Interest Rate Rise, Strikes and Xmas Reading

I am still hoping for a Santa rally in share prices but they are certainly not happening today. The Bank of England raising interest rates by 0.5% to 3.5% has surely had a negative impact. These are some of the depressing comments made by the Bank:

“Bank staff now expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report. Household consumption remains weak and most housing market indicators have continued to soften. Surveys of investment intentions have also weakened further”; and “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response…..The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”. In other words, more interest rate rises are likely to follow.

With major strikes by train staff, NHS staff and postal workers, you can see why there is gloom in the market. Are the strikes justified? My personal view is that NHS nurses deserve some increase to reverse the erosion of their real pay over the last ten years and to make the job more attractive. I visited my renal consultant on Monday and she was not happy to be providing cover for striking nurses in the next few days. But will I need to cross a picket line for my next appointment? It’s almost 50 years since I had to last do that when HM Customs & Excise staff were on strike but it was all very civilised in reality.

As regards train staff I am not convinced that they are justified in disrupting another essential service for a pay rise and for their demands over working practices. They are already highly paid in comparison with other workers and they should not be trying to dictate how management run the operations. There are also suspicions of a political undertone to their actions.

I issued a tweet saying the strikers should be give an ultimatum to work normally or be sacked. Rather surprisingly I got a response from the RMT which said “In your haste to sound draconian you’ve not considered who would staff the railway or train the replacements if you’ve fired them all? Nothing would move for years!!”.

My response was “Well it worked when Ronald Reagan did it for air traffic controllers, did it not?”. This refers to the events in August 1981 in the USA. To quote from Wikipedia: “After PATCO workers’ refusal to return to work [over a pay dispute], the Reagan administration fired the 11,345 striking air traffic controllers who had ignored the order, and banned them from federal service for life. In the wake of the strike and mass firings, the FAA was faced with the difficult task of hiring and training enough controllers to replace those that had been fired. Under normal conditions, it took three years to train new controllers. Until replacements could be trained, the vacant positions were temporarily filled with a mix of non-participating controllers, supervisors, staff personnel, some non-rated personnel, military controllers, and controllers transferred temporarily from other facilities”.

The US airlines continued operations with minimal disruptions and the Reagan move had a significant impact on union activities in other organisations effectively resetting labour relationships in the USA. Strikes fell in subsequent years. From 370 major strikes in 1970 the number fell to 11 in 2010, and it had a positive effect in reducing inflation.

Just as Margaret Thatcher handled the coal miners in the UK, Reagan’s firm resolve on facing up to the unions created a new and better culture.

As regards postal workers the picture is not so clear. The average postman salary in the United Kingdom is £47,500 per year but the average for all postal workers is much less. But there is one thing for certain, Royal Mail Group will be badly hit by the strikes and customers will reduce the number of letters they send even more and switch parcels to another provider. Postal workers are cutting their own throats by continuing strikes. Here also the dispute is not just about pay but also working practices.

This is another essential service which should not be disrupted. Legal notices get delayed, dividend cheques go missing and letters re hospital appointments and medication deliveries are held up.

It’s all gloom on the political and economic fronts at present. But I am getting ready for the xmas holidays by stocking up on books to read. In fact I have already started reading “The Stock Market” by John Littlewood which covers how capitalism has worked in the UK in the last 50 years. Not well in summary is the answer as it has been driven by political dogma from one extreme to another. The author points out the difference from the USA where the major political parties have always supported capitalism rather than socialism.

Other books I have ordered are “Fall” – a biography of arch fraudster Robert Maxwell, “The Anglo-Saxons: A History of the Beginnings of England”, “Power Failure: The Rise and Fall of General Electric”, and “The World: A Family History” by Simon Montefiore. They should occupy me for a few hours!

Roger Lawson (Twitter:   )

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The Death of KIDs

HM Treasury have announced plans to revoke the PRIIPs regulations which will likely mean the death of KIDs (Key Information Documents).

KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding. But in reality KIDs are grossly misleading for many investment trusts.  This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. This writer certainly ignores the KIDs for the investment trusts I hold and I doubt most retail investors took much notice of them.

KIDs were a typical example of complex financial regulations that were misconceived by EU bureaucrats while imposing substantial costs on investment trusts which they no doubt passed on to investors.

The Treasury have issued a public consultation on what might replace KIDs – see . It explains exactly why KIDs need scrapping.

I may respond in some detail to the consultation as I might have time over Xmas to do so.

In the meantime I am still waiting for the usual Santa rally in share prices. Perhaps I am just being impatient and Santa Claus may arrive in the last few days before Christmas. I hope so but the market has already gone quiet with prices stabilising. I guess folks might be too busy attending parties and doing Xmas shopping to spend time on share trading.

Roger Lawson (Twitter:  )

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Holmes Sentence, Diploma Results, TRIG Announcement, Office Space Surplus and Gamification of Trading

It was good to see that on Friday Elizabeth Holmes, former CEO and founder of Theranos, was sentenced to 11 years in prison for fraud. The US company claimed to have a revolutionary blood testing device and raised $900 million when the product never worked and investors and customers were deceived. This is the kind of sentence that we should see in the UK but never do for companies that mislead investors.

This morning Diploma (DPLM) published their Final Results for last year. Both revenue and profits were ahead of forecast. This is a diversified engineering company which has grown both by acquisitions and organic expansion. With a bland company name and a low profile, this can be an under-appreciated business while it also benefited from a high proportion of export sales last year (a 5% benefit to revenue from foreign exchange movements).

Another announcement this morning was from The Renewables Infrastructure Group (TRIG) which is one of those alternative energy suppliers which the Chancellor recently targeted with a new tax as they were making too much profit. The detailed impact is now spelled out.

The new tax is a 45% levy on revenues in excess of £75/MWh. TRIG estimates this will reduce the company’s NAV per share by 8.3p per share, i.e. about 6%. But the company expects electricity price increases to more than offset that. The company will also see a positive impact from inflation but that is offset by a similar decrease in asset valuations which are discounted at a higher rate as a result.

The overall impact on the share price today at the time of writing is negligible but many of these changes were already forecast of course. This is an example of the problem of investing in companies or sectors where the government is interfering in the market. In this case the government decided to incentivise renewable electricity generation but then decided that companies were making too much money as a result.

An interesting article in the FT has highlighted the rise in empty office space as working patterns changed with more people working partly or fully from home. Occupancy levels have plateaued at about half pre-Covid levels and new construction has slowed. Offices can be repurposed to meet the housing shortage but that is not always easy the article reports. You can see why the commercial property sector is in the doldrums and that is surely not likely to change soon. I doubt people will return to the old working patterns now they have enjoyed the benefit of a lot less commuting, particularly in London. Personally I always hated commuting and avoided it so far as possible. Even after setting up a business initially in the West End, that was soon moved out to the suburbs freeing up two or more hours extra working time.

Lastly the FCA has warned against the “gamification” of trading apps. This is where product features are added to encourage activity. The FCA is right to look at this issue but as usual it is closing the stable door after the horse has bolted. It has been clear for many months that some share trading platforms are encouraging speculation as opposed to long-term investment.

Note: I hold shares in DPLM and TRIG.

Roger Lawson (Twitter:  )

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Market Trends, WeWork, Cryptocurrencies, Passive Saturation

Last week was a remarkably one for my stock market portfolio. Share prices were up on almost all my holdings. This was no doubt sparked by good news from the USA – inflation seems to be under control with CPI falling to 7.7%, and the war in Ukraine is looking up as Russia withdrew from the west bank of the Dnipro River. Stalemate in the latter war is looking increasingly likely which may encourage both Russia and Ukraine to reach some accommodation.

I also get the impression that stocks were being bought back in a panic after previous sales as they fell sharply in previous months. This particularly affected less liquid small cap and AIM stocks.

But this is surely only temporary relief from the gloomy economic prognostications. Interest rates in the UK still need to rise further as inflation is still high and real interest rates still negative. Political stability may help over the next few months but it looks like we are all going to be significantly poorer from aggressive tax rises. This will not help the UK economy one bit.

