This week the Commercial Awareness update comes to you mid-week after Philip Hammond made his Budget speech earlier in the week. We cover what you need to know, as well as the markets in selloff mode and key companies to watch this week.
Chancellor Philip Hammond delivered his plan for the next financial year in the House of Commons yesterday afternoon, announcing the era of austerity (spending cuts in an attempt to reduce the deficit) was coming to an end. Here are the key points:
On personal taxation, the threshold - the amount at which people start paying tax - will rise from £11,850 to £12,500 and the threshold for higher rate tax (40%) will rise from £46,350 to £50,000
For indirect tax, duty on beer, cider and spirits will not rise; however, wine duty will rise 8p. Fuel duty will be frozen for the ninth year in a row.
Universal Credit, which has amalgamated six types of benefits, including unemployment benefits, will be given an extra £1 billion to support people onto the new system - since its announcement, it has been unpopular, but this Budget reaffirms it is here to stay
As expected, £20.5 billion extra has been committed to the NHS, with a minimum of £2 billion for mental health
An extra £1 billion has been allocated to the armed forces, largely to enhance cyber-capabilities. Plus, an extra £160 million was committed to counter-terrorism
A new 2% digital services tax for big tech companies for the revenue they make in the UK - this will be introduced in 2020, unless there is an agreement between a number of big countries on this (which is currently in the planning stage)
£900 million for business rate relief and £650 million to work on UK high streets, in the aim to increase their prosperity
A 30% increase in infrastructure spending, including a £30 billion package for roads - including pothole repairs
State of the economy
The 2018 growth forecast has been downgraded from 1.5% to 1.3%, meaning Britain is likely to be behind most developed countries in terms of growth. However, for 2019 growth has been upgraded to 1.6% from 1.3%. The Chancellor also expects 800,000 more jobs to be created by 2022 and has pointed out that wage growth is at its highest in around a decade. A key aim for Philip Hammond is to reduce the deficit (the difference between government expenditure and the money it collects). This year it will be £11.6 billion lower than expected at £31.8 billion and is expected to drop to £26.7 billion in 2019/20.
On Brexit, it was announced that an extra £500 million would be used to prepare Britain for leaving, which now totals £4.4 billion. The Spring Statement in March could also be upgraded to a full budget if Britain is leaving the EU without a trade deal.
Questions to ask yourself... Who gains the most from the Budget? Does the NHS need more than an extra £20.5 billion over the next five years? Should the government be doing more to collect tax from tech giants?
The Markets in selloff mode
Another disappointing week for markets across the world, with the two main American exchanges - the Dow Jones Industrial Average and the S&P 500 - entering negative territory for the year. Confidence in the global economy is currently fragile and disappointing results for Amazon (see below) and Google didn’t help the situation towards the back end of last week. The poor showing in America had a knock-on effect across the world, with markets in Asia and Europe taking a hit. The FTSE 100 fell 0.9%, while France’s CAC 40 index fell 1.3% - in Europe, the EU rejected Italy’s proposed budget last week which caused nervousness across the markets.
Economic data showing the US economy is growing more than it did last year didn’t appear to have a major uplifting impact on the stock markets. Third quarter data showed economic growth was 3.5% more than it was in the same period last year. Consumers spent 4% more - confidence is likely to be higher due to low unemployment and low taxation. Americans are also on average saving less, which is quite a surprise - with interest rates increasing, it’s more profitable to save than it has been in almost a decade.
The impact of the market dip was felt in the oil industry. After rising oil prices for the last two years, the price of brent crude fell 5% on the New York exchange. If there is an economic slowdown, the demand for oil is likely to curtail - hence why the price is heavily linked to activity in the stock market. Two large oil companies, Total and Eni, reported better than expected third quarter results due to higher oil prices, but this prosperity may start to dip if prices drop.
Questions to ask yourself... What can quell investors worries and encourage them to invest more in stock? Should the EU have the right to block Italy's budget?
Companies to watch
Scottish Investment firm and one of Tesla’s biggest shareholders, Baillie Gifford, has signalled confidence in Elon Musk and claimed it would provide more funds for Tesla if the electric car company needed a new investment of capital. It’s reported that Baillie Gifford own around 8% of Tesla and are currently the third largest shareholder. A partner at the firm last week backed under fire CEO Elon Musk hailing his “vision and ambition” for driving the business forward.
There was good news for Tesla last week, as they posted a profit for the third quarter. The car company reduced manufacturing costs on their vehicles by 30% and had a record for sales of their Model 3. As a result of the news, shares soared 12%. One thing haunting the company was their slow production rate, but this appears to have been sorted in the last quarter, with record numbers of deliveries to their customer base.
Amazon’s share price has dropped 23% over the last month as the firm announced disappointing third-quarter figures and a lower than expected forecast for the fourth quarter. The online retailer expects a year-on-year sales growth of 10% to 20% for this quarter - significantly lower than the 29% sales growth they experienced last quarter. There was some positive news, as they recorded the fourth consecutive quarter of £1 billion in profit, but the outlook isn’t as positive. The retail part of the business is where Amazon is experiencing a slowdown - their Web Services are going from strength to strength. However, with IBM acquiring open source software company Red Hat, Amazon's and Google's domination in cloud computing could be challenged.
Netflix surprised some last week by announcing a further $2 billion of investment to fund new content. They will sell senior unsecured bonds in dollar and euros to raise the new funds, as they continue to try to get ahead of the competition with new and original content. Profits are going up each quarter, but investors worry about subscriber growth moving forward. They are spending $8 billion in original content this year alone - if they don’t meet targets for subscribers, this investment could be very costly to profit levels.
Questions to ask yourself... What key challenges does Tesla face in continuing their growth? What impact could Netflix's debt have on the business?
We’re delighted to be partnered with Hogan Lovells for the Commercial Awareness updates in October. They are a top global law firm combining a unique balance of ambition and approachability with over 2,500 lawyers working in over 47 offices. They deliver practical solutions to prestigious clients and have a dynamic working culture where the ambition of their trainee solicitors is supported to ensure their success.