Monthly Archives: November 2015

Angela Eagle: we’re all wrestling with our consciences on Syria

Shadow business secretary Angela Eagle would not reveal which way she wanted to vote on air strikes in Syria, but it was clear just how uneasy a topic this is for the deeply divided Labour party as she carefully picked her words.

“There’s no easy, right or wrong answer to Syria,” she said at the Confederation of British Industry’s Medium Sized Business Summit in London today.

“Every MP is wrestling with his or her conscience on what to do.”

Labour leader Jeremy Corbyn is holding meetings today (one just now at 1pm and the other at 6pm) to decide whether to whip MPs to oppose air strikes in Syria. A three-line Labour whip against military intervention would likely put prime minister David Cameron off holding a vote, but it could also trigger a flurry of resignations within the opposition party.

Even more cagey at today’s conference was Lloyd’s boss and City smoothie Antonio Horta-Osorio. I asked him whether the Bank of England’s decision on stress tests tomorrow (ramping up capital requirements, curbing excessive lending) would hinder the bank’s plans to expand its lending to small and medium sized businesses, but he wouldn’t comment further than saying he was “very confident” about tomorrow.

Northern Powerhouse? It needs teeth, says Liverpool-based conglomerate

Chancellor George Osborne made a number of funding pledges in last week’s Autumn Statement to drive his plan of a “Northern Powerhouse”, but Sir Michael Bibby is not convinced.

The managing director of Bibby Line Group, a Liverpool-based company that operates in everything from shipping, financial services and retail through its Costcutter supermarkets acquisition, urged for “more than just words” to support business in the region.

“We need clarity from the government on the Northern Powerhouse. We need more than just words on what they’re doing,” he told the audience at the Confederation of British Industry’s Medium Sized Business Summit in London today.

“As a concept it needs to get some teeth. We need some planning and real investment to happen.”

Bibby Line Group is a £1.715bn turnover business, operating in more than 20 countries and employing 6,500 people, according to the family-owned company’s website.

“We need a unified voice to talk to London and get the funding we need,” he added. “There’s nobody to do it at the moment.”

The comments contrast to the chancellor’s claims last week that he is making the biggest effort in 50 years to close the north-south divide.

The so-called “devolution revolution” aims to give local councils more powers on areas such as business rates, but so far just six out of 38 city regions have struck devolution deals. George has promised funding to improve issues such as transport links between northern cities, but critics say it is simply not enough.

Sir Michael also urged for more clarity from the government on its stance on offshore wind farms in the North Sea, on the day that climate change talks kick off in Paris, with all the world’s leaders in attendance.

“We’re willing to invest there but we need support from the government,” he said.

Allianz GI’s UK equities fund manager on the merits of oil and why defensive stocks are losing their edge

In the first of Hot Commodity’s investor series, I chat to Simon Gergel, chief investment officer, UK equities at Allianz Global Investors, about which stocks are set to become a hot commodity next year and which ones will be yesterday’s news…

Simon says: oil majors

The fund manager is pretty bullish on large oil companies, which suggests that the sector is suitably distressed enough to become attractive. Simon thinks the oil giants are in a more promising shape than oil itself, as the depressed pricing environment has made the likes of BP and Shell cut costs and improve their business models. Although he is expecting the price of oil to rise in the medium term.

So will Allianz GI be ramping up its allocation to oil-focused equities? Simon did not rule this out. “We’ve already got quite a big position on oil companies and we have increased our position before,” he says.

Simon says: copper

Surprisingly commodities are not the pariah one might expect in the current pricing climate, dragged down by the growth slowdown in China. Or should I say SOME commodities. “It’s dangerous to generalise”, says Simon.

“A lot of production has been taken out of copper this year. It is much tougher to increase output for copper than for some other metals such as iron ore, as it uses deeper and more difficult technologies”, he says, the implication being that tightening supply will push up the price. “It is also less dependent on Chinese infrastructure. We’ve bought [FTSE 100-quoted Chilean copper miner] Antofagasta in the last six to nine months.”

Simon says: leisure

Other sectors on the Christmas wish-list are leisure stocks, such as gambling firms William Hill and Ladbrokes, cruise company Carnival, pub chain Greene King and satellite firm Inmarsat – “I see growth in marine and aviation communications”.

I asked Simon what he thought about fund guru Neil Woodford’s bullish stance on tobacco and healthcare.

“The problem with tobacco is that the valuations are so high now,” he says. “The product is on the decline in most parts of the world.”

