Market Prognosis

A concise summary of the major macro events of the past 24 hours, and selected UK company-specific news.

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June 23, 2023

Why the BoE has made things worse

Macro & Overnight

It is always interesting when financial news becomes front-page news, as in the case of the mortgage time bomb primed by the BoE yesterday.

The BoE showed signs of panic yesterday by raising rates a full 50 bps in a move not dissimilar to turning up the temperature in the shower after it has yet to fully respond to the previous attempts to turn up the heat. The result of this overreaction now makes a recession more likely. People will be unwittingly scalded.

Equity investors will now see more profit warnings than they otherwise might. However, people adapt as consumers, producers and investors. Equities performed poorly last year, mainly due to fears of a recession and tighter financial conditions as rising raw material and energy costs sucked liquidity from financial markets.

But, prices of internationally traded goods from energy, industrial materials, and finished products are falling. Prices for slower-to-adjust services such as labour and accommodation are still increasing, explaining why consumer spending, consumer confidence and Next’s profits are all counterintuitively higher than expected.

Every economy measures its consumer price basket differently. They have different mixes of goods and services and differing market structures for critical things like energy, housing and labour, complicating comparisons of measured inflation across countries. These factors lead to different adjustment rates to monetary and fiscal policies and other exogenous factors like oil price changes or supply chain shocks.

Year to date, the US has seen much sharper falls in inflation than Europe. European countries have seen different iterations of “structural” or “lagging” factors that lead to the absurdity of policymakers berating workers for demanding higher wages and giving headline writers excuses for recycling terms like “stagflation” and “sick man of Europe.”

Equity investors focus on the future and are seeing inflationary pressures reduce before we witness the full impact of higher interest rates. The increased chance of a recession heightens specific financial risks, such as profit warnings and defaults (expect PE casualties). It also increases the likelihood of lower rates in the next 18 months to two years as policymakers’ fears shift from inflation to deflation. The prospect of lower rates boosts duration and explains why equity values can rise while real economic activity has yet to decline. These are the factors behind the rise of the AI tech giants and Japanese and other semiconductor share prices. Prepare for this “bubble” to inflate further.

UK Company News

Audioboom has warned that advertising markets have remained challenging for longer than anticipated. It now expects the revenue and adjusted EBITDA for the current financial year to be lower than anticipated. It has also changed the approach to calculating its minimum guarantee offers for podcast partners.

Hotel Chocolat has said that its cost-base efficiencies are materialising later in the year than initially anticipated. It now expects to deliver an underlying marginal loss before tax for FY23. It expects sales and PBT to be lower than current market expectations over the next two years due to ongoing weakness in consumer sentiment and continuing inflationary pressures.  

Revolution Beauty said trading has been excellent, with sales up 60% yearly. Gross margins were 48.2%, compared with 41.7% last year. EBITDA at constant currency was £3.5m (Q1 FY24: £7.4m loss), and cash on hand was £15.4m (Q1 FY2024: £10.1m). It believes that Boohoo’s hostile EGM requisition is “value-destructive, opportunistic and self-serving, as well as not being in the interests of the Company’s shareholders.”

The Soap Opera continues. 

Meanwhile, after market close yesterday, Boohoo said in its AGM update that its guidance remains unchanged since May’s final results, with expectations of a return to profitable growth in 2H. 

Prognosticator 

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