Week Ending 3rd December 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Middle East Africa China Latin America Russia & Eastern Europe South Asia
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18
Agriculture & Resources Energy
Currencies 20
EUR, USD, GBP
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Week Ending 3rd December 2017
MACRO REVIEW United Kingdom On Monday the Bank of England (BoE) announced that the UK’s biggest banks could cope with a “sharp, disorderly” exit from the European Union, referring to the “unlikely event” of a no deal at the end of the negotiation period. This is because, for the first time since the financial crisis, all of the biggest lenders have passed the stress tests designed by the BoE, with RBS and Barclays passing after improving their financial positions since 2016. The tests are designed to present adverse economic conditions and see if the banks would still have enough money to lend and support the economy. This appears to be positive news. However it is important to note that the tests simulate very adverse conditions, such as a 33% fall in house prices, a doubling of the unemployment rate, a 25% drop in the value of the pound and a sharp interest rate hike to 4%. If these conditions were to be realised, the UK economy would be in a dire situation. The value of the alternative currency, Bitcoin, has experienced volatile movements in its value this week, reaching a high of $11,434 (£8,500) on Wednesday, before falling sharply by 16% to $9,600 on Thursday. The value of
Bitcoin has been rising steadily this year, with some suggesting that it indicates an economic bubble (where investors pay an inflated price for an asset whose true value is below its trading price). There is the potential for an economic shock if the Bitcoin asset bubble were to burst, due to its rapid rise in price and demand. Opponents to this argument suggest that transactions in Bitcoin are not large enough to pose any significant threat to the wider economy however. Despite passing the BoE’s stress tests earlier in the week, RBS announced on Friday that it was going to close 259 branches. Whilst RBS promised to keep compulsory redundancies to “an absolute minimum”, this decision would nevertheless result in 680 job losses. The rationale behind the closures is due to the increasing switch to online banking by consumers. It is possible that this is the first of many announcements by high street banks, if the switch to online banking is a structural and persistent issue in the financial industry, which is reasonable to assume. Deevya Patel
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NEFS Market Wrap-Up
United States Figures released this week showed that GDP has grown significantly in the USA. However this positive data was largely overshadowed by news of collusion with Russia. Statistics released in Canada this week illustrate a mild slowdown in growth but an overall positive outlook for the economy. Data released on Wednesday 29th revealed that GDP for the USA grew at an annual rate of 3.3% in the third quarter of 2017, up from 3.1% the previous quarter, according to the Commerce Department. This is the fastest pace of growth the US has experienced since 2014 and marks the first time there has been two consecutive quarters with 3% or more growth since said period. The increase in growth was higher than the expected 3.2% predicted and strengthens the argument for further interest rate increases next month. Michael Flynn, Donald Trump’s former national security advisor, pleaded guilty to lying to the FBI over collusion with Russia on Friday 1st and is set to testify against Donald Trump. Flynn claims that Trump directed him to make contact with Russian officials when he was a presidential candidate. This has large ramifications for Trump, as the formal admittance of collusion suggests that there may have been further cooperation with Russian officials, which could cast doubt over Trump’s presidency if found to be true.
Markets reacted negatively to the news of collusion. Subsequently, the Dow Jones fell 300 points and the dollar fell by more than 0.5% against a basket of major currencies. The markets did however rally somewhat following Senate leader Mitch McConnell’s announcement that the Republican tax bill would have enough votes to pass, as fifty GOP members have stated that they would support the bill. Meanwhile, figures released on Friday 1st by Statistics Canada illustrate the strength of the Canadian economy as unemployment fell by 0.4% to 5.9% in November. This is the first time unemployment has fallen below 6% in Canada since 2008 and is significantly lower than expectations, with Reuters predicting unemployment to be 6.2%. The improvements in unemployment were largely driven by increases in construction, manufacturing, and wholesale and retail trade. Despite the positive unemployment data, Canada’s GDP growth fell to 1.7% from 4.3% for the third quarter of 2017. This fall in growth was largely due to a 2.7% fall in exports and a reduction in residential structures investment. Nicholas Gladwin
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Week Ending 3rd December 2017
Europe “The economic expansion remains solid and broad-based across countries and sectors in the euro area” This statement from the ECB’s president Mario Draghi boasts of unabated growth momentum supported by strong domestic demand seen so far in Europe for Q4. However many fear that the success of Europe’s recovery may only be superficial, considering the unpredictable nature of this boom and the greater-than-expected resilience of the Eurozone in escaping the financial crisis. While the crisis revealed major underlying flaws which the ECB has since taken measures to correct, governments have been unable to compensate for the last decade of monetary policy inertia. The macroeconomic needs of member states are still not being met entirely, with its leaders bound by a fiscal compact signed in 2012. Banks are stronger than they used to be, but arguably not strong enough. Europe’s bankers must now consider whether the avalanche of subsequent regulations will ever cease. The European Commission (EC) is making strong efforts to prevent the loop in which weak banks and sovereigns drag each other down, seen in reforms outlined by Basel III (namely PSD2, MiFID2 and IFRS 9). However these reforms only weaken the loop; to sever it, the EC wants to go further.
