Commercial Awareness Update 13th February by Ben Triggs

1. Brexit bill through the Commons

Last week the Brexit Bill passed through the House of Commons without amends, as 498 MPs voted to give the government the authority to trigger Article 50, with only 114 voting against. The Labour Party and other opposition MPs proposed multiple amendments to the bill, but were unable to gain enough support to change the bill. These included:

• One amendment would have forced Theresa May to give a report back to Parliament every two months – this was defeated by 333 to 284 votes
• Another amendment called for leaders of the devolved administrations to be consulted on any final Brexit deal – again 333 MPs voted against this compared to 276 for.

What happens next?

The bill continued to the House of Lords, where it will be debated and potentially amended. As an unelected institution, the Lords cannot reject the legislation but can recommend amendments to the bill – in this case the House of Commons will be called on again to debate the proposed amendments. Debates start on 20th February and are expected to continue into March. Many commentators suggest the House of Lords will push for amends, which would almost certainly delay Theresa May’s plan to trigger Article 50 by April. However, a Government source warned the House of Lords ‘faces abolition if they block Brexit’ – urging them to deliver the will of the British people.

In other Brexit news, it’s been reported that Chief EU negotiator Michel Barnier is set to demand £48 billion from the UK to leave the EU. The payment is to cover spending the UK has already committed to EU projects up until 2020 and to fund the pensions of officials. Several figures in the EU have suggested that a trade deal cannot be negotiated until a ‘divorce' settlement has been reached. 

Questions to ask yourself… After the public voted for Brexit, should the unelected House of Lords recommend amendments to the Brexit bill? Could the negotiations over the ‘divorce' settlement cause problems for future trade deals with the EU?

2. Snapchat's IPO

After huge speculation, Snapchat’s parent company Snap Inc. confirmed it would be publically floated on the New York Stock Exchange (NYSE). The social media app is expected to be valued at approximately $25 billion and aims to raise $3 billion funding from the IPO. The high valuation doesn’t mean they are making a profit. In 2016, Snap’s revenue was $404 million, but it posted a net loss of $514 million. The valuation is largely based on the potential for large profits  – Snapchat has 158 million daily active users, with an average user going on the app 18 times per day.

CEO Evan Spiegel and co-founder and CTO Robert Murphy have total control of the business, which means they won’t give current shareholders a vote on the public offering – the first time a stock will be made public without consultation of this form. The complete control the founders enjoy is considered a risk by many investment managers.

Could Snapchat go the same way as Twitter?

Last week, Snap’s rival Twitter announced a $167 million loss in the last three months of 2016. Twitter had 319 million active users in the quarter – up 4% compared to the previous year – but their losses almost doubled. On Thursday, the social media giant’s share price dropped 12% as a result of these new figures. It was believed Donald Trump’s use of Twitter and the publicity surrounding this would lead to a financial boost, but this didn’t materialise.

In November 2013, Twitter floated on the stock exchange with shares being offered at $26. On the day it went public, Twitter ended trading at $44.94, but after this latest announcement, shares are trading below $16 per share. Twitter’s strategy for making profit has failed thus far and with a declining user base, this is unlikely to change anytime soon. Snap inc. is growing rapidly at the moment, but staying relevant and a clear strategy for revenue generation is required to avoid a similar outcome.

Questions to ask yourself… How can Snap Inc. become profitable? What are the advantages of floating on the stock exchange? Why do some consider the total control enjoyed by Snap Inc. founders a potential problem?

3. Co-op bank is up for sale

The Co-operative Bank has put itself up for sale, aiming to attract a buyer to acquire all of the company's shares. The bank was bailed out by US hedge funds after almost collapsing in 2013, and has struggled to boost revenues since, due to low interest rates. A merger with Britannia Building Society around the time of the financial crisis caused major problems and in 2013 the bank announced a £1.5 billion black hole in its accounts. To save the bank from collapsing, lenders wrote off their debt in return for part ownership of the bank (a debt for equity swap). 

Co-op Bank hasn’t managed a return to profitability since 2013 and expects to make a loss this year, making it an unattractive prospect for many potential buyers. However, it has loyal 4 million customer base and has been championed for creating a distinct ethical brand within the market. TSB has been tipped as a potential buying and have stated they would consider the acquisition at the right price. After separating from Lloyds, TSB doesn’t have the scale needed to challenge the Big Five commercial banks – merging with Co-op Bank would give them a much larger market share.

