Good morning!


Exchange rates

I've been pondering this issue a lot lately. On balance, I'm beginning to wonder whether myself & other commentators might be over-reacting a little? Certainly prices of most things will rise, due to weaker sterling. However, I was reading an article yesterday saying that a lot of larger retailers have hedged their currency forward by a considerable amount - e.g. Debenhams is 1-2 years hedged apparently. So maybe inflation could be more gentle & gradual than I previously thought?

Also, if you look at the long term chart of sterling against the dollar, we saw a huge devaluation from mid 2008. Sterling dropped from about $2.00 to a low of around $1.40. