Generally financial markets fell back during the quarter, understandable given rising interest rates and what for a period of time included the possibility of a major conflict between NATO and Russia. The fact that the war in Ukraine, so far at least, has been localised put markets back on a more stable footing. Oil unsurprisingly was the biggest riser, increasing 31% during the quarter and gold, traditionally a safe haven in difficult times, ended up 6%. Our own FTSE 100 was the best performing major global market managing to end up 1.29%, this is due to its large concentration of oil and mining companies. With interest rates going up, UK Gilts fell 5.99%. Traditionally government bonds are considered low risk but when interest rates rise, bond prices fall. We are significantly underweight in bonds and sold further holdings of bonds earlier in the quarter. Monies raised are being reinvested into higher yielding shares and funds. I note that there are still many UK funds which invest in stock markets whose dividends are 5 or even 6% per annum. Far more attractive than government bonds.

General thoughts

The most interesting investment fact I have read recently is about Berkshire Hathaway. For those that do not know the firm, it is the company run by the famous and most successful investor of modern, if not all time, Warren Buffet. Buffet took control of Berkshire Hathaway in 1964 which at the time was a failing textile business. He began investing in insurance businesses. Today Berkshire is the eighth largest company in the world and owns some well-known brands such as Duracell and stakes in large US companies such as Coke, Kraft Heinz and American Express. Berkshire’s market capitalisation is now $780 billion and growing. Warren Buffet puts his success down to compounding - that is, reinvesting profits, time and again and not overpaying for shares. While reading about his firm this week I found out that Berkshire only employs 26 people, which I found quite astonishing. Their revenue last year was $354 billion, and they made $111 billion profit. It is true that Berkshire is effectively an operating company and the underlying investments it owns, themselves employ many thousands upon thousands of people but nevertheless, how many other businesses the size of Berkshire would end up employing thousands of staff ‘to look after’ the firm's investments, introduce regulations, forms, controls? Berkshire manages the whole outfit with 26 people. A cursory glance at their website also shows that they do not seem to use cutting-edge technology. Perhaps they just do the basics of investment well.

Time in markets

Another theme favoured by Buffet is buying shares for the very long term and keeping them. One way of looking at this is the chart below. It shows the Dow Jones Industrial Average going Back to 1860. Dow Jones 1896*2013 The main point is that stocks go up over time as economies grow. However, they are interspersed with long periods of underperformance. After the 1929 Wall Street crash you can see that it took 25 years for the stock market to get back to its high of early 1929. Even still for those alive at the time it must have seemed quite amazing to claw back all that ground given the disastrous scenario that unfolded from 1929 to 1932. Folk stories telling of brokers jumping out of the windows of New Yorks skyscrapers and even Winston Churchill nearly being made broke. Of course not all stocks recover, this chart is referring to markets as a whole. These days bank shares are nowhere near the levels they were in 2009 but the stock market on the whole is much higher. That is due to new businesses coming along, creating growth and economies ending up larger than in the past. Tesla and Netflix being examples of new industries that were only in their infancy 15 years ago.

Stock markets and rising interest rates

The financial subject on everyone’s lips is inflation. Not too long ago we were focussed on the potential for lost decades of growth and Japanese style deflation, China was flooding the world with cheap goods and interest rates in Europe were negative. European banks were penalising customers for keeping money in the bank! The way that stock markets have behaved in the last month has been one of the most interesting in the last twenty years. Back in 2003 a term known as the ‘Greenspan put’ was coined. Greenspan was the Chairman of the US Federal Reserve and responsible for setting interest rates. As he cut interest rates, the stock market went up, the rational being that with money being cheaper, business could borrow to expand and profits would be higher. Conversely a pattern also emerged that if Greenspan signalled that he would increase interest rates the market went down. The Fed seemed to reverse policy if markets fell too much and start to cut interest rates to give them a boost, worried that markets would collapse if they increased interest rates too much. This cycle led many to believe that Greenspan was at the mercy of financial markets when he should have been paying more attention to inflation. Then came the financial market meltdown in 2009, when Bear Stearns and Lehman went bust. In addition, governments took on massive amounts of private debt. Interest rates were cut to near zero and lower still during COVID. Since the financial crash of 2008/9 central banks have struggled to increase rates and, on most occasions, when they have done so, there has been a fairly violent reaction from stock markets. When that has happened, central banks have tended to soothe markets concerns by either reversing and cutting rates or telling markets they will keep them low for longer. As recently as 2018 when the US Federal Reserve began to increase interest rates, markets fell 6% and the Fed reversed policy again. Two things happened this quarter. The US Fed stated that it is finally going to increase rates and fairly rapidly saying that they are likely to increase interest rates 6 times during 2022. They are likely to go up from zero to 2.5% this year. While 2.5% is not historically very high, it is a significant change from several months ago. The second thing that happened during the quarter is that stocks markets have not collapsed. They have fallen slightly but there has been no sense of pending doom as has often been the case during the last twenty years when markets have become very unsettled at even the prospect of higher interest rates and despite the Ukraine situation. The creation of new jobs in the US economy is very strong indicating that the US economy is still growing at a fairly rapid rate. Stock markets seem to have decided that finally, for the first time since the early 2000s that markets can cope with rising interest rates. This is a good sign of the underlying strength of the economy but of course has taken 12/13 years since the financial crash of 2009.

Inflation

Run-away inflation has very negative effects but central banks have managed to avoid a deflation disaster. They now need to get inflation expectations under control which is why they have finally (somewhat belatedly) said they will raise interest rates and quickly. The jury is still out on what inflation will be more than a year out. There are those who think we are in an entirely new paradigm and that inflation is here to stay. I think it is too early to take that view. Firstly, the statistics themselves still include many anomalies from Covid, partial lock downs, changes to behaviours such as working from home. Commodity prices have clearly risen enormously but again, we are comparing to a time when the oil price fell to zero and you literally could not give it away as everyone was locked inside their houses. Take even the Ukraine situation. There is disruption to oil and some commodities such as wheat but could that be eased looking a year out. What we do know is that consumers are going to get squeezed by rising prices and rising interest rates. These two things will slow economic growth. What central banks do not know yet is where the new natural rate of interest rates will settle. The best guess perhaps being 2.5%. In the old days it may have been around 5%, meaning mortgage rates of around 6.5% or 7%. Levels of that nature now would surely cause a large fall in the housing market and significant economic pain. Policy makers will likely aim for a level of around 2.5% and hope that this is enough to bring inflation back to around 2.5-3% without causing too much economic pain.

Hedging inflation

One of the best ways to defend against inflation is to invest in certain stocks and reinvest the profits or dividends. Investors of course have to be choosy. Some companies will be able to increase their profits and increase their dividends, and when for periods of time it does not work out the answer is to keep hold of them and buy more. The caveat is doing research and stick to good quality.   Paul Coffin

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Over the past few weeks all the headlines have been dominated by the war in Ukraine, which began at the end of February. This war started when the Russian forces invaded Ukraine and is ongoing as I write this note. This outbreak of war with Ukraine has impacted the world, financially, economically, and socially. It has had a major impact on the price of oil and energy. Oil recently touched a high of over $120 a barrel, mostly due to the fact that Russia is one of the biggest global suppliers. This in turn has a major global inflationary effect, which has the potential to create a significant inflationary shock that could persist longer than previously anticipated. Many western nations reacted to the situation by imposing significant sanction on Russia and providing military equipment to Ukraine. This has disrupted stock markets and put active equity Fund Managers and their portfolios through a real-time stress test. Prior to the invasion, inflation was already an issue in the post-lockdown era. Central banks subsequently raised interest rates, which were the big market drivers. The Bank of England raised the base rate to 0.75% - the pre-pandemic level - with more rate rises to come if inflation hits their forecast of 8% later this year. The Governor, Andrew Bailey recently warned that “…uncertainty about how the Russia-Ukraine war will develop has made it nearly impossible for the Bank of England to chart the direction of the UK economy”. The Invasion of Ukraine has definitely come at a difficult time for the global economy. However, this inflationary market dynamic has been present for several months and is one which tends to favour more value, cyclical sectors, such as: mining; energy; and financials. With the mining sector performing particularly well, benefitting from the war in Ukraine, with the surge on commodity prices, due to some or all the Russian/Ukraine supply being unavailable. There is also a consensus that there is a new bull market in energy stocks, which may be in its infancy. If $100 a barrel becomes the new normal (rather than a temporary fluke) oil companies will begin printing money. There will also be benefits to energy infrastructure companies that build storage facilities and pipelines etc. In the current climate, trying to pick up bargains while everything is in the air can prove costly, an option would be to drip feed some money into a portfolio if funds allow. Meanwhile, let’s hope for peace and a near-term resolution to the war.   Stephen Lovelock                  

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It is almost impossible not to comment on the Ukraine crisis. Excepting the smaller events in the Bosnian war of the 1990s, this is the first major conflict in Europe since the second world war in 1945. There is no doubt that there are immense geopolitical and economic consequences, which need to be evaluated by markets. This will need to be worked through as it evolves, but already the tectonic plates of Europe are moving, and the old structure is being replaced. In a classic case of the law of unintended consequences, Putin, has made matters worse for himself as NATO has been galvanized and is no longer the sleeping creature it was. Other countries, such as the Nordics, are thinking of joining NATO. The West is now aware of his plans and is showing some gumption. Over the last twenty years successive decisions by some Western leaders have led to Putin believing the West was weak and divided and, in some cases, notably Germany that he had them on hook as he supplies such a large amount of their energy needs. Obama did nothing when Russia invaded Crimea in 2014. Germany chose to close all its nuclear power stations and buy most of its energy from Russian and Biden’s hasty withdrawal from Afghanistan must all have led to Putin deciding that he was in a strong position. Now, we are seeing some of the consequences of these decisions on top of the huge suffering of the people of Ukraine. The military strategists will have noted how effective anti-tank weapons have been and how vulnerable the tank is. Is it the end of the tank? Fighter aircraft is yielding the skies to military drones. Lots to think about here. As far as economic fallout, there are five key outcomes. First, we see another blow to globalization. The pandemic was the first warning that supply chains in a global world are too long and there are now further threats that call for greater self-sufficiency in key materials. This will benefit UK manufacturing. We have seen how a shortage of microchips can halt a complete auto line in the West. China will be watching with interest and will see how dependent the West is on Chinese products and components. Of course, with inflation rising after the Pandemic the energy crisis now seen will further hit inflation numbers. Several European nations are close to 10% inflation, and we could easily see that level in more during the latter half of year. For any government, that is a gift to the opposition, for a company it is a question of pricing power. Some have it and some do not, I like distributors as it is easy to alter prices as suppliers raise them. Time lags on price increases can be very damaging if the balance sheet is weak and your pricing power is poor. The energy questions posed are a two way pull. In the short term we need more UK based oil and gas, so expect to see more North Sea exploration that seemed out of court before and similarly a fresh look at fracking as there is more gas under Lancashire than in most parts of the world. The problem is that the long-term solutions with mini nuclear units and wind farms offshore in the Irish sea are years away in providing greener energy in bulk, short term it means more of our own fossil fuels – a negative for the green lobby. Whenever there is an energy crisis – as in the early 1970s - it is usually followed by a recession. Expect one by the end of this year. For the consumer, life will be tough. The bottom 20% of the nation will not be able to pay their gas and electric bills without external help. The next 20% thought they had accumulated a nice nest egg during the pandemic, but that will quickly evaporate. The richest 20% will not notice too much. So that means slowing consumer spending. which is so important in the UK economy. It will also mean trading down by consumers and greater levels of debt. If I may digress here, here is another example of the law of unintended consequences, where interest rates charged on unsecured loans to the poorest have been huge. So, to protect the borrowers, regulation has been raised and lenders have found it no longer economical, and you can see the development of unregulated under cover lenders as desperate borrowers end up in a more adverse position than before. From an investment view that is a boost for traditional pawnbrokers such as H&T, where the loans are backed by gold and jewellery. The other change we are certain to see is a significant increase in defence spending in the Western world. The UK is spending around 2% on defence; During the cold war, we spent around 5%. Russia spends 5% now, Germany is spending 1% and will need to step up to the plate.  Ironically, when I spoke to a fund manager recently, he told me his performance will be poor in the near term as following his ESG (Environmental Social and Governance) doctrine, he holds no defence or oil stocks! Markets show great resilience, but it is a topsy turvy world, so hold on to your index linked gilts, defence, and oil stocks. Barrie Newton