Questions to ask yourself… Given its lack of profitability, would acquiring Co-op Bank be a smart move for TSB? Why is TSB’s lack of market share an issue?

4. The recalculation of business rates

CEOs of high street giants have warned many popular high streets will lose shops, restaurants and pubs due to the recalculation in business due to take effect in April. Business rates are charged on almost all non-domestic properties in proportion to the property value – Chancellor Philip Hammond commissioned an update to account for changes in property value since business rates were last set seven years ago. The new “rateable values” will have a dramatic impact on small and large businesses, especially in areas of London and the South East where property values have soared. For instance, Westfields in Shepherds Bush will see a 102% increase. In other areas of the country, rates will go down as commercial property prices have decreased. 

A transition arrangement proposed by the Government will limit the annual increase in the first year, but owners of Pizza Express, Greene King Pubs, Wagamama and many other chains have written to Hammond asking him to reconsider the increase.

Question to ask yourself… Should the government be charging higher rates on successful high streets, while the retail sector is already struggling?

Commercial Awareness Update 21st November by Ben Triggs

Dollar reaches 14-year high

The US dollar jumped to a 14-year high as markets anticipate a huge spending boom by President-elect Donald Trump. Optimism in America led to the Dollar index - which measures the Dollar against a number of other currencies - reaching its highest level since mid-2002. After the initial shock of the Trump victory, the dollar dipped but has risen ever since as the markets speculate on his forthcoming presidency. The President-elect has promised public spending on infrastructure and construction - which could cost as much as $1 trillion - and experts believe this will provide a short-term boost to the economy. This public spending can also have a positive long-term impact for the US economy, but this will rely on the projects being a productive use of taxpayers money with little long-term wastage.  

A rise in interest rates is also expected to boost the value of the dollar. In the coming months, inflation is likely to rise - especially as Trump has pledged to restrict free trade - and with the current positive economic outlook, will encourage the Federal Reserve to push up interest rates. The rates are currently at 0.5% but most believe they will be increased next month.

Trump’s pro-business and spending stance did have an impact on the bond market - it’s lost $1 trillion worldwide since the US presidential election. Low-yield ‘safe’ bonds are being sold off in what many have coined the "Trump Dump", as investors pursue more lucrative investment strategies. With inflation rising, bond prices are likely to increase - the more you pay for a bond, the lower the yield (or potential earnings). Plus, Trump’s pro-business stance has encouraged investors to take money from bonds and put them in stocks - believing they will see strong returns.

Questions to ask yourself… Is a strong dollar good for the global economy? Is the market's current positivity about the Trump presidency an example of short-termism?

Click here for Finimize's more in-depth analysis.

Facebook to expand UK workforce by 50%

Last week Facebook announced it would boost its UK workforce by 50% when it opens a new London headquarters in 2017. There are plans to hire another 500 members of staff, including high-skilled engineers, marketers and salespeople. Facebook's engineers in the current London office have helped with the development of their new product, Workplace - a business platform to help internal communication flow between staff. 

After the EU Referendum there were many companies considering moving operations out of London but it remains the tech stronghold of Europe. Google has also committed to building a new headquarters in the capital which will provide 3,000 more jobs when it opens in 2020. London Mayor Sadiq Khan suggested this investment is a “sign that London is open to talent, innovation and entrepreneurship”.  

Questions to ask yourself… What makes London a tech hub? How does Britain improve technical skills among its workforce? 

Build-up to the Autumn Statement

Chancellor Philip Hammond will give his first Autumn Statement this Wednesday, as the Government will outline its plan for the economy. The Prime Minister Theresa May is keen to help out lower income households, but most of the attention will be on how Hammond aims to boost a potentially stuttering economy after Brexit. With ex-Chancellor George Osborne’s target of cutting the deficit being scrapped, this statement could spell an end to austerity. The cost of Brexit has also been a key topic this week, with forecasts suggesting it could leave a £100 billion blackhole in the budget.

What we think could be announced:

• Hammond has suggested £1.3 billion will be spent on improving roads across the UK
• The Chancellor is expected to back Osborne’s plans to cut corporation tax from 20% to 17% by 2020
• The personal allowance on income tax may be raised - it could be increased to £11,500 from today (previously scheduled for the 2017/18 tax year)
• To encourage savings, the amount people can put in ISAs before being taxed could be raised
• The idea of reducing VAT to 17.5% may be suggested, but this is unlikely to happen this tax year
• Increased tax on employees benefits - making gym memberships, private healthcare and similar more expensive for workers

Questions to ask yourself… What is the priority for the UK economy in the next six months? Should the Government continue spending and run at a deficit?

