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Original article
In this week’s Commercial Awareness update, we discuss a strong summer for the British economy, Italy’s economic outlook, Nike’s Kaepernick campaign, Amazon after hitting £1 trillion market capitalisation and more.
The summer economic boost
UK economic growth was stronger than expected in July as the warm weather and World Cup fever swept the country. The retail sector was the biggest winner as the economy grew 0.3% during the month. The service sector also had a strong month, with demand for engineers, accountants and lawyers particularly high. The growth in the construction industry has led to a record high in terms of output, but it wasn’t the same picture in manufacturing which retracted 0.2%. Despite this, the growth of 0.3% was well ahead of the 0.1% that experts had forecasted. The news had a positive impact on the pound which was boosted by 0.15% against the dollar and 0.2% against the euro.
The pound also reacted positively this week to the EU Chief Negotiator Michel Barnier’s suggestion that a Brexit deal could be possible within two months. Barnier claims that if both sides were realistic, the deal could be struck by early November. With Theresa May facing a Tory backlash against her Chequers Plan, it appears that the EU has thrown her a lifeline.
In other Brexit related news, Bank of England governor Mark Carney has agreed to stay on until January 2020 to help facilitate a smooth exit from the EU. Carney agreed a five-year term when he took over from Mervyn King, which will now be extended by seven months. The move adds stability during what is likely to be a difficult period for the economy and is likely to be welcomed by the markets.
Questions to ask yourself… Is Michel Barnier an ally or an enemy for Theresa May? What can Mark Carney do to facilitate a smooth transition when Britain leaves the EU?
Italy’s negative outlook
Ratings agency Fitch downgraded its outlook for Italian government debt from ‘stable’ to ‘negative’. The agency predicts the government will be borrowing more over the next year and their deficit will increase - essentially the difference between what they are spending and their revenues will increase. The increased spending could put Italian government close to the limit set by the European Union - that is spending should not exceed 3% of the country’s Gross Domestic Product (GDP). Over the last week, investors have been selling off Italian government bonds (government’s sell these to raise funds offering consumers are return, then they are traded on the market) as confidence in the economy waned. However, crucially, Fitch only downgraded their outlook, not their rating. The Italian debt is still set at ‘investment grade’ and not ‘junk’, meaning that they still believe it is a safe investment.
Questions to ask yourself… Should the Italian government borrow more to inject money into the economy? What are the advantages of investing in government bonds over other types of investment?
Companies to watch
Nike
Last week, sportswear giant Nike launched a new advertising campaign featuring ex-San Francisco 49ers quarterback Colin Kaepernick, celebrating 30 years of their slogan ‘Just Do It’. The NFL player was the first player to kneel during the national anthem on match days to highlight racial injustice. As a result of the campaign, reports surfaced that Americans were burning Nike products in protest against the ads - at this point the share price fell 3%. However, looking back on the days after the ad was released showed that sales grew by 31% year-on-year. In the same period last year sales grew by 17%, highlighting that the ad didn’t have the impact on sales investors first worried about.
Amazon
Amazon has become the second US tech company to reach a £1 trillion dollar valuation, after their share price on Tuesday soared to $2,050.51. The stock has surged 75% in 2018 alone, adding $430 billion to the companies value. Amazon generates an annual revenue of $178 billion and captures around half the amount spent online by consumers in the US. With Apple achieving the same feat last month and Alphabet and Microsoft closing in on the milestone, some commentators worry that giant tech firms have an excessive influence over policy makers and the stock market. In recent months, regulators both in America and the UK have aimed to curtail the influence of these tech companies in some ways, whether it’s their tax affairs or their use of data.
One key reason Amazon has been able to grow so quickly is by letting small retailers to sell on their platform. Opening up may appear counterintuitive, but being able to control the marketplace has been key to Amazon’s success. It’s not just their retail arm which generates big revenues; Amazon Web Services brings in $17 billion and is the company’s biggest profit driver.
Network Rail
Network Rail is selling its commercial property portfolio, mainly converted railway arches, for £1.5 billion to Telereal Trillium and Blackstone Property Partners (two investment groups). Network Rail will maintain access in the leasehold agreement, but the commercial deals will be managed by the investment groups. The money raised by Network Rail through this deal is to be invested into improvement work and to shore up their financial position. However, the smaller businesses who occupy the arches worry about the impact on their rents. They tend to get cheaper rates than other spaces, but they have been increasing significantly in recent years - the new ownership could boost prices even more.
Funding Circle
Funding Circle is set to be the first peer-to-peer lenders in London to float on the stock exchange, as they plan an October Initial Public Offering (IPO) valuing the company at £1.5 billion. The company, which launched in 2010, plans to raise £300 million by listing on the London Stock Exchange. Funding Circle is part of a new wave of London Fintech firms which have challenged established institutions and practices in recent years - in this case traditional banks. The Fintech company has helped many start-ups across London fund early-stage growth and given many smaller investors a chance to invest in these businesses. The firm is yet to turn a profit, losing £35 million in 2017, but is considered a Fintech ‘unicorn’ (because its value is above £1 billion).
There are challenges to Funding Circle continuing their rapid growth, especially in the event of an economic downturn. Some commentators believe they would struggle to maintain their value if people were to start investing less when times were more difficult for the British economy.
Questions to ask yourself… What makes an advertising campaign work? How can Amazon become a £2 trillion dollar company? How does Funding Circle protect themselves against future economic downturns?