Investment Comment
2nd June 2023
If only the French had a word for cuisine
For a country whose high streets are blessed by national dishes of pizza, curry and kebabs, English cuisine is the veritable envy of the world, especially the French. In France, the impact of higher food prices has been a 16.7% collapse in food spending since 2020, to levels last seen over 20 years ago. As a result, the French government got agreement from the food retailers to introduce a ‘lowest possible price’ on a range of products. The agreement has been implemented in a way to protect the farming community, support household spending power and is set to reduce the profit margins of food retailers.
French food: prices up and consumption down over the past 2 years
Source: Artorius, Bloomberg
Food price inflation may ease in coming months as underlying food costs are starting to fall, and typically lead food inflation by 12 months
Source: Artorius, Bloomberg
With the highest food inflation across Europe, it was reported that the UK government was considering a similar response, but details are yet to emerge. Longer term, there should be better news as the food price shock is receding. This is shown by the Commodity Research Bureau (CRB) Food Index, which captures the farmgate costs of agricultural products. This index is showing a 10% rise over the past year, and this should be reflected in shop-floor inflation in 2023.
How quickly lower agricultural prices are passed on to the end consumer will be the key driver of food inflation and is an important test of pricing power and the competitive backdrop. Will those companies that have seen a rise in profits through the inflationary period continue with their price setting behaviour or will policymakers act (as they have in France) to ensure price deflation is passed onto the consumer even though that may impact profit margins.
As a note in passing to reflect the lack of competitive pressure in the UK, the May Investment Outlook referenced the UK’s Competition and Markets Authority (CMA) interim report on the state of forecourt fuel pricing. Having found that profit margins (especially in diesel) had nearly tripled since 2017, imagine the shock to then find diesel prices sharply lower over recent weeks. With a lack competition to keep prices keen, the concentrated nature of some sectors in the UK economy may mean that the recent falls in commodity costs will benefit the companies rather than the consumer unless the authorities keep their fingers on the pulse (and prices) of the UK.
Narrow days
Away from the excitement attached to technology stocks, and Artificial Intelligence, equity markets appear to have paused. Corporate commentary is no longer dominating investor attention as the earnings season has finished and so expect markets to be driven by economic data and the actions of policy makers over the next few months. The good news is that US politicians have reached agreement to raise the Federal debt ceiling, which had threatened to shut the US government, but so far this does not appear to have lifted investor sentiment.
Gerard Lane Chief Investment Officer
All expressions of opinion reflect the judgment of Artorius at 2nd June 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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