Monday Espresso Podcast 25th April 2022

[00:00:00] Sheldon MaDonald: It's the 25th of April, another weaker week for equities, last week that we saw.

[00:00:06] Sheldon MaDonald: Equities lower really across the board, mainly on the back of the Fed, affirming its hawkish stance on rates.

[00:00:12] Sheldon MaDonald: We heard Powell essentially confirming that there will be a 50 basis point, at least, hike in the next Fed meeting. We also saw weaker growth projections from the IMF and The World Bank.

[00:00:22] Sheldon MaDonald: And that also put a dampener on expectations going foward. And here in the UK, we saw some weaker data coming out. Raj, can you take us through that?

[00:00:31] Raj Manon: Yes, as we know, consumers have had a lot to deal with over recent months, such as surging energy bills, higher taxes, and the highest inflation we've seen for over three decades.

[00:00:42] Raj Manon: Last week, we also had a Bank of England policy member, suggesting that we may see a half a percent increase in interest rates in May, at the next meeting.

[00:00:52] Raj Manon: And that, of course, would mean more expensive mortgage costs.

[00:00:56] Raj Manon: That difficult environment has been affecting our spending habits and it's affecting the amount that we're spending in the shops.

[00:01:03] Raj Manon: Last week's consumer confidence survey showed that confidence had fallen for the fifth straight month and is currently at its lowest level that we've seen since the recession in 2008.

[00:01:14] Raj Manon: In the shops we're spending less and we're changing our spending habits.

[00:01:18] Raj Manon: So we're trading down from more expensive brands to cheaper brands and we're spending less.

[00:01:23] Raj Manon: So retail sales data fell 1.4% last month, which was a bigger fall than was expected.

[00:01:31] Raj Manon: So what we're seeing now, is that performance being seen in share prices with the retail sector being one of the worst performing sectors this year with stocks such as Marks and Spencer and Next down well over 20%.

[00:01:45] Raj Manon: Now with consumer confidence at an extreme low, and inflation at well over 7%, here in the UK, if we have seen a peak in inflation and inflation starts to reduce, then some of these areas that have suffered the worst falls may well be due a rebound.

[00:02:02] Raj Manon: But that, of course, won't be widespread in this environment.

[00:02:05] Raj Manon: The companies that will do best will be those that will be able to pass on those price increases and maintain those profit margins.

[00:02:13] Nathan Sweeney: Interesting, your points on consumer confidence, because when consumer confidence gets very negative, generally that can be a contrarian indicator and you tend to get, you know, kind of bounces from those lows and you've seen that in the US historically and the UK.

[00:02:29] Sheldon MaDonald: We still remain overweight on the UK, despite some of this doom and gloom that you've mentioned, UK PLC really is quite well-placed in the current environment.

[00:02:38] Sheldon MaDonald: The banking heavyweights and the oil majors as well, helping the UK to be really the top performing index among the global indices this year.

[00:02:47] Sheldon MaDonald: Bringing it around to the bond side.

[00:02:48] Sheldon MaDonald: Bonds also had a weaker week last week.

[00:02:51] Sheldon MaDonald: Really pricing in further rate hikes, further inflation, to come, despite those weaker growth projections, bonds, not yet pricing in any sort of recession.

[00:03:00] Sheldon MaDonald: Coming back to the equity side, we saw the start of the Q1 earning season in the US. 20% of companies reported last week.

[00:03:07] Sheldon MaDonald: What can we take away from that? So far, Nathan?

[00:03:10] Nathan Sweeney: Yeah, so actually earnings coming in ahead of expectations.

[00:03:13] Nathan Sweeney: So on average companies reporting earnings growth of around 8%.

[00:03:18] Nathan Sweeney: So some positive news on that side, seeing some good numbers coming through.

[00:03:22] Sheldon MaDonald: Yes, the earnings coming through above forecasts, as expected, analysts do tend to low ball their expectations, but the proportion of companies beating and the scale of the beats slightly above average.

[00:03:33] Sheldon MaDonald: Of course though, the big earnings week is this week, right?

[00:03:35] Nathan Sweeney: Yes, we've got a lot of big names reporting this week, so everybody will be focused on the likes of Amazon who are reporting their figures.

[00:03:42] Nathan Sweeney: Facebook are reporting their figures.

[00:03:44] Nathan Sweeney: We've got Twitter as well.

[00:03:46] Nathan Sweeney: So yeah, the big, big focus on those numbers this week, because they're obviously big stocks within benchmarks.

[00:03:53] Sheldon MaDonald: Something else that's starting to be spoken about in market, is dollar strength or perhaps the weakness of other currencies, particularly the UK and Europe.

[00:04:01] Sheldon MaDonald: Currencies weakening versus the dollar, that creates a slightly added incentive for the central banks in Europe and the UK, perhaps, to raise their rates sooner than they might or higher than they might.

[00:04:12] Sheldon MaDonald: That though increases the risk of potential policy error, the risk rates go up too far or too soon and starts to cut off any economic growth.

[00:04:20] Sheldon MaDonald: So certainly something to keep an eye on.

[00:04:22] Sheldon MaDonald: In the meantime, though, those weaker currencies mean that the returns of foreign holdings are actually boosted though the Sterling based returns of US equities, for instance, higher than it would have been otherwise.

[00:04:35] Sheldon MaDonald: Turning to the week ahead, perhaps the big news is the meeting between the UN secretary general Gutierrez and Putin.

[00:04:42] Sheldon MaDonald: Not really expecting much to come from that, but who knows, perhaps there's some form of progress.

[00:04:47] Sheldon MaDonald: And then of course we had the election in France.

[00:04:50] Sheldon MaDonald: Macron confirmed as a second term, the first time in 20 years that France has had a second term president, really affirming the status quo.

[00:04:58] Sheldon MaDonald: But the stability that we've seen from that, that was certainly a positive.

[00:05:02] Sheldon MaDonald: Anyway interesting times.

[00:05:03] Sheldon MaDonald: And we look forward to speaking to again next week.