The Payment Services Directive (PSD2) allows consumers to more easily compare financial services, thus reducing existing monopoly powers and promoting consumer welfare. As retail banks start gearing up for PSD2, investment banks will be grappling with the new Markets in Financial Instruments Directive (MiFID2), which is intended to make financial markets more transparent by forcing more derivatives onto centralised exchanges. The newest International Financial Reporting Standard (IFRS9) is the last of the aforementioned changes that European banks are obliged to make, concerning provisions for expected loan losses. In total there are five main sets of rules which are either about to be introduced, are near completion or are due for reform – targeting competition, tighter trading rules and boosting capital requirements – as a means of completing the banking union. Although vital to producing a healthier and more robust banking system, bankers may (understandably) be less enthused by the expansion of the post-crisis regulatory environment. Whether the last leg of Basel III will be both necessary and sufficient to propel recovery further may be but a test of time. Amelia Hacon
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NEFS Market Wrap-Up
Japan & South Korea Earlier this year, trading economics reported South Korea’s household debt stood at 93% of GDP in the second quarter of 2017. This is part of a much wider problem in Asian markets of funding growth through unsustainable borrowing. For this reason, on the 30th of November, the Bank of Korea announced interest rates would rise for the first time in six years. Following pressure from the Federal Reserve to deal with the growing debt that plague so many Asian economies, interest rates have now been set at 1.5%. However, with rising interest rates will come a fall in borrowing and hence consumption. This could prove damaging to the South Korean economy as inflation rates are already at an 11month low of 1.3% (as seen in the graph below). This dramatic fall could pose potential problems, similar to that of Japan and their battle against disinflationary pressures. The Bank of Korea however are looking to rebalance household debt through other means. The same day that these new rates were announced, the BBC reported that the South Korean government was to write-off the debts of as many as 1.6 million people. This should help boost consumer confidence and
hopefully help to counteract consumption falls caused by the rising cost of borrowing. Despite these policy changes South Korea has recorded strong growth results for the most recent quarter of 2017. On Thursday, it was reported that South Korea surpassed initial growth forecasts for Q3 – despite this forecast being the highest rate of growth the nation would have accomplished in the previous seven years. Growing at 1.5% in the three months leading up to September, GDP has now grown 3.8% in annual terms (again surpassing the initial forecast of 3.6%). The main drivers behind this faster growth were boosts in consumption and investment. Consumption grew at 0.8% while investment grew at 1.5%. However the importance of consumption and investment in growth, as well as the recent contraction in exports and imports, poses further worries as to how South Korea will deal with rising interest rates. Laura Leng
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Week Ending 3rd December 2017
Australia & New Zealand This week the Australian Prime Minister, Malcolm Turnbull, announced a year-long royal commission inquiry into Australia’s banking and financial sectors, which will cost the Australian taxpayer A$75m (£42m). This follows almost a year of the Prime Minister refusing to call a royal commission amongst mounting pressure from the government and other groups. Since the financial crisis of 2008, the largest Australian Banks (known as the Big Four, including Commonwealth, Westpac, National Australia and ANZ) have felt a large degree of public scepticism. Various issues that the Australian public have with the banking sector include poor and misleading financial advice, high fees, money laundering and rigged interest rates. On Thursday the Prime Minister received a letter from the Big Four banks detailing how “it is in the national interest for the political uncertainty to end|, thus calling for an inquiry. It is hoped that this will shed some light on the misconduct that the banks have been accused of in recent years. The Big Four banks in Australia hold 80% of Australian loans and embody over a third of the country’s stock market value. In the words of Malcolm Turnbull, they are
therefore “the bedrock of the economy”, hence making the restoration of public confidence central to Australia’s economy remaining stable in the future. Although necessary, the inquiry remains a very unpopular option for most people involved. The banks themselves have previously said they do not want it to go ahead because they claim to have put right their past misconducts. In reality, it is likely that they are not keen because the year-long inquiry is expected to produce many months of negative publicity for the banking sector. Following the announcement on Thursday, Australian S&P/ASX 200 index fell by 0.6%, with financials being responsible for over half of the losses. The Commonwealth Bank of Australia even fell to its lowest figure of 2.1% since the 8th of November. The Australian Government hopes that the inquiry will end the political uncertainty that has plagued the Nation for years through high levels of distrust and doubt. For now at least, the future of many homes, savings and loans rests in the hands of a deeply untrusted financial industry. The report will be returned to the Government by February 1st 2019. Abigail Grierson