Simon likes GlaxoSmithKline – “the Novartis deal transformed the business” – but that’s the only pharmaceuticals stock in his portfolio.

So what is leaving him cold?

“Defensive stocks/bond proxies have done well at a time of low rates,” he said. (Bond proxies are companies with healthy dividend yields and low volatility, that are seen as a safe-ish bet in poor market conditions).

But with rate rises imminent in the US and the UK, which will increase bond yields, Simon expects defensive stocks, including the likes of Unilever and Reckitt Benckiser, to become less attractive.

Simon expects an EU referendum in late spring/early summer. “Uncertainty around a Brexit could lead people to focus on global companies, which are less dependent on the UK economy,” he says.

Telco M&A: bigger, faster, more expensive

The telecoms sector is set to see more deals over the next year with larger values, according to a senior banking source.

Telecoms companies just can’t keep away from each other. EE and BT, O2 and Three…with high costs and low returns, the sector has been ripe for consolidation.

My source tells me that he expects to see bigger M&A deals in the UK and Europe, both in-market and cross-border, within the same products and across different product lines.

As long as the macro environment behaves itself, that is.

Troubles in the capital markets could hit the sector hard, with corporates quick to cut down their telecoms costs in the event of a financial downturn.

This year has seen ramped-up regulatory scrutiny from antitrust watchdogs in the UK and EU on telco mergers (like the two deals mentioned earlier) and this is likely to increase, he adds.

Desperately seeking financing: Nigeria in trouble

How do you solve a problem like Nigeria? Long touted as the jewel in Africa’s crown in terms of economic potential, the country’s bad debts and a domestic liquidity crunch are showing no signs of abating as long as the low oil price persists.

Brent crude futures edged down to around $43.63 yesterday evening, which is not a million miles away from August’s six-and-a-half year low of $42.23. I’m pretty bearish on oil and wouldn’t be surprised to see the price slide wayyy down over the coming months – the underlying pressures just aren’t going away.

The Nigerian economy, which is heavily dependent on oil, can’t break even at these prices and its currency has crashed. The central bank is rationing its foreign currency reserves, causing major problems for companies who borrowed in dollars and need to pay off their debts.

Multinational oil companies such as Shell and Chevron had already sold off their assets in Nigeria to local firms, who borrowed money to buy them and are now the ones saddled with this bad debt.

With such limited liquidity in Nigeria, it’s the international market who is providing the refinancing – mainly banks and private equity. And a well-placed source tells me that he expects more London listings for Nigerian companies, who can’t raise money on the teeny Nigerian stock exchange.

Will institutional investors come to rescue Nigeria from its debt debacle? It’s not the safest bet, but I expect that there is money to be made for those willing to take a long (long, long…) view.

Meanwhile Nigeria is facing a major fuel crisis. Despite its plentiful oil reserves, the country imports its petrol as it does not have the capabilities to refine it. Importers are now withholding petrol after an alleged payment dispute with the government, causing lengthy queues of angry motorists at petrol stations.

Nigeria needs to get a grip on its resources and build some refineries. Of course, to do this it needs reliable power generation, another problem the country is yet to address. And is unlikely to do so as long as its liquidity woes continue.

Why we need to give up on UK steel

As Jennifer Aniston’s relentless array of terrible movie roles demonstrates, sometimes you just need to accept something isn’t working, will never work and move on. Because if you don’t, you will be throwing money down the drain that could be better spent elsewhere and will inevitably look back on it as a costly mistake.

Just as Jen should put the rubbish rom-com scripts down, the UK’s steel industry needs to accept its shortcomings and cut its losses.

Over the past few months, mill closures and job cuts have grabbed headlines, with the UK’s steel crisis blamed on a handful of things: the dumping of cheap steel from China; high energy costs; a strong pound; and high business rates for capital intensive firms.

Out of these factors, China has broadly been seen as the largest culprit in making UK steel unprofitable. After a slowdown in the world’s second largest economy, the People’s Republic has had a surplus of steel on its hands that it has been offloading for a cheaper price. Plentiful state subsidies give Chinese steelmakers an even more unfair advantage in the global market, its critics say.

I’m not disputing the validity of these arguments. China is a big problem. Energy costs and business rates are higher for steelmakers here than overseas. But I do not see any way that UK steel could become truly profitable without heavy state subsidies.

The industry has received £50.4m from the UK government since 2013 to offset environmental levies and is currently waiting for EU state aid approval for the Energy Intensive Industry Compensation Package, which will provide hundreds of millions of pounds for energy-intensive industries including steel.