I watched an interesting TV documentary on WeWork yesterday. WeWork was essentially a company that rented out office desk space, i.e. it was a property company but ended up being valued as a high flying technology business valued at a peak $47 billion before it crashed. Led by Adam Neumann as CEO in a messianic style it developed into a cult which became further and further detached from reality. As profits were non-existent they redefined the word profit.

It’s a great example of how investors can be suckered into backing dubious companies led by glib promoters simply due to FOMO (fear of missing out). There is a good book on this subject entitled “The Cult of We: WeWork and the Great Start-Up Delusion” which I have ordered and may review at a later date.

Cryptocurrency exchange FTX became bankrupt last week. At the end it looked like a typical “run on a bank” as folks rushed to take their money out. FTX reportedly had less than $1bn in easily sellable assets against $9bn in liabilities before it went bankrupt. This has also affected other cryptocurrencies as traders take their money off the table.

Can cryptocurrencies survive? Only if backed by the state I would suggest. I am reading an interesting book – the Travels of Marco Polo which covers his time spent in the Mongol empire including China circa 1300. It describes how paper money was widely accepted in the Mongol empire which covered most of Asia at the time. But it was backed by gold or silver for which it could be exchanged. One advantage of their paper money was if you wanted a lower denomination note you could simply cut up a larger one. Paper currencies do rely on public confidence which is why state backing is so essential and also confidence that holdings are not going to be devalued by excessive printing of more money. Cryptocurrencies have tackled this issue in more than one way including the need for large power consumption to create new coins. But the whole structure still seems unsound to me.

An interesting article in the Investors Chronicle this week covered the subject of passive investing under the headline “Passive Saturation”. There has been concern expressed for some time that a high proportion of the stock market is held by index tracking funds that simply follow the herd. This might magnify trends and not relate to the reality of fundamentals in the companies they buy and sell. This was previously not thought to be a problem because the “passive percentage” of the market was estimated to be only 15%. But a new academic report suggests the real figure is more like 38%.

A very high passive percentage means that stock pickers can do well, and better than the indices as they ignore trends and look at the fundamental merits of companies. I prefer actively managed funds even if you do pay more for them in charges. Funds that rely solely on momentum may have done well historically but they are likely to exaggerate trends both up and down and the higher the percentage of the market held by passive funds, the more dangerous this becomes.

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Market Conditions, Fonix Mobile Webinar and Aston Martin

The stock market seems to have calmed down now that we have some political stability in the country, it seems we might not run out of gas this winter after all and may be able to keep the lights on. But small cap companies are still very depressed with stock market investors preferring to put any spare cash into big or mid-sized oil/gas companies. Big miners are still holding up reasonably well because of the high dividends they are paying despite the gloom over the prospects for consumption in China.

I am not trying to buck the trend and have even bought some BP, Shell and Rio Tinto shares recently. I feel that all those new speculators in small cap company shares that joined in during the boom times have departed the market and are not likely to return soon. Once bitten, twice shy may be their motto.

I reduced my holdings in smaller companies as their share prices declined but I still hold some of them. One such is Fonix Mobile (FNX) who gave a presentation of their annual results on the Investor Meet Company platform today. I’ll briefly summarise what they do:

The company specialises in carrier billing systems, i.e. charging fees to your mobile phone as an alternative to credit card payments (75% of revenue), and in text messaging services (22% of revenue). They are experts in core verticals such as media, charity donations and online gaming but any transactions of less than £40 qualify so can be used also for such things as car parking payments.

What do I like about this company? The positives are:

  • Steady growth in revenues and profits in the last 4 years (they listed on AIM in October 2020).
  • High return on capital.
  • Pay a decent dividend.
  • High recurring revenue and high customer retention.
  • Focus on internally generated growth not acquisitions.
  • Limited foreign adventures.

They do have an international development strategy but that’s mainly focused on Ireland at present with some activity via partners in Germany and Austria. They are also evaluating other markets but they suggest they have room to grow in their existing markets. They are mainly investing in product development and sales/marketing. They only have 40 staff at present with about 15 in product development.