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NEFS Market Wrap-Up
EMERGING MARKETS
Middle East This week saw the Organisation for Petroleum Exporting Countries (OPEC) meeting in Vienna, which concluded that there would be oil production cuts for an additional 9 months from January 2018 to December 2018. The campaign to reduce oil production is to wrest back control of the global market from America’s shale industry. To date, OPEC consists of 14 members, with the big boy of the group (Saudi Arabia) accounting for more than 30% of OPEC’s production in October 2017. Since the pact started a year ago, global inventories have fallen and prices have risen by more than $20 a barrel. By keeping cuts of 1.8 million barrels a day in place for an additional 9 months, the oil producers aim to return stockpiles to their five–year average without overheating the market. Libya and Nigeria, previously exempt from cutting production due to internal strife, also agreed to the collective cap on their output. Jan Edelmann, an analyst at HSH Nordbank in Hamburg, said that the inclusion of these two countries is a positive sign that removes uncertainty about oil supply in 2018. For Saudi Arabia, who was warned by an IMF report in early November that the country will need to sell oil at $70 per barrel in order for the country to fully fund
its 2018 budget, OPEC dominance is facing challenges in Saudi oil policy and Aramco. Unlike most other countries in its region, Saudi Arabia does not take revenue from the sales of its country’s oil to deposit directly into its treasury. The money first goes to Aramco, Saudi Arabia’s national oil company. As a largely independent corporation, Aramco earns money and then pays some of that money in taxes, fees and royalties to the Saudi government. For a while, these payments to the government amounted to somewhere between 85% and 93% of Aramco’s profits. Last year, the tax was lowered to 50% in preparation for an IPO. Aramco is also posing a challenge as it has the lowest cost of production of any oil company in the world due to its comparative ease of access, being between $2 to $10 per barrel. Saudi Arabia is also changing where its government spends its money. The government is moving away from a welfare state model to instead spend more on programs intended to promote economic growth. Hayati Sharir 8
Week Ending 3rd December 2017
Africa This week we will be taking a look at Kenya, where Uhuru Kenyatta has been sworn in as president for a second term after months of political turmoil. Uhuru Kenyatta was declared the winner of a controversial repeat presidential election in October, after the result of the August general election (also won by Mr Kenyatta) was viewed to have been rigged. The opposition candidate, Raila Odinga, thus appealed to the Supreme Court, where Judges later agreed that there had been illegalities and the August general election results should therefore be nullified. There have been two petitions calling for the nullification of the repeated October election, which were unanimously rejected by the Supreme Court. There is a big question of the credibility of the whole process, with confusion surrounding turnout, the intimidation of Supreme Court judges and a boycott of the repeated election by Mr Odinga (Mr Kenyatta’s main opponent).
The political crisis has had a detrimental impact on the Kenyan economy, with growth having slowed down and investment decisions being postponed due to the uncertainty around the country. Mr Odinga has led a “national resistance movement”, involving boycotting three major companies within Kenya. The decision to clear the way for Mr Kenyatta has also led to a great deal of violence between the supporters of Mr Kenyatta and the supporters of Mr Odinga. Reports suggest that around 70 people have died as a result of this violence since the flawed election that took place in August. Mr Kenyatta reached out to his opposition during his speech, stating that he will listen carefully and is open to the ideas that they hold. He stated that his priorities for his second term would be achieving universal healthcare, building affordable housing, developing manufacturing industry and creating jobs. Abdul Akhtar
The withdrawal of Mr Odinga in the repeated elections led to deadly protests by his supporters during the time of the elections, which led to no voting taking place in 25 of the 290 constituencies. Mr Kenyatta won the election with 93.8% of the votes, but Mr Odinga’s withdrawal and call to supporters to boycott the vote meant that the turnout for the election was 38.4%, which was half the turnout for the original election in August.
