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In the week’s Commercial Awareness update, we discuss a potential interest rate rise, Nestle’s acquisition of a ‘hipster” coffee shop, Goldman Sachs expands its retail offering, offshore wind farms and the new iPhone X.
A rates rise on the cards?
Last week, the Bank of England hinted a rise in base interest rates was on the cards, causing a sharp increase in the value of the pound. On Friday, a speech by one of the members of the Bank’s interest rate-setting committee suggested there could be a rise in the coming months. The two key factors in this speculation is signs of a strengthening economy and increasing inflation (which rose to 2.9% in August). If interest rates are lower, people are more likely to spend and it’s cheaper to borrow, therefore demand for goods is high. As interest rates increase, demand lowers, and therefore should cool inflation. Many believe the Bank could increase rates back to 0.5% in November, but that’s highly dependant on strong economic figures in the coming months - there has been on and off speculation about a rise for many months. Data suggests there is a 63% chance of a rise, making it more likely than any time since the Brexit vote.
After the speech on Friday, the pound hit its highest level against the dollar since the Brexit vote, as it rose by 1% to $1.361 - it also gained 1.1% against the Euro. The value of Government bonds also hit a 15-month high, which tends to be a good indication of a forthcoming rates rise. The yield on five year UK bonds increased to 0.772%.
Questions to ask yourself… Is the economy strong enough for a rates rise? What impact will a rates rise have on the stock exchange?
Companies to watch
Nestle’s continue their quest to become the biggest player in the beverages market by acquiring American coffee chain Blue Bottle Coffee. In a deal reportedly worth over $425 million, the Swiss consumer giant will take a 68% share in the so-called ‘hipster’ coffee shop. With a focus on high-quality and a minimalist style, Blue Bottle had previously raised £120 million from a number of investors (including U2 singer Bono) and is expected to have 55 shops in America and Japan by the end of this year. With this acquisition, Nestle are aiming to strengthen their position in the international coffee market - they already own the Nespresso and Nescafe brands. Nestle is the biggest seller of instant coffee in the US, but Starbucks is by far the largest when it comes to fresh beans.
In other coffee related news, researchers at Citigroup believe the UK’s high street coffee market will reach saturation in the next four to five years. There are now more than 22,000 coffee shops in the UK and the study suggests chains like Costa will stop opening new shops very soon.
Goldman Sachs is set to move into retail banking in the UK, as one of the leading investment bank further diversifies its offering. In the US, it already has a mass-market offering, with high interest online saving accounts and last year launching Marcus by Goldman - a digital consumer lending platform. It looks to bring the retail side of the business to the UK next year and potentially acquire a book of deposits if the opportunity arose. In its first eight months, Marcus supported $1 billion worth of loans to businesses.
Goldman Sachs’ current desire to diversify could be due to a slowdown in some of its traditional markets - the debt trading and equity arms have returned modest results in recent times. In the summer, Goldman’s market capitalisation dropped below rivals Morgan Stanley for the first time in a decade.
In the tech world, Apple announced the release date and features of the new iPhone 8 and iPhone X this week. It looks broadly similar to the iPhone 7, with some highly talked about new features - an improved 12-megapixel camera, retina recognition software and the X doesn’t have a home button below the screen. For many it isn’t the features being talked about, but the price - the iPhone X will cost $999 when it’s released, or over $60 per month on a standard two year contract. Apple often price their iPhone dependent on the region, so it’s likely to be more expensive in Europe. Have they pushed prices too high for the latest model? Phones tend to have a life span of two years, so it will be interesting to see if consumers pay for the premium model. Apple are chasing a $1 trillion valuation, so sales of the latest version of their leading product will be pivotal on whether this happens.
Questions to ask yourself… Is the iPhone outpricing themselves from the market? How can Nestle compete with the likes of Starbucks in the coffee market?
And finally… Offshore wind farms
The cost of offshore wind farms has halved over the last few years, making the energy generated cheaper than nuclear power. As the technology and processes have become cheaper, they now produce energy under £58 per megawatt hour of electricity. The lower costs mean that the UK is eligible for a £294 million funding pot, which could bring in £17.5 billion of investments into the UK.
Question to ask yourself… Should the UK look to expand their offshore wind farms?