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Not many of us will want to dwell too long on 2021. Unfortunately, a year dominated again by Covid-19 with restrictions on social and work life, travel difficulties, cancelled arrangements and far too much time spent in front of screens. But during the first half of 2021 there was a strong global economic rebound, driven by vaccination programmes being rolled out across the world, markets generally shrugged off news of fresh Covid-19 waves and variants. This powered a rally in value stocks, that tend to have greater economic sensitivity. The second half of 2021 was somewhat different, where optimism gave way to fear and the value rally stalled as inflation figures rose across emerging and developed markets, being mostly due to supply chain disruptions. With China the second largest economy in the world also starting to slow down. As we enter 2022, higher inflation is proving to be persistent. While some aspects of inflation may be transitory, with supply chain issues improving, it is becoming clear that the cost of living has increased for consumers, due mostly to an increase in energy costs, along with wage pressure creeping in. Should inflation prove to be more entrenched and not as transitory as perceived, Bonds (fixed income) will not be favourable. Best to shift investments into real assets, such as property, infrastructure, and consumer staples and focus on companies that are best placed to deal with inflationary pressures, whether because they have pricing power, the ability to adapt their supply chains, or can quickly pass on costs. Value stocks could perform well in 2022 if investors become more confident in economic growth and interest rates rise gently. With recent macro events suggesting that the rotation from high-value stocks into Value stocks could continue, as plenty of value shares have recently burst into life. There are various sectors to look at, many have low-looking valuations. The UK market is a bountiful hunting ground for valuation. Markets around the world are reeling from coronavirus pandemic. With so many great companies trading at what looks to be discount bin prices. Now could be the time for savvy investors to pick up some potential bargains. Turning to Income, I have previously written about Investment trusts and the Investment trust industry has done well to minimise the dividend challenges during the pandemic era, with dividend reserves being used as necessary to provide a good level of protection for shareholders, some trusts will dip into them again in the coming year, expecting dividends to be covered again from 2023. These days, a lot of income is generated by alternative asset trusts, where there was a lot of fund-raising last year, particularly for those involved in renewables and sustainability. That seems set to continue. Looking further into 2022, high inflation, as well as the prospect of interest rate rises and the withdrawal of QE, are likely to feature on most investors agendas.   Stephen Lovelock

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The final quarter of the year was positive for most stock markets including our FTSE 100 which rose 7.45%. This compared favourably with other major stock markets and better than the NASDAQ’s 4.13% rise. The NASDAQ which is home to many technology companies has strongly outperformed over the last two years but more recently the share prices of older, more traditional companies have started to increase. The FTSE 100 is home to many such companies for example BP, Royal Dutch Shell and many Utility companies. This trend, switching from tech to traditional or ‘value’ stocks may continue as tech stocks look fully valued. On the economic front, the biggest change during the quarter has been that interest rates have started to rise. In December the Bank of England increased interest rates from 0.1% to 0.25%. Markets are expecting two or three more interest rate rises during 2022. This may happen fairly quickly now that effects of Omicron appear to be less severe. There has been much debate about inflation and whether prices will continue to rise. Currently inflation is 5.4%. The Bank of England currently expects inflation to peek in April 2022 before falling back as supply disruption eases. However, growth in the US is very strong, putting pressure on prices globally. The UK jobs market is also very strong and wage rises are the strongest they have been for some years. The risk appears to be skewed to more interest rate rises than currently predicted. UK Average weekly earnings growth. One country where interest rates are moving in the opposite direction is China where interest rates fell from 3.05% to 2.95% last week. Economic growth in China was 4% in the last quarter of 2021. That is the slowest rate of growth in the last year and a half. They have a weak property market and consumption has been less than expected. This is certainly one of the risks for us to keep an eye on in 2022.

