FC and, like every good trader, knows when to take profits.  For the Chinese, not only has depreciation of the renminbi made investments for cash rich Chinese companies in the UK and in the West look more attractive, they have an opportunity in the Chinese market for extra merchandising not available to Western owners.

Nexen, one of those companies which affect your life but of which you may have never heard, being one of the main operators in the North Sea oilfields and producing around 11% of Britain’s daily output, making it the largest single operator in that field – a share that is likely to grow as it is operating in two comparatively new fields, whilst others are nearing the end of their lives.  It is owned by China National Offshore Oil Corporation, (“CNOOC”) a major worldwide operator of offshore based drilling rigs who bought it from its former Canadian owners in 2012.  Nexen has just announced that it has been able to take advantage of changes in tax rules for North Sea operators and that last year it had a negative tax position.  In spite of current low oil prices, which probably mean that the North Sea business is loss making, CNOOC says that it is very committed to its business here and in other locations around the world, especially in the South China Sea, a politically very sensitive location at the moment.  Business commentators see a risky but possibly very profitable long term strategy – but political commentators are more inclined to think that the company’s aim is political influence over oil supplies – CNOOC is owned by the Chinese Communist Party.

SATISFACTORY COMPLETION:  Last week we reported on Bovis, who, in spite of some commentator’s low expectations of the house building business, produced a good set of results.  This week it was the turn of Persimmon, also a FTSE100 housebuilder, who reported profits for the first half of the year up 29% to £352m, and sales up 12% to £1.49bn.  As with Bovis, the group warns of rising construction costs in the short term, and in the medium term, of increasing shortages of building land and slow processes in the planning system.  Buyers do not appear to be deterred by Brexit considerations – after a slowdown in enquiries after the Referendum, things appear to be back to normal in the sales offices.

KEY MARKET INDICES:

(as at 23rd August 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (falling); 5 year 0.35% (rising).

Euro€: 1 mth -0.40% (falling); 3 mth -0.28% (steady); 5 year -0.28% (rising)

US$: 1 mth 0.86% (rising); 3 mth 0.74% (rising); 5 year 1.14% (rising)

Currency Exchanges:

£/Euro: 1.16, £ steady

£/$: 1.32, £ rising

Euro/$: 1.13, € steady

Gold, oz: $1,337, steady

Aluminium, tonne: $1,650, rising

Copper, tonne:  $4,732, falling

Oil, Brent Crude barrel: $48.50, rising

Wheat, tonne: £131, steady

London Stock Exchange: FTSE 100: 6,828 (falling).  FTSE Allshare: 3,722 (falling)

Briefly: The dollar has seen renewed upward pressure on rates this week, though the last rally ended in a drop only a few days ago. Otherwise, not a lot to report – oil briefly went through the $50 barrier, but only for a day, as rumours spread that the end of localised fighting in Nigeria will mean an uptick in the supply from there.

 

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