In this week’s Commercial Awareness update, we discuss how geopolitics impacts on markets, London’s job market, Amazon’s taxes, Disney moving away from Netflix and Google’s diversity initiatives.
The impact of geopolitics over markets
On Thursday, the FTSE 100 had its worst day of this year (closing 1.44% down), as intensifying political tensions between America and North Korea caused global markets to falter. On the 10th anniversary of the financial crisis, Trump’s threat to “fight fire with fire”, after North Korea suggested it would respond to new United Nations (UN) sanctions with military action, has made investors nervous and seek out safe-haven stocks. The American government has aimed to play down the talk of full military action but many believe there is a realistic chance of this occurring - something which China has warned against.
Why is this impacting the markets?
Political instability and uncertainty in general has a psychological impact on confidence in future prosperity - people tend to become risk averse when there are unknown variables with the potential for significant consequences. However, these may be valid worries. These geopolitical tensions do have the ability to impact on America’s trade, especially with China. A strained relationship could lead to greater barriers to trading between the two superpowers, affecting large multinational companies - especially in the technology and resource sectors - and therefore global markets.
Speculators have turned to safer investments in an attempt to shelter themselves from the worst possible outcomes. Last week, the value of gold, the Swiss Franc and the Japanese Yen all saw strong gains. Gold is often seen as a safe investment because it’s a desirable natural resource, so its value should stay fairly consistent, compared to shares which rely on the continued prosperity of a company. Technology firms were badly hit by last week’s stock sell-off, with firms like Snap Inc. being viewed as carrying significant risk.
Questions to ask yourself… What other factors create market volatility? Why is the Swiss Franc seen as a safe investment in this situation? Can Snapchat turn around their fortunes?
Job creation and profits
Job creation in London reached a year high in July, as the job boom continues despite Brexit worries across the capital. Figures from an employment tracking index by data giant IHS Markit shows a healthy rate of job creation in the capital. This report follows figures published by the Recruitment and Employment Confederation suggesting firms are recruiting at the fastest rate in two years. A spokesman from Lloyds Bank Commercial Banking said “London business activity gained momentum at the start of third quarter” and attributed this to the need for hiring more staff. The UK’s biggest firms (those on the FTSE 350) saw revenues rise 41% to £22.7 billion during the last financial year, hence the desire for staff to deliver their services.
The Bank of England expects unemployment to fall to a record low of 4.4% in September. However, the outlook for a wage increase looks bleak, with pay rises forecast at 1% for the next year - well below the 1.8% rise last year. The Chartered Institute of Personnel and Development (CIPD) found that despite this falling unemployment, the supply of labour was halting wage growth. The more people that are available to work in both low and high skilled jobs, the less firms need to do to attract the talent they need.
Questions to ask yourself… Is the unemployment rate a strong indicator of economic strength? What challenges do big firms face in the coming 12 months?
Companies to watch
Last week Amazon’s taxes were in the spotlight again, after it was revealed they only paid £15 million tax in Europe on a revenue of £19.5 billion. In the UK, the online retailer’s UK logistics department separately managed to halve their corporation tax bill from £15.8 million to £7.4 million in 2016 - despite the UK business boosting their annual turnover from £946 million to £1.46 billion in the period.
Across Europe, Amazon aggregates the sales made from countries across the continent - it reported a pre-tax profit of £50 million last year. In 2015 Amazon said it would stop using frowned-upon corporate structures that diverted sales and profits away from the UK, but this latest announcement will reignite the debate surrounding the tax paid by large corporates.
In the firm’s latest earnings report, Disney announced it would be looking into pulling its movies from streaming service Netflix, with the intention of setting up its own branded service in 2019. Disney is in the process of gaining majority ownership of BAM Tech for $1.58 billion (they already own a third of the firm), which will support their capabilities to deliver their own product in this market. Within the current plans, Marvel films, many Pixar titles and other box office hits will remain on Netflix until the end of 2018.
Not surprisingly, Netflix’s share price dropped 5% on the announcement, but interestingly Disney’s also fell 4%. This suggests stakeholders were sceptical about Disney’s change of direction and the future outlook for the company.
Google - update
In the previous Commercial Awareness update, we discussed a leaked memo sent by one of Google’s employers criticising Google’s diversity initiative - read more here. After gaining global news coverage and outraging many, the male Software Engineer who authored the piece lost his job in the last week. The tech industry - most specifically Silicon Valley - is developing a poor reputation surrounding issues of gender equality and discrimination. However, this is changing within a large number of tech firms - many offering upskilling coding courses and “unconscious bias” training for existing members of recruitment teams.
Questions to ask yourself… Should the government be doing more to ensure big firms pay more tax in the UK? Or should we be encouraging firms to do business in the UK by offering lower taxes?