Monday Espresso Podcast - 26 June 2023

[00:00:00] Nathan Sweeney: It's Monday the 26th of June. Today I'm joined by Raj Manon, portfolio manager and our UK Equity Analyst. We'll get some insights from Raj in a second. There's quite a lot of happening, which some of our listeners may have missed. So let's start with a quick recap of markets last week.

[00:00:18] Nathan Sweeney: So equity markets have been on a very good run over the last couple of weeks. As an example, if we take a look at the Nasdaq, it was up for eight straight weeks in a row prior to last week's pullback. So what was causing markets to pullback? Why did we break this winning streak? Raj is here to answer that question.

[00:00:37] Nathan Sweeney: The market was pretty much focused on the UK equity market last week because we had a very important data printout. Raj, what happened?

[00:00:47] Raj Manon: It was a very eventful week for the UK with headline inflation holding at 8.7% and core inflation surprising to the upside at 7.1% and that was the highest reading in over 30 years, giving the UK the unwanted title of having the highest core inflation in the G7.

[00:01:11] Raj Manon: So what's behind those numbers? So we've seen fuel and energy, they've been falling and putting downward pressure on the inflation numbers. But what's actually adding to the number is the spend on factors such as recreation and culture.

[00:01:29] Raj Manon: Now, some of that can be put down to seasonal factors such as the warm weather we've been experiencing and that to some extent will start to fall out of the figures as we move through the year into the winter months.

[00:01:44] Nathan Sweeney: Okay, so what next for inflation, are you suggesting we expect to see inflation coming down this year?

[00:01:50] Raj Manon: So we're already seeing fuel and energy applying downward pressure to the inflation numbers, and we expect that to continue as we move through the year, but we also expect that spending on recreation and culture to also fall as we move through into the winter months and those increases to mortgage costs start to bite consumers.

[00:02:13] Nathan Sweeney: Yeah. Speaking of mortgage costs, we did see interest rates last week they went up. So what happened on that front? What was the Bank of England doing last Thursday?

[00:02:23] Raj Manon: There was actually a hawkish surprise from the Bank of England with a more than expected increase of 50 basis points, and that took the Bank of England base rate to 5%.

[00:02:34] Raj Manon: And the market is now pricing in a terminal rate by year end of 6%.

[00:02:40] Nathan Sweeney: Interesting. So I think from a mortgage perspective, that's obviously putting a lot of pressure on households. So do you have any insights on that side?

[00:02:50] Raj Manon: So the news over the past week has certainly been filled with the effect of the rate increase on those with mortgages, but not as much attention has been given to the other side of the equation.

[00:03:02] Raj Manon: Those with savings. The majority of households in the UK actually do not have a mortgage. Today total mortgage debt as a percentage of UK housing value is 19%, so that's 19% loan to value.

[00:03:18] Raj Manon: The total value of household bank deposits is actually larger than the total value of household mortgages, so that's approximately 1.8 trillion in deposits compared to approximately 1.6 trillion in mortgage debt. So with increasing interest rates, that 1.8 trillion is now actually earning quite decent levels of interest and to a large extent, that's adding that surprise strength that we're seeing in UK consumer spending and the UK economy generally.

[00:03:52] Nathan Sweeney: Okay. That's actually quite interesting because a lot of people are really concerned about the higher cost of mortgages on households. There's 1.4 million households expecting to renew mortgages this year, and for those individuals, they will have to pay higher prices because they locked in two years ago, let's say 2%, and now they're facing 6%.

[00:04:12] Nathan Sweeney: But as you mentioned, there are a lot of households where this rise in interest rates will not impact them, and therefore that's good news and good news for the consumer.

[00:04:21] Nathan Sweeney: Now let's take a different direction and talk about ESG cause we did have some very interesting news. I'm not sure if people picked up on this or not, but the US Department of Agriculture approved two companies to sell lab grown chicken.

[00:04:37] Nathan Sweeney: So, yeah, I'll repeat that. So basically lab grown chicken. So this is taking animal cells, cultivating them and then growing protein or meat from those cells. So this is kind of a groundbreaking technology, but you know, from an ESG perspective, what this does or what this can help to do is reduce the carbon footprint associated with animal agriculture.

[00:05:01] Nathan Sweeney: Because if you think about it, if you're raising herds, you need a lot of land, you need a lot of feed, you need a lot of water, and therefore that creates a lot of emissions and has quite a big impact on the globe. So from this perspective, I expect you'll see lots of interesting debate about this.

[00:05:18] Nathan Sweeney: Is this controversial? Is this a solution? But we'd expect to see more about this coming out in the weeks, months, years ahead. So we will be following that. So let's move on to the week ahead and wrap up. So Raj, what are we expecting this week?

[00:05:34] Raj Manon: So in the UK, we have GDP figures for the first quarter where those figures is expected to come in at around 0.1% positive.

[00:05:44] Raj Manon: So although that number is sluggish, it does highlight that the economy has been stronger than expected and the consumer has been quite resilient. In the US we have PCE inflation data, which is a personal consumption index.

[00:05:58] Raj Manon: This is actually the Fed's preferred measure. So it will be interesting to see if that is falling and feeding into investor expectations around the Central Bank next rate decision in July after the June pausing rate hikes.

[00:06:13] Raj Manon: And in China, we have PMI data with the data expected to add to the narrative that the recovery in the world's second largest economy is losing momentum. If the data is soft, that may encourage Chinese authorities to add further stimulus to support the economy.

[00:06:31] Nathan Sweeney: Okay. Thank you Raj, as always, lots to watch out for. Have a great week everybody, and thank you for joining us today.