29 Feb 2024
I remember writing in one of my previous journal entries how cheap our food was. And, despite recent inflation, the British continue to benefit from this – and indeed, take it for granted.
That it is cheaper to buy four pints of milk than a bottle of mineral water is a joke. That a whole chicken can cost less than a fancy processed sandwich from our leading retailers is equally bad. And vegetables; I am amazed how cheap carrots, potatoes and onions are. By international comparisons, only the US has food that is so cheap.
Last week the Prime Minister announced plans to release an annual food security index, with a focus on monitoring how self-sufficient we are in food. UK food producers rarely resort to protest, and certainly not on the scale seen recently in Europe, where the muck has literally been flying.
Across the euro area, farmers are pushing back on environmental legislation, free trade agreements and rising cost pressures. UK producers have the same problems, and our environmental policies are not helping them: more profitable to grow wildflowers than wheat, more financially attractive to farm solar panels than potatoes. We are heading for trouble, with more food being imported and a continued shrinkage in our farming base.
As a predominantly urban country that has lost contact with its rural roots, consumers may be unconcerned. After all, rewilding sounds nice until the consequences become clear as traditional landscapes disappear and access changes. We are heading for the demise of family businesses, with imports and “factory like” mega production filling the void. Food security, I think, will be a growing issue that will challenge our complacency.
Back in the world of financial markets, data was mostly supportive. There was a small rise in the UK Composite Purchasing Managers’ Index, from 52.9 in January to 53.3 in February, which suggests the second half of the 2023 recession may already be over. The improvement was driven by higher manufacturing output, although the balance was still below 50 whilst services activity was unchanged at 54.3. It looks like a small positive growth outcome for the first quarter of 2024 is on the cards. The UK inflation outlook remains mixed. Tensions in the Red Sea area adding to shipping costs and disrupting supply chains whilst the service sector is still hampered by labour shortages, and this is likely to support wage growth. Conversely, energy costs are coming down. As this feeds into the Consumer Prices Index there should be good news in the coming months, with a chance of a fall to 2% for April.
Equity markets continued to grab the headlines last week. Technology-inspired gains in the US, helped by Nvidia, propelled the S&P 500 towards a record high while, after more than 30 years of trying, the Nikkei 225 surpassed its 1989 peak. The UK equity market remains a laggard – remember in 1985 the Dow Jones index and the FTSE 100 were around the same level. Today one is nearly at 40,000, the other well below 8,000. We hear complaints about companies shifting their listing to the US, and how regulators should do more to so stop the drift. But the fundamental point is that valuations are higher in the US, there is a more entrepreneurial spirit and there is a thriving “equity” culture. In the UK, it is housing that is the predominant investment culture; an under taxed area, distorted by government interventions to encourage first time buyers. Last week saw headlines about 99% mortgages with some element of government guarantee. Madness.
Bond prices moved modestly higher last week, with the 10-year benchmark US Treasury yield finishing at 4.25%. In the UK, the gilt market was subdued, with little data being released and the 10-year rate closed a bit above 4%. This pattern was repeated in the euro area; German 10-year yields moved below 2.4% whilst Italy’s yield premium continued to shrink, with its 10-year rate settling at 3.8%.
Credit indices showed more spread tightening – in both investment grade and high yield. This reflects the perception of better economic times ahead and strong ongoing demand for the asset class. We are certainly finding it easier to sell than to buy in our sterling credit strategies. New issue premia (the yield concession required to sell new bonds) are trending lower and book building sizes look extraordinary in some cases (indicative demand during the price discovery phase of a new issue). I still think some caution is justified on both the economic front and valuations.
There is an economic concept of comparative advantage. It is great to see that the UK has such a lead in sunshine. Just waiting for the rain to stop.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.