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 pointes, here he shows how the fundamentals lying behind consumer spending are strong, and why there is a good opportunity in consumer cyclical stocks.

Written by
Share

Print Friendly, PDF & Email

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.

ES R&M UK Recovery Fund

This fund enables investors to have targeted exposure to those companies we believe to have particularly strong potential to create value, following a period of depressed profits that could enable significant recovery.

R&M-18.1-MACRO-FIRST-RIGHT

Latest perspectives

Dan Hanbury on… the current opportunity for UK smaller companies

Dan Hanbury on… the current ...

Video 25 November, 2021

Dan discusses how his fund looks to exploit the current opportunities in UK small caps.

Learn more

Why the ‘because of staglation’ narrative is wrong

Why the ‘because of staglation’ ...

Article 21 November, 2021

Hugh Sergeant explains why he believes that the “because of stagflation” anti-consumer stock narrative is…

3 min read

Finding patterns in the prosaic

Finding patterns in the prosaic

Article 4 November, 2021

William Lough, Portfolio Manager at River and Mercantile, considers how the team’s proven and repeatable…

5 min read

James Sym on… his approach to selecting ESG stocks

James Sym on… his approach ...

Video 12 October, 2021

James Sym discusses his valuation conscious approach to selecting ESG stocks for his European equity…

Learn more

Sign up to our newsletters

Stay ahead of the curve by receiving our newsletter containing current industry developments and insights.