Thursday 27 October 2016

Your Commercial Awareness update 17th October 2016 by Ben Triggs

1. 'Hard Brexit' could cost £66 billion

A leaked document from the Treasury shows Britain could lose up to £66 billion each year in tax receipts 15 years after a ‘hard Brexit’. The papers were circulated to MPs in April after a controversial study into the impact of leaving the EU by then Chancellor George Osborne. It also suggested that leaving the single market would cause Britain’s Gross Domestic Product (GDP) to drop 9.5% over the next 15 years, compared to staying in the EU. There was widespread criticism at the time of publication, but it’s believed the Treasury stand by their predictions today. 
The debate between MPs seeking a 'soft Brexit' and those after a 'hard Brexit' has intensified in the past week, as more pressure is being put on Theresa May to give the House of Commons a vote on the Brexit negotiation strategy. Even within the Conservative Party, pro-Remainers are calling for a vote to legitimise the Government policy on Brexit. Labour MPs are putting forward an Opposition Day motion which calls for MPs to be able to scrutinise a plan before Article 50 is triggered, which many ‘rebel’ Tory MPs are contemplating backing.
Commentators suggest the Theresa May government will topple if they try to force through a negotiation strategy without the scrutiny of elected representatives in the House of Commons. 
Questions to ask yourself… Should the Government have to consult Parliament if there has been a referendum on the issue? Why would Brexit potentially lead to lower tax receipts?

2. Marmite-gate

Last week Tesco stopped stocking Marmite and other Unilever products in a row over price hikes. Tesco refused to accept Unilever’s price increase of around 10%, set due to the falling value of the pound and the impact it was having on importing goods and ingredients to make their products. Tesco boycotted 100s of Unilever’s products, including Marmite, Pot Noodle and Domestos, and withdrew them from their website. The likelihood was these increases would be passed onto the customer and Tesco believes Unilever's reaction to exchange rate changes was excessive. Many commentators actually suggest the falling price of the pound actually benefits Unilever overall because they can export their goods abroad much cheaper. After a two day stand-off with the leading supermarket, a compromise was reached and Unilever’s products are now fully available.
Bank of England Governor, Mark Carney has claimed inflation will rise due to the lower value of the pound. In recent times, there has been very low inflation but analysts believe it will rise to 3% by the end of next year. The Government target is 2%, but Carney is happy to miss that target if it means continued economic prosperity and high employment. Food and fuel prices are going to be the key components of inflation as it will become more expensive import them from abroad. Fuel prices have already risen since Brexit and are expected to rise again by 5p per litre after another poor week for the pound. 
The pound lost 2% last Tuesday alone and finished the week at around $1.21. The weak pound is making a number of people nervous but a former International Monetary Fund (IMF) chief has described it as ‘desirable’, suggesting the UK is rebalancing “remarkably well” and the pound losing value is a necessary part of this rebalance.
Questions to ask yourself… Who benefits if inflation increases? What will make the pound gain value again?

3. A second Scottish independence vote?

Nicola Sturgeon has started the process for a potential second referendum on Scottish independence by submitting a first proposal for consultation. At the Scottish National Party (SNP) conference, she expressed her desire to give the Scottish people an independence vote before the UK formally leaves the EU in 2019. The SNP believes if the UK goes for a hard Brexit, Scotland should have the opportunity to remain in the single market by voting for independence. The British government suggest they would reject a proposal for Scotland to get a second referendum as the issue was laid to rest by the first in 2014.
This isn't the only problem for Sturgeon - the polls currently suggest the Leave vote has not swayed enough people towards Scottish independence. In the first referendum 55% voted for Scotland to remain in the UK and it would require a large swing to change the result.
Questions to ask yourself… Is it undemocratic to have a second vote on the same issue so close to the first? Would the EU welcome an independent Scotland?

4. CMS, Nabarro and Olswang set to merge

Partners at law firms CMS Cameron McKenna, Nabarro and Olswang have agreed to a merger, which is expected to take place in May next year. Trading under the name CMS Cameron McKenna Nabarro Olswang (or CMS for short), they will become the sixth biggest law firm in the UK, with a total revenue of just under £1 billion globally. Law firms are trying to broaden their service and break into new markets and this merger aims to accelerate this process, allowing them to compete with Magic Circle firms. The new firm will have offices in 36 countries and employ 4,500 lawyers. As the law market becomes increasingly global, City law firms have struggled to stay as competitive - this merger aims to counter this.
The role of technology is having a greater impact on the law sector, with firms aiming to become more efficient with modern tech. After the merger, CMS plans to invest more in artificial intelligence which is increasing the amount of automation for routine work in the sector. 
Questions to ask yourself… What are the potential disadvantages of this merger for the firms involved? Will this start a trend of small law firms seeking mergers?