And the sad truth is it would take even more than this to keep it afloat, due to the myriad of problems hammering the sector.

European politicians have this week promised “full and speedier” measures to address Chinese dumping, but knowing Brussels bureaucracy this is likely to be nothing near speedy, if anything is achieved at all.

Even if China were tackled AND the UK government lowered business rates AND energy rates, you still have the strong pound to worry about – and the fact that it’s cheaper transportation-wise to make steel in countries such as China, which are closer to where iron ore is mined, especially as the end-user is often in the Far East.

For me, the situation draws immediate parallels with UK coal. We still get a significant part of our energy from coal, yet our coal-fired power plants continue to shut down. Instead, we rely heavily on cheaper, imported coal. We simply can’t compete on price.

It may seem harsh to want to curtail support for domestic industries and I am not intending to diminish the devastating impact of job cuts on local communities in any way. But the UK needs to look to its strengths and replace investment in loss-making industries with investment in new ones.

Rather than provide a temporary panacea for steel plants with a support package that will inevitably run out and need renewing, why does the UK government not invest in the communities affected, providing new jobs in more sustainable industries?

Giving up on UK steel does not mean giving up on UK industry – it’s about adapting to our strengths and accepting our weaknesses.

Tesco chief lashes out at “unsustainable” business rates

Tesco boss Dave Lewis today blasted “unsustainable” business rates on the retail sector and called for urgent government reform.

The chief executive of the supermarket chain told the CBI annual conference that high business rates, combined with the National Living Wage and other policy changes such as the apprenticeship levy, needed to be addressed, or “I fear that it’s communities all over Britain that will suffer”.

“Over last five years property values have fallen, profits are down but business rates are up. Quietly but dramatically,” he said.

“Business rates have hit £8bn for retail. That’s over a quarter of the bill and significantly more than any other sector. That’s an enormous pressure. Shops have closed. Businesses lost. Jobs sacrificed.

“Our own business rates bill has increased by well over 35 per cent in the last 5 years. It’s the biggest tax we pay and it is now three times OECD average. For every £1 we pay in corporation tax large UK retailers pay £2.31 in rates. It’s unsustainable and needs urgent reform.”

Dave called for a re-assessment of how business rates are calculated, including the regularity of reviews and moving from RPI to CPI inflation.

The boss warned that the National Living Wage – the new, higher hourly minimum wage – could come at the expense of benefits packages and said that “collecting taxes through mechanisms like the apprenticeship levy…wipes out the equivalent of our whole training budget”.

Dave, who repeatedly referred to himself as a “new boy” to retail with a “fresh” take on the sector, eschewed suggestions that the supermarket’s turnaround was not working, despite admitting that “the profitability of Tesco in the second half of last year was zero in the UK”.

Tesco, like the rest of the big four, has been struggling to maintain market share and profitability in the face of strong competition from budget discount chains Aldi and Lidl.

Welcome to Hot Commodity!

Welcome to my finance blog Hot Commodity – because the most valuable commodity is information!

To kick off proceedings, I’m here at the Confederation of British Industry’s annual conference, where an interview series on ‘disruptive innovation’ showed that there is certainly some tension between the old and the new when it comes to the short-term rental market.

Andy Harrison, chief executive of Premier Inn-owner Whitbread, is calling for the government to level the playing field for its hotel chain against controversial new pretender Airbnb, which allows people to rent out their spare room or flat on a short-term basis.

“The government is not keeping up with the pace of change in technology,” he told the packed room at Grosvenor House on Park Lane.

Andy said he had done his own research on Airbnb and found that there were a number of hosts with multiple properties available – some as many as 13. He questioned whether these “professional landlords” were properly regulated so that they feel “the same degree of accountability” as the likes of Premier Inn.

Unfortunately Andy was not directly pitted against James McClure, general manager for UK and Ireland at Airbnb, who spoke earlier during the session and would have made for a more interesting debate. When questioned about the amount of tax its hosts pay in the the UK – particularly relevant considering that Airbnb was forced to share data about its Irish hosts with the authorities recently – James gave a politician’s answer and simply said “we have a very good discussion with HMRC”.  With a clamp-down inevitable here in the UK it’s unsurprising that James was cagey.

While Andy eschewed the suggestion that Airbnb was eating into Premier Inn’s margins, he did concede that the company is investing heavily online – “we’ve got 30 people in jeans and t-shirts doing digital marketing that we just didn’t have a few years ago,” he announced proudly. Ahem.

More conference news to come…