Inflation Not Under Control

Back in March I said: “As I suggested in my comments on the budget, the probability of inflation falling to 2.9% by the end of the year is a grossly optimistic forecast”. And so it has turned out to be. Instead of inflation falling below its 2 per cent target within a year, which the Bank of England had forecast, the Bank now thinks it will only hit the goal in 2025. So Bank Rate has been raised again to 4.5%.

It really brings into question the competence of Andrew Bailey and Bank of England forecasters when an amateur financial commentator like me can be more accurate.

Inflation is always very sticky. When people see prices rising they adjust the prices they expect to pay and the wages they demand. And companies pay little attention to the exhortations of politicians.

Roger Lawson (Twitter:  )

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GB Group Webinar plus Spirent and Paypoint Trading

I watched the Capital Markets Event webinar yesterday of GB Group (GBG), a company whose shares I have held for a number of years. As one of the speakers said, identity verification is the key for trusted e-commerce and GB has exploited the growing demand for that.

The event lasted over 2 hours and was full of marketing hype including four presentations from customers saying how wonderful the company was. But I learned very little that was new about the company’s activities.

Future guidance was reiterated. According to Stockopedia that puts the company on a prospective p/e of 19.2 for the current financial year (year end of March) and 17.1 for next year which does not seem expensive. The half-year results recently announced showed positive growth in revenue but earnings per share down and debt risen no doubt due to the recent large Acuant acquisition.

I would have liked much more information on their competitive position, market share, integration progress etc.

This morning there was a trading statement from Spirent (SPT). This said 2022 results were in line with expectations but also included the comment “the Group’s performance is now likely to have a heavier than usual weighting to the second half of 2023”. That was enough to scare the market and the share price is down 16% at the time of writing. Investors have learned to be very wary of such comments – it usually simply means sales targets are not being met.

Yesterday did produce some better news at another of my holdings – Paypoint (PAY). They said “Group net revenue from continuing operations increased by 9.8% in the quarter to £32.5 million”. The share price perked up yesterday and it looks fundamentally not expensive but a large holder (Sanford DeLand Buffettology Fund) has been selling recently and still holds a big stake so the share price may remain under pressure.

The other good news yesterday was that inflation fell slightly to 10.5%. Will it continue to fall? Probably but at that level it’s still rapidly eroding the value of the pound in our pockets. Food price inflation is a particular problem. Killing off inflation is not going to be easy as labour shortages and strikes means there will be pressure to increase wages and hence prices for some time.

Roger Lawson (Twitter: )

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Bad News from the Bank of England and Tips to Avoid the Worse

I watched Andrew Bailey, Governor of the Bank of England, present the bad news yesterday about the economy. Inflation is likely to rise to 13% and he is forecasting the economy will soon be in recession, with household incomes falling over the next year. With inflation being driven by the war in Ukraine affecting energy prices the Monetary Policy Committee has decided to increase Bank Rate by 0.5 percentage points to 1.75% to try and get back to the target of 2% inflation.

With mortgage rates rising and the cost of living rising while there will be downward pressure on wages relative to costs most people are going to be poorer over the next year. There may not be a recovery until 2024.

What was the impact of this gloom on the stock market? Very little in essence. The main UK market indices actually rose yesterday as did my personal portfolio. Perhaps because the bank interest rate rise had been widely forecast and it’s still at a historically low rate. Sales of consumer durables, furniture and carpets – big ticket items for which purchases can often be postponed – will surely fall but the share price of companies selling those products have already fallen over the past few weeks.

The UK stock market is of course dominated by companies with revenue and profits mainly arising overseas while banks will tend to benefit from higher base rates and energy companies are making hay from the high prices of oil and gas.

The conclusion for investors is if you have spare cash on deposit don’t leave it there because its value will shrink. Give it away or spend it on home improvements as we will be doing – particularly to cut your energy consumption. If you do want to put some into the stock market, go for companies who have indexed linked revenue (such as some property companies and alternative energy investment companies) or who have pricing power (i.e. can raise their prices without losing volume). Avoid investing in fixed interest securities such as Government bonds who are benefiting from the erosion of their debts.

Here’s a tip for business owners I learned from past recessions. If you are faced with a loss of revenue in a recession, you should be raising prices not lowering them, i.e. don’t react like your competitors might do to try and win more business. With less revenue and the same overheads you need to raise prices not lower them so avoid following the herd.

As regards giving money away, it is worth bearing in mind the potential Inheritance Tax liability. There was a very useful article in Investor’s Chronicle headlined “What does HMRC mean by gifts from surplus income?” a couple of weeks ago. Gifts from surplus income are exempt from IHT and the IC article explained the rules that apply.

It’s worth doing it regularly but you need to keep a record of all income and expenditure and tot it up at the end of each tax year to ensure you keep within the limit if you are giving money to offspring. I have been recording all personal income and expenses for the last 50 years, now in a spreadsheet, so I have the data readily to hand. This might seem rather manic to some people but even John D. Rockefeller, probably the richest person of all time and certainly in the 1920s, used to record all his personal expenditure, even tips to taxi drivers, in a notebook according to a biography I read.

Gifts to spouses or charities are exempt from IHT of course.

Let us hope the Bank of England is no more accurate in its economic forecasts than it usually is but it’s certainly been looking incompetent at controlling inflation of late. My view is that printing money to keep the economy afloat and protect the NHS during the pandemic was the cause of the inflation compounded by the impact of the imported energy costs.

