Investment Comment
14th July 2023
The cycle continues
As the Tour de France continues into the last week with three British riders in the top 10, despite the heart-breaking crash of Mark Cavendish who was chasing his 35th and record-breaking Tour stage victory, we have a timely reflection on the continued rise of bike sales in the UK and US.
During the long period of Covid lockdowns, cycling and bicycle sales sped ahead as people around the world looked to exercise and get around in the fresh air. The working-from-home phenomena enables people to exercise instead of commuting. While the boom in sales largely abated as economies reopened, levels of bike sales remain high. In 2019, average monthly consumer expenditures on bicycles and accessories in the US totalled USD 6 billion and jumped to a peak of just under USD 9 billion in March 2021. In the UK spending on bikes has climbed by 28% over the same period.
US and UK consumer spending on bikes has continued to climb through Covid and beyond
(Spending on bike index = 100, 2012)
Source: Artorius, Bloomberg
Inflation is falling faster in other countries than in the UK
Source: Artorius, Bloomberg
Inflation and Sterling
With interest rates rising in the UK, US and Europe to curtail inflation, Wednesday’s inflation data release from the US holds out hope that inflation is indeed transitory and is moving back into the comfort zone for policymakers. Both headline and core inflation came in better than expected for June offering the prospect of lower inflation in the months ahead. In the US, the Federal Reserve chose not to raise interest rates in June. This was taken well by investors, and the lower-than-expected inflation rate data may allow interest rates to be put on hold for the next few months.
In the UK, we face a different situation. The policy choice not to put in place price cap energy prices early in 2022, as they did in France, has resulted in a widespread inflation problem which has resulted in wage inflation that the Bank of England believes will result in higher inflation for longer. As a result, interest rates are expected to keep on rising through 2023.
The difference between interest rates (captured on the chart below using 2-year bond yields) appears to be a key factor in the rise of Sterling. The weaker economic backdrop of the UK economy in 2022 dragged Sterling to low levels and that has been replaced by concerns over inflation and higher interest rates in 2023. In this case, a strong Sterling against both the US Dollar and the Euro doesn’t reflect a strong UK economy.
The UK currency may have temporary support through higher interest rates. However the prolonged Current Account deficit means that effectively the UK economy continues to rely on foreign lenders, and they in turn may lose faith if the economy weakens further. Our own research suggests that Sterling is close to fair value at $1.30 but is relatively expensive against the Euro. The implication is that the Euro is undervalued relative to the US Dollar, and if the Federal Reserve does delay further interest rate increases whilst the European Central Bank raises them through the rest of the year, then the Euro may have its time in the sun.
Sterling appears to have tracked interest rate differentials for the past 3 years
Source: Artorius, Bloomberg
The RICS survey has reached a new cyclical low and is consistent with continued house price falls year on year (yoy) and fewer new buyer enquiries
Source: Artorius, Bloomberg
That Sterling has been strong strikes a discordant noise given the mixed signals around the UK economy. Thursday’s update from the Royal Institution of Chartered Surveyors (RICS) points to a continued slump in house price expectations. Combining the RICS data on new instructions and buyer enquiries provides a useful indication of recent changes in the supply/demand balance across the sales market and this points to continued falls of between 5 and 10% in house prices over the next year. The UK housing market is hardly going to get better given the sharp rise in mortgage rates in recent months. How quickly housing market stress results in a wider fall in inflation pressure may be key in tempering interest rate expectations and Sterling’s climb.
Earnings
The US corporate reporting season kicks off in earnest this week. The Banks are seen to be the starting gun of company updates. Whilst Artificial Intelligence and the Magnificent Seven stocks have fuelled higher US equity markets, the narrative from companies will be studied to see if the recent surge in optimism is justified.
To justify further sustained upside to US equities, earnings need to be resilient and inflation pressures continue to ease, which will in turn enable the Federal Reserve to step away from further interest rate increases.
Gerard Lane Chief Investment Officer
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All expressions of opinion reflect the judgment of Artorius at 14th July 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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