This photograph taken on September 28, 2017, shows a smartphone being operated in front of GAFA logos (acronym for Google, Apple, Facebook and Amazon web giants) as background in Hédé-Bazouges, western France. / AFP PHOTO / Damien MEYERDAMIEN MEYER/AFP/Getty Images
© AFP

FT writers predict what 2019 may hold for technology groups, banks, the car industry, UK retail, airlines and energy companies.

Technology

Will there be room for another FAANG in 2019?

The small club of leading consumer tech companies stands to add its first new member since Facebook six years ago. Uber’s Wall Street debut — due before the end of March, unless market upheaval or regulatory complications intrude — is set to be one of the stock market events of the years.

But even as the FAANG group looks set to expand, it is facing its biggest test. While the stock market climbed ever higher, the five companies in the club — FacebookAppleAmazon,Netflix and Alphabet (parent of Google) — came to define the tech-led bull market. In 2019, their apparent invincibility will be subjected to much more scrutiny, not just from stock market investors, but also regulators, politicians, and a public that is increasingly wary of their growing power.

The tone for next year has been set in recent months, with $1.13tn wiped off the combined value of the FAANG companies  in the recent market slide. At $2.68tn, they are worth 30 per cent less than at the market’s peak — a harder fall than the Nasdaq, which is down less than 20 per cent, and a sign that many investors believe the period of tech leadership is over.

After a remarkable run, during which most of the leading consumer tech companies reported a re-acceleration in their growth rates, next year is set to bring a notable slowdown. Revenue growth among the FAANGs will fall from 26 per cent in 2018 to 17 per cent next year, according to analysts at Jefferies. That would still be a remarkable performance for a group of businesses with combined revenues of more than $700bn. But it is still likely to prompt concerns that a new era is beginning, where tech leaders slip from high growth to the merely ordinary.

The worries will be compounded by any US economic slowdown. A decade ago, after the financial crisis, the leading consumer tech companies barely registered the deep economic malaise as they rode strong secular trends like the rise of ecommerce and online advertising. This time, they may be less well insulated from any pullback in consumer demand.

Even bigger concerns hang over the extent to which politicians and regulators around the world will act to rein in the power of the tech leaders. Facebook has suffered the brunt of the anger over attempted election interference, wiping nearly 40 per cent from its shares as investors fret over regulatory responses — and the costs of dealing with them — that may follow.

The worries are not limited to Facebook. Google and Amazon have also faced intermittent political attack from Washington, where calls to limit their market power are on the rise. Next year should bring a clearer sense of whether the politicians are prepared to follow up their rhetoric with real action — or whether the unbounded power of the tech giants will continue.

Banks

JPMorgan Chase & Co. signage is displayed at its Madison Avenue building in New York, U.S., on Tuesday, Jan. 12, 2016. JPMorgan Chase is scheduled to release earnings data on January 14. Photographer: Michael Nagle/Bloomberg
JPMorgan's chief financial officer said there was a 'modest' cut in pay at the investment bank due to the markets’ result © Bloomberg

The looming disruption of Brexit, persistently low interest rates and a new wave of legacy scandals combined to make 2018 a particularly bad 12 months for European banks.

At the start of the year, Deutsche Bank was about one-tenth the size of JPMorgan Chase in market value. By December, the US bank was almost 20 times the size of its German rival. That might be an extreme comparison — JPMorgan had a pretty good year and Deutsche Bank had a dreadful one. But across the board, the gap in size and performance between European lenders and their US counterparts has widened to a record level.

The question now for banks and their investors is whether 2019 will be any better. The signs are not encouraging.

For Europe’s banks, in particular, fears are mounting that the Danske Bank money laundering scandal, which has already engulfed partner lender Deutsche Bank, may be the tip of a very big iceberg across the continent. If so, there could be big fines from enforcement authorities in the year ahead.

But the US is no panacea. Already, the shine has come off the country’s banks, as the dwindling impact of President Donald Trump’s tax cuts, a less hawkish Federal Reserve and more limited room for deregulation under a Democrat-controlled Congress sent share prices tumbling.

