Inflation worries sink FTSE and supply deals help to lift Morrisons

“The market just can’t shake the inflation fears which are clouding the recovery from Covid,” says AJ Bell Investment Director Russ Mould.

“Some days investors appear relaxed about inflation risks and the possibility of central banks having to lift rates and withdraw stimulus. Today is not one of those days as, after last night’s big sell-off on Nasdaq, the FTSE 100 finds itself undoing much of its recent progress and trading below 7,000.

“Surging commodity prices are acting as a canary in the coal mine for inflation – with the huge infrastructure and stimulus packages in the US a key contributing factor.

“The valuations of the tech-based growth companies in the US are harder to justify in an inflationary and rising interest rate environment – where lower risk assets typically offer higher returns – hence the big fall in the Nasdaq yesterday.

“However, one UK technology-orientated name which is doing very nicely indeed is sports and health products online platform The Hut Group or THG for short.

“THG is raising a large amount of money, some of which is coming from Japanese investor Softbank which has also struck a deal giving it the option to invest in THG’s Ingenuity division.

“The Ingenuity platform is already used by Nestle, Nintendo and Homebase, and has been compared to Ocado’s out of the box web-based groceries solution for global supermarkets.

“Where THG is attracting inward investment, NatWest saw the Government sell £1.1 billion worth of shares to reduce its holding to 54.8%. In this case the bank will likely be pleased as it marks another step in the long rehabilitation of the group from the financial crisis.”

Morrisons

“Supermarkets are now lapping very tough comparative figures. The nation rushed to stockpile food and drink during the latter part of first quarter 2020 and retailers are now reporting the same equivalent period for 2021. Under these circumstances, Morrisons’ 2.7% like-for-like sales growth excluding fuel isn’t too bad.

“Importantly, wholesale accounted a good chunk of that growth, with Morrisons continuing to strengthen its position as a key supplier to the likes of Amazon and McColl’s.

“Morrisons is now at the point where it needs to think about the next stage of its career, and we’ll find out its refreshed spending plans in September. This will almost certainly involve boosting capacity to fulfil online orders and seeing how it can further expand as a supply partner.

“Competition continues to be fierce in the industry and the latest push by many food sellers is for same-day, rapid speed deliveries. The economics of such a proposition are still being ironed out.

“To win in the supermarket industry, companies need to excel on multiple fronts, namely value for money, service and adapting to customer needs. Customers can be very demanding and supermarket bosses cannot afford to upset anyone as there is always another food and drink seller around the corner waiting to sell their goods.

“Morrisons doesn’t seem to be putting a foot wrong in terms of these factors, but equally there is nothing that really makes it stand out from the crowd. In the long term that could be to its detriment.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.