Callum Abbot JPM

Written by Callum Abbot

June, 2021

In association with

The long and short of it: Review of the markets in May

I went out for dinner in London the other night… inside a restaurant. The novelty of the occasion made my fellow diners and me slightly giddy with delight. Given how absolutely abysmal the weather has been since the government allowed outdoor dining and drinking, it must be welcome relief for restaurants to be opening their doors to chilly customers.  

Since reopening mid-April, pub group Marston has experienced like-for-like demand 20% below pre-COVID levels (company trading update 19th May). This is impressive considering dining and drinking have been restricted to outdoor only; while April was the frostiest on record and we are on course for the wettest May on record with average temperatures 2°C below the long-term average (Source: Guardian, Met Office). Pubs and restaurants have recently been able to allow indoor dining and the government has confirmed the country is still on track for the 21st of June full reopening. It looks like we will have a busy summer of offloading some of the £180bn (c.10% UK GDP) of additional savings built up through the last 15 months (Source: FT).  

The additional kicker for domestic companies is that the summer holiday looks likely to be a staycation. There are very few options on the government’s green list at the moment. This will get better over time, but it leaves consumers facing a gamble or a hasty last-minute booking. The other hurdle that potential travellers face is demonstrating negative PCR COVID 19 tests. To travel to Portugal each traveller must show a negative PCR test on the way out and on the way back. They may not use an NHS test. Private tests in the UK cost around £150 each and in Portugal are around €150, for a family of four this can add over £1000 to the holiday cost! Even with the extra cash in many people’s pockets that will be unaffordable or simply unpalatable.  

The fly in the ointment is inflation. In April, the Office of National Statistics (ONS) reported inflation over the previous 12 months was 1.6% y/y, hardly a jaw dropping figure (Source: ONS). However, as opening up continues, the ability to spend has increased, we are lapping weak inflation data points from last year and certain parts of the inflation calculation are seeing upward pressure.  

Commodity prices are one area of pressure; iron ore hit an all-time high this month at $238 per tonne and is currently 120% higher than it was 12 months ago, oil is nearly 90% higher and wheat is 30% higher (source Bloomberg). There are stories of friction in the labour market, particularly in parts of the market that are just opening up. Factors explaining this friction include foreign workers returning home (part Brexit, part pandemic), people leaving an industry and the millions of people still on furlough (the last reported figure was 4.7million at the end of February. Source: GOV.UK).   

Everyone expected at least transient inflation. The extremely weak inflation data points from last year combined with a wall of money to be spent on reopening it made it inevitable. The question, no one really knows the answer to, is whether it will prove transient or structural. At the moment central banks are looking through inflation but, if prices continue to rise, they may need to look in their toolkit for ways to ease inflation whilst keeping the recovery going. Monetary tightening is likely to be taken badly by markets. We saw this in the middle of May when the markets sold off aggressively. The FTSE All-Share has recovered strongly and is up (at the time of writing 24th May) but more ‘growth heavy’ markets like the NASDAQ are down for the month as the risk of inflation and higher interest rates hangs over the value of the long dated cashflows which growth stock promise. 

The Long  

Grafton. This building supplies merchant is benefitting from strong Renovation Maintenance Improvement (RMI) trends. HMRC data for April housing transactions was the strongest it has been since the financial crisis (source GOV.UK). When people buy a house, they often do building work. This has been augmented by people saving money through the pandemic and looking to update and improve their homes! At recent results Grafton announced a strategic review of its business, which will likely lead to disposals. Management has good track record of capital allocation, so proceeds will likely be deployed astutely in accretive acquisitions.  

The Short 

Blue Prism. The robotic process automation company is part of a fast-growing market segment. However, the company does not yet make any profit and published forecasts are for it to remain negative at the EBITDA line out to the mid-2020s.  The lack of profit has also meant the company burns cash and has had to raise over £240m since listing, increasing the share count by over 50%. Recent underperformance has been driven by downgrades to the revenue guidance, suggesting growth may be slowing. Their main competitor, UiPath, is better capitalised and growing faster, which suggests possible competitive pressures. Microsoft is also entering the market, which could further disrupt their market position.  

Sources: 

Guardian:  https://www.theguardian.com/uk-news/2021/may/21/uk-weather-may-on-track-to-be-wettest-on-record-with-more-rain-to-come#:~:text=The%20wettest%20May%20on%20record,with%202007%20recording%20114.2mm

FT:  https://www.ft.com/content/5e7b5c88-937c-445f-859c-2f9653332afe 

ONS:  https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/april2021 

GOV.UK: https://www.gov.uk/government/statistics/coronavirus-job-retention-scheme-statistics-march-2021/coronavirus-job-retention-scheme-statistics-march-2021 

https://www.gov.uk/government/statistics/monthly-property-transactions-completed-in-the-uk-with-value-40000-or-above/uk-monthly-property-transactions-commentary

Bloomberg:  

Iron Ore Spot Price Index 62% Import Fine Ore CFR Qingdao USD 

Generic Brent Future price 

Generic Wheat Future price 

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