Market Musings 230722:
When Recession is all the talk

Rebelling against the consensus narrative: whenever one thinks something, there is a good chance that the opposite will happen. So the worst may already be priced in…

Summary:

The most well-anticipated recession in history?
US measures of activity are still falling, as in the UK and Europe
Much is already priced in, particularly in Europe and the UK
Opportunities exist even in supposedly beaten-down sectors like Retailing
Technology provides a number of entry points into long-term growth compounding stories
UK corporate bonds: an interesting opportunity

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This will be the most well-anticipated recession in history

My Twitter feed is full of the dreaded « R » word these days.

It is clear that the global economy is suffering a sharp slowdown. This is evident in an array of economic indicators, from Purchasing Manager Index surveys of economic activity to Retail Sales.

The Atlanta Fed GDPnow estimate indicator of US GDP growth for the current (Q2) quarter is solidly in negative territory, highlighting a likely contraction of the US economy over this current quarter.

US Q2 GDPnow estimate points to negative growth

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Source: Atlanta Fed

All the while, central banks around the world continue to raise interest rates to combat high inflation rates. The European Central Bank has joined the band of central banks raising interest rates this week. Indeed, the ECB raised interest rates for the first time in nearly 10 years, while the US Federal Reserve looks likely to raise interest rates in the US yet again by 0.75% this month.

Remember: these higher interest rates slow inflation by first slowing growth as the cost of borrowing goes up. So these actions will first slow down the global economy even more.

So economic indicators look bleak, suggesting impending recession both in the US and in Europe, not to mention the UK.

I feel duty-bound at…

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Anthony127

26th Jul '22

It does indeed seem that this is "the most well-anticipated recession in history". I am getting the impression that the talking heads on CNBC and Bloomberg are practically talking us into a recession; and that we must not move on till it's happened.

As you say Edmund not all indicators are flagging a recession. I understand that we have two unemployed people for each vacancy. This feels more like an output gap to me than a set up for recession. I also note that the Economist magazine is forecasting a GDP increase of 3.6% for 2022. My main concern with regard to a recession is to what extent we will have energy shortages and could that precipitate a recession?

I agree that many shares have already priced in the worst outcome.

£JD. and Frasers (LON:FRAS) are mentioned as strong areas of consumption. I think this is true and I think an important trend here is the large numbers of Women and Girls who are taking up sports like football. I think this is one of the drivers of their consumption and represents a secular social trend which will benefit these companies. Listening to the fantastic mainly female support England had in the Euros Quarter Final suggests to me that this is a major change that is taking place.

illiswilgig

27th Jul '22

Thank you Edmund for a timely, excellent and thought provoking article. I'm surprised that its not stimulated a lot more discussion - which is perhaps also due to the level of fear, confusion and negative expectations in the investment community? Really quite noticeable change in the investment debate.

So in view of the disappointing lack of respons - I'll waffle on instead.

Its entirely normal bias that people project their current experience - positive or negative - into the future.? Whatever bad (or good) thing has happened today - tends to dominate our fears for the future. And we over estimate its importance despite what the data might be telling us - basically its getting back on the horse/bicycle/stock market once you fall off? It seems to me that the revolution in media communictions is amplifying this bias - making the positive and negative emotional bias swings much bigger?

Obviously I am thinking that current negative trends are biasing us towards the downside and perhaps making us miss positive opportunities. But I'm also realising I should have been looking much more towards the downside when things we going less badly ( I can't say I've ever noticed things going that well in the last few years? )

A downturn - be it a slowdown or a recession - always breaks things. That's fairly much always a bad thing at the time - partly because as a society we fail to predict and enable change before it becomes inevitable. Also because we have failed, more often than not, to ease the consequences of change through investment in the parts of society that are 'collateral damage'. But when the tall trees fall - new ones grow much faster. For me - this is the very best time to be uncovering the gems left high and dry by the falling tide. As usual its just sorting them from the rest that's the hard part.

This is classic stock selection. I've no doubt that there is a fortune to be made in backing the right big tech - but you always pay a lot for the privilege? Isn't this the same in any industry? Big Tech is just the 21st century version of 20th century big pharma, 19th century big oil, 18th century big mills etc,etc? Just because their prices are lower than they used to be does not make them cheap - expecially if you back the wrong one., at least that's what Netflix tells me.

Sure you might get rich if you pick the right one. But that's as much luck as judgement if not more so? Picks and shovels have always been where I find the best combination of value and opportunity.

So automation is a huge opportunity but so is the infrastructure to support the growth areas? There might be a lot more profit to be made from EV chargers than from EV's? Or from automated warehouses than the retailers using them? I find the sudden arrival of the 'drop-ship' process quite fascinating. Normally its talked about for the ease and convenience of setting up an etailing site and outsourcing all of the operations to the provider of the dro-ship warehouse. But it seems to me that the advantage might well be with the warehouse provider? They take a margin from the websites for providing the drop-ship service, no great loss if the web-sites fail but they can benefit hugely if one or more of the websites takes off?

And even more opportunity where physical infratructure - and of course jobs - are being replaced by data platforms, sensors and surveillance. Amazon itself is one of the best examples of this. AWS being the jewel in the crown and it sells its picks and shovels to all the rest as well as using them itself. I find a lot to admire in that - though I'd not want to buy the shares. I missed that bandwagon a long time ago - where is the next one coming from is what fascinates me most?

To return to my drop-ship theme I've noticed that Portmeirion (LON:PMP) has been investing in its warehousing and logistics as it seeks to grow its direct digital sales - in my view these are replacing the old department store model of pottery and tableware sales? Very sensible and quite possible turning a moribund low margin business into one growing both revenue and margins - and globally. They've also implemented a drop-ship capability - so now in addition to their own digital sales they can also handle third party web-site sales for an improved margin? No big deal alongside their own sales - it all helps - but if one of these wabsites takes off it could benefit Portmeirion more than the website?

The lack of productivity improvement in the UK has puzzled economists for decades. Though I'm not sure it should have. A bit late in the day - but the confluence of supply chain problems, labour shortages and freight costs toegetherwith energy and national security might well reverse - it already is starting - the long tradition of out-soucing and off-shoring which has put cheaper labour ahead of investment in productivity improvements? I'm noticing companies that have quietly and consistently invested in their UK operations - like Portmeirion (LON:PMP) - now seeing growth in both revenue and margins on the back of this trend.

Thanks again for the stimulating and thought-provoking article and apologies for waffling on,

cheers

Mark

Market Musings 230722: When Recession is all the talk

Market Musings 230722:
When Recession is all the talk

Summary:

Podcast: Three Income Strategies for Patient Investors

This will be the most well-anticipated recession in history

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Edmund Shing

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