Why consumers just want to have fun

Launched in June 2009, Rathbone Strategic Growth Portfolio has an outcome-focused approach and complete flexibility of where to invest in order to achieve that. It has a target of cash plus 3-5% p.a. over a minimum five-year period and a big focus on delivering this via a risk-controlled framework.

Here, manager David Coombs gives us his thoughts on the macroeconomic backdrop for Europe, the UK and the US, his outlook for bonds and equities, and tells us why Cyndi Lauper lyrics are relevant to consumer sentiment today.

What are your views on Europe, the UK, and the UK?

“As Russia’s war in Ukraine grinds on, the continued gas flow to Europe becomes more precarious,” said David. “Supplies have already been shut off completely to some smaller nations, while others (including France, Germany, and Italy) have had their consignments severely curtailed. Yet more cuts could be on the cards.

“An exceptionally hot summer has led to unseasonably high energy demand because of people cranking up the air con. European countries — including the UK — have done well finding alternative energy import partners, yet completely reconfiguring your energy complex takes more than a few months. Continental gas prices have shot roughly 60% higher since March-end.

“Put another way, the benchmark European gas price is nearly nine times the average price of the past decade. When you get down to brass tacks, energy is key for economic activity. The extra cost of power — and with natural gas being the keystone of most European power grids, accounting for a quarter of all energy use — will make Europe’s manufacturing sector less competitive and squeeze its people’s wallets, hurting cafes, bars, restaurants, and retailers. It’s why we’re worried about the potential for recession in Europe and the UK.

“It’s also bye-bye BoJo. The Prime Minister’s widespread popularity with voters gave him more lives than a pack of cats, yet the final straw was those two crushing by-election defeats and high-profile resignations, sparking another fight for the keys to Number 10.

“The effect of Johnson’s resignation on the UK market and sterling shouldn’t be overstated though. Given the government’s poor polling and recent by-election defeats, together with the cost-of-living crisis, the Conservatives are highly unlikely to hold a general election until they absolutely must — likely in January 2025 because of The Dissolution and Calling of Parliament Act. So, this will simply be a case of swapping one Conservative leader for another.

“We’re feeling better about the prospects for the US, despite it now falling into a technical recession, versus Europe and the UK, where the upended energy markets are having a greater impact. This year has been a painful one for holders of US companies, yet we remain comfortable with our exposure and have added steadily to them throughout the quarter’s drawdowns.”

What is your outlook for bonds?

“Bonds are often thought of as the boring market, yet they have been wild this year,” said David. “The three broad scenarios are: the risk that inflation lingers for higher and longer; that higher costs crimp the spending of households and businesses, causing a recession; and the gold-toothed rooster itself, that inflation fades quickly, allowing central banks to slow their rate hikes.

“Ten-year government bond yields, on both sides of the Atlantic, have fallen back from their mid-June peak following worrying economic data. The yield drop was more pronounced in Europe and the UK, because of the recession risk we noted before. Even after the pullback in yields, we think investors are assuming too many rate hikes over the coming months. The global economy seems just too fragile for such phenomenal tightening. Because of this, we think bond yields are finally starting to look attractive again. The inverse relationship between bond and stock markets is starting to reassert itself, which could make them a much more helpful diversifier.”

What about equities?

“As for stocks, this earnings season is more revealing than ever,” continued David. “Investors are eager to hear how companies are feeling. The probability of recession has risen significantly so far, and cost pressures for businesses are high because of rampant inflation… Yet so far, in this earnings season, the companies we own have broadly met or exceeded the lower expectation set by the market.

“That said, weak sentiment surveys have combined with disappointing retail sales and Purchasing Managers’ Index readings to renew worries about a global slowdown. The cost of living has skyrocketed all over the world, pinching many people’s spending power. Meanwhile rapid rises in the cost of labour and raw materials have tripped up more than a few companies reporting earnings.

“Still, these concerns clash with the sugar rush from reopening, driven by pent-up savings and boredom. To paraphrase Cyndi Lauper, many people still seem to want to have fun… Flights are full again, and restaurants and pubs seem to be doing alright. But the question is how quickly people rein in spending as the summer of high prices rolls on. Wages are rising though, which could offset some of the effects and support spending.”