What happened in Britain?

The UK economy got some good news last week as data showed that prices for everyday consumer goods and services (like rent, groceries, clothing, etc.) weren’t increasing as much as feared. Also, retail sales (e.g. stuff sold in stores) grew by 7% versus a year ago - the strongest increase in 14 years. Economists continue to warn that prices will rise next year (as the weak pound makes imported goods more expensive), which will mean people won’t be able to buy as much stuff. But the pain has been delayed for longer than most economists were expecting.

And finally… 

Snap Inc., the owner of popular social media app Snapchat, officially began the process to become a publicly traded company (i.e. to have its shares traded on a stock exchange via an IPO). At a rumoured valuation of $25-35 billion, it would be the biggest US tech IPO since Facebook in 2012. The IPO is expected to take place in the first half of next year.

Autumn Statement 2016: What happened

The Autumn Statement for 2016 was announced yesterday (Wednesday 23^rd November) and as a follow-up to last week’s post about what to expect, we will be running through the anticipated areas of development, what happened in regards to them, and how the Statement and its proposals will have an impact.

Office for Budget Responsibility (OBR):

As noted in our previous post, the OBR had a particularly challenging task of predicting the British economy due to the uncertainty surrounding Brexit.

The OBR predictions for the growth of the UK economy are as follows:

Year	Growth (%)
2016	2.1
2017	1.4
2018	1.7
2019	2.1
2020	2.1
2021	2.0

The OBR also forecast the amount borrowed in the coming years as follows:

Year	Amount borrowed (£bn)
2017-18	59
2018-19	46.5
2019-20	20.7
2020-21	17.2

In regards to the challenges they faced, the OBR provided a counterfactual based on what the predictions would have been had there been no referendum in June. They found that as a direct result of the referendum result, we are borrowing £3.5bn more this year, £10bn more next year and £15.6bn more in 2018-19, than we would have been without the referendum.

Public borrowing and spending:

In the Budget given by George Osbourne in May, the forecast for the financial stability of the government until 2021 was £122bn more optimistic than that given by Hammond. As a result, public expenditure will fall from 45% in 2010 to 40% this year, although certain budgets (such as defence, pensions and health services) will be protected.  

National debt is also predicted to rise to alarming levels next year (from 84.2% of GDP to 90.2%), and the total amount borrowed is expected to reach just under £2 trillion by 2021. While an increase in the amount of public borrowing was foreseen, the scale of the increase has led to concern among some economists.

Investment:

There were many calls for investment in certain areas, and Philip Hammond announced which sectors would be the focus of public investment.

Infrastructure:

As the Former Secretary of State for Transport, a high level of investment in transport and infrastructure was expected from the current Chancellor. Hammond announced an investment of £1.3bn in English local transport networks – while this decision was largely praised, some have noted its relative significance given it represents 0.08% of GDP. Hammond also expressed his plans to invest £1bn in digital infrastructure, including 5G technology and £2bn per year by 2020 into R+D funding. The above are part of the government’s goals to have invested £23bn in innovation and infrastructure by 2021. 

This extra funding for those in these sectors will be much welcomed due to the significant demand by citizens for improved roads and railways.

Housing:

There has been a notable demand in the past few years for more affordable housing in the UK. Hammond stated this afternoon his intention to invest £2.3bn into a housing infrastructure fund in order to create 100,000 new homes in high-demand areas, alongside another £1.4bn into a fund to build 40,000 affordable homes.

He also announced plans to implement a large-scale regional pilot for the Right-to-Buy schemes and a ban on upfront fees by letting agents, to be effective as soon as possible. The rest of the UK will follow Scotland’s precedent on this matter, where the fees are shifted to the landlords, who have significantly higher bargaining power than prospective tenants.

These changes in the housing industry should help increase the number of homeowners in the UK.

Taxation and pay:

It was revealed that the income tax thresholds will be raised in April 2017 (from £11,000 to £11,500) and again in 2020 (to £12,500) and that the higher rate income tax threshold will be increased to £50,000 by the end of Parliament. Furthermore, the national living wage will see a rise of 30p to £7.50 in April, which is smaller than the rise that was predicted in the March Budget.

While fuel duty has been frozen for a 7^th year, saving the average driver up to £350 annually, insurance premium taxes will be raised 2% to 12% in 2017. We can also expect to see the introduction of a sugar tax on soft drinks in 2018.

