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In this week’s Commercial Awareness update, we discuss the possibility of another financial crisis, Italy forced to bail out two more banks, British manufacturing at a high, Toshiba descending into further trouble and the success of George Clooney’s Tequila company.
1. Is a major global financial crash on the horizon?
An international body within the Central Bank has warned that another financial crash could come “with a vengeance”. The annual report from the Bank of International Settlements (BIS) has claimed that the financial cycle of boom and bust will continue. These forecasts are due to activity in China and other developing economies, which are showing similar patterns to those in the UK and USA before the global financial crisis of 2007/08. They suggest improving levels of Gross Domestic Product (GDP) around the world and large increases in global stock markets could lead to overconfidence. The worry is that the financial sector will start lending too much without evaluating the risk effectively – a largely unforeseen problem in the West before the crisis ten years ago. China’s household debt rose steeply last year, which could be become a major issue if countries start raising interest rates to combat rising inflation.
With financial markets rising significantly in 2017, many believe stocks are largely overvalued, especially since major events such as the Brexit vote and Trump’s presidency appear not to have taken their toll on the markets. Even though the markets have done well, yields on government bonds (interest rates on government debt) have not risen much, potentially causing tension within the global economy.
Questions to ask yourself… What can the Central Bank do to negate the effects of boom and bust? Are global stock markets set for a decline?
2. Italy bails out two regional banks
On Sunday evening, the Italian government took the decision to wind down two failing regional banks in an attempt to prevent a bank run, which could destabilise the whole industry. The Veneto Banca and Banca Popolare di Vicenza, both of the Veneto region of Italy, are collapsing after years of poor management and out of control lending. The government has struck a deal with the country’s largest retail bank, Intesa Sanpaolo, who will take on the assets of both banks. However, this doesn’t come cheap – the government will pay an initial €5.2 billion to finance the deal and recapitalise the banks, as well as giving guarantees up to a further €12 billion to cover future losses.
With this cash injection, the banks have run as normal on Monday and the government hopes they will be able to prevent people rushing to the bank to withdraw their savings. Some commentators are questioning whether the deal complies with EU rules, as the taxpayers are no longer meant to fund banking bailouts. The government claims the money will come from a fund created last year to support struggling financial institutions, so won’t impact on taxpayers.
Questions to ask yourself… Should the government be committing this level of funding to failing banks? What impact, if any, will this have on the rest of the Eurozone?
3. British manufacturing hits 29-year high
The Confederation of British Industry has announced that British manufacturers are enjoying the greatest demand for their products in 29 years. A survey of factories found June was the strongest month for orders across the sector since 1988, as the global recovery and weaker pound boost demand. The balance of companies who were reporting better than average orders went from +9 in May to +16 in June. If these figures prove correct, this is positive news for the UK economy, after there was a slight dip in the manufacturing sector during Q1 of this year. However, manufacturing only makes up around 10% of British annual output, with the service sector having a much greater impact on overall economic prosperity.
Questions to ask yourself… Are there any other ways a weaker pound benefits the UK economy? What will maintain prosperity in the manufacturing sector after Brexit?
4. Toshiba’s losses increase
In the Commercial Awareness update a few weeks ago, we discussed Toshiba’s troubles, with their US nuclear unit running into financial difficulty and an accounting scandal which found that the company had inflated their profits by $1.2 billion. Last week the electronics giant announced more bad news, as they have now forecast their losses for 2016 to be greater than expected. They predict a net loss of 995 billion yen (£7 billion) compared to the previous estimate of 950 billion yen. The company has been downgraded to the second tier of the Tokyo Stock Exchange and been given an extra deadline extension until August to file their previous year’s full accounts. Toshiba is trying to sell off its lucrative microchip unit to provide some relief for the firm.
Questions to ask yourself… What is the advantage of delaying the publication of full accounts? Should the Japanese government step in to support the firm if they continue to decline?
5. Holland & Barrett sold for £1.8 billion
The UK’s leading health food and supplement retailer Holland & Barrett has been bought by Russian billionaire Mikhail Fridman for £1.8 billion. Founded in Hertfordshire in 1870, the store has sold everything from groceries to clothing, and has changed hands multiple times. The company now focus on health and wellness products and employs over 4,200 people in their 1,300 stores worldwide. L1 Retail – the fund set up by Mikhail Fridman in 2016 – is buying Holland & Barrett from US private equity firm Carlyle, who bought the retailer back in 2010 for £3 billion as part of a bigger deal. The health and wellness market is currently valued at £10 billion in the UK and L1 Retail group aims to take a further share of this.
Questions to ask yourself… How can Holland & Barrett take a bigger share of the health and wellness industry? Should the UK be encouraging more foreign investment into business?
6. And finally… George Clooney’s tequila firm sold for $1 billion
UK drinks firm Diageo has agreed to pay up to $1 billion for a tequila company co-founded by George Clooney. Set up four years ago by the actor and two others, Casamigos has become “the fastest growing super-premium tequila”, and sold 120,000 cases last year. Drinks manufacturer Diageo will pay $700 million to take over full control of the business and a further $300 million if the brand does well over the next ten years. This isn’t the first time Diageo has ventured into the tequila industry – it acquired Don Julio from Casa Cuervo in 2014 in return for giving the Mexican firm its Bushmills Irish whiskey brand. It appears to be a strong investment, as global tequila sales grew by 5.2% last year.
If you’re interested in opportunities at Diageo, take a look at their profile just here.