5. Update on last week

Last week we discussed the potential of a spring 2017 Initial Public Offering (IPO) for Snap Inc. - the company that owns Snapchat - worth $25 billion (read more just here). This week, Snapchat’s founder Evan Spiegel is said to have appointed both Goldman Sachs and Morgan Stanley to lead this operation. 
Questions to ask question… What are the advantages of floating a company on the stock exchange?

Monday 17 October 2016

Your Commercial Awareness update 10th October 2016 by Ben Triggs

1. The pound drops to new low
At the end of last week the pound hit a 31-year low against the dollar, as the markets feared the impact of a ‘hard Brexit’. On Friday, the pound was trading at $1.25, down 2.5% after Theresa May announced her plan to tirgger Article 50 by the end of this tax year.
Shortly after currency markets opened in Asia early on Friday morning, the pound crashed 6% in two minutes to $1.18. However, it bounced back quickly leading to most blaming it on a 'fat-finger' trade (a data input error) or a rogue automated algorithm.
However J.P. Morgan strategists believe it wasn’t an error and despite the quick recovery, the pound never fully recuperated from this sudden dip and continued to lose value during the day. It appears that comments made by French President François Hollande suggesting there will be tough negotiations over Brexit triggered worried speculators to sell the currency.  
What is 'hard Brexit'?
The term 'hard Brexit' has been frequently used by the media in recent weeks. This arrangement would see Britain give up their access to the single market and regain control of their borders. Pro-Brexiteers suggest this would give Britain the ability to form free trade partnerships with the world. However many businesses believe leaving the single market will lead to tariffs being placed on imports, making Britain less competitive.
These businesses and Remainers are seeking a 'soft Brexit', where Britain would maintain a close relationship with the EU and be part of the single market. The UK would not be part of the EU Parliament, but still be a part of the European Economic Area (EEA). 
Questions to ask yourself… What are the advantages and disadvantages of a ‘hard Brexit’? Would a 'soft Brexit' let down the 52% who voted to leave the EU?
2. UK will be fastest growing economy in 2016
The International Monetary Fund (IMF) has admitted the UK will be the fastest growing G7 economy this year, after previously claiming they would be in recession due to the Brexit vote. In June, the IMF downgraded the UK’s growth predictions to 1.1%, but now believes it will achieve 1.8% - which was their original prediction before the Referendum. Leading figures in the IMF have said Britain will have a ‘soft landing’ this year, but the effects will be felt next year, especially if the British government pursues a 'hard Brexit’.
After the initial shock of the Brexit vote, the UK markets have made consistent gains. Last week, the FTSE 100 rose above 7,000 points for the first time since April 2015. The fall in the pound has been seen as a good thing for the UK main index as manufacturers in the UK can export their goods cheaper. Many of the multinational companies listed on the index operate in dollars so they are making more profit with the favourable exchange rate.   
Questions to ask yourself… What factors could impact on the UK’s growth next year? What can the Government and Bank of England do to continue minimising the impact of Brexit? 
3. Snapchat set for an IPO in 2017
Reports suggest Snapchat owners Snap Inc. are planning an Initial Public Offering (IPO) worth $25 billion in March 2017. An IPO is the first time a company sells shares on the public stock market and if Snap Inc. does go ahead, it will be the biggest IPO in America since 2014. Last year the company’s revenue was $60 million but they are predicted to have an ad revenue of more than $360 million this tax year - however it is unclear whether the app is profitable or not. Snapchat has 150 million regular users worldwide and is currently launching augmented reality glasses, their first hardware product, which allows users to take 10 second video clips.
In other social media news, Twitter’s share price fell 20% last week as Disney, Apple and Google revealed they weren’t interested in launching a takeover bid. Twitter has never made a profit but was floated on the stock market at $26 per share. After these latest announcements, the share price fell below $20. It is rumoured that business cloud software firms, Salesforce and Microsoft are considering their position on a possible takeover bid - nothing has been confirmed as of yet.
Questions to ask yourself… What are the key advantages of a company becoming public? Why are Twitter struggling so much to become profitable?
4. Did RBS squeeze struggling businesses?
Leaked documents show Royal Bank of Scotland tried to profit from floundering businesses. The bank bought up assets from these companies on the cheap in what they called a ‘dash for cash’, leaked confidential files have revealed. Employees at RBS were looking for firms who could be restructured or where they could charge higher interest rates. These restructures often involved cutting the size of their customers' loans while receiving cash or other assets. The files show these efforts were ramped up after the 2008 financial crisis and over 12,000 businesses were referred to the bank’s 'turnaround division', Global Restructuring Group (GRG).
RBS has said they led down some of their smaller customers but deny deliberately causing businesses to fail. The leak potentially supports a report compiled three years ago by Lawrence Tomlinson, who believed the GRG was a ‘profit centre’, which neglected the interests of small businesses. RBS’s share price was down around 3% as a result of the leaked papers.
Question to ask yourself… Should banks have more regulation placed on them today?