The management presented well and a recording is available of course.  Note though that the shares are tightly held and there is limited trading in the shares with a bid/offer spread of over 2.5%.

There are other companies in the carrier billing market, e.g. Bango and Boku, but the focus on certain verticals in the UK clearly has enabled them to build a solid niche.

I see Aston Martin (AML) published another poor set of results this morning – a year to date loss of £511 million and debt rising to £833 million although claimed revenue was up. The company blamed “supply chain challenges and logistics disruptions”. It still looks a complete basket case to me and I suggest only car aficionados should consider investing in it. When the anticipated recession really bites will folks be buying “ultra-luxury” cars as they call them? My only slight interest is that after holding it for 9 years my Jaguar XF will soon need replacing – a big bill today for some maintenance work on it. Let me have your suggestions for new petrol or hybrid luxury vehicles, or perhaps I will be able to pick up a low-cost Aston Martin when they near bankruptcy?

Roger Lawson (Twitter:  )

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Retail Investor Trading and Their Bad Habits

There is a very good article by Michael Taylor that has been published by Sharescope on the subject of the behaviour of retail investors, and their bad habits. It is based on an academic article.

I quote from some of it:

“1. Retail investors tend to trade as contrarians after large earnings surprises, both positive and negative”. Retail investors typically love to buy stocks with profit warnings – the old catching a falling knife trade. They are also quick to book profits on stocks with earnings surprises to the upside. This is why “cut your losses and run your winners” is an oft-used phrase. It’s the exact opposite of what the study in the article found retail investors do.

2. Contrarian trading behaviour did not appear to be information-driven on average. The study found that most retail investors were doing their trading post announcement. Rather than taking a view on the stock before the announcement, they were reacting to the surprise (and often as a contrarian).

3. Contrarian behaviour appeared to be attention related. Retail investors were more likely to trade as contrarians more intensely on stocks they held. I believe this is because many retail investors are risk-averse. Rather than cutting their losses, they preferred to take on more risk rather than admit they were wrong. I think this because many of these portfolios that were looked at had significant negative returns compared to the market by going against momentum.”

You can read the full academic article here:

I don’t think I suffer from most of the bad habits mentioned above although I certainly tend to trade post announcements. I cannot see the point of trying to trade on imaginary news and trading before announcements is positively dangerous as there tends to be little trading then so prices can fall for no reason.

But I have seen the above errors many times in the numerous retail investors I have talked to over the years, particularly in the inexperienced ones.

With the gyrations in the market at the moment I am probably trading too often. Should one buy back a stock after it has fallen and you sold it? I certainly do so if the fundamentals suggest it is good value or that the market has temporarily over-reacted to negative news. At present the stock market is being swept by emotions so a couple of rules I would suggest: 1) Wait a few hours before reacting to news and trading unless the news is very clear (and by the time you can react the price will have moved anyway); 2) Make sure you are sober before trading and not distracted by other events – you need a clear head and need to avoid emotional reactions.

You need to accept your mistakes, ditch the losing stocks and run your winners. That means accepting your mistakes on selling as well as buying.  

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Why Property Companies Are Falling

A couple of articles in the FT today explain why commercial property company share prices have been falling of late, causing some damage to my portfolio.

First there is an article headlined “Goldman Sachs sounds alarm on UK commercial property”. They predict that with a sharp rise in borrowing costs billions of pounds will be wiped off their value. Prices could fall by 15 to 20 per cent by the end of 2024 they say. See

The article also points out that the “mini” budget which caused a disruption in the gilt market has caused pension funds to sell their property holdings. Several property funds have suspended redemptions so no doubt they are ditching holding in property investment trusts instead which I hold rather than open-ended funds. This means that a company such as Schroder REIT (SREI) has fallen to a 47% discount to NAV which seems excessive.