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Markets over the last three months have fallen slightly but are still much higher than a year ago. This is despite all the negative stories. A saying when I first came into stockbroking was that “Wall Street climbs a wall of worry.” When times are bad often the market rises. That is because the market is looking ahead and forecasting a recovery. The UK and most major economies are now experiencing a strong recovery and the UK economy still has plenty of room for further recovery in the coming year. Estimates for GDP growth are now over 5% in 2022. Consumers are still sitting on significant accumulated savings they were not able to spend during the pandemic. Yes, some are worse off but we estimate UK consumers have saved around 10% of GDP more than they normally would. In contrast to the last recession, house prices have risen by 15% since the start of 2021 meaning that the 65% of householders who own a home feel richer. Interest rates remain very low. Although forecast to rise in November, the current forecast is for rates to settle below their pre- COVID levels. The percentage of income being spent on mortgages and other debt is far below the levels that caused problems in 2008. 35% of households now own their own home without a mortgage and the 30% that own with a mortgage, half have fixed for 5 years. The furlough scheme has ended which has kept 1.6m jobs protected but on the other hand there are currently 1.2 million job vacancies. Not all will be able to retrain but many will. Cheap valuations Added to this UK shares look cheap on several measures. Relative to other developed markets the UK market is now 35% cheaper. This is partly because we have much fewer tech companies, but the gap is now too stretched. We also have a lot of the more ‘boring but stable’ companies in the oil, mining, and industrial sectors, all of which have improved of late as demand has picked up meaning these companies’ profits will increase over the next couple of years. Take over activity is high, with Morrisons, one of the companies, to recently succumb.   Paul Coffin

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It can sometimes be hard to decide what to write about but a cursory glance of the performance statistics for the last 3 months and then viewed slightly differently, over the previous 1 and 3 years clarified a theme that has been developing in my mind recently. Namely differentiating between the fact and what essentially is fiction or noise. Let’s take the oil price. The performance table indeed shows that it has risen 10% during the last 3 months and indeed 98% over the last year! Shock and horror. However, a slightly longer-term perspective of 3 years shows that the price is more a less the same as it was 3 years ago. Those three years have been quite a tumultuous few years and for oil witnessed a period encompassing a complete collapse in the demand for oil during lockdown and a subsequent demand spurt in the recent post lock down months. What is clear though is that we have been here before.    

Table 1. Stock Market Performance  Oct 5th, 2018 – Oct 5th, 2021

    I recall a history lesson at school where we were taught the value of Primary research over Secondary and to look for the original wording and source. This can be especially beneficial when researching companies. Fortunately, the Stock Exchange has a service called the Regulated News Service (RNS). It is a bit like the Associated Press (AP). AP put out the factual story, then news companies take the story, journalists rehash it and if I were sceptical might say that, often the story in the headlines ends up completely different, or at least let’s say, dramatised in one way or another. The RNS service is where a listed company must publish its annual results and any news stories concerning the firm that may affect the share price. So, for example, changes in directorships, new contracts which will significantly affect revenue. When I was relatively new to stock markets an older peer, passed on some good advice, which was to check the RNS each day for companies I follow, or indeed for stories about companies that may look interesting. Today there are literally hundreds if not thousands of these announcements, and while you cannot follow everything, I do still look through the announcements regularly. This is the best way to get the facts, and there are often many facts contained within the statements, such as a company’s set of accounts, that are never noticed or mentioned in the press. It does seem to be becoming harder to separate fact from fiction. During the recent ‘petrol shortage’ I heard several news reports mentioning the ‘petrol shortage’ when there was no such thing. This was also true of the stories around gas. The initial stories made much comment about the UK and how we were at the whim of Russia. A search on the ONS or British Gas website shows the UK receives 44% of its gas from the North Sea and the East Irish Sea. The rest comes from various countries but a large amount from Norway and Denmark with under 5% coming from Russia. 24-hour news and social media clearly make news travel a lot faster but are also making it harder to get the real facts through, although conversely this can create opportunity if a company is sold off when the facts are wrong.   Paul Coffin  

