Why the 'because of staglation' narrative is wrong

Article 21 November, 2021

Why the ‘because of staglation’ narrative is wrong

Hugh Sergeant explains why he believes that the “because of stagflation” anti-consumer stock narrative is wrong. Using some charts to illustrate his points, here he shows how the fundamentals lying behind consumer spending are strong, and why there is a good opportunity in consumer cyclical stocks.

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Hugh Sergeant

Whilst the UK and global consumer may well be a bit cautious in the very short term, as energy prices and negative media commentary combine to create uncertainty, the fundamentals lying behind consumer spending are strong. It should also be noted that while the observations below are specific to the UK, the same points apply in many countries around the world.

First, because the savings ratio has remained high throughout the pandemic period, there is a lot of cash to be spent. The graph below shows that the UK savings ratio has remained elevated throughout the last two years but has come down following the release of lockdowns, as people are able to go out and spend again on ‘experiences’ as well as ‘things’.

Figure 1. UK household savings ratio since 2011

Source: Bloomberg. 12 November 2021

Secondly, house prices, whilst under short-term pressure from higher energy prices, are actually likely to be feeling a lot wealthier because house prices have been so strong.

Figure 2. UK house prices since 2016

Source: Bloomberg. 12 November 2021. Y axis is showing the UK Nationwide House Price index.

“Actually, looking at all the data makes me even more bullish on consumer stocks, not just in the UK but around the world; consumers are in a good place and consumer cyclical stocks are discounting the next recession when, in reality, 2022 should be a strong year.”

And then thirdly, unemployment is falling, as shown below, from a not very elevated level (thanks to furlough schemes), wages are increasing (maybe not as much as inflation in the short-term, but they are at least going up vs. the post Global Financial Crisis stagnation) and interest costs on credit have remained very low.

Figure 3. UK unemployment data tells a positive story

Source: Bloomberg. 12 November 2021

Lastly, the government’s “levelling up” agenda, replicated in many developed countries in some form currently, would have the most positive incremental impact to incomes in demographics with the highest propensity to spend.

Actually, looking at all the data makes me even more bullish on consumer stocks, not just in the UK but around the world; consumers are in a good place and consumer cyclical stocks are discounting the next recession when in reality, 2022 should be a strong year.

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