Brexit will be another headache. Although the banking sector seems among the best prepared in the business world, the impact of a no-deal outcome will be profound, forcing global banks to reroute large chunks of their London-based business to newly established hubs in Frankfurt, Paris and Dublin. US banks, which employ thousands of staff at European headquarters in the City of London, will be among the hardest hit. UK lenders, particularly Lloyds and Royal Bank of Scotland, stand to lose most in terms of second-order impact if the UK economy stalls.

Britain’s exit from the EU, along with other geopolitical jitters — from US-China trade relations to the Middle East — will also provide an unstable backdrop for markets. The gradual withdrawal of quantitative easing in both the US and Europe is expected to redouble the pressure on stocks, property and other assets as money flows back into higher-yielding government bonds.

For investment banks, some divisions will gain and others will lose from these trends, but on a net basis, the impact is likely to be negative. Mergers and acquisitions began to dry up in the fourth quarter of 2018, as financing tightened: that could be a harbinger of bleaker times for M&A bankers, especially if the nervy macroeconomic and markets outlook becomes entrenched.

If the credit cycle has peaked, too, as many believe, loan losses will begin rising. And with global debt now 40 per cent higher than it was when the financial crisis hit in 2008, the impact could be severe.

Technology may provide a bright spot, allowing banks to boost their appeal to customers while cutting costs. But there is a flip side. Fintech start-ups and giant tech groups alike will continue eating away at banks’ core business. All in all, banks may face as tough a year in 2019 as they have in a decade.

Cars

An employee attaches a door to a Toyota Motor Corp. automobile at the company's factory in Burnaston, U.K., on Friday, Feb. 18, 2011. Toyota Motor Corp. is aiming to post an operating profit at its parent company level on a monthly basis by the end of next fiscal year, said Executive Vice President Atsushi Niimi. Photographer: Simon Dawson/Bloomberg
© Bloomberg

The clouds hanging over the car industry look likely to darken in 2019.

The automotive world has always been a captive of consumer spending cycles, but key markets are entering downturns at exactly the time that carmakers need to spend on expensive new technologies, from electric to self-driving vehicles.

Whether China, the world’s largest market, grows or shrinks this year will depend largely on the government’s intervention, while the US is braced for another year of falling car sales. The trade war between the two nations remains unresolved.

The first wave of mainstream electric cars arrived during 2018, but 2019 will see a deluge, as carmakers ramp up launches ahead of strict new European CO2 rules that kick in during 2020 and tougher rules in China.

Expect more focus from carmakers on the need for charging points across Europe. National governments also face their own CO2 reduction targets, and are likely to come under more public pressure to invest in charging infrastructure.

The growth in electric car numbers will also accelerate the race to buy batteries, with Daimler and Volkswagen already pledging to spend €70bn. As others step up their investments, the price of raw materials such as lithium and cobalt looks set to rise.

In the UK, the impact of Brexit on production, from disrupted supply chains to the possibility of tariffs, will override all concerns about future technology. The industry has warned that a no-deal exit will cause some sites to close.

Several of the world’s largest carmakers also face their own challenges.

The Renault-Nissan-Mitsubishi Alliance, forged and held together by Carlos Ghosn, faces huge uncertainty following his arrest in November on corruption allegations. Any changes to the structure will draw in governments of both Japan, which can block foreign takeovers, and France, which owns 15 per cent of Renault. A full split between the alliance members, though almost unthinkable, is not out of the question if Mr Ghosn does not return.

Another alliance that should become clearer is that between Ford and VW. On paper the pair make an ideal match, with Ford’s strength in US pick-up trucks, European commercial vehicles and self-driving vehicles complementing VW’s larger presence in European cars, China and electric cars. Current talks indicate collaboration is likely, including VW potentially taking stakes in specific ventures such as Ford’s Argo AI, but will stop well short of a full-blown merger.

