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Original article
In this week’s Commercial Awareness update, we discuss a new American trade deal, IMF’s global recession warning, Italy’s worrying budget plans, Unilever’s headquarters and Unilad to go out of business?
United States-Mexico-Canada deal
After weeks of nervousness in the markets about trade disputes involving America, especially with China, there is some welcome news after they agreed on a new trade deal with Canada and Mexico. After negotiations, the US and Canada agreed to replace the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA). President Donald Trump had been concerned about the balance of trade under the existing deal, and aimed to redress this imbalance - for instance, Canada has agreed to more market access for US dairy farmers and there are changes in rules around car exports. Originally, Canada was not involved when the US and Mexico agreed to a preliminary deal to change NATFA, but in the latest announcement, it appears that a trilateral deal has been agreed.
Stocks in America reacted positively to the news of the new trade agreement, with key indexes boosted as a result. The S&P 500 rose 0.8%, which pushed the index close to a new all-time high. The Canadian dollar hit a four-month high and the Mexican peso gained 0.5% after the agreement brought months of uncertainty and the chance of a North American trade war to an end.
Questions to ask yourself... Can protectionism really benefit America? How can China and America work towards cooperation over trade?
IMF’s warning
The International Monetary Fund (IMF) is set to meet this week in Bali, Indonesia, amid concerns about the possibility of a fresh global recession. They claim that rising global debt levels and an inability of governments to push through the regulation change needed to shore up financial systems. Global debt is at an all-time high and has increased by 60% in the last decade to £139 trillion. The IMF believes that despite more being done to bolster reserves in banks, economies could be susceptible to reckless behaviour.
There are also worries about the backlash against international agreement stunting trade and cooperation. Investment in developing countries potentially could be at risk, especially after a rise in interest rates in the US - if investors can get better returns from US banks, they may shift some of their investment from developing countries.
In Europe, heads were turned by the Italian government’s new plans for borrowing to fund welfare spending and tax cuts. Italy’s debt burden is already 130% of their Gross Domestic Product (GDP) - the second biggest in the EU, behind Greece - but what has worried investors about the new plan is the forecasted GDP increases it’s based on. They expect the economy to grow by 1.5% next year, which is higher than the estimates by the EU. This will not please the EU, who are already worried that Italy is dangerously close to breaking EU rules over borrowing.
Questions to ask yourself... Would Italy be better outside of the Eurozone? What can the IMF do to ease fears of a global recession?
Companies to watch
Tesco
Tesco’s shares dropped 8% last week as the UK’s largest supermarket announced weaker than expected profit growth. They delivered their 11th quarter in a row of increased like-for-like sales and their pre-tax profit for the first half of the year was up 2.2%. Their acquisition of Booker earlier in the year has shown strong returns and gives Tesco a greater strategic advantage - owning the wholesaler could help lower purchasing costs for their stores. However, analysts expected greater increases in profits and there are worries about their performance in some international markets, especially Poland and Thailand.
The UK market is also of growing concern as German discounters Lidl and Aldi are taking more market share. In an attempt to quash this increased competition, they have launched a brand new discounter store, Jack’s. The plan is to introduce 10 to 15 stores across the UK, which will sell predominately own-brand goods. Tesco sells over 35,000 products, but Jack’s will sell around 2,600 - focusing on essential groceries.
Unilever
Unilever has abandoned its plans to move its headquarters to the Dutch city of Rotterdam, after large swathes of UK shareholders said they wouldn’t back the plan. The company has a dual headquarter structure, but planned to make it just one - Rotterdam, not London - in recent plans. It is one of the biggest firms on the London Stock Exchange (FTSE 100), but under the new plans they would not have been eligible to be listed - commentators believe this would have caused many UK shareholders to sell their stock.
This is good news for the British economy and the government, who are worried about losing business from London after Brexit. The hope is that London can maintain its reputation as a global financial capital during the coming years.
Unilad
The company that owns viral publisher Unilad has gone into administration after HMRC issued a winding-up petition over unpaid taxes and concerns over the business model. Bentley Harrington has a debt of £6.5 million, despite the fact that Unilad is believed to be making £6 million to £7 million in revenue each year and the website currently being the fourth biggest publisher on Facebook. In recent months Facebook’s algorythm has changed in an attempt to bring more high-quality news to user’s newsfeeds - this hasn’t stopped Unilad continuing to grow its influence on social media.
Unilad is aiming to reach a deal with HMRC, but that could prove difficult given there are concerns about the company’s reliance on one platform (Facebook) for their revenue. Last week, reports suggest an offer of £10 million was made for Unilad, which is jointly funded by Rocket Sports and others.
Questions to ask yourself... How can Unilad become less reliant on Facebook? What is the key to success for a discounter supermarket?
And finally…
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.