Taxing the tech titans
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (20 – 24 January 2020).
A growing movement by governments to tax American tech giants has quickly emerged as the largest global economic battle of 2020. It could eventually lead to the US raising tariffs on UK goods. Boris Johnson’s government could also be heading for a clash with Washington over the use of Huawei equipment in Britain’s next-generation mobile network. A decision is expected next week. Boris Johnson's Brexit bill is now law after completing its passage through parliament and the granting of royal assent.
Concerns about the spread of a deadly novel coronavirus from China saw a slight chill emerge in stock markets. The FTSE 100 fell 0.6% over the week by mid-session on Friday and the FTSE 250 lost 0.7%.
Although not exactly bearish, Garry White argues that markets are due a pause for breath here.
Boris Johnson's Brexit bill is now law after completing its passage through parliament and the granting of royal assent. The EU (Withdrawal Agreement) Bill, which paves the way for the UK to leave the bloc with a deal on 31 January, must be approved by the European Parliament next week.
Key members of President Trump’s US Cabinet say that both the UK and US governments want to complete a trade deal this year. US Treasury Secretary Steve Mnuchin said that the UK had indicated it wanted to accomplish both a deal with the EU and the US in 2020, which was “an aggressive timetable”. But he added that the US-UK trade deal alone was “an absolute priority of President Trump and we expect to complete that within this year”.
The chancellor warned manufacturers that "there will not be alignment" with European Union (EU) rules after Brexit and insists companies must "adjust" to new regulations. Mr Javid admitted not all businesses would benefit from Brexit, but declined to specify which EU rules he wanted to drop. EU officials told the Financial Times: “In the end it is all rather simple: If Britain wants to diverge from EU rules, it will diverge. Such an approach would obviously lead to new trade hurdles between Britain and the EU and in consequence less trade, less investments, less jobs.”
The EU has “no choice” but to negotiate a new trade deal with the US, Donald Trump said. The US president met with European Commission President Ursula von der Leyen at the World Economic Forum in Davos. Mr Trump has threatened to slap tariffs on European cars in a bid to strong-arm EU leaders. In this week’s meeting, he claimed to have told Ms von der Leyen that, absent a trade deal, he would need to “take action” in the form of “very high tariffs on their cars and other things.” He wants a trade deal before the US election in November.
Garry White argues that the biggest victim of US tariffs in 2020 could be the EU here.
Europe may have avoided tariffs from Washington over France’s digital service tax – for now. However, a global battle over taxing tech titans has now started. President Trump and his French counterpart agreed to hold off on escalating a trade war, US officials said, avoiding a massive new tariff increase on French goods such as wine, cheese and handbags. The US administration had threatened the new duties in retaliation for a tax slapped on revenue earned in France by American tech groups such as Facebook and Alphabet’s Google. The White House said that Mr Trump spoke with French President Emmanuel Macron and "agreed it is important to complete successful negotiations on the digital services tax," though did not confirm his decision to hold off on tariffs for now.
Over 2020, the US and EU are likely to come into conflict on a number of issues. Will it end with tariffs? John Redwood takes a look here.
In related news, the UK was told to "hold fire" on a new tax on big technology companies planned for April. The OECD said that there needs to be a global agreement on technology company tax. Without such an agreement, there would be the risk of "a cacophony" with countries going their own way. US Treasury Secretary Steve Mnuchin threatened to “punish” the UK if it went ahead with a new tax. Chancellor Sajid Javid defied pressure to cancel the government’s proposed technology tax and said they will not back down on the proposal, which comes into force in April.
Last week’s trade deal is still being considered as a truce, not a peaceful solution. John Redwood looks at the important points in the text here.
President Trump’s “appetite” for a post-Brexit trade deal with Britain will be diminished if Boris Johnson gives Huawei the green light to help build its 5G network, the UK has been warned. The prime minister is facing intense lobbying as they attempt to put pressure on him to ban the Chinese technology giant. The government is widely expected to give Huawei the go-ahead. Andrea Leadsom, the business secretary and a member of the National Security Council said yesterday that alternatives to Huawei were limited. Before the decision Stephen Mnuchin, the US Treasury Secretary, revealed that he would meet Sajid Javid, the chancellor, in London to discuss “significant concerns” about Huawei.
A Canadian judge is now considering whether to extradite Huawei's chief financial officer Meng Wanzhou to the US. Washington has requested Ms Meng's extradition from Canada so she can stand trial on charges of bank fraud and sanctions violations. This week's hearing in Vancouver covered a crucial element of the extradition process called "double criminality" – in order to extradite someone from Canada, the conduct they will be tried for in the destination country must also be a crime under Canadian law.
