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Eurovision Returns

25 May 2021

Well, that will teach us bothersome Brits. We may have escaped Europe’s clutches to plough a furrow of our own in global commerce but they have had the last laugh (so far). With Eurovision back to its pre-Covid worst, divine retribution was drawn out over several painful hours on Saturday evening. James Newman (who he?) was apparently our representative with his rendition of Embers. Despite the title, the performance failed to ignite and Europe unanimously displayed that vengeance is un repas best served cold. Don’t mess with Brussels was the clear message. Point taken. Or rather, nul points.

Back in the real world, Brussels has rather more to worry about than terrible songs on a Saturday evening. Following in the footsteps of Joe Biden’s massive economic stimuli in the US, the European Central Bank has kept the taps open whilst holding interest rates down and, even though Covid numbers are still much worse than the UK’s, economies are recovering fast – too fast in some commentators’ eyes. Where deflation was a major worry in the weak southern states, inflation is now becoming a cause of great concern in the northern ones. This is before even the first tranche of last year’s €800bn EU Recovery Fund is distributed.

The bureaucratic monolith that is the EU ensures that no process moves quickly enough. We saw this in the last financial crisis when, as everyone else was stimulating their economies, the EU was doing the exact opposite, still resolving an old out-dated problem. The difference between the US (and UK) and the EU is that the latter does not have a central bank in the true sense of the word. We will see this when Germany’s Bundesbank kicks up a fuss about so much economic largesse. Inflation is anathema to Germany and we can expect a major argument between it and the ECB some time this year.

We have already assumed that governments will allow their economies to run at least warm for a while, keeping interest rates behind the inflation rate and letting some of that Covid debt mountain to be inflated away. However, if and when it becomes necessary, we can expect the US Federal Reserve and the Bank of England to take action promptly. Do not expect similar rapid action from the ECB. The twenty-seven states will argue their corners. The Germans will argue more forcefully than any and will probably win in the end but, by the time action is forthcoming, the situation will have worsened to a degree that something even more drastic is required.

I read that foreign (to the EU) investors have been and are still liquidating their holdings in eurozone bonds, made possible because the ECB is still buying them to hold down interest rates. We would not be buyers of fixed interest debt at this point in the elongated cycle anyway but that goes double for most sovereign eurozone debt. It has all the hallmarks of a nasty car crash in the making.

Market Update

Following the upset caused by the sharp tech sell-off early this month markets have gradually recovered their poise. The Dow Jones is a whisker away from its all time high and the FTSE 100 is again attempting to establish itself above the 7,000 level. It feels a little better based this time and it would be no surprise to see the FTSE approach 7,500 over the coming months.

One sector that has performed very strongly over the last year has been the housebuilders and we fully expect that they have further to go, underpinned by the continuing drastic shortage of housing across the country. We also feel the retail side of the DIY sector is worth a look. Kingfisher issued a solid trading update recently and, although the figures compared with an extraordinarily strong period last year, the numbers were better than consensus and laid the ground for good growth over the coming year. However, the market then took fright at the news of shortages in the availability and rising costs of products such as timber, cement etc and the share price turned an early morning positive into an afternoon negative.

Timber prices have been on the rise for a long time and are purely a reflection of a long-term supply and demand imbalance. However, the current cement shortage is, I feel, a different matter and was exacerbated by the bottle neck in the Suez Canal last month and Covid related supply chain issues. These will resolve themselves in due course as will similar shortages in a number of materials. In the meantime the recent weakness in the Kingfisher share price (currently 362p) offers an attractive longer-term buying opportunity on a very modest prospective multiple of around 12.

Those looking for something a little more racy might consider Wickes Group, recently floated off by Travis Perkins. At around £650m market capitalisation Wickes is tiny in comparison with Kingfisher’s £7.6bn and, therefore, falls into the high-risk category. At 260p it would be no surprise to see them become a take-over target.

Russell Dobbs MCSI
Chartered Wealth Manager