Investability bulletin 18/03/22: Raise a Glass

Life is returning to the leisure sector

Photo by Dan Barrett

The end of Covid restrictions has brought a return to almost normal trading conditions for JD Wetherspoon. In the last three weeks sales are down just 2.6% from where they were in 2019. Following the end of the Omicron fear, I think older customers are feeling a lot more confident to return to these often large airy pubs that don’t have music. 

Revenue for the six months to Jan 23rd fell 13.5% to £807.4m from the pre-Covid £933m reported in 2020. The firm posted a loss of £13m against £35.7m reported two years ago. 
Some wise words from Tim Martin: “The readiness of the leaders of all the UK’s main political parties to resort to lockdowns, and extreme restrictions, which were not contemplated in the UK’s 2019 plans for pandemics, is the main threat to the future of the hospitality industry, but also to the economy.” Never again. 
The stock has been an absolute dog over the last year but holders will be hopeful for signs of life again as ‘normality’ returns. However, inflation will be a problem and operating income can’t recover to anything like its peak. Debt servicing costs are a lot higher…tough one but could see it claw back 970p or so? I rather like some of the new line-up at the taps (ex-Bud)…but do the punters at ‘Spoons particularly care?
European shares were a bit more defensive in early trading on Friday, paring some of the gains of the previous two sessions. Nevertheless, stocks are on to finish the week higher as investors seem to be riding out some of the key war, sanctions risks. At the highs this morning the FTSE 100 was only around 80pts below where it was before Russia invaded Ukraine. European stocks are on course for their best week since Nov 2020 despite all the tumult, but also because it’s been a much calmer commodity story. Investors are adjusting and getting comfortable with what’s out there and what the risks are…but I stick to the view that this is only the start and it remains a bear market rally.
US stocks notched a third day of wins – Fed out of the way helping sentiment it seems. There may have been some relief too as Russian managed to make a dollar payment on its bond, avoiding a default for now. 4,400 is still the top of the range for the S&P 500, futures pulling back from that area overnight. A close tonight above 4,400 might see a further move higher. Vix back in contango, a healthy sign for the market. 
Sterling has been on the move on the MPC decision to raise rates…GBPUSD slipped on the hike which was not as hawkish as it could have been with an 8-1 vote. Last time, 4 members dissented, calling for 50bps. Now a month later with inflation worse, the only dissenter wanted a pause. Even the MPC’s actions don’t communicate very well what they might do in the future, let alone their official ‘communications’.  The latest ‘risk’ is Ukraine. The MPC stuck to the view that some modest tightening was likely but added a massive caveat, saying there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve. So, risks on both sides … except there are not risks on both sides in terms of inflation, which is the mandate. 
The fact is the BoE is, like the rest of them, asleep at the wheel. Now it’s one thing to fall asleep, get woken by a jolt and correct the course…it’s another to drowsily allow yourself 40 more winks. They have been watching this inflation take hold like a slow-motion car crash – we spotted months and months ago but still they sat on their hands because they didn’t know what the labour market would look like post furlough, and then Omicron, and now it’s Ukraine…always an excuse to avoid making that big call. The BoE should be acting swifter to tackle inflation – the labour market is tight enough to warrant more aggressive tightening. The response by the Bank is rather soft and inflation expectations may continue to rise as a result of this. The Fed is in a similar position – whilst it is going for the 7 hikes, it should be acting with larger measures more quickly. The economy there can handle it, the labour market is super tight. Financial markets are the only risk…and the Fed does not have a mandate for that, right? 
The Bank of England is tightening…can we look to the other side of London for some fiscal relief with next week’s Spring Statement? Not likely…National Insurance is going up, and except for some small helicopter drops it’s hard to see much in the way of support for the cost-of-living squeeze from the Chancellor. 
Elsewhere, nickel plunged 12%, limit down for the third straight day at the LME. USDRUB stabilised around 103 ahead of a Russian central bank decision today. Evans, Barkin and Bowman are today’s Fed speakers. Oil is higher after a sharp bounce yesterday…IEA’s Birol warns ‘emergency’ in oil markets may get worse. USDJPY around 118 after BoJ unchanged…Morgan Stanley look for it to hit 125.

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