China has widened a lockdown in Hubei province – the centre of an outbreak of a deadly coronavirus – as the death toll climbed to 26 on Friday. China confirmed that the respiratory disease can be transmitted between humans – and it has emerged at the worst possible time. Many Chinese have been criss-crossing the country to see their families over the holiday period. This, which is often described as the "largest human migration in the world", provides an ideal opportunity for the virus to spread. Chinese officials have estimated that the number of trips by Chinese citizens related to the holiday could be as much as three billion and has tried to limit travel from Wuhan, the capital of the Hubai province.
The Severe Acute Respiratory Syndrome (Sars) outbreak in 2002/03 caused more than $50bn worth of damage to the global economy, despite infecting fewer than 8,000 people and having caused just 800 deaths, the World Economic Forum has calculated. According to World Bank estimates, the annual global cost of moderately severe to severe pandemics is roughly $570bn, or 0.7pc of global income. The World Health Organisation said it will not declare the virus a “global emergency” due to the relatively low number of deaths outside China, but this could change.
The news hit Chinese shares and Western companies exposed to China. These included miners such as Antofagasta, BHP Group and Rio Tinto and luxury goods companies such as Burberry, Hermes and LVMH. Chinese shoppers account for 35% of all luxury goods sales and 90% of last year's growth in the market, according to consultancy Bain. The valuation of US casinos such as Las Vegas Sands and Wynn Resorts was also hit, as they have sizeable operations in places such as Macau. InterContinental Hotels was also on the back foot on news that it will allow guests to charge or cancel stays at most Chinese hotels scheduled up to 3 February at no additional cost. Airlines such as British Airways owner IAG also moved lower.
The International Monetary Fund (IMF) expects the world economy will strengthen in 2020, albeit at a slightly slower rate than previously anticipated. Global growth will accelerate to 3.3% from 2.9% in 2019, marking the first pickup in three years, the fund said. Both figures are down compared with forecasts in October, and it marks the IMF’s sixth straight reduction for 2019.
Upbeat data has caused some to question whether the Bank of England will cut interest rates at its 30 January meeting, as many expect. The latest manufacturing and services output data for the UK from IHS Markit for January showed that there has been a rebound in economic activity. Its UK Composite Flash Purchasing Managers' Index (PMI) is at a 16-month-high of 52.4, up from 49.3 in December.
Also, in the three months to November, the UK saw the strongest jobs growth in nearly a year. The unemployment rate stayed at 3.8% cent, its lowest since the 1970s, but the number of people in work rose by 208,000, the Office for National Statistics (ONS) said. This was the best growth since the three months to January 2019 and well above analysts’ expectations.
PMIs from Europe showed that France and Germany's economies were both seeing a recovery, with combined output growth at a five-month high, but other Eurozone countries saw business activity slowing to near-stagnation.
Demand from companies in the Eurozone to borrow money from banks fell for the first time in six years – a potentially worrying sign for the region’s stuttering economy.
New European Central Bank (ECB) president Christine Lagarde launched a major policy review. It came as the ECB’s governing council kept interest rates on hold at a record-low level and maintained the Bank’s massive bond-buying programme.
The White House has started work on a second round of tax cuts even as the budget deficit continues to grow, Treasury Secretary Steven Mnuchin said. “The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts,” Mr Mnuchin said. “They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.”
The annual Davos talking shop took place in Switzerland, with Donald Trump declaring that the US economy was the best it had ever been – and it was all, of course, down to him. John Redwood looks at what’s spooking attendees at the World Economic Forum here.
US impeachment managers continued to make their case that President Trump abused the power of his office. However, the Republican-led Senate is not expected to vote to remove the property magnate from the Oval Office.
Saudi Arabia denied that its crown prince Mohammed bin Salman was responsible for hacking Amazon boss Jeff Bezos' phone. A message from a phone number used by the prince has been implicated in the data breach but the kingdom's US embassy said the stories were "absurd" and called for an investigation. It was previously claimed the alleged hack was linked to the murder of Washington Post writer Jamal Khashoggi at the Saudi consulate in Istanbul. Mr Bezos also owns the newspaper that employed Mr Khashoggi.
Moody’s downgraded Hong Kong’s credit rating to “Aa3” from “Aa2”, saying its view on the strength in Hong Kong’s institutions and governance is “lower than previously estimated.” The agency, however, moved its outlook to stable from negative. “The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody's had previously assessed,” the agency said.
A third of retailers issued a profit warning last year following a “bruising” year for the UK high street. For the second year in a row, a third or more of the FTSE retail sector warned on lower profits over the course of 2019.