But gilts have rallied today which might relieve the pressure on pension funds. Another FT article said this: “Investors had previously been unnerved by confirmation from [Andrew] Bailey on Tuesday that the BoE’s bond-buying programme would not be extended beyond Friday, with the Bank warning troubled pension schemes that they had just three days left to sell whatever assets they needed to in order to restore their cash buffers. However, after the central bank purchased £4.4bn of bonds on Wednesday — easily the biggest daily volume so far in the BoE’s programme — markets were reassured by signs that pension funds were taking advantage of the facility to offload gilts and raise cash”.

Comment: I am getting really annoyed by these gyrations. When commercial property should be one of the less volatile of shares they are being driven into bouncing around by speculation on what the chancellor and governor of the Bank of England will do.

Even the negative prognostications on borrowing rates from Goldman are misconceived. Property companies rarely need to refinance their loans in the short-term and their loan to book values are generally not high (28% in the case of SREI in March this year for example). If loans need to refinanced in a few years time, what will be the loan interest rates achievable then? They are likely to be somewhat higher as the rates have been unrealistically low for many years but nobody really knows.

In summary these gyrations might soon be making property trusts more attractive but the general malaise in the stock market is not going to encourage anyone to buy unless the outlook seems brighter and the gilt market stablises.  

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Preparing for Power Cuts

The Government seems to think we will be able to muddle through in the same old British fashion but I am getting prepared by thinking ahead. It’s not going to be as easy as it was 50 years ago when miners were striking in the 1970s as so much now depends on electricity.

National Grid have warned that power cuts may have to be imposed this winter for periods of hours because of a shortage of gas which is the largest source of electricity generation. If there is a very cold spell, supplies of gas are cut off from Russia which is already happening, and a combination of other negative factors occurs then we will be facing a bleak mid-winter.

You might have gas central heating but your boiler won’t operate without an electricity supply. Are you working from home? Forget it because your PC or laptop will shut down along with your wifi router. Even your 4G phone signal may fail as phone masts only have a few hours back-up battery supply.

I have checked out our two old oil lamps (photo of one above which I have polished) to see if they still worked and they do, with some oil remaining in them. Can be lit with a few matches.

We also have a gas fire in our living room that can be lit manually with a match which will suffice – it’s rare for a domestic gas supply to be cut off because, so far as I recall, to do so creates problems when the supply is reconnected requiring a visit to every household in case a pilot light needs lighting. Industrial users would no doubt be cut off first.

But I probably should not have thrown out a paraffin room heater a few years ago – however they are still available and cheap.

As regards electronic communication, my broadband supplier (BT) provides auto switchover to a 4G connection if the broadband goes down but I don’t think that will help if the router loses power. I had a quick look at UPS systems but these are mainly of help in providing a gentle power-down. They typically only provide a few minutes battery time unless you spend a large amount of money. If you want hours of back-up you need a diesel generator. I doubt the expense of that is worthwhile.

A mobile phone like my iPhone 13PRO will operate for two days without a recharge so that should cope with lengthy power cuts. But if your phone has a shorter life then you need a “powerbank” which can give you many hours of power. They are readily available and not expensive. It could also support notepads as well as phones but laptops and PCs are another matter.

In extremis I could power my laptop in my car because I have a converter that plugs into the car auxiliary socket and supplies a 230-volt normal 3 pin socket. I can then probably tether my laptop to a 4G signal via my phone.

This might enable me to continue trading my stock market portfolio one way or another but will the stockbroking platforms and the LSE continue to function? I have no idea. I hope they are thinking ahead at the moment on how they can operate if power cuts are widespread.

A diesel or petrol car can supply many days of power but those folks who have bought plug-in electric vehicles might have difficulties if there are lengthy power cuts.

The above covers my personal “resilience” on power supply but nationally we seem to be in a really dangerous position. The Nord Stream gas pipeline was apparently easily damaged by some malicious act – probably Russian, but electricity interconnectors which we rely on for power from the continent are vulnerable. Similarly internet/phone cables could be easily damaged (as happened in January to a link from Norway to Svalbard).  In the modern world we are extremely open to all kinds of malicious acts from foreign powers and Russia now seems intent on using its capabilities to cause mischief on a global scale. All off-shore installations are vulnerable in essence so we need to crack-on with fracking.