In terms of corporation tax, while there was some indication by the Prime Minister that the nation would see a further slash of tax to 15%, the Chancellor has stuck to his intentions and kept the tax level for the coming year at 17%, as was announced in March.  

Hammond intends on raising £32bn by cracking down on tax avoidance schemes.

Other:

Exports:

While there was little clarification on a Brexit strategy, some comfort has been offered to those that are concerned about a decrease in exports to the EU following Britain’s departure. The UK Export Finance funds will be doubled, a change that has been deemed as “vital for small businesses to reach new markets [especially] in the wake of Brexit” by the Chairman for the Federation of Small Businesses, Mike Cherry.

Salary sacrifice schemes:

The salary sacrifice schemes that allow employees to accept benefits in lieu of pay will be restricted, meaning that income will increase for a number of people, resulting in more taxes flowing to the State budget.

The Autumn Statement is somewhat indicative of a stable and strong post-Brexit economy; however, this is dependent on large amounts of borrowing to sustain the immediate aftermath of the referendum. The demand for investment in infrastructure was satisfied and, overall, the changes made will increase the amount of money in the pockets of the general population. However, the lack of clarity regarding Britain’s goals and strategy for leaving the EU leaves a lot to speculation – and the fulfilment of these proposals will be dependent on the terms on which the nation leaves the EU.

- Ellie Dobbyne

Autumn Statement 2016: What to expect

The Autumn Statement is due to be delivered by Philip Hammond next Tuesday (November 23rd), and there has been a lot of speculation over what UK citizens can expect. The Autumn Statement is an annual report by the Chancellor updating the public on the country's taxation and spending plans. The future of Britain’s relationship with the EU and the weakening of the GBP reinforces the importance of this year’s Statement. 

Challenges for the OBR: 

The Office for Budget Responsibility (OBR) provides independent economic forecasts for the next 5 years of the UK economy. They are expected to release a forecast on Tuesday, soon after the Autumn Statement. 

This year will prove particularly challenging to the OBR given the level of uncertainty surrounding government policy, especially regarding Brexit strategy. The OBR, however, will be showing its workings to shed light on how they calculated their predicted figures despite this lack of political and economic foreseeability.  

Brexit: 

The BBC interviewed several business owners across the UK and asked them what they would like to see Mr Hammond address in the Statement. All their responses include more clarity regarding Britain’s position in terms of a Brexit agreement, a thought that most the UK public can empathise with. Furthermore, in the infrastructure industry, business owners would like confirmation of access to the single market as they fear they would struggle to find skilled labourers without access to EU workers. The Prime Minister, Theresa May, has expressed support for free trade agreements, and this may lead to the Statement indicating plans to reach an agreement to facilitate access to the single market. 

Corporation tax:

Before his dismissal, Former-Chancellor, George Osbourne, expressed plans to further reduce the corporation tax from 17% to 15%. This was intended to retain London’s status as the home to a significant number of large businesses following Britain’s decision to leave the EU. The threat of Brexit saw several companies threaten to move their headquarters to other countries, such as Ireland – where their 12.5% corporation tax and position as an EU Member State is desirable. However, Hammond has suggested that he has no intention of further reducing corporation tax, which was 20% before the Budget earlier this year. This may indicate the Chancellor’s faith in a strong post-Brexit Britain. 

National debt:

Differing from his predecessor again, Hammond has indicated that the nation may seek to borrow in order to survive an inevitable post-Brexit depression, before it regains its strength. Spectators will be looking at whether this increase in borrowing will lead to a move away from the Party’s policy of austerity. 

Investment:

There have been strong hints towards an increase in funding for infrastructure in the coming year, which was requested frequently by those interviewed by the BBC. The increased demand for better quality roads and railways has pushed the possibility of investment into this area, which will be well received by many. 

There has also been a lot of demand for investment into healthcare, particularly the NHS and mental health services. This has proved a highly controversial area for the government and Leave campaigners following the well-publicised bus scandal, in which the Leave campaign mislead the public that it would invest in the NHS with the money no longer going to the EU. 

What’s to come in the Autumn Statement is very much speculative, but what is certain is that the nature of the plans for the UK budget will rely heavily on Hammond’s faith in a post-Brexit Britain. The UEACA Society will be making a follow-up post next week summarising the Statement and its implications for the future of Britain.

- Ellie Dobbyne