Is Britain losing its thirst for gin? Upmarket tonic maker Fevertree Drinks missed expectations in its Christmas trading update and cut its guidance for the second time in two months as a result. The UK’s decline in sales contrasted with a 33% jump in the US, a 16% climb in Europe and a 32% rise in the rest of the world.
Swiss bank UBS cut its profitability targets as Switzerland's largest bank grapples with ultra-low interest rates and increased competition for wealthy clients.
Geosciences company Getech said negotiations on several substantial transactions overran from December 2019. As a result, 2019 revenue is expected to be around £2m lower than previously expected, at £6m or so, compared to revenue in 2018 of £8.0m.
Nasdaq President and chief executive Adena Friedman and New York Stock Exchange President Stacey Cunningham both predicted strong demand for IPOs in 2020. Last year was plagued with some disappointing market debuts and failures including Uber, Lyft and WeWork.
Goldman Sachs won't take companies public anymore unless they have at least one "diverse" board member, the bank's chief executive David Solomon said. Goldman's push for diversity will be focused primarily on women: Over the past four years, initial public offerings of companies in the United States with at least one female director on their boards performed "significantly better" compared to those without, Mr Solomon said.
Julian Metcalfe, the co-founder of Pret a Manger, will float his Asian-influenced Itsu chain to fund a sizable expansion into the US. “We will float Itsu, as we have to, for it to grow to 1,000 stores over the next few years,” Mr Metcalfe said. There are currently 75 European branches of the chain, which mainly sells Japanese and Korean-style food, with a focus on low-calorie counts. It will open its second US location this summer.
There have been many Netflix bears as competition in the sector hots up, but the US streaming service held its own against rivals at the end of last year – passing its first big test since Apple and The Walt Disney Co launched rival services. The company added 8.8 million worldwide subscribers during its fourth quarter, surpassing expectations. Management said it expected to add 7.6 million subscribers. The shares fell immediately after the statement, as it issued a cautious forecast for the first quarter.
IBM shares rose after the technology giant turned in a surprise revenue gain, its first annual quarterly sales increase in more than a year.
United Airlines beat Wall Street estimates by 2 cents a share, with quarterly profit of $2.67 per share. The airline’s revenue was very slightly above expectations. United’s performance came despite numerous flight cancellations resulting from the grounding of Boeing’s 737 Max jet.
However, Southwest Airlines reported a 21% drop in fourth quarter profits due to mounting costs relating to the continued grounding of the Boeing jet.
The Bank of England will examine how Britain could adopt a bitcoin-style digital currency as part of a global group of central banks that have joined together to examine the possible pitfalls of relying on electronic money. Bank officials will meet with the Bank of Japan, the European Central Bank, the Sveriges Riksbank, the Bank of Canada, the Swiss National Bank and the Bank for International Settlements to pool research and experiences of the potential for a central bank digital currency.
Vodafone withdrew from the organisation overseeing Facebook’s efforts to launch its Libra digital currency, making it the latest in a string of big companies to abandon the project. Facebook’s Libra project has faced intense scrutiny from regulators and politicians across the world over the social media giant’s plans for the launch of the stablecoin — a digital currency backed by a basket of real-world assets. The telecoms operator is the eighth company to quit the Libra Association, following Paypal, Mastercard, Visa, eBay, Booking Holdings, Stripe and Mercado Pago.
Dutch-listed semiconductor equipment maker ASML unveiled a three-year share-buyback program of up to €6bn after profits soared in the final quarter of 2019.
Facebook is to create 1,000 new jobs in London by the end of the year. The new posts will take the tech giant's total number of UK employees to more than 4,000. More than half of them will be technology-focused, with roles in software engineering, product design and data science.
A new low-cost Apple iPhone – the SE 2 – will go into mass production in February, according to press reports.
Brent crude futures fell 4.8% to trade at about $61.70 over the week by mid-session on Friday amid fears that China’s coronavirus will erode fuel demand just as markets struggle with a fragile world economy and adequate supplies.
Cairn Energy said that 2019 production came in at the upper end of guidance. Combined oil production from the Catcher and Kraken fields averaged 23,000 barrels of oil per day, coming in at the top end of its guidance of between 21,000 and 23,000.
Monaco-based oil and gas consultancy Unaoil paid $6m in bribes to secure Iraqi oil contracts after the fall of Saddam Hussein, a London court heard. The UK Serious Fraud Office (SFO), which is prosecuting in the case, alleges that Ziad Akle, Stephen Whiteley and Paul Bond plotted with Unaoil's controlling Ahsani family and others to skew a tender process for oil projects between 2005 and 2011.