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Post lockdown booms and higher prices have elevated inflation around the world as supply bottlenecks, shipping distribution and recovering demand have been driving up prices.   Higher commodity prices and cost of energy have also been lifting headline inflation. Currently these higher prices have forced some Emerging Market (EM) central banks to already act. Brazil, Mexico, Russia, South Korea, and parts of central and eastern Europe have already started increasing their interest rates, while others are willing to wait.   However, investors should not be too worried about the upward move in inflation across much of the EM’s. It should be viewed as an expected part of the economic normalisation of the post Covid-19 crisis.   Outside EM’s, central banks have so far taken the view that these pressures are transitory and will sort themselves out, but it is not that simple. It is worth thinking about the changing forces behind inflation as they arguably point to longer higher prices.   The UK annual inflation rose to 3.2%, a jump of 1.2% since July. Rising prices for food, hotels, and transport were behind this increase in the consumer price index (CPI). The Office of National Statistics (ONS) has stated this cost-of-living raise is likely to be temporary due to last August’s food prices being artificially lower during the ‘Eat Out To Help Out’ scheme, time will tell.   On 17th October the Governor of the Bank of England (Andrew Bailey) spoke at a virtual meeting of the G30 group of current and former central bankers. Bailey affirmed his view that recent spikes in inflation will be temporary. He also warned that price increases could last until next year, specifically citing the energy sector. This comment comes ahead of the latest UK CPI numbers when inflation for September is expected to remain unchanged at 3.2%, according to consensus. The Bank of England’s inflation target remains at 2%.   Unless wages keep pace with rising costs, inflation is generally negative for consumers, but what does that mean for investors? Inflation is perhaps the biggest topic for global investors, following Covid, the logical question is what action central banks plan to take to tackle it and when.   Leading investment banks are reporting that rotation is happening everywhere, from growth shares and risk assets such as Emerging Markets into classic value sectors such as energy, cyclicals, and financials.   Investor unease is the highest it has been for some time as rising inflation tends to be seen as bad news for markets. For equities, it can make it harder for some companies to increase their earnings growth if they do not have any pricing power and operate in very competitive industries. With bonds, having a fixed return, inflation eats away at those returns. However for other sectors such as, energy shares, real estate investment trusts and consumer staples business inflation can lead to higher profits.   Whatever the conditions choosing the right investments, is what we endeavour to do.   Stephen Lovelock

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The words ‘A Perfect Storm’ are being used increasingly in recent days as several chickens come home to roost. The evidence that the recovery in GDP from the COVID-19 pandemic may be starting to slow down is gaining credence. There are twin brakes on prosperity. These are supply chain frailties and the rise in inflation. Central banks from the Federal Reserve to the Bank of Japan and our own Bank of England deem the spike in inflationary pressures to be ‘transitory’. In other words, it’s here today and gone tomorrow. How then can one reconcile that with the Bank of England’s statement that inflation could breach 4% later this year? Given we are already in October, that suggests the inflationary spike is strongly positioned. Of course, the Bank will be looking at its chosen Consumer Price Inflation (CPI) measure inflation and not the old-fashioned Retail Price Index (RPI) which due to the way is calculated would show a much higher rate. In my opinion, it is a much better guide. Many UK Inflation linked government bonds are still linked to the RPI and therefore, holders of those will do well as their investments will keep up with what I believe is the real rate of inflation. Inflation is just one of the things that markets are worrying about. Many are asking why so many investors are worried, given that markets like a modest degree of inflation? The answer lies in the threat of higher interest rates as just about everyone from consumers, companies and of course, Governments have got used to cheap money. This is true not just of the UK, but worldwide. The pressures have come in two ways. The supply chain problems and the apparent loss of those willing to supply labour. We may think that the UK is a special case with EU workers not returning after the COVID break, but it appears to also be the case in the EU and US that less people are willing to join the Labour Market. There just seems to be less people wanting to be in the workforce. Maybe Covid has radically changed some people’s living habits after a long period of Government subsidy. Many situations exist in the economy which cannot be explained by traditional analysis. Take for example the jobless rate and house prices. We are told that up to a million EU workers are reported to not have returned to the UK. If this were true you would expect high vacancies for rented property and reduced demand generally for housing. Given the lack of supply and increase in house prices this analysis seems unlikely. Certainly, one of the side effects of COVID seems to be disruption in many areas. Uber drivers leaving the industry to set up at Amazon warehouses means Uber fares are skyrocketing; staff in restaurants, pubs and bars are retraining. This is quite understandable as those industries had no work for 18 months. We are still living with the disruption caused by COVID. Now we come to the energy price rises that are taking place. Something that COVID but also the race for renewables has disrupted. One small business I know came to the end of its electricity contract a couple of weeks ago and the new price offered was 100% higher. Strangely, because they were slow to respond, the business was put onto an emergency one-year tariff. These are normally much higher than a standard tariff, but the one-year tariff had been fixed at the start of the year and was only 50% higher than the last one. Lucky, but still a huge increase. The last time there was an energy crisis in the 1970’s it ended in inflation and a recession. That was OPEC induced. This time is it the Russians? We hear about gas supply restrictions, but the reasons go deeper. Russia only supplies 1% of the UK’s gas. The switch to new sources of energy has meant that less time has been devoted to finding readily available fossil fuels.  This is particularly true in countries that have closed coal fired power stations and replaced their electricity output with wind turbines only to find that sometimes winds are subdued, and turbines are stationary. This all suggests that massive changes in how we live need to be handled very carefully and planned for a long-term outcome. This does not seem to be happening around the world and there will be many bumps along the way if planning is inadequate. Replacing gas boilers for example with air-source heat pumps will be another big bump. Electric charging infrastructure is another awaiting us – will it be in place before we all have to buy electric cars? Is the stock market taking any notice? Apparently not as valuations remain at high levels. Albeit some of the recent new issue froth has begun to diminish as planned flotations, such as Marley, have been side-lined. Inflations looks less than transitory as the Bank of England has increased its year end rate from 4% to 5% just while I am writing this article and more importantly, Chinese factory prices are now running at an inflation rate of 10.7%. The careful investor will be moving away from highly rated equities on PEs of 20- and 30-times earnings and seeking value situations. It’s probably also the wrong time to sell any index linked gilts, given the inflationary storm ahead.   Barrie Newton

