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Bank of England – New Governor, Same Problem

9 November 2021

Despite the Bank of England’s recent warnings on interest rates, when it came to the crunch the Monetary Policy Committee last week decided to maintain the status quo. I don’t think that Governor, Andrew Bailey, reads this blog but you never know – certainly, something seems to have changed his mind as the MPC meeting approached. Communications from Mr Bailey had been quite emphatically guiding markets towards a rate rise at this month’s meeting before, reminiscent of his predecessor, the unreliable boyfriend, he left them scratching their heads.

We mentioned last month that raising rates in the face of a slowing economy was likely to be seen as a wrong move and expected markets to look through such a mis-step were it to happen. In fact, the pound has weakened noticeably in recent days, indicating a much lower interest rate peak than consensus estimates. This is consequently indicative of a lower inflation peak than the consensus, much as we suggested on these pages last month. The BoE raising rates will not ease the oil price and nor will it solve the global port bottlenecks that have led to massive increases in freight and transportation costs. It will just add to the costs of the home-owning consumer – something that appears to have dawned on the MPC at the last minute.

The above two main drivers of inflation are already having a negative impact on world growth and, with its own additional manpower problems, the UK is particularly vulnerable. Economic slowdown will have its own negative impact on inflation and a number of major items will drop off the 12 month rolling chart later next year. It is worth reiterating our view that inflation is likely to peak at less than the 5%+ that many commentators have been expecting. Markets had priced in interest rate increases to 1% next year but even this is now looking a bit high in our view. The BoE may still impose a tiny increase in December or early next year but, having delayed, the trajectory now looks quite a bit lower and we believe equity markets will take heart from this once it becomes apparent. Who knows? We may even be able to look forward to a Christmas rally.

Tesco – Every Little Helps

 Tesco is a lot less likely to feature on a predator’s target list due to its much larger size than Morrisons and ASDA, both of which have recently been bought, the former by a Private Equity group and the latter by the Issa brothers. The common theme with these two is that their acquisition involved loading both of them with debt. In Morrison’s case, with its substantial freehold property estate, there is scope for it to be burdened with still greater levels of debt. The other member of the “big four” supermarkets, Sainsbury, has been a prospective target for many years and its board has recently again been alerted to the prospect of another attempt.

Tesco, under the leadership of current CEO Ken Murphy, has made considerable progress in streamlining the sprawling, unfocussed, business built by his predecessor, Sir Terry Leahy who, with great irony, is involved with the PE group that has acquired Morrisons. Tesco now looks a much sharper business and is emerging from two years of Covid in very good shape. Whilst others are worrying about sourcing sufficient products for Christmas, Tesco, a month ago, had already ordered 10% more turkeys and almost 40% more fresh produce from Spain to ensure customers do not suffer yuletide disappointment. Although by far the largest of our supermarket groups, Tesco has become a much more nimble business under Murphy.

The company is generating strong cashflow and has just embarked on a £500m share buyback programme. The dividend is also likely to see decent growth with a prospective yield of 3.5% or so this year and a further increase next. Every little helps, as they say! A number of analysts have begun raising their expectations for Tesco and we expect the re-rating that has become evident recently to continue. They look very good value at the current 275p.


Russell Dobbs FCSI

Chartered Wealth Manager