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“Markets flashed red across Europe and Asia on Friday as uncertainties remained over the future of troubled Chinese property developer Evergrande, with no news on whether it had made its latest bond interest payment,” says Russ Mould, Investment Director at AJ Bell.
“Persistent and rising inflation would suggest that central banks have to act soon to get the situation under control which means interest rate hikes sooner rather than later. However, there is a bleak winter ahead given pressure on energy prices, supply chain problems and a sharp hike in the cost of living.
“All these factors threaten economic growth, so central banks have a fine line to tread – raise rates too quickly and the economy could falter, but don’t act and risk inflation racing away.
“The FTSE 100 fell 0.3% to 7,058 with healthcare being the only sector in fashion, thanks to positive news on a cancer drug from AstraZeneca. That rounds off a good week for the pharma giant which also pleased with very promising trial results on a breast cancer treatment.
“Miners were weak as investors started worrying about the potential fall-out should Evergrande go bust. Commodities demand could tumble if the Chinese property market experiences a crash.”
Nike / In The Style / Earnings Warnings
“Welcome to the season of sales and profit warnings. Investors should brace themselves for disappointing trading updates as supply chain issues and inflation weigh on margins. There is a real risk that companies are going to miss earnings expectations despite there being strong demand for their products and services.
“Nike is one of several companies to disappoint on this front. Production and shipping delays means it is struggling to keep up with demand and, as a result, has lowered its sales outlook. That caused shares in Adidas and JD Sports to fall in sympathy as investors worry that they too will be affected.
“Womenswear fashion seller In The Style is seeing strong growth in revenue but it warns that profit will be hit by higher freight costs and more people returning items. The former is perhaps out of its control, but the latter could have been prevented or reduced if it has stricter rules around returns. In the Style has seen a bigger share of its product sales mix in occasionwear which tend to come with higher return rates. That’s the classic trick of going to a party with the tags still on a dress and returning it the next day.
“Cost pressures are serious business. It is costing more to transport costs, there are disruptions to the flow of supplies due to driver shortages, and there is significant pressure on wages as companies struggle to recruit fill vacancies unless the pay packet is more generous than they’d normally offer.
“All these factors would suggest that 2021 is going to be remembered for the year that profit margins got squeezed.
“It hasn’t helped that many analysts have been overly optimistic with earnings forecasts. The cost pressures are so clear that widespread downgrades to profit margins seem inevitable in the coming months.
“Even supposed inflation champions like Unilever have shown that they haven’t got the pricing power required to pass on all the extra costs to the consumer.
“There is a crisis brewing. Companies may be stomaching lower profit margins due to transportation issues, but if they get to point where stockpiles are run down and they are struggling to get the necessary supplies to meet demand, then revenue will be hit as well. Lower revenue and higher costs are a nasty cocktail. This situation casts a dark cloud over earnings prospects as we look to the new year.”
Tortilla
“It might not seem like the most opportune moment to list a restaurant chain on the stock market given a mounting cost of living crisis, staffing shortages and as we head into an uncertain winter.
“So, it is a show of confidence from Mexican fast food concept Tortilla to press ahead with its IPO plans regardless.
“It has heavyweight backing in former Wagamama CEO Emma Woods who has joined as chair. Emulating what Wagamama has achieved in Asian dining with its Tex-Mex offering would be a laudable ambition for Tortilla.
“As a relatively new brand, the company was agile enough to respond to the challenges posed by Covid-19. Shifting its focus to delivery and operating across smaller sites and using so-called cloud kitchens which only produce food to send to people’s homes.
“The good news for Tortilla is that thanks to the pandemic there are plenty of vacant units around with affordable rents which it can use to expand.
“However, selling burritos and fajitas is hardly a ground-breaking concept and there are plenty of lookalikes in the UK. Tortilla will have to work hard to win that wrap battle.
“Also, Tex-Mex street food seemed to fit neatly with an on-the-go consumer making their way to or from work and with footfall in city centres still below pre-pandemic levels this could be a continuing headwind for Tortilla.
“It must also deal with the challenges facing the whole hospitality sector, like the difficulty in attracting staff, supply chain issues and growing pressures on consumer spending.”
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