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The stock market now has some interesting features, some of which have not been seen before in my time.  At the moment, I am being bombarded with a volume of what were once called ‘New Issues’ or ‘Flotations’, but are now badged as ‘IPOs’, or ‘Initial Public Offerings’. A term we appear to have imported from Wall Street, just as CEO (Chief Executive Officer) has replaced the Managing Director in Britain.   So why are we seeing such a tsunami of Companies seeking a stock market quotation, so that the volume is swamping meetings with existing quoted companies?  There are many reasons, several interrelated. First, there has been pent up demand from the start of the pandemic. After all, no company could float in March 2020, given the uncertainty meant management had no story to tell. Secondly, corporate brokers are keen to stimulate the high fees that New Issues generate after a fallow period. A third reason is that Companies too are opportunistic and see the present time as being receptive to their prospects.  Fourthly, the investment industry is currently confused about the long-lasting impact of the pandemic. Many consumer habits may have changed for good, such as more online shopping, but in several others the change may be temporary.   Many of the New Issues being seen have been beneficiaries of the pandemic and management’s assurance that those benefits will stay and grow is questionable, particularly when the flotation is at a very high multiple that does not reflect that risk. A good example being the recent Deliveroo IPO at 390p per share and which now trade 20% lower.  Another high-profile trend is the increasing presence of Private Equity (PE) in business transactions. Perhaps the most familiar example being the £6.3bn bid by Fortress for supermarket chain Wm. Morrison. We know that supermarkets have done well during the pandemic as other retailers had to shut and many have even made home deliveries profitable. So why has PE alighted upon Morrison? Most likely it is because it has the highest level of freehold property amongst the major supermarkets. Indeed, over 80% of its stores are reported as freehold. That will make an enticing sum on any disposal to leave the main supermarket business at a very cheap net price. We have not heard the last of this bid, with a bidding war quite possible and even MPs taking an interest in the situation.   Private Equity has a reputation for extracting value from quoted and private businesses, increasing debt significantly and later on looking for a profitable exit.  Currently, a most popular exit is through a stock market listing during the present tsunami of IPOs.  I would say that I have not seen so many IPOs that I can remember, where stock has been sold entirely or partially by Pes.  Acquisitive quoted companies are consistently telling me that their main competitors in the acquisition of private businesses is now Private Equity. Certainly, the main fact that makes the PE business model so effective is the low cost of capital, which means that gearing a business is really cheap. Indeed, the only consideration for a private company seller that would make a sale to a quoted company preferable is in cases where the prospects for staff and the longer-term future of the business are paramount.  Certainly, PE holds lots of cards in terms of price.   Inflation is another current topic.  The authorities in the US, UK and Europe all say do not worry, it is temporary.  I am not so sure.  Consumers have lots of savings in many cases.  Supply chains are disrupted and the expected unemployment due to the pandemic has not materialised.  Indeed, there are labour shortages in most countries.  If the authorities have got this wrong and interest rates must rise, then the halcyon days for Private Equity may be shorter lived than expected and IPOs less frequent.

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