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In this week's commercial awareness update we discuss OPEC's limits, Budweisers IPO, Pepsi's strong earnings and whether there is a recession looming.
Will a no-deal Brexit lead to a recession?
The Office of Budget Responsibility (OBR) reported last week that a no-deal Brexit will plunge the British economy into recession and wipe 2% off the value of the economy. In an official assessment looking at the next five years, OBR believes the economy will drop into recession (two consecutive quarters of contracting Gross Domestic Product) in 2020 and have to borrow an additional £30 billion a year to weather the storm, meaning taxes would have to rise or, more likely, borrowing would increase. The report highlighted that greater uncertainty and increased barriers for trade would have a significant impact on wages, employment and house prices. This ‘stress test’ is not the worst-case scenario, but predictions based on what the International Monetary Fund (IMF) reported earlier in the year. The economy has currently flatlined as we move towards the 31st October, but according to this report it is likely to get worse if a deal or an extension can’t be agreed.
This could serve as a blow to leadership contestant for next Conservative leader and PM, Boris Johnson. He’s expected to beat Jeremy Hunt to No.10 this week, but he has pushed for Britain to leave the UK on 31st October no matter what and even if there’s no-deal agreed. Many commentators have pointed out that with the summer recess in the UK’s Houses of Parliament, it makes it difficult for a new deal to happen in such a short timeframe. If Johnson sticks to his pledge, the prospect of a no-deal becomes increasingly likely. Over the weekend, Chancellor Philip Hammond took the unprecedented step of saying he would resign if Johnson was elected by the Conservative Party, because he would not commit to Britain leaving before 31st October if no deal has been agreed. It has been near impossible to get popular support in Parliament for a deal, so it will be interesting to see what happens when a new PM comes back to Parliament after the recess.
Questions to ask yourself... should there be a second vote on EU membership? Will the next PM be forced into calling a general election?
OPEC’s oil limits
The organisation of all the main oil producing countries, OPEC, has agreed to continue having limits on supply until 2020 in an attempt to regulate the price of oil. The production of oil has been vast in recent years, with America producing the most. However, as growth for the global economy slows and western countries increasingly seek greener energy solutions, demand is no longer matching supply. In this case, prices are likely to decline as the buyer is in a position of strength because there are more suppliers to buy off. Therefore, with oil (brent crude) dropping to under $40 per barrel in 2015, OPEC decided to limit supply to raise prices. It’s currently sitting at around $65 per barrel but there are still worries around demand.
Limiting supply at times may be good for the oil industry but businesses who rely on oil production lose out from savings if the oil price rises, which then get passed onto the customer. There’s clearly an environmental need to look at alternative energy, but if prices rise this could also be a further catalyst for economies to seek alternatives. It’s a difficult balance to strike.
Question to ask yourself... Is OPEC doing the right thing?
Last week, the biggest IPO of the year which had a valuation of up to $9.8 billion, was delayed after weak investor appetite. Parent company, Anheuser Busch InBev (AB InBev), was seeking to sell a minority stake in Budweiser as initially there was a high level of demand for Budweiser. However, occasionally investors will state they want more stock than they actually are willing to buy, in order to get the amount they are actually looking for. Consequently, last week, Budweiser found that demand was much lower than initially seemed. The deal had been expected to breeze past Uber as the biggest IPO of 2019, and in a statement, AB InBev stated there were several reasons for not going ahead with the transaction, with one factor being “prevailing market conditions”.
The IPO was initially designed to list 1.6bn primary shares, which would have valued the business between $54.2bn and $63.7bn. In the past week, shares in the drink company have fallen more than 6%.
The world’s oldest package holiday company, Thomas Cook, has announced that it is in talks with Chinese conglomerate, Fosun over their struggling situation. This is their largest shareholder and the discussions could see a £750m injection of cash and a consequent break up of the firm. This capital would allow the high street travel agent to continue trading into the winter season, as well as investment in the business. In this deal, Fosun will gain a controlling stake in the tour operating businesses, as well as a significant minority in the company’s airline. Peter Fankhauser, the company’s chief executive, stated it wasn’t the desired outcome but was the “best available choice”.
Thomas Cook has been struggling to maintain with the woes of the British High Street, along with increased online competition and increased uncertainty surrounding Brexit. Amid profit warnings and a strategic review, the firm announced that there would be 21 store closures, 300 job cuts and a £1.5bn loss.
Questions to ask yourself... is this injection of cash enough for Thomas Cook to turn around their woes on the High Street?
Soft drink giant, PepsiCo, had a strong second quarter as earnings topped estimates, however shares in the company rose less than 1%, despite earning $1.54 per share, above the expected $1.50. Overall shares in the company are up 20% this year due to Pepsi’s expansion into healthier snacks and sparkling water. With consumers turning to healthier drinks, Pepsi has followed the health trend. Furthermore, 50% of Pepsi’s sales are now coming from it’s snack market, where the company is benefitting from consumers in more developed countries buying healthy snacks. Even with sugar taxes being implemented in some markets, many consumers are still enjoying fizzy drinks.
PepsiCo has a market value of $185.5 billion, which is $36 billion less than its rival Coca-Cola, however it is interesting to note Pepsi’s share prices have risen twice as much as Coca-cola in the same time period, with the drink companies shares rising just 10%.
Questions to ask yourself... is Pepsi’s diversification enough to last the new healthy living trend?