Tuesday 11 October 2016

Is technology making us impatient?

The benefits of technological advancement are undeniable and plentiful, however, while technology can enable us to work and live more easily, the risks are becoming more and more evident.
Cybercrime has already been identified as one of the most damaging challenges facing most industries, and that is not the only concern. The risks of negative qualities such as impatience and laziness developing are easily put down to ‘fearmongering’ by technophobes, however, their concerns are not entirely unjustified.

New technology means what we have faster access than ever before and our expectations of quick accessibility are getting too high. As next-day delivery comes more commonplace, a 3 to 5-day wait to receive your item seems absurd, and after catching up on your favourite programme online, waiting a whole 7 days to watch the next episode seems unbearable.
On a larger scale, while businesses can work more efficiently with technologies facilitating day-to-day activities, higher expectations can mar a company’s reputation and potentially decrease revenue. Nordstrom recently announced that they saw an 11% drop in online sales after visitors to their site experienced a slower response time of 0.5 seconds. This is damning for companies that are wanting to make use of new features requiring complex algorithms, such as 360-degree photos and improved user interfaces.

Our desire for fast service means that 50% of us will abandon a sale entirely if the web page takes longer than 3 seconds to load – this is compared to the 10-second wait it took for the same amount of people to leave the site just 3 years ago. In the multi-billion pound industries that make the most use of online shopping, the revenue lost from these sales is staggering.

The media industry, too, is hit hard by the need for immediacy. Illegal streaming of film and music is largely put down to the increasing costs of visiting the cinema and buying or renting films. However, even programmes that are on TV for free (provided you have a TV license) at a much higher quality than copies found online are being illegally streamed at significant rates. This is particularly true of US programmes that are typically released months before in America than in other countries. People would rather watch a poorer quality copy of a programme as soon as it is released than wait a month or two to watch it with good quality video and audio. This realisation could be the reason for companies such as Netflix releasing an entire series of Orange is the New Black at midnight, rather than keeping the usual TV format of releasing a new episode each week. Similarly, the fact that illegal downloading of Game of Thrones episodes increased by 45% in 2015 has been credited as the reason the Series 5 and 6 were simulcast across 170 countries.

On a more positive note, a comparison could be made to smartphones, TVs and computers – the desired size of these devices seemingly takes turns between large and small. As technology advances, a larger device is required before companies work out how to get the same technology into a smaller area. Before long, new technology comes about, taking up more room in the device requiring bigger gadgets and so on. The same could be said about online markets – new technology requires complex algorithms which in turn means longer load times for web pages. In the last year, the average page load time has increased by 7% across the globe, with Australian consumers waiting for almost 52% longer than they did in 2015.  Soon, we will be seeing new ways to make the same technology simpler and quicker to load.

Understanding the dynamics in consumer expectations is vital for any company, and appreciating the cycle of innovation followed by speed can enable companies better prepare for the slower periods.