It’s a far cry from when my father ran a coal-fired power station in the 2nd world war – he never ran out of coal. The Government has clearly got to take a good look at energy security in the UK. Even if the hot war in Ukraine cools down we might have an energy cold war for some years. It’s going to be long time before anyone trusts Russia again and certainly not while Putin is in power.

I have also been adapting my stock market portfolio to the new world of energy insecurity in the last few weeks by buying shares in oil//gas companies such as BP, Shell, Serica Energy and Woodside Energy. The dividend yields on such companies are now sufficient to offset the capital risks. I am normally prejudiced against commodity stocks but when times change I decided it was time to reconsider. But I still will not be looking at small exploration oil companies.

I have also been buying alternative energy suppliers such as Gore St Energy Storage, Greencoat UK Wind, Gresham House Energy Storage, Octopus Renewables Infrastructure and The Renewables Infrastructure Group although even those have dipped recently after a good run up since the start of the year. Whether this is due to the general stock market malaise or doubts about the new regulatory regime for electricity is not clear. As in any bear market, there is nowhere to hide as everything falls.

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Currency Impact on the Stock Market

I have been wondering why certain stock market sectors have been falling for no very obvious reason of late. For example UK property companies and alternative energy funds. I suspect one reason is that the majority of UK listed shares are now held overseas – 56.3% at the last reported figures in May 2020 which was a record high.

The pound against the US Dollar has fallen by 14% in the last 3 months. So if you are an investor sitting in the US you will have seen your UK shares fall in price in your local currency by that amount. When shares are falling for no obvious reason, people tend to sell them – at least I know I do. So it’s quite likely that the UK market is being affected by US shareholders dumping their holdings as a defensive reaction to falling prices.

Some people have suggested that UK companies are being affected by the high inflation rate, by labour shortages, by higher interest rates, by logistic issues or a looming recession but in reality the reported results have been OK of late.  Yes some companies might be directly affected by a falling pound – exporters positively and importers negatively. But there is no simple correlation with a company’s share price.

In reaction to the falling pound the Bank of England is buying UK bonds to calm the market. But they surely need to raise interest rates further and soon.

The rising proportion of UK listed companies held by overseas investors is exacerbating the bear market. Exchange rates can be very volatile and this makes for a very unhealthy stock market.

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Treatt Profit Warning

It has been suggested by articles in Investors Chronicle that now might be the time to venture back into the small cap market after a big fall in the share prices of such companies in the last year (the FTSE-AIM index is down by 27%). But investors in Treatt (TET) might not agree. After a profit warning this morning the share price is down by 31% at the time of writing.

Treatt is a supplier of natural flavouring and fragrances and has been highly rated in the last few years because of its apparent strong market position in the sector (a forecast p/e of over 27 before this warning).

What is the reason for the profit warning? Well there are a whole rag-bag of excuses including lack of anticipated performance in Tea blamed on poor US consumer confidence, volatility in FX movements, significant input cost inflation and Covid-19 restrictions in China.

Has poor US consumer confidence really impacted the consumption of that horrible beverage iced tea or was the company just being over-optimistic in sales forecasts? I suspect the latter.

Note I do not currently hold Treatt although I have done in the past. I eventually came to the conclusion that the share was too optimistically priced as I was not convinced it had as strong a market position as suggested and was vulnerable to competition.

Another small-cap company reporting today was Up Global Sourcing (UPGS) which I do hold. They issued a pre-close trading update in which they: “Unaudited Group revenues increased 13% to a record £154.2m (FY21: £136.4m), driven by the earnings enhancing acquisition of Salter, and a resilient performance of the core business, with underlying organic growth of 1.0% to £137.9m (FY21: £136.3m). Growth has been particularly strong with our supermarket customers, which now represent our largest sales channel”.

But with organic growth only 1.0% and a looming recession that will no doubt impact consumer goods purchasing, the share price has only risen slightly today. On a prospective p/e of 9 that is certainly looking cheap in comparison to what it was a year ago but I am not yet convinced it’s time to pile into such small cap stocks. The future needs to be clearer, particularly re supply chain costs ex China and consumer confidence in the UK.

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