Antofagasta posted a 5.8% drop in fourth-quarter copper production, hit by supply and transportation disruptions because of civil unrest in Chile that started in October. However, full-year output hit a record high.
Mike Coupe will step down as chief executive of J Sainsbury at the end of May after six years at the helm. The UK’s second-largest supermarket group appointed retail and operations director Simon Roberts as his successor.
Walmart’s Asda will become the first UK supermarket to launch a one-hour click & collect service, following successful trials. Express Click & Collect will be rolled out to 25 stores by the start of February, with hundreds more set to launch by the end of the month.
Wm Morrison plans to axe around 3,000 managers in stores as it installs thousands of shop-floor workers. Heads of departments such as beer, wine and spirits chiefs are under threat of redundancy, with a final decision expected in March.
Dixons Carphone suffered from an embarrassing “clerical error”. The retailer had to reissue its Christmas trading figures to say sales went down, not up over the period. It issued a fresh statement for the last 10 weeks of the year, saying sales had fallen by 2% rather than risen by 2% as the firm had earlier reported.
Ted Baker said inventory on its balance sheet was overstated by £58m, more than double its preliminary estimate.
Shares in Asos jumped after a record Black Friday helped to increase sales by a fifth over the festive period. The online retailer beat market expectations, prompting suggestions it was "back on track" after a tough period.
Hotel Chocolat reported a big increase in sales for the second half of 2019. It said total group revenues during the 26 weeks to 29 December rose 14% from last year, while in the 13 weeks to the same date total sales were up 11%.
Budget retailer Matalan endured falling sales and profit at the end of last year, as it fell victim to the challenges facing the UK high street. The clothing and homeware brand said total revenue dropped 1.2% to £311.7m in the 13 weeks to 30 November.
WH Smith said sales in the 20 weeks to 18 January rose 7%, as more customers shopped at its outlets in airports and railway stations, but turmoil on the British shopping streets led to lower like-for-like sales.
The private equity owner of fashion retailer Reiss is mulling putting the fashion chain up for sale following a period of strong performance. Warburg Pincus has appointed investment bank Rothschild to launch a review of strategic options for the business, which could involve a sales process.
Shares in Just Eat fell following news that its proposed merger with Dutch group Takeaway.com will be investigated by the Competition and Markets Authority (CMA). Activist shareholder Cat Rock, which owns a stake in both companies, criticised the CMA’s decision. "Takeaway.com has no UK operations, exited its minor business there over three years ago, and has stated that it had no intention to enter the UK market before the Just Eat merger,” Cat Rock founder Alex Captain said.
Shares in plant-based meat group Beyond Meat soared this week on a story that can only be described as spurious. The jump came after Starbucks announced an environmental push to add more plant-based food and drinks to its menu and also more options in reusable packaging. There was no indication that the coffee chain giant would choose products from Beyond Meat. Its shares are up a staggering 757% in the year to date valuing a company with $75m of annual revenues at about $8bn.
Competition in the “meat-free meat” sector is also increasing. This week US food group Sysco launched a new plant-based burger and a ground “meat” option.
Private US group Memphis Meats, which grows meat from animal cells, raised another $161m in a new round of financing. The latest round of fundraising is led by SoftBank, Norwest and Temasek. It also includes flashy investors like Bill Gates and Richard Branson, as well as meat companies Tyson and Cargill.
Garry White asks if lab-grown meat is the next ethical investment fad here.
Burberry edged up its forecast for full-year sales after strong demand for designer Riccardo Tisci's new collections. The company said it now expected total revenue to grow by a low single digit percentage at constant exchange rates compared to previous guidance of broadly stable. Comparable store sales rose 3% in the quarter, it said.
Shares in Hong Kong listed fashion group Prada rose on speculation the company was up for sale. Co-chief executives Patrizio Bertelli and Miuccia Prada reportedly met Kering head Francois-Henri Pinault in December. However, a spokesperson denied the company was for sale.
Germany’s Hugo Boss said that sales and operating profit rose in the fourth quarter, buoyed by growing momentum in Europe.
Pub operator JD Wetherspoon posted a 4.7% increase in its like-for-like sales for the second quarter, joining rival Mitchells & Butlers in reporting strong performance during the key holiday season.
Airlines & transport
It was another bad week for US aircraft behemoth Boeing. Management revealed it did not expect to win approval for the return of the 737 Max to service until mid-2020. Boeing announced the delay after its shares were suspended following a report from CNBC. The shares fell almost 6% before trading was halted ahead of the announcement. Boeing said in a statement: “We are informing our customers and suppliers that we are currently estimating that the ungrounding of the 737 Max will begin during mid-2020.
