Stock Take

Not for the first time this year, last week’s economic news was dominated by persistent inflation struggles in the UK.

Leading up to last week, expectations were for a moderate drop in inflation. The Bank of England (BoE) had already raised central interest rates numerous times to curb inflation. The US and Eurozone both reported drops in their inflation rates the week prior.

However, the Office for National Statistics (ONS) revealed that headline Consumer Price Index inflation remained unchanged between April and May, at 8.7%. Potentially more worryingly, core inflation, which excludes volatile components such as energy and food, rose.

In response, the BoE hiked the basic rate of interest by 0.5% to 5%, a larger increase than many expected. The BoE also indicated that further rises should be expected as the year goes on.

Speaking to broadcasters after the news, BoE chief Andrew Bailey re-emphasised the importance of reducing inflation to its 2% target.

“To do that, I have to be clear – and we expect inflation to come down this year – to do that we cannot continue to have the current level of wage increases,” he said.

“And we can’t have companies seeking to rebuild profit margins which mean prices continue to go up at their current rates.”

While the risks of high inflation are broadly known (and can be seen in the average weekly shop), the dangers of higher interest rates are becoming an increasing political issue for the Government. According to think tank Resolution Foundation, on current market trends, households re-mortgaging next year – when there will be a general election – will experience an average annual mortgage bill rise of around £2,900.

In response to the higher-than-expected inflation and interest figures, UK markets generally fell. The FTSE 100 ended the week down 2.4%, while the more volatile FTSE 250 ended down 5.1%.

Azad Zangana, Senior European Economist at Schroders, said market reactions indicated rising fears of a recession.

He added: “The BoE recently admitted that its forecasts have not been performing well enough, and an external review of its processes may follow. It suggests that the Monetary Policy Committee (MPC) is no longer placing much emphasis on its analysis, and instead being forced to raise interest rates until the macroeconomic data worsens.

“Given that interest rates work with a significant lag, lengthened by developments in the mortgage market, it may mean that the MPC can no longer wait and allow inflation to fall back more gradually.”

One caveat to this is that the BoE is due to release a Financial Stability Report in July. Given recent events, this report might garner more mainstream interest than usual, as it will likely have a large impact on just how high interest rates can go.

While this news might have been significant in the UK, markets were generally down across the western world.

In the US, comments made by Federal Reserve Chairman Jerome Powell at a Congress testimony undermined performance. The S&P 500 posted its first weekly decline for six weeks (-1.4%), with value stocks continuing to underperform.

The US economy has continued to perform relatively well in the face of rising interest rates. In contrast to the UK, inflation has fallen throughout the year – although it remains well above the 2% target. Although the Federal Reserve paused interest rate rises last month, it made clear this was only a temporary halt, and that more increases were probably on the way.

Kristina Hooper, Chief Global Market Strategist at Invesco, noted: “If the Fed does tighten two more times this year, I believe it really risks overkill – sending the economy into a significant recession. I’m sounding like a broken record, but I’ll say it again: there is a lengthy lag between when monetary policy is implemented and when it actually shows up in the real economy data, which Powell acknowledged in the press conference. We haven’t seen much of an impact yet because of that lag. That’s why we have to worry so much about overkill.”

Poor performance was recorded elsewhere. Growing rate hike expectations and recessionary fears were also an issue on the Continent, with the MSCI Europe excluding UK Index ending the week down 2.8%. Moving to Asia, the Nikkei 225 in Japan fell by 2.7%, although this may have reflected profit-taking after an incredibly strong start to 2023. As for China, the Shanghai Composite lost 2.3% in what was a holiday shortened trading week.

Wealth Check

Companies frequently hit ceilings as they pass revenue milestones, which requires leaders to reassess the skills needed to reach the next level. This might mean upskilling or restructuring a management team.

You can tell a ceiling is approaching when your business becomes less efficient and produces less income or profit for the same effort and resources. That means it could be time to reassess your goals and strategic priorities; review existing board members’ skills against new plans; and see where you need to reskill, hire, or replace.

As your business grows, you’ll likely have to acquire many wide-ranging skills. For example, you may need:

  • a more experienced sales leader to achieve higher numbers, build a sales team or use their experience of international sales to attract overseas customers
  • a finance director to ensure the fiscal rigour necessary to optimise and protect a larger business
  • a leader with experience of mergers and acquisitions, to grow your business
  • a production director to introduce efficiency-building disciplines in your growing production or manufacturing capabilities
  • specialist distribution experience – such as a director of distribution – to cope with greater demand for your products.

Conduct a thorough strategic review of your business, including a financial analysis and a feedback process across all staff and leaders. Use this to find out what you as a firm already do well, need to improve, or need to do more or less of.

As part of this reassessment, linking strategic goals to daily tactical behaviour is critical. Ensure your job descriptions and incentive schemes for your senior leaders, especially bonuses and commissions, reward the right performance to support the business goals. These could be profit margins, order-turnaround speeds, and conversion rates for the products, services or geographical areas you want to target or improve.

If you’re looking at new hires or other expansion opportunities and want to review your finances to help make these work, contact us today.

In The Picture

Despite the recent increases to the rate of interest, it remains notably below the rate of Consumer Prices Index (CPI) inflation. This means money saved in a cash bank account will lose purchasing power over time.

The Last Word

“It’s a very special and emotional night for me as it may be my last ever show in England, so I better play well and entertain you as you’ve been standing there so long.”

British pop legend Elton John plays the last UK show of his Farewell Yellow Brick Road tour to a Glastonbury crowd estimated at over 120,000 people.

Invesco and Schroders are fund managers for SJP

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 26/06/2023

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