The lack of a UK energy policy to keep the lights on and gas flowing has been a big cause of our difficulties. Lack of investment in nuclear energy plus restrictions on fracking and new gas exploration due to a rush to achieve net zero carbon have been very damaging.

For more details on the gloomy bank forecasts see:

Roger Lawson (Twitter:  )

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Inflation and EKF AGM

Inflation is certainly a big problem with the news that it is now at 9% and heading higher in the UK. Most advanced countries have been hit in the same way due to higher energy and food costs but the UK is certainly leading the bunch due to past mistakes over energy policy.

What annoys me is not so much the price inflation as when companies shrink their packaging as happened recently to Kellogs Cornflakes and Nescafe’s Azera Coffee tins, while no doubt maintaining the same price.

I thought the price of microwave ovens had suffered from gross inflation when my wife bought a replacement for £529. That’s after I managed to fry the old one by leaving a potato in it. But looking at the market you can buy a perfectly good one for £60. I don’t think my wife is very price sensitive! She clearly thinks we are rich when with the stock market declining we are getting poorer.

With the sun out, the sky is blue and there is no cloud in the sky it’s difficult to focus on financial matters. But I did watch the EKF Diagnostics (EKF) Annual General Meeting this morning. This was run as a hybrid event run via Zoom with about 9 people on-line and at least one ordinary shareholder physically present. The acoustics were not good though so difficult to hear the questions posed by the one present and at some point multiple people speaking at once was confusing.

There were a number of questions posed on-line or received in advance. I’ll only mention some particularly interesting comments. The company has plans to launch a sepsis test for use in critical care environments in 2023 with clinical trials at the end of this year. That would be of great use as I almost died from sepsis in hospital after a minor surgical procedure a few years back. It can be difficult to diagnose at present.

There were some interesting comments on the difficulty of getting approval for medical devices in China. Regulations are used to block foreign products it appears. The company needs to change its strategy for that market.

The point of care market is growing at 6% per year but there is higher growth in the enzyme market hence the focus on that.

The meeting lasted about 50 minutes and was of some use.

Roger Lawson (Twitter:  )

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Is the Investment World Changing?

With the war in Ukraine continuing and inflation hitting over 6% (and likely to go higher), it seems a good time to review one’s investment strategy. My thoughts on this were prompted by watching the panel discussion at the Mello Trusts and Funds webinar on Tuesday. Some members argued that now is the time to move into commodities and out of the high growth technology stocks that have been such winners in the last few years. Is growth going to go out of fashion?

It’s certainly very clear that high inflation in basic commodities such as food (likely affected by the war in Ukraine who are a major producer) and oil/gas (also affected by the war and the associated sanctions on Russia) will have a big impact on consumers in the UK in the coming year. We are already seeing this in the shops and in on-line stores from my brief shopping experience yesterday.

As the Chancellor’s Spring Statement indicated yesterday, the UK is facing its biggest drop in living standards on record as wages fail to keep pace with rising prices. His measures to relieve this by raising the National Insurance threshold and cutting fuel duty will help a few people but not the retired or those not in work. The basic rate of income tax will fall slightly in 2024 in time for the next general election but the country will remain a high tax environment. Perhaps the Chancellor has decided he cannot protect people from the world economy which is undoubtedly true so he has just made a few gestures.

Economies might grow less rapidly or recessions hit as a result of these adverse economic winds, or we might see the dreaded “stagflation” return to the UK. But does this mean I should change focus on the types of companies I invest in?

I don’t think so and I shall repeat what Investment Manager of Smithson Investment Trust (SSON) said in their Annual Report which I was reading today: “One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off”.

Commodity companies go in an out of popularity as their profits depend on the commodity demand and prices. But the production of most commodities responds to price changes so in a year or two the boom is over and the bust follows as over-capacity has been created. Chasing these rotations requires a large amount of time and effort when I prefer to purchase companies that one can stick with for many years.  

The impact of high inflation does mean that one has to be careful in selecting companies with high margins and pricing power, i.e. the ability to raise selling prices when their costs rise. But that is a truism in all economic circumstances. Those are two factors that differentiate quality companies from the pedestrian ones.

Companies that have index-linked contracts with their customers might be worth looking at now that inflation is heading to 10%. That applies to many infrastructure investment companies for example and another sector is property companies who often have inflation linked rent reviews. I hold a few shares in Value and Indexed Property Income Trust (VIP) which is one such company.

Incidentally Smithson noted they had sold their holding in Abcam (ABC) which I also commented on negatively recently. They are concerned about the uncertain paybacks on the investments being made which I completely agree with.

Changing my investment strategy which has developed over the last twenty years and has made me an ISA millionaire does not seem to be wise. There was an interesting article published today in the Daily Telegraph on ISA millionaires of which there are apparently over 2000 in the country now according to HMRC. There may be more than that as Hargreaves Lansdown alone claim to have 973. See article here:

The average age of ISA millionaires is apparently 71 and the article reports that the top three stocks favoured by these investors are pharmaceutical company AstraZeneca, insurer Aviva and oil giant BP. Popular funds include Artemis Income, Fidelity Global Special Situations and Fundsmith Equity. That tells you that you don’t need to be a speculator to become an ISA millionaire. You just have to invest the maximum possible every year in a diverse portfolio and stick with it.

Roger Lawson (Twitter:  )

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