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NEFS Market Wrap-Up
China In this week’s wrap-up, questions about the fairness of China’s competitive edge, and worries about a once-promising innovative industry. Tencent, China’s answer to America’s social media giants, has surpassed Facebook in market value, becoming the first company in China to be worth more than $500bn. It is now the world’s fifthmost valuable listed company. Tencent owns WeChat (a messaging app with 1bn users) and Supercell, the maker of Clash of Clans - two names you may have heard of, amongst many other holdings. It also owns large stakes in Snapchat and JD.com. G20 nations have come together to form a deal which tackles over-capacity in the steel industry, which resulted in the UK’s steel crisis 2 years ago. China was responsible for the production of 0.8bn tonnes of steel, half of total world production. Neoclassical economists would call this great competition – if it were not that the production was hugely subsidised by the Beijing government. China has frequently been slated for not competing fairly in world markets by many nations, foremostly America (which even formed a great part of Donald Trump’s presidential campaign). Artificially and unsustainably low prices for steel result in a hugely detrimental effect on firms that may neoclassically perform stronger than those in China and yet do not reap the benefits. China has been pioneering the future of dock-less bicycles, hailed by critics as the ‘Uber for bikes’. Its two best bicyclesharing firms, Ofo and Mobike, have together raised $2.2bn of capital and are each valued at more than $4bn. Bike-
sharing has been pioneered by China and may soon become more commonplace across the globe. It could be a solution to the environmental and congestional concerns that urbanisation brings.
Above, however, is a picture of one of China’s ‘bike-sharing graveyards’ – captured this week by a photographer in Xiamen. The pile contains thousands of bikes from Mobike and Ofo, as well as Bluegogo – a now bankrupt firm. Concerns are piling that there are too many bikes and not enough demand. Bluegogo was China’s third largest bikesharing company, and it ceased service two weeks ago, whilst still holding riders’ deposits. It fell out of the market with no responses to customers, claiming that the owner had ‘left the country’. It may have been Bluegogo’s puny $90m in funding was no match for its massive competitors. Or perhaps demand is simply not there in a once-promising industry. Matthew Chapman
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Week Ending 3rd December 2017
Latin America This week Brazil released data on economic growth and unemployment. Additionally, Mexico has appointed its next central bank governor. Brazil experienced an expansion in economic growth in the third quarter at a lower-than-expected rate of 0.1%. Despite missing market expectations of 0.3%, GDP has increased by 1.4% compared to the same period last year. The main driver of the expansion is Brazil’s rebound in investment following a continuous reduction in interest rates. Capital investment rose by 1.6% from the second quarter, its fastest pace since 2013. The three consecutive quarters of growth, shown in the diagram below, highlight the economy’s recovery following its worst ever recession. Moreover, Brazil is expected to see a rise in retail sales this Christmas. Before the recession the economy was one of the world’s most attractive consumer markets due its unique culture of instalment payments for credit card purchases. However the scheme has encouraged overspending and, combined with a lack of savings, has caused household debt to dramatically increase. As the economy emerges from recession, many Brazilians have started to repay debts and take out credit again. This has improved retail sales, which rose to 6.4% year-on-year in September.
Another boost to household spending is the nation’s falling unemployment rate, which experienced a fall to 12.2% in the three months to October. The fall is attributed to a rise in informal employment. Despite the economy’s positive outlook, maintaining a steady pace of economic growth could be a challenge due to the unpopularity of Brazil’s President, Michel Temer. Temer has attempted to pass reforms on Brazil’s generous pension system, however has also received allegations of corruption. With an approval rating of 3%, the president will struggle to push through with these reforms and campaign to continue them following next year’s presidential election. In Mexico, Alejandro Diaz de Leon, deputy governor of the Bank of Mexico, has been appointed the next central bank chief following the departure of Agustín Carstens. The Goldman Sachs chief economist for Latin America called Diaz de Leon a “very solid choice”. However the governor will be faced with controlling above target inflation and an exchange rate that has been fluctuating amidst threats regarding the North American Free Trade Agreement. In his first interview in the role, he stated that although the bank’s main challenge is to get inflation to its 3% target, inflation may not fall further due to recent and future shocks. Jessica Murray
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NEFS Market Wrap-Up
Russia & Eastern Europe This week’s article will focus on China’s ‘One Belt, One Road’ (OBOR) initiative in Eastern Europe, after Chinese Premiere Li Keqiang announced on Tuesday 28th that “funding worth over $3 billion [will be provided] for development and investment projects in Central and Eastern Europe”. This follows the launch of the €10 billion Sino-CEE private equity fund last November by the Chinese government, designed to contribute to sustainable economic development in the region. On Monday 27th, China’s premier and 16 leaders from countries in Central and Eastern Europe attended the 6th annual “16+1” summit in Budapest. The summit confirmed China’s goals to extend its impact in CEE and highlighted the resulting emerging ties between the Far East and the region. For less-developed Eastern European economies, such capital could aid key infrastructure developments with little government spending involved. Dr Kent Deng, associate professor at LSE, stated: “Chinese technological and constructions expertise comes at roughly a third of the cost of western options”. Discussions on a new high-speed railway, which will link Budapest to Belgrade and will become the primary route for Chinese products coming by sea through Greece, led the summit this year. The $2.1 billion project will mostly be funded by China’s Exim Bank. The bank has also granted a €613 million loan to EPBiH (a Bosnian energy firm) for a new coal-fired power station.
