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  • Writer's pictureMark Watson-Mitchell

What price for cost-of-living standards?

I still stick to my comment of 3 January this year when I noted that the market had no real base to be as high as it was then trading.

Nor does it now in my view.

Then I commented that the Bank of England had been incredibly slow in responding to the onset of inflation some two years earlier – and that it would carry on rising.

The various strikes have continued to impact so many walks of commercial and environmental life.

Pay has not kept up with the incredible cost rises over the last year or two, with the average having fallen in real terms.

Strikes are inevitable and will persist until remuneration levels start to balance out.

My comments about the house property market were not too difficult to predict – anyone could see that further price falls were to be anticipated, especially in the face of the Old Lady’s useless measures to slow down the rate of inflation.

Governor of what - the 2% inflation rule has long gone

Across the board the higher interest rates have had their detrimental effect.

The Bank Governor, who appears to blame everyone else for inflation, has been stating that the cost-of-living squeeze will ease by the summer.

I suggest that could well be a load of cobblers.

Inflationary pressures are persisting and will continue to have their effect.

He is even saying that early retirement has been fuelling inflation – what is he on about?

And he has been asking company bosses to hold back price rises – he is in the land of Nod and needs to come up above ground to really see what is going on out there.

Fuel and other price hikes coming

Just take on board the turn round that we are about to see in fuel prices as the OPEC countries start to tighten their production, inevitably pushing forecourt costs higher again.

Everything seems to be going up in price – 10.4% as the rate of inflation is a total nonsense.

Household finances struggling

Household finances are being crushed. It is stated that half of all UK consumers have cut non-essential spending.

Families are struggling to manage surging energy and food prices, along with increasing rents and mortgages.

The effect of ‘shrinkflation’

Just ask any housewife or supermarket shopper about their added costs. Increases of well over 30% have been the norm in the last year, while product weights or sizes have been sliced by manufacturers to reduce the visible reaction to explosive check- out till embarrassments.

That is called ‘shrinkflation’ and it is being increasingly used by both food producers and by supermarket operators as a way to absorb cost pressures.

Food prices have yet to peak, with higher manufacturing expenditure, a weak pound, poor harvests in Europe and North Africa, cocoa and sugar prices at their peaks - all combining to inflate costs and reduce supply.

Hospitality higher costs

And have you been out to eat recently? The bill at the end of an evening’s enjoyment can be mind-blowing.

But I have to say that I would not like to be in the hospitality sector at present – staff shortages, produce increases, massive energy hikes – all combine to kill any sensible margins, certainly causing many proprietors to consider selling up or even just closing their doors.

Everything is up in price

Local Council Taxes, water bills, prescription costs and even stamp prices have all gone up this month, while the cost of broadband and mobile services are said to be set to surge some 17%.

Corporate pressures

Then we have to look at the growing ranks of quoted companies missing Management targets, as turnovers may seem higher due to price increases being added while the profits go out of the window.

Even UK factory activity slowed in March and is not expected to pick up in any meaningful way until later in the year. Such sluggish business in the manufacturing sector will inevitably drag down any growth in productivity.

Although I was interested to note that car production is back on the road to recovery as the supply shortages ease, especially in microchips. But it is still in the slow lane.

Running fast and standing still – seems to be the corporate norm.

Who would be an IPO specialist

Have you taken on board just how quiet the new issue market has been in the last year or so? The dearth of float work and lower equity valuations on small caps have combined to impact the earnings at several broking firms, like Peel Hunt, finnCap, Numis and others.

Worse still to be a banker

Recent news in the banking sector has been pretty dramatic – with several banks being put out of business, while others have been swiftly taken over to avoid embarrassment elsewhere within the sector, it is very unsettling.

It actually goes to show that there is a certain fragility in the global banking system – and that is worrying, especially for those that can remember 2008.

Silicon Valley Bank, Singnature, Silvergate, Credit Suisse, Deutsche Bank and First Republic Bank have all been victims – so much so that the IMF has warned of increased risks to the stability of the financial systems after weeks of banking sector turmoil.

One has to question the lack of real Governmental control of our financial institutions that allows so much shakiness – and is the bank bailout system the correct answer?

Gold up and Bitcoin questionable

Which is why the gold futures are on the rise again, with investors looking at the ‘defensive’ merits of the yellow metal.

Even Bitcoin prices have risen 50% so far this year, which is great news for outright unprotected gamblers and money launderers.

The shaky banking sector has enlivened interest back into crypto, but as the FCA has warned ‘you could lose it all if you buy bitcoin’ - so be careful if you do punt in such markets.

House prices falling

Against the favourable news that more people in England own their house outright than have a mortgage, the homeowners are now experiencing falling values.

They were down over 3% in the last year – well that is the official figure. However, sellers are dropping their expected prices by 10% or more just to tickle some interest from those buyers lucky enough to afford and have mortgage finance in place to complete any purchase.

And that process alone can take over six months for the transaction to conclude.

With the downturn in the housing market now in full swing, I see property values easing back some 15% from their Pandemic bounce peak of the last couple of years.

The lockdown-induced boom has come to an end, with many potential downsizers now regretting that they were too slow to market their properties.

I still see the Bank of England looking to raise the Bank Rate yet again this year, despite whatever the Governor might say.

The Old Lady really has to get inflation back under control.

That is bad news for house buyers.

Some good property news

On the plus front, yes there are some plusses in this mire, I have recently spoken to a number of company bosses who have not only stymied any landlord rent rises, but in several cases have actually enjoyed some rent-free periods or even reductions on market prices.

Just think how many restaurant, pub and bar premises may well become vacant shortly.

There are still masses of empty shops and business premises due to the continuing ‘work from home’ practice – just walk around any city centre and you will see for yourself the combined effect of Covid and inflation.

Even divorces are going up

And if that is not enough – I understand that divorces are currently hitting their ten-year high due to the strain on household finances.

The FTSE 100 Index

Turning to performance of the FTSE-100 Index – my little rule that what goes up in three comes back by one has proved more than right.

From last year’s 6707 Low to this year’s High of 8047, the market fell back to a Low of 7237 just two weeks ago, which was almost two-thirds back on its rise.

That the FTSE has subsequently recoiled to last night’s close of 7639 is yet another example of the current international weighting in the Index constituents together with the rise in the share prices of Shell and BP and other resource stocks in the Index – all being influenced by the OPEC and Saudi Arabian oil production cuts.

Brent Crude futures could be worthwhile

I would not be at all surprised to see the price of a barrel of Brent crude oil rising to well over $100 very soon, just think it was only $70 two weeks ago and is now $84 and rising.

Goldman Sachs are now predicting $95 a barrel by the end of this year and $100 next year.

Other analysts are even suggesting $110 a barrel this summer. And that cannot be good news.

So where now?

That and other big questions remain in the offing – what price oil, will fresh produce hikes carry on, when will Putin retreat, are property values likely to continue falling, will wage pressures remain, will the strikes persist, at what rate will inflation top out etc etc etc. – the quandaries are prolific.

My view, as always, is to stick to investing in companies with quality earnings and good asset-backed cashflow.

And particularly seek out enterprises with high levels of annual recurring revenues because it is always good to know that the money is still pouring into balance sheets.


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