Sources:

Thursday 6 October 2016

Weekly Commercial Awareness Update

By Ben Triggs
In this week's Commercial Awareness update we discuss Theresa May's announcement on Brexit, Deutsche Bank, oil production and the launch of Google smartphones.
1. Will it be a 'hard' Brexit?
Last week Theresa May announced Britain will trigger Article 50 by the end of May 2017 and formally begin the two-year period of leaving the EU. The Prime Minister also suggested Britain's legal position will be clarified by a 'Great Repeal Bill' which will remove the European Communities Act of 1972 from statute law. Many Conservatives and Leave voters were getting frustrated about the lack of progress but this new revelation adds clarity and means Britain can prepare itself for the complex negotiations with other EU member states.
International Trade Secretary Liam Fox has predicted Britain will be able to keep the benefits of the EU free trade agreement post-Brexit. He suggested introducing tariffs on trade between Britain and other European countries would harm the EU more, as Britain imports a huge amount from those countries. Others believe this wouldn't be the case, with Liberal Democrat MP Nick Clegg claiming Fox was "delusional".
It's been 100 days since Britain voted to leave the EU and the state of the economy is significantly better than many experts believed. Last week the Treasury predicted Brexit "will not dent growth at all in 2016". Gross Domestic Product (GDP) forecasts were immediately downgraded after Brexit, however they have recently seen a 1.8% increase.
Questions to ask yourself… Will Britain be able to negotiate a free trade deal with the EU after Brexit? Which industries have felt the biggest impact of the Leave vote? 
2. Problems for Deutsche Bank
Deutsche Bank's share price plummeted to its lowest level since 1992 after the revelation it faces the prospect of a $14.5 billion fine from US authorities for an alleged misselling scandal before the 2008 mortgage crisis. The bank's share price has fallen by around 50% this year after they announced a €6.8 billion loss in January, but the share price hit a new low of under €10 this week. There has been much speculation of the bank's possible collapse for months and in July the International Monetary Fund (IMF) suggested it was "most important net contributor to systemic risks in the global banking system". 
The German government has shown reluctance to provide Deutsche Bank with a bailout, but this could change if the situation deteriorates. There's a suggestion the government may take a 25% share of the company or facilitate a merger with Commerzbank. Deutsche Bank is getting media attention at the moment but the crisis stems from wider problems in European banking. With almost 0% interest rates, it's very difficult for banks to make money, as margins on yields are almost non-existant. Secondly, banks continue to be hit with misconduct fines and European banks often are the worst effected. The American Department of Justice often threatens banks with with removal of their dollar clearing licences if they don't pay the fines.
There was some better news for Deutsche Bank on Friday afternoon however as rumours emerged they were about to strike a deal with US authorities to cut their fine to $5.4 million. This caused a sudden rise in the share price, but the deal is yet to be confirmed.
Questions to ask yourself… Should the German government bail out Deutsche Bank if there's no other solution? How can investment and commercial banks start making more profits?
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3. FTSE rises after oil production deal
The FTSE 100 rose by 1% on Thursday with oil stocks increasing the most, after the Organisation of the Petroleum Exporting Countries (OPEC) agreed to cut oil supply. Oversupply has led to a declining oil price in recent years, but this new agreement will ensure exporters cut supply, in the hope of driving up prices. OPEC will cut output to between 32.5 million and 33 million barrels per day from about 33.5 million barrels. Despite the markets reacting favourably to the announcement, the cost of oil actually fell as many speculators believed OPEC wasn't doing enough to cut supplies.
Mining has also being doing well recently as investors seek safe assets while there's economic uncertainty. The price of gold has risen by 6% in the last 100 days while silver has increased by 12%. The industry has been volatile in the last 12 months, but an increase in investment and many seeking safe returns has provided stability in the industry.
Questions to ask yourself… Will Theresa May's announcement about Brexit have an impact on the markets this week? What are the potential downsides of cutting oil supplies?
4. Google Phones
Google will launch their first branded smartphones this week, aimed to compete with Amazon and Apple. Google focused on producing software which other companies could use, but with its new hardware division, they are about to launch their own distinct products. Google tried and failed to break into the phone hardware market after acquiring Motorola many years ago - this was a short-lived venture. Globally, around 80% of smartphones use Google's Android platform, but the hardware market has been dominated by Apple and Samsung in recent years.
In the same week, Blackberry has announced they will not be designing any more of their own handsets after 14 years, and will now focus on creating software instead. The launch of Google first smartphone is expected on Tuesday at an event in San Francisco - keep an eye out this week.
Questions to ask yourself… Which markets are key for the success of Google's smartphone? Does Google have the power to compete with Apple?
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5. UK still very competitive
The UK is the seventh most competitive economy according to the World Economic Forum. Efforts to cut red tape has made business activity in the UK much easier and led to a three-place rise in the rankings. The country is at the forefront of digital innovation and money is readily available for new ventures. Switzerland continues to top the list, while Singapore and the USA make up the top three.
Question to ask yourself… What are the key factors in making a country's economy competitive? What gives Switzerland the edge compared to other countries?