Client Login Client Login Research Portal Research Portal Wimbledon Debentures Wimbledon Debentures


The Inflation Genie

21 June 2021

All of a sudden it is the word on everyone’s lips and markets have suffered a bit of a wobble as a result. I have been pointing to the spectre of higher inflation for some months now and suggesting that governments would be happy to let their economies run hottish for a while to help inflate away some of their massive Covid debts. In my 12th April blog I wrote that this would in all likelihood be acceptable provided central banks acted before things ran too far. I felt the US Fed and the BoE could probably be trusted to head off a problem but I had little faith in the ECB doing likewise.

First off the mark was the Fed, last week, indicating it would bring forward interest rate rises from 2024 to 2023, when we could see two increases. In the central banking world the power of speech counts for much and is a major weapon in its armoury. This represents quite a sharp change from its distinctly dovish tone over recent months so they clearly don’t want the inflation genie escaping completely from the bottle. I was only thinking a week or two back that the then, almost unanimous view amongst central bankers that the current inflation rise is transitory, seemed dangerous if only because there appeared no doubters amongst them. At least the Fed has now loosened the unanimity a little, which is no bad thing, and represents fair warning to the markets that they cannot ignore the potential for interest rate rises at some point and that point just moved a little closer.

The current wobble markets are suffering as a result will, I feel, remain just that – a wobble. I expect them to recover soon and still regard the UK market as extremely cheap so I do not think one should worry oneself out of good stocks. I do not expect it to be too long before the FTSE 100 is closing in on 7,500.

William Morrison

I have highlighted a number of times that, with the UK equity market valued at such a discount to other major markets, it is no surprise to see a growing number of overseas (US particularly) and private equity bids for our companies. Today we learn of a cheeky £5.5bn bid by US private equity firm, Clayton, Dubilier & Rice for William Morrison. I cannot think of better private equity fodder than Morrison, stuffed with a sizeable estate of freehold properties built up over many years by the late Ken Morrison. What better collateral for PE to use to gear the business to the hilt, strip out the cash, and run an “efficient” model.

These “efficient” models often end up being too efficient for their own good and gearing up a business as described above at a point from which interest rates can only rise (just a question of how far) does not seem to me the most sensible move chronologically. The Morrison board has rejected the bid, and rightly so. However, with other suitors apparently looking at the developing situation, it looks as if Morrison’s days as a quoted entity are numbered. Let’s hope the board at least fight for the best price possible – they have started well enough.

This approach has focussed the market’s attention on the other supermarket groups, Tesco and Sainsbury. There have already been stakes changing hands in Sainsbury but neither they nor Tesco have the freehold property assets enjoyed by Morrison. They are the plum ripe for picking and they are worth a handsome premium. The shares currently stand at a 5p premium to CDR’s 230p cash bid. I would hope Morrison’s board hold out for something closer to 275p.

One thing is an absolute certainty – there will be plenty more bids coming until our market is valued more sensibly.

Russell Dobbs FCSI
Chartered Wealth Manager