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Written by: Steve Clayton, HL Select Global Growth Fund Manager
Chinese economics dominates the headlines for the second day in a row. Yesterday it was news that trade volumes were falling, suggesting that China was slowing sharply. Today comes news that both producer and consumer prices are now falling in the world’s second largest economy. Consumer prices fell by 0.3% in July, while producer prices dropped by 4.4%. This is very different to inflation falling, which is what we are seeing back in the UK. The UK economy is still seeing prices rising strongly, just not quite as fast as they were. China is now witnessing the actual cost of goods both in stores and at the factory gate falling. It is indicative of a significant slowdown in the Chinese economy, which is beset by high levels of indebtedness.
Just this week we are witnessing Country Garden, once the nation’s largest property developer, finding itself in financial difficulties after binging on debt in the boom years. The question is, will China’s internal difficulties get exported? We’ve already seen their demand for imports falling. If the falling price level feeds through into the cost of Chinese exports, then China’s most significant export to the rest of the world could become disinflation, for which many Central Bankers would be very grateful right now.
It's a very different story in European cooking markets. Far from witnessing deflation, the price of olive oil is hitting record highs, sending shock waves around larders across the continent. The price of a tonne of extra-virgin olive oil has rocketed to $8,500, more than double the average of the previous twenty years. The price surge is being driven by a weak harvest; production last year was down more than 20%. Will it impact on inflation? Perhaps in Southern Europe where consumption is far higher than in the rest of the world. But olive oil is a small fraction of the world’s overall cooking oil consumption, which is dominated by palm. soya and rapeseed oils. But it shows the importance of supply shocks in commodity markets and with an increasingly variable climate perhaps we will see more volatile agricultural commodity prices in future?
WeWork was perhaps the most over-hyped start-up of recent years. The business model was simple enough, rent large offices and sub-let smaller sections on flexible leases for significantly higher rents per square foot. The business was founded by a charismatic entrepreneur, who somehow appeared to walk away with billions of dollars when the debts first started to look challenging. Now the company has admitted that it is quite likely that WeWork simply doesn’t and that there is “significant doubt” about the company’s ability to continue to remain solvent.
This is a business that did nothing that hasn’t been done many times before, but suggested that it had somehow launched a revolution with novel financial metrics to explain why it was great, despite not making the real money that one would normally expect a property company to. Community EBITDA was a financial metric unique to EBITDA. That’s unlikely to change. With the group’s debts trading for cents on the dollar the market is clearly concerned about the value left in the business.
Flutter Entertainment has announced interim results that mark a watershed. The group which was formed through a series of mergers that saw Paddy Power, Betfair and PokerStars combine to create Flutter. The business has been targeting the opportunities created by the rolling legalisation of sports betting across the USA. In its results today the group revealed that it has reached profitability in the USA, revealing £49m of EBITDA earned there, compared to a loss of £132m the previous year. With US player numbers growing fast, some 43% in the first half, Flutter sees its US profitability in the full year settling anywhere between £90m - £190m.
Bellway is the latest UK builder to admit that things are getting tougher. Their trading update revealed a now familiar combination of falling sales volumes, weaker reservations, lower selling prices and squeezed profit margins. Private reservations per site have fallen by 36% and the group’s total completions of 10,945 homes were flattered by a stronger pace of completions in the social housing sector. At the current pace of reservations, volumes could be down by as much as a quarter in the next year, but actually, their forward order book is down by an even greater percentage. The group say pricing has remained robust, but demand has fallen away again following recent rate hikes after enjoying some recovery in the spring. The statement is something of a curate’s egg. The backward-looking stuff, how much they have sold and at what margins is generally fine, but the outlook is tougher than some had expected and at least one (admittedly over-optimistic) broker has cut their profit forecasts for the current year by a whopping 33%. The market is more sanguine though, given other builders had already reported weak news, limiting the share price reaction to a dip of 1% in early trading.
Related: Markets Have Let Their Guard Down, but the Bout With Inflation Is Far From Over…