Boeing is in talks with banks to secure a loan of $10bn or more, US reports suggested, as the company faces rising costs stemming from two fatal crashes of its 737 Max planes. The aircraft maker suspended production of the troubled planes this month as the grounding stretches into its eleventh month.
Short-haul carrier easyJet raised first-half revenue guidance after outperforming expectations for passenger revenue, helped by the collapse of Thomas Cook. Total revenue for the quarter rose nearly 10% to £1.43bn. Passenger numbers rose 2.8% to 22.2m, driven by a 1% increase of capacity to 24.3 million seats. The airline’s founder and biggest shareholder, Sir Stelios Haji-Ioannou, said he planned to vote against the re-election of the company’s chairman to express his view that higher profits should be prioritised over capacity growth.
UK rail operator Stagecoach took the government to the High Court, arguing ministers acted unlawfully in awarding rail franchises. Last year, Stagecoach and its partners were barred from bidding to run three franchises in a row over pension liabilities. Stagecoach is seeking compensation, as well as a judicial review, which could see franchises already awarded being declared invalid. Stagecoach's legal action is backed by its bid partners, Virgin and French state-owned operator SNCF, as well as rival operator Arriva. Arriva settled the legal action on Tuesday.
Europe’s car sales are likely to decrease this year, according to the European automotive industry association ACEA. Car registrations are projected to drop two per cent in 2020, which would be the first drop in seven years.
Elon Musk had another good week. Tesla’s valuation hit $100bn for the first time, meaning Mr Musk is a step closer to earning the first $346m tranche of options in a record-breaking pay package. The $100bn valuation needs to stay for both a one-month and six-month average in order to trigger the vesting of the first of 12 tranches of options granted to Musk to buy Tesla stock. The package is worth about $50bn in total.
Cruise, the self-driving car start-up, majority-owned by General Motors, unveiled its first driverless vehicle. The electric-powered Cruise Origin was developed by Honda, which also has a stake in the company. The vehicle, which has no steering wheel or pedals is designed for shared ownership. "It's not a product you buy, it's an experience you share," Cruise said.
Germany’s Daimler said that its earnings almost halved last year and it would book additional expenses of up to €1.5bn related to Mercedes-Benz’s diesel issue.
AstraZeneca revealed that its Imfinzi (durvalumab) and tremelimumab, an anti-CTLA4 antibody and potential new medicine, have both been granted orphan drug designation by the Food and Drug Administration (FDA) in the US for the treatment of hepatocellular carcinoma, which is the most common type of liver cancer. An orphan drug is a pharmaceutical agent developed to treat medical conditions which, because they are so rare, would not be profitable to produce without government assistance.
Smith & Nephew bought California-based Tusker Medical for an undisclosed sum. Tusker makes ear tubes that can be inserted by doctors under local anaesthetic to treat infections in young children. S&N said it would fund the purchase from existing cash and debt facilities.
Broadband provider Cityfibre will now acquire Fibrenation, Talktalk’s fibre networks rollout business, for £200m. The deal, which was delayed in November after Labour announced plans to nationalise BT Group, means that Cityfibre’s rollout target has risen from 5 million up to 8 million premises in the UK.
Hipgnosis Songs Fund, a music investment vehicle listed in London, has bought 362 songwriting credits of Brian Higgins. Mr Higgins wrote Girls Aloud's Sound of the Underground, the Sugababes' Round Round and Cher's hit Believe.
BAE Systems has announced two deals as it seeks to grow its electronics systems business. It has agreed to buy Collins Aerospace's Military Global Positioning System business for $1.925bn and Raytheon's Airborne Tactical Radios business for $275m. The deals are subject to the successful completion of the Raytheon-United Technologies Corporation (UTC) merger, as well as regulatory approval.
Rolls-Royce plans to install and operate factory-built mini nuclear power stations by 2029. Mini nuclear stations can be mass manufactured and delivered in chunks on the back of a lorry, which makes costs more predictable.
Housebuilder Berkeley Group said it plans to return £1bn to shareholders over the next two years, an increase of about £455m, while ramping up its annual housing delivery by as much as 50% over the next six years.
Retail landlord Intu needs to raise more cash and plans a fundraising that press reports said could be as much as £1bn. Following press speculation over the weekend, management confirmed an equity raising would be unveiled at its full-year results at the end of February.
UK house prices rose over the last month at the fastest rate on record for the time of the year, as sellers felt more confident about the outlook for the housing market after the general election, according to Rightmove. The average price of properties coming on to the market jumped by 2.3%, the biggest rise for the period since the property website started its house price index in 2002.
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Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.