Weekly Market Commentary – 11 October 2019

All Brexit Signs Point towards a General Election
This week has seen a flurry of Brexit headlines, each one both calling an end to the process and somehow extending the whole saga at the same time. While trying to guess what the government is actually doing in these talks is difficult, not least for the government, we’re of the view that despite the noise nothing has changed. The Good Friday Agreement will require more alignment to EU rules than the Brexiteers are happy with to keep the Irish border open, and the Benn act makes talk of no-deal meaningless.

We think all the activity now underway is just theatre. Talk of a work around to force no-deal ignores the illegality of such an attempt and is solely designed to keep the base from turning on the PM. There will most likely be an extension at the end of the month, followed by a general election. All of Westminster knows this, and almost everything you see and hear from now on is just election campaigning.

Autos: China’s Love for Mercedes keeps Daimler in High Gear
As demand for cars declines globally, Daimler-owned Mercedes Benz’s quarterly figures show them battling against the tide. Year-on-year sales were up 13 per cent for last quarter with much of the demand driven by Chinese consumers. In addition, Germany’s enthusiasm for Mercedes hasn’t waned either as sales for the region were up 25 per cent for September compared to last year. Mercedes enjoyed similar growth in the US, only just losing out on being number one premium selling brand to BMW by 34 cars.

Mercedes can only do so much for the German economy however. While export figures remain in the doldrums buffeted by trade tensions, the labour market remains tight and real wage continue to grow fuelling consumer appetite for spending. The auto industry represents five per cent of the German economy and if consumers are happy to spend on the likes of Mercedes and BMW – Germany may just be able to stave off a recession this year.

UK: Recession Fears Subside Despite Weak August
Economic forecasts released this week predict that the UK will avoid a recession this year. A “technical recession” would require two consecutive quarters of negative GDP growth and while the economy contracted in Q2, GDP is expected to rise by 0.5 per cent in Q3 easing recession fears. Despite the Brexit uncertainty, the TV and film industry helped to boost the services sector, but manufacturing is expected to remain weak.

Meanwhile, Pizza Express may become the next casualty in the casual dining sector. The 54-year old business has a hefty £1.12bn debt pile of which £656m is owed to bond holders and the rest to its parent company Hony Capital. The emergence of disruptors like Deliveroo along with the changing taste buds of millennials, who prefer Middle Eastern and Caribbean food, has eaten into the Pizza chain’s profit margin. Of the £543m revenue generated last year, £93m went straight to pay off its debts leaving the company £56m in the red.

Global: OECD New Tax Proposals Set to Hurt Faangs
The Organisation for Economic Co-Operation and Development (OECD) this week proposed a global shake-up of taxation rules. The aim is to ensure multinational companies pay more in corporate tax; which is set to impact tech giants like Amazon, Facebook and Google. The current rules which have stood for close to 100 years inadvertently enables corporations to exploit loopholes to artificially, yet legally, shift profits to no or low-tax countries. In order to stop this, a global framework has been set out which all countries can abide by rather than going down the unilateral route such as the digital tax sales mooted by the UK and France.

The new tax proposals will ensure that more corporate tax will be paid in countries where the most profits are generated ensuring exchequers receive a fair share of revenues generated. G8 members and developing economies stand to be the biggest winners if these changes go through, while low tax jurisdictions like Ireland and the Netherlands are set to lose out.

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