Greedflation

With politicians and even Andrew Bailey, governor of the Bank of England accusing some retailers of ‘profiteering’ during the cost-of-living crisis, the role of UK regulators is coming under greater public and political scrutiny. This has fuelled fears of monopolistic greedflation.

The water regulator Ofwat has already received considerable flak from the UK public over the discharge of raw sewerage into our rivers. The cost of cleaning up our rivers does suggest even higher household water bills in the long run. Meanwhile, Ofwat has had to deal with Thames Water which is sinking under a mountain of debt.

Meanwhile, Ofgem, the gas and electricity regulator failed to spot that companies supplying energy to UK consumers were undercapitalised. This left them vulnerable to global price volatility and not having the scale to hedge future energy costs. Some 30 energy suppliers have gone bust since Russia’s invasion of Ukraine sparked an energy crisis. Ofgem is now warning energy suppliers that they should retain profits rather than pay out returns to shareholders!

Meanwhile, the ORR (Office of Rail Regulation) has not protected users of Northern Rail services from the failures of franchise rail operators. In telecoms, Ofcom allowed operators to implement inflation-linked price increases for households for broadband services. Elsewhere, the CMA (Competition and Markets Authority), has confirmed that motorists were paying an extra 6p per litre for fuel at supermarkets last year as weak competition let them charge more. Last week, the FCA (Financial Conduct Authority), called in the heads of the four major high street banks to question the rate at which the benefits of higher interest rates are being passed onto savers, relative to the hikes in mortgage rates for borrowers.

Unfortunately, the failure of some regulators to be more forceful or aggressive on business viability, is coming back to haunt them. Inflation and higher interest rates, has opened a can of worms.

The problems at Thames Water came as a surprise to some observers, but to those who have followed the water sector closely, it was no surprise at all. If Thames Water is up an effluent strewn creek without a paddle, then it is one of its own making. However, it looks as if over the weekend Thames shareholders may have thrown it a lifeline to avoid it sinking.

‘Earth provides enough to satisfy every man’s needs, but not every man’s greed’. – Mahatma Gandhi

What have we been watching?

Weak manufacturing and service activity data overshadowed markets as did more disappointing economic data from China. In addition, markets were disturbed by China’s decision to restrict exports of some key semiconductor commodities. A ‘hawkish’ set of Federal Reserve meeting minutes did not help the mood either.

The ‘technology trade war’ between the US and China continues to escalate. Last week, China’s commerce ministry, imposed controls on exports of certain gallium and germanium substrate products for the semi-conductor industry on the grounds of security and national interests. China is thought to produce 80% of the world’s gallium and germanium and the US imports 50% of its supply. Meanwhile, American media has reported the US government is considering limiting access by Chinese companies to cloud-based computing services including that offered by Amazon and Microsoft.

Ukrainian President Volodymyr Zelensky warned that Russia was planning ‘dangerous provocations’ at the Zaporizhzhia nuclear power plant. This followed Kyiv and Moscow trading accusations of preparing an incident at the plant. Russian troops may have laid explosives on the roof of the nuclear power plant. Surely no one is that crazy?  The UN has demanded access to the site and roofs.

---

 

UK manufacturing PMI slipped to a six-month low of 46.5 in June with customer uncertainty continuing to weigh on order books. Higher interest rates have flowed through into the mortgage market with the average two-year fixed deal now 6.47% while a typical five-year fixed mortgage is now 6%. It is not just homebuyers paying more. Last week, the Treasury raised £4bn through the auction of a two-year gilt with a yield of almost 5.7% – the highest two-year borrowing cost this century!  UK interest rate futures also moved higher suggesting a 66% chance that interest rates will hit 6.5% by February 2024.     

---

 

In Europe, the manufacturing PMI was even weaker than that of the UK, falling to 43.4 in June.  German and Italian manufacturers saw a sharp fall in activity at the end of the second quarter and there is growing evidence that the capital-intensive industrial sector is reacting negatively to the ECB’s interest rate hikes.

---

 

US ISM manufacturing activity was also weaker than expected in June at 46.0 with companies lowering output as softness continues and optimism about the second half of 2023 weakens. However, the ISM services activity indicator was up month-on-month to 53.9. The Federal Reserve June meeting minutes signalled an increased likelihood of a July rate hike as ‘almost all’ committee member agreed that further tightening will be needed this year.

---

 

The Chinese Caixin services PMI was weaker than expected and dropped back to 53.9 in June. This was the lowest reading since January and, once again, suggests the key driver of China’s post-Covid recovery is cooling down.

---

 

Brent oil edged up to $78 as Russia announced it will lower exports by 500,000 barrels a day while Saudi Arabia is to extend its 1million barrels a day cut into August. 

---

Finally, as its Wimbledon. How much do ball boy and girls get paid? Apparently, they earn around £200 for the fortnight at Wimbledon but they also get to keep their iconic Ralph Lauren uniforms at the end of the tournament.

Read Last Week’s Alpha Bites – A Great British Energy dilema

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Trading name text

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.