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Cautious start for Europe as PSA, Fiat deal agreed

Cautious start for Europe as PSA, Fiat deal agreed

Yesterday’s modest pullback in European markets wasn’t enough to prevent US markets from making new record highs last night, nonetheless as we head towards the middle of the last full trading week of 2019, investors appear to be adopting a much more safety first approach, as the euphoria of a US, China détente and a new Conservative majority government quickly fade.

Today’s start to European market has been typically subdued with the FTSE100 modestly firmer due to a weaker pound while markets elsewhere in Europe have opened largely flat.

There was a time when Pearson owned a wide range of businesses from the FT, to book publishers, as well as its education business in the US. Since the announcement of that sale of the FT in 2015 to Nikkei for £844m, the share price has pretty much gone one way, from record highs in March that year, to over 50% lower today, which suggests that while Pearson management may have a strategy for the business, investors are less convinced.

This morning the company announced the latest in a long line of asset sales, this time selling the remaining 25% stake in Penguin Random House to Bertelsmann for £530m, thus completing a process which began in January 2017, when they announced their intention to sell their 47% stake. The first 22% was sold in the summer of that year and it would appear that management have decided the time is right to offload the remaining stake, and this is expected to complete early next year, with the shares opening higher this morning.

Over the same period of time the company has sold off a range of other assets in what is seen to be an attempt to cement a niche as the world’s leading digital education company. The loss of thousands of jobs over the past few years, along with the sale of a range of businesses including the K12 US school textbook business earlier this year hasn’t been enough to stop the share price losing over half its value since the heady heights of 2015.

In M&A news it would appear that the speculation over a PSA Fiat Chrysler merger has been firmed up this morning after the two companies agreed terms for a merger to create the world’s fourth largest car maker.

The combined company will be led by Carlos Tavares, Peugeot’s CEO who has overseen a remarkable turnaround in the fortunes of the French car giant since he took over all the way back in 2014, when there was a real risk the company could well have gone to the wall.

The auto industry has undergone a significant amount of disruption over the last decade, from huge amounts of overcapacity to the challenges of electric and driverless cars, and that’s even before the fallout from the emissions scandal, which decimated the diesel market.

Under the terms of the deal it has been reported that there is the potential to make €3.7bn of savings without the closure of any plants. This seems wishful thinking but maybe that was the price of a promise to a French government which has a sizeable stake in the business.

There is certain to be a sizeable overlap between the two businesses, with the business in the UK perhaps the most vulnerable given the politics at play, and the labour laws in France and Italy which make it much more difficult to reduce the size of the work force there.

The deal will also need regulatory approval and this may well be where it could fall down given that China’s Dongfeng will have a 4.5% stake in any newly amalgamated business. Given current relations between the US and China, any concerns the US might have about Chinese influence in a big US employer, could well be something that the US President might use to block the deal.

The pound has continued to slip back after the strong gains of recent weeks, after the UK government said that they wouldn’t look to seek an extension to the transition period. While some have suggested that this raises the risk that the UK could leave the EU without a deal, such an event still remains well over a year away, and we haven’t even left the EU yet. It seems a little early to start fretting about that.

The decline in the pound also needs to be put into context. Since the lows in September at 1.1950 the pound has risen steadily, peaking at 1.3500 last week, a rise of 12%. A pullback at some point was inevitable, and this is precisely what is happening. Putting the declines to one side we’re still very much in the uptrend from those lows, and we could well see further losses towards 1.2800, without undermining the upward bias.  Today’s inflation data looks set to offer consumers another boost ahead of the Christmas break with a fall in headline CPI to 1.4%, against a backdrop of wages that are 2.1% higher at 3.5%.

The UK economy may be flat lining for now but consumers are still reaping a real terms earnings boost, a trend that has been in place now since February 2018. While central bankers may well be concerned about the lack of inflation, I’m pretty sure most consumers won’t be, and will be glad of it.

Yesterday’s resilience for US markets was reinforced by economic data that has continued to remain fairly firm, with improvements in building permits and housing starts, which helped push the US dollar higher. Unsurprisingly they prompted the usual tweets from President Trump about the strength of the US dollar and calling for more Fed easing, however they are more than likely set to fall on deaf ears for now.

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