in return for cheap Chinese capital. According to Peter Schwarz, “the percentage of Chinese imports [in Eastern Europe] rose from less than 2% to more than 6%” from 2009 to 2014, with Hungary and the Czech Republic importing “more goods from the Far East than they do from France, Italy or the Netherlands”. Though total intended Chinese investments are projected at $15 billion, current investment remains modest. The €10 billion in the Sino-CEE fund has not yet been spent, as the Chinese government concerns itself with a tight budget and prioritises imperative foreign policy matters over its promises to Eastern Europe. Furthermore, Chinese investment flows are dwarfed by predicted EU budget transfers of $150 billion for the period 2014-2020. Eastern European countries still welcome investment from China. However there are major concerns arising, including the inflow of Chinese capital as a potential means of obtaining influence over the bloc’s consensus vis-à-vis the disputed South China Sea, China’s human rights record, and imposing environmental controls. The divisive effects of China’s involvement are clearly visible, as beneficiaries display opposition to all sanctions against China, whilst the populist governments of Hungary, Poland, Slovakia and the Czech Republic use the situation to obtain some autonomy from the European Commission. Felicia Bogdana Cornelia Ababii
These agreements will see a rise in trade, as countries in the region purchase goods
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Week Ending 3rd December 2017
South Asia The Nepalese went to the polls on the 26th of November to elect their first formal parliament for the first time since 1999. The results will be determined after a second electoral phase on the 7th of December, hence marking a significant step in the country’s transition to become a federal republic. Voting proceeded largely unhindered, but several small explosions were set off near polling areas, calling back memories of the civil war. India and China both have a stake in the outcome of the election. The Nepali Congress and an alliance between the two major Communist parties are contesting for control of the government. The former is considered pro-India, and if it wins it could result in dearly needed infrastructure deals with the South Asian power. The two countries are closely tied economically as they share a 1,800-km border. India provides 90% of Nepal’s imports. India, as well as China, will hope to gain access to Nepal’s potential for generating hydroelectric power. China has also offered to extend infrastructure aid, and will be hoping that the Communist party coalition wins in the polls. Earlier this year, the Chinese Gezhouba Group, in which the party-state owns a large stake, attempted to sign a US$2.5 billion deal for the Budhi Gandaki Hydropower Project, but the Nepali Congress-controlled government scrapped the deal.
Pursuant to its Belt and Road Initiative, China will look to reinstate this project if a more sympathetic government is formed. The chairman of one of the Nepalese Communist parties claims the alliance will win a two-thirds majority of the vote. The Asian Development Bank (ADB) has issued a US$90 million bond to finance many projects that help to combat poverty and increase social participation for women in Asian countries. Japan’s DaiIchi Insurance bought the entirety of the first issuance of the bond, on which it expects a yield of 0.9%. Among the projects funded by the sale of the bond is an initiative to provide credit and financial training to women in Bangladesh who are starting businesses. The bond issuance reflects the ADB’s recognition of the importance of fostering sustainable development by empowering all individuals in a society. In South Asia, women are typically poorer than men, earning 70%-90% less in wages. The World Bank forecasts that output per worker could rise 7-18% if women were given the same opportunities and access to productive resources. Daniel Blaugher
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NEFS Market Wrap-Up
EQUITY AND DEALS
Financials The S&P 500 ended November 2.8% higher, with soaring bank and insurance shares on Wednesday driving the financial sector of the S&P up 2.6%, to hence give the index its best single day gains since March. This week Bank of America experienced a 4% increase in its share price and Citigroup rose 3.2%, with JP Morgan and Goldman Sachs also posting significant gains. The index was up for the eighth consecutive month which is its longest streak since January 2007. The Dow also recorded monthly gains of 3.8%, with the past eight months having been its longest streak of monthly gains since 1995. Market growth has been aided by the increased chances of a consensus being reached on tax reform. It has also been responsive to remarks from the Federal Reserve Chair nominee Jerome Powell, who provided an upbeat outlook for the US economy.