Tesla, which managed to break out of “production hell” during 2018, will face pressure to begin making a $35,000 version of the Model 3 car. So far it has only made models selling for $49,000 upwards, with reports suggesting its break-even point is $42,000.

Changes sweeping the industry are affecting the companies that make components as well. Continental will split out its older power train business from the rest of the company, echoing moves by Delphi and Autoliv to hive off “old world” technologies. Pressure will build on other suppliers to follow suit.

UK retail

Shoppers on Oxford Street, in central London, on 'Super Saturday', the final Saturday before Christmas. PRESS ASSOCIATION Photo. Picture date: Saturday December 22, 2018. Photo credit should read: Dominic Lipinski/PA Wire
© PA

The coming year promises more upheaval and distress in the UK retail industry, but may also show retailers offering more response to structural change and cyclical pressures.

As 2018 drew to a close, many concluded that only by offering big discounts could they tempt increasingly cautious consumers to open their wallets. Others tried to maintain prices. January’s glut of trading updates may shed light on which strategy was less damaging, but the first casualty of poor Christmas trading came on Friday, with music chain HMV filing for administration.

Those who got it wrong may be forced to resort to a legal mechanism much in use this year: the company voluntary arrangement. Intensely disliked by landlords, they allow retailers to rationalise their store estates, cutting rents and shortening leases. Many expect department store group Debenhams, whose shares now trade in pennies, to make such a move in the first quarter.

Historically, most companies that entered CVAs have ended up failing; next year will offer clues as to whether the CVA users of 2018, which include Homebase, New Look, Mothercare and Carpetright, have done enough to secure their futures.

The coming year is also likely to see a fundamental reshaping of food retail. In early March, the Competition and Markets Authority will publish its final determination on the proposed takeover of Asda by J Sainsbury. Approval would see the industry consolidate from four big supermarkets into three, with the top two holding a three-fifths market share; rejection will, in effect, rule out future consolidation among the big groups. The regulator is thought unlikely to block the deal outright, but if it demands significant store disposals, that could be enough to kill it — raising questions about future strategy at both Sainsbury’s and Walmart, the US owner of Asda.

The CMA decision will come just a few weeks before the UK, unless Westminster decides otherwise, is set to leave the EU. Few industries would feel the impact of departing without a withdrawal agreement more quickly or acutely than food retail. Industry executives have refused to say very much about their contingency planning, but they have been clear that stockpiling fresh food is not an option. Fresh items trucked from Europe in particular would rise in price almost immediately.

That would quickly feed through into inflation and consumer confidence and force supermarkets, which already operate on thin profit margins, to contemplate more price cuts or face losing market share. The discounters Aldi and Lidl could be the winners in such a scenario, but only on a relative basis. A no-deal exit would be extremely disruptive for the sector. That may create opportunities for the bold and the well-financed; speculation about Amazon’s intentions in the UK, particularly in food retail, is unlikely to abate.

Several executives in the sector have points to prove in 2019, foremost among them Mike Ashley, the founder of Sports Direct, who will want to show that his 2018 acquisition of House of Fraser was inspired rather than reckless. Archie Norman and Steve Rowe, chairman and chief executive respectively at Marks and Spencer, will need to start demonstrating progress as their five-year plan passes the halfway mark, while Véronique Laury may face increasing pressure to contemplate more radical action at Kingfisher.

At Ocado, one of 2018’s few success stories, Tim Steiner’s team need to show they can implement and profit from the series of technology deals announced over the past 18 months. 

Airlines

FILE PHOTO: An airplane takes off at Gatwick Airport, after the airport reopened to flights following its forced closure because of drone activity, in Gatwick, Britain, December 21, 2018. REUTERS/Toby Melville/File Photo
© Reuters

When the trade body for the world’s airlines published its predictions for 2019, they came at the end of a patchy year for the industry of high oil prices, airline failures and a growing trade war between China and the US. Nonetheless, the International Air Transport Association forecasts next year will be a 10th consecutive year of profitability — the longest run for decades.

