WeeklyWatch – Coronation offers welcome boost for UK economy

10th May 2023

Stock Take

The UK raises glass to coronation uplift

The bank holiday weekend marked a historic day for the UK, with all eyes on the coronation of King Charles III and Queen Camilla. With events throughout the nation – and spectacular displays of pageantry in London in particular – there were hopes the celebrations would precede a glorious trading weekend for pubs, restaurants and retail to give the UK economy a much-needed boost. In fact, the Centre for Retail Research expected consumers to add more than £1.4 billion to the economy over the weekend.

Meanwhile, the cheers among the Conservative Party members may well have faded following the England council election results. Labour and the Lib Dems made gains at their expense, while the Green Party took control of their first council.

Markets consider the next steps for central banks

Across the pond, Federal Reserve Chairman Jerome Powell indicated that the central bank might have completed its series of rate hikes last week, stating: “We’re closer, or maybe even there.”

Yet in confirming the expected 0.25% hike, Powell emphasised that inflation remains a primary concern. He noted that the market’s expectation of rate cuts before the year-end was misguided. However, Powell expressed optimism that the US would avoid a recession, citing positive jobs and earnings data as evidence of a potential soft landing.

Keith Wade, Chief Economist at Schroders, commented:

“The Fed has turned off autopilot on rate hikes and it looks like policy will become more data-driven and event-dependent. Whether cruising altitude has been reached will depend on the growth and inflation figures, particularly the latter.”

At the end of the week, the Fed’s plan to pause was put to the test when it was confirmed that the US job market remained strong, adding 253,000 jobs in April. This result surprised economists and disappointed investors who were hoping for slower economic data that would provide room for the central bank to cut rates.

Earlier in the week, it was reported that the US services sector maintained a steady pace of growth in April, while manufacturing continued to decline for the sixth consecutive month, primarily due to higher borrowing costs and tighter credit. The ongoing turmoil in the US banking sector poses a further risk of financial conditions tightening.

On Thursday, PacWest became the latest regional lender to seek a financial lifeline. Despite assurances from the Fed and bank management, investors remained anxious, causing shares in Western Alliance and First Horizon to plummet as they searched for the next bank to collapse.

US crisis causes global ripples

The UK and eurozone are starting to feel the impact of the US crisis. In the former, Bank of England data revealed that households withdrew a record amount of deposits from lenders in March.

Following the Federal Reserve, the European Central Bank (ECB) increased its deposit rate by 0.25% to 3.25%. This decision followed reports that eurozone inflation rose to 7.0% in the previous month from 6.9%. However, core inflation, which excludes volatile food and fuel prices, unexpectedly slowed down, providing support for a smaller rate hike.

But unlike her Fed counterpart, ECB President Christine Lagarde made it clear more tightening was on the cards, saying: “We are not pausing. We know that we have more ground to cover.” She added that interest rates were not yet “sufficiently restrictive” to pull inflation down to the ECB’s 2% target.

Mark Dowding of BlueBay Asset Management observed:

“Broadly speaking, the European economy remains in a relatively healthy position. Eurozone unemployment data shows an all-time low since the creation of the Monetary Union. Business confidence is robust. Wage growth is elevated and inflation is well above the ECB target. We continue to see rates at 3.75% this summer.”

Tech stocks help markets rally

Recession fears continue to reign supreme among investors, with key market indices clocking weekly declines. But in positive news, Apple’s stock is up 28% year-to-date – continuing big technology stocks’ trend of better-than-expected results, boosted by strong iPhone sales and notable inroads in newer markets like India. The S&P 500 has risen 8% so far in 2023, but 80% of the gain has been driven by just seven companies, with Apple and Microsoft accounting for half of that.

But how sustainable is the rally? The difference between the share performance of the tech giants and the wider market has been a cause for some unease, although commentators also pointed out that such extreme readings are more often a sign the market is reaching the bottom of its current cycle.

Wealth Check

As a business owner, data has no doubt played an important role throughout your business journey – from helping you identify customer segments to keeping track of your accounts. The role of data insights should not be underplayed when it comes to selling your company.

Indeed, strong metrics are vital in showing the potential of your business to interested parties. From showing healthy revenue to proving strong profits, your firm has a compelling and sustainable proposition. Some SME acquirers even refuse to look at firms that don’t meet certain eligibility criteria – such as £1 million revenue and 15% profit.

Make sure you compare your headline figures against similar businesses in your sector. For example, service-based businesses would expect to command a higher margin than grocery sales. What’s more, good growth at a manufacturer might be 10% to 15% a year. But in a dynamic young tech company, it might be much more.

Caught a potential buyer’s eye? Data still has a role to play.

They want to look at more detailed metrics, such as working capital and cash-flow forecasts. Having recurring revenue, especially customers on contracts, helps make your firm attractive. For example, if you have monthly contracts that require notice to end, the acquirer can see that income is reliable.

Additional significant metrics to consider are minimal customer and staff turnover, indicating that both your customers and employees are happy. In addition, potential buyers should also examine the percentage of retained profit year-over-year. For instance, suppose you had 100 customers paying £1,000 each year, but the following year you only had 95 customers paying £1,250 each. In that case, it suggests that your product has increased in value. Losing a few customers is not necessarily a cause for concern in this context; as long as your expenses remain unchanged, your revenue and profits will still rise.

Furthermore, when presenting information to potential buyers, it may be useful to showcase a strong track record in environmental, social and governance factors. Other aspects include a favourable credit history and a low or non-existent record of complaints, court rulings, tribunals or regulatory fines.

The Last Word

“My wife and I just wanted to share our most sincere and heartfelt thanks to all those who have helped to make this such a special occasion.”

King Charles III thanks everyone involved in the coronation held over the weekend.

Schroders and BlueBay Asset Management are fund managers for St. James’s Place.

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SJP Approved 09/05/2023