in more than three months. Despite this brief slump for the overall month of November, the index was up 2.2%. The FTSE 100 closed the week 100 points lower after a number of heavyweights in the Pharmaceutical sector (including GlaxoSmithKline and AstraZeneca) fell 2% each. This dragged the index down by 0.9% on Thursday. This week saw increased volatility in oil prices as OPEC countries met for the 173rd OPEC meeting on Thursday. On Friday prices managed to recover from an early week dip as the 14 member OPEC cartel decided to extend their deal to keep 1.8 million barrels a day off the market until the end of 2018 in a bid to boost prices. Futures spiked when markets opened on Friday as big firms started putting in buy and sell orders. Changu Maundeni
However this week’s impressive gains in the financial sector worked to dampen the tech stock heavy NASDAQ composite, as investors shifted from tech stocks to banking, spurred on by improving economic conditions as well as lower regulations and higher interest rates. On Wednesday the NASDAQ composite was down 1.6% - its biggest single day decline
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Week Ending 3rd December 2017
Technology & Health This week saw major developments in global Technology and Health sectors. The stocks of Apple’s biggest supplier of power management chips, Dialog Semiconductor, took a 20% plunge on Thursday after its biggest client reported it would stop using the chipmaker’s tech on future products. Losses have been seen since April, after Bankhaus Lampe presented “strong evidence” that apple was developing its own chips to cut reliance on suppliers, causing Dialog shares to drop by 36%. Whilst these reports are yet to be proven true, considering that 75% of Dialog’s revenues come from Apple, the company should try to expand to other phone providers, such as Huawei. Another German technology company, Rocket Internet, saw a sharp decline in its stocks after stating that it would take a “couple of quarters” longer than planned for some of its key portfolio companies to begin turning in profits. Furthermore, by failing to clarify how it plans on spending its €1.6bn cash pile, the group saw share value lower by more than 5%. Although the co-founder, Oliver Samwer, assured investors that the company is ready to “bet big” when the opportunity arises, he is unsure as to whether these “huge investments” could take place “in the next six months”. Despite the success of its flotation’s, Rocket faces questions over the use of its cash, as well as demands to return more of it to shareholders.
Moving on to Health, the NHS has stated that without sacrificing funds to other areas of care, it will not be able to meet the NHS Constitution Waiting Time Standards for next year. Under extreme pressure, the question is how far waiting lists for routine operations can grow for the sake of services in areas such as A&E and cancer care. The expected NHS revenue for 2018/19 is 1.9%. Chinese biotech groups are expected to raise $10bn this year from venture capital funding due to expectations of global competitiveness. China currently contributes 4% to drug R&D, compared to the US which invests 50%. This share however is expected to increase with domestic companies spending more on R&D, with 800 new molecules under development. Although Chinese innovation is more geared at the domestic market, start-ups are still considering worldwide expansion of their products. Investors have put record sums of money into China’s biotech startups, amounting to $3bn in the first half of 2017, hence bettering the outlook for Chinese pharmaceuticals in the future. Mario Pucinelli Filho
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NEFS Market Wrap-Up
Oil, Gas & Industry As Jan du Plessis, the current chairman of commodity giant Rio Tinto, plans to retire in the first six months of 2018, Rio Tinto are battling shareholders to find a suitable replacement. Rio Tinto previously expressed that they would appoint Mick Davis as their next chairman. Mr. Davis is known for his involvement with Xstrata, a rival mining group that eventually merged with Glencore, where he was the CEO. However, leading shareholders have opposed this idea and have pushed for another candidate. Since then Simon Thompson the current head of the remuneration committee and chairman of 3i, a private equity group, has been nominated as Rio Tinto’s next chairman. The Deutsche Börse is set to see its biggest IPO in over two decades, after Siemens announced they planned to list their medical solutions division in Frankfurt, worth an estimated €40bn. Some report London was not chosen as a flotation location due to the UK’s decision to the leave the EU. The division, known as Healthineers, is an imaging and diagnostics business and will be listed in