Iata predicted that net profit across the industry would be $35.5bn, up 9.9 per cent on 2018 although down on 2017’s peak of $37.7bn. It also forecast record revenues of $885bn and passenger numbers at 4.6bn, a 5.6 per cent increase on 2018.

Alexandre de Juniac, Iata’s director-general and chief executive, said: “We are cautiously optimistic that the run of solid value creation for investors will continue for at least another year. But there are downside risks as the economic and political environments remain volatile.”

Brent crude spent most of the autumn between $75 and $85, before dropping back to just over $60 in mid-December, and Iata predicted it would average out at $65 next year. The industry’s fuel bill will still rise, from $180bn this year to $200bn next year, but will remain constant as a share of expenses.

Alex Paterson, analyst at Investec, praised measures to reduce excess capacity that allow airlines to maintain fares. “What we’re encouraged by is that capacity growth accelerated during the year but has come back to a more manageable level because of the action of 50 or so airlines, all slightly reducing their capacity for winter.”

But there were problems from 2018 that could recur, Mr Paterson said, such as flight disruption because of air traffic controller strikes and shortages, and industrial action at airlines including Ryanair and Air France.

The strong global economy also has its downside, said Brian Pearce, Iata’s chief economist. “Although fuel prices have fallen, the industry is facing significantly rising costs elsewhere — infrastructure costs, labour costs. That’s reflecting the broader economy pressures — spare capacity used up, unemployment at low levels,” he said.

Those pressures may lead to more consolidation in 2019. In autumn 2018, a spate of smaller airlines failed: Latvia-headquartered Primera, Cyprus’s Cobalt, Switzerland’s SkyWork, Germany’s Azur Air and Lithuania’s Small Planet Airlines.

Meanwhile, UK regional airline Flybe put itself up for sale, a US private equity firm agreed to invest in Iceland’s Wow Air and Norwegian is in advanced discussions on more funding.

If global trade falls in 2019, cargo flights will suffer. While Iata predicted that the cargo market would grow from 63.7m freight tonnes this year to 65.9m tonnes next year, it forecasts yields falling 8 percentage points to 2 per cent. If the US and China come to terms, cargo may come through.

Energy

Oil platforms operated by Lukoil company are seen at the Korchagina oil field in Caspian Sea, Russia October 17, 2018. Picture taken October 17, 2018. REUTERS/Maxim Shemetov
© Reuters

A 30 per cent rise in Brent crude prices between January and October lifted earnings at major oil and gas companies and gave them the confidence to boost investment and pursue production growth again. 

But renewed price volatility, with Brent touching $50 a barrel this week, will unsettle companies only just riding the wave of the energy sector’s recovery following a brutal multiyear downturn that battered their balance sheets.

A further slide in the oil price would put new pressure on companies from BP and Royal Dutch Shell to US rivals, which have been committed to reducing costs and keeping a firm grip on spending as they reduce debt.

“The recent slide in prices justifies the sector’s conservative mindset. In our view the commitment to capital discipline will not budge entering the new year,” Tom Ellacott, of consultancy Wood Mackenzie, said in a recent note.

Energy sector analysts have already questioned the ability of the big majors to sustain free cash flow generation growth, despite new higher-margin projects that are coming online and costs that remain relatively low despite initial signs of inflation.

Until now, the extra cash has enabled companies to pay dividends, buy back stock as well as make new investments such as BP’s $10.5bn deal for BHP Billiton’s US shale assets and the $40bn LNG Canada project that Shell announced in October.

“Companies will be cautious about raising shareholder distributions and investment too quickly,” said Mr Ellacott. 

Even as the majors may opt to pay off debt to enhance their ability to absorb future shocks and hold out for opportunistic deal activity, the US shale sector is one area where investment will continue to flow. LNG projects in Qatar and deepwater oil resources in Brazil are among several others. 

The energy sectors biggest companies will seek to announce new moves as part of the sector’s positioning for an energy transition towards cleaner fuels, particularly as they try to appease investors. But companies will still only spend a fraction of their budgets on low-carbon strategies

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