the first six months of 2018. It is expected that Siemens will sell a minority stake of up to 25%. The listing comes as another major move in Siemens ‘Vision 2020 plan’, commenced in 2014 by CEO Joe Kaeser. The plan shifts Siemens’ strategy by focusing on predominant industrial operations and spinning off other divisions. Out of Siemens’ nine divisions, Healthineers produced the largest revenue (€3.7bn) in the last quarter and was also the most profitable (19% margin) during this period (see graph below). Siemens is also currently trying to join its rail division with Alstom, which will then be listed in Paris. This follows on from a successful merge of Siemens’ renewable energy unit and Gamesa, a Spanish wind turbine producer. Sarren Sidhu
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Week Ending 3rd December 2017
Deals The Meredith Corporation has finally succeeding in purchasing Time Inc with the backing of billionaire brothers Charles and David Koch. Meredith Corp has been pursuing the publisher of Time, People and Sports Illustrated for a number of years, having held talks in 2013 and in the starting months of this year. Meredith Corp has agreed to pay $18.50 a share, making this deal valued at an estimated $2.8 billion in total, including the acquired debt. The combined entity of the two brands will create a media conglomerate with over 135 million readers, 60 million of whom pay for their services. Meredith Corp. is also using this opportunity to expand its reach through its digital side and can expect to have 170 million monthly unique visitors just in the USA, with an excess of 10 billion video views annually. So why now? With the industry in decline, Time has found it difficult to adapt as circulation deteriorates and advertisers prefer digital media. Time’s Q3 revenue underperformed analysts’ forecast by more than $14 million, with reported revenues of just $679 million. This was the
sixth quarter in a row the company had underperformed income expectations. Furthermore, the brothers behind Koch Industries are two of the world’s richest men, who have shown a great desire to purchase daily newspapers such as the Chicago Tribune. Now, through their private equity firm, the Koch brothers have helped Meredith fund this acquisition by giving $650 million in preferred equity. Meredith Corp has announced however that the Koch brothers will not have a seat on Meredith’s board and will have no influence on the day-to-day actions of the media company. The eye-watering $2.8 billion valuation includes debt. However Meredith Corp forecasts that this deal will save the company between $400-$500 million in just the first two years through operational synergy. As a result, news of the deal sent stocks of Time Inc and Meredith Corp rocketing. Meredith announced it predicted the deal to be closed by March 2018. Sembian Balachandran
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NEFS Market Wrap-Up
COMMODITIES
Agriculture & Resources Mount Agung, a volcano located in Bali, has recently started erupting, with the frequency of these eruptions increasing throughout the week. Consequently, on Monday the Indonesian government declared the highest level of alert. This would be disastrous for the island if the situation became more intense, as Bali’s economy relies heavily on agriculture and tourism. In the long term however a major eruption could have global consequences, with vast quantities of sulfur dioxide released from the eruptions threatening to spread across the globe and significantly reduce global average temperatures. Moreover, geologists are still unable to tell whether these eruptions will soon cool down, or if much more powerful and destructive explosions are currently on their way.
highly depend on the free movement of goods and services to the UK. Food and drink products make up a big chunk of the Irish economy, with 37% of their food and drink exports going to Britain. The agrifood industry also supports 70,000 jobs directly in Northern Ireland. With Ireland so dependent on food and drink exports, any major disruptions to its delicate supply chain would be disastrous for Ireland’s economy. Irish Prime Minister Leo Varadkar has repeatedly expressed his wish to let Northern Ireland remain in the EU customs union, but DUP says Northern Ireland should not be treated differently from the rest of the UK. The 50% WTO tariffs for most food and drink products means that food prices could rise significantly in both Ireland and the UK if no deal was made.
It’s worth noting that the eruption of Mt Eyjafjallajokull in Iceland in 2010 did make a profound impact on agriculture globally. Supply chain was greatly disrupted, with 43% of business executives identifying ‘volatile commodity prices’ as their greatest concern. The eruptions started in April and officially ended in October. During that period, the global price of corn rose from approximately $3.5 per bushel to nearly $5. The price of wheat also increased by more than 70%.
EU and UK leaders are expected to meet at a summit in mid-December and reach an agreement on the border, which was described by the Irish government in Dublin as an event with ‘historical significance’. Experts say it would be extremely difficult to find a balance point however, as the solution cannot be too much of an example of ‘Irish Exceptionism”, but the border supply chain issue needs to be addressed.
Irish farmers are demanding a seamless border post-Brexit, as their businesses
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Week Ending 3rd December 2017
Energy The rise of the UK’s FTSE 100 index earlier this week was led primarily by Royal Dutch Shell’s 3% surge. The AngloDutch giant is planning to invest $2bn on wind power, bio-fuels and electric cars, following recent pressure from shareholders to set up new green targets and drastically reduce the use of carbon by 2050, which includes cutting it by 80% by 2035. Ben van Beurden, Shell’s chief executive, stated: “It is making sure that the products within society have an overall lower carbon footprint. That is the longterm way of making sure our business remains a relevant business in the face of the energy transition.” However, the decision to double the amount invested on clean energy, with bio-fuel and wind having a key role, accounts only for a limited fraction of its forecasted $25-30bn annual investment (see figure below). On the other hand, Shell’s latest deal with major carmakers, such as Ford, BMW, Daimler and Volkswagen, will offer highspeed charging points for electric vehicles in Europe. This partnership with Ionity, a charging network company, is a signal of the strategic plan by Shell to invest in the fast-rising market to electric vehicles. István Kapitány, head of retail for Shell, affirmed: “Customers want to go on long journeys in their electric vehicles and feel confident that there are reliable . . . places to charge them quickly.” According to the majority of oil executives, whilst the transition to EVs will take more than twenty years, Shell’s stance demonstrates that it is definitely not too early to start the shift.
The competition in the UK household energy supply market is rising constantly, with more than 60 businesses now competing and newer private energy companies finding it hard to maintain profitability within their operations. Taxpayer-owned providers, such as Angelic Energy in north London and Liverpool Energy Community Company, have been asked by local authorities to address the national issue of unfair pricing. The involvement of taxpayers in the energy market, which has been privatised for more than two decades, is likely to grow. The re-nationalisation of the energy market is part of the Labour’s party agenda for June’s general election, which would consist in the creation of local public energy companies. After Theresa May’s promise to tackle “ripoff energy prices”, Centrica, owner of British Gas, is planning to scrap its standard variable tariff (SVT) for new customers from April. New customers will therefore be offered a choice of fixed tariffs, in an attempt to solve the consumer over-charging phenomenon. According to the UK’s competition watchdog, this amounts to £1.4bn a year. Giovanni Cafaro
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The pound recorded its biggest weekly gain since October, after reports that British and EU negotiators have broken the deadlock on the Brexit divorce bill. This gave hope that a deal on Brexit will be struck this month. The gloomy warning regarding Brexit economic pain from the BoE’s Governor, Mark Carney, pushed the GBP/USD down to its weekly low of $1.3220, only for it to reverse sharply in a matter of minutes following the news concerning Britain and EU negotiators. GBP/USD rallied more than 300 pips on this news to trade above $1.35, its highest level in nearly two months. Uncertainty over Brexit negotiations have proved to be a major impediment to the pound’s recovery as it continues its bumpy ride this year. Despite the political roadblocks, the pound has still managed to eke out a 13% gain against the USD so far this year. GBP remains more than 10% lower than the USD and 13% lower than the Euro since the June 2016 EU referendum. Confidence on the pound was at its low when a flash crash on 7th October 2016 saw GBP/USD plunge from $1.26 to $1.18 in a space of two minutes.
weighed down by negative headlines, or be buoyed by positive developments in Brexit negotiations. This week the USD also came under heavy selling pressure after former US national security adviser Michael Flynn pleaded guilty to lying to the US Federal Bureau of Investigation (FBI). The media also reported that Michael Flynn was prepared to testify that as a US Presidential candidate, Donald Trump directed him to make contact with the Russians. The US Dollar Index subsequently fell to 92.56 while EUR/USD surged above $1.19. Market risk aversion also saw USD/JPY drop from ¥112.80 to ¥111.40 in a couple of minutes. Major US stock market indices like S&P 500 and Dow Jones Industrial Average pulled back from their historic highs as investors fled to market safe havens like Gold and US Treasuries. Looking ahead, markets will be expecting solid EU GDP growth figures next week. The US Federal Reserve will be looking for strong November US Non-Farm Payroll figures before hiking interest rates in December. Mingli Yong
GBP’s near-term performance against the major currencies will hinge on the Brexit deal in the coming months. Only time will tell if the pound will continue to be 20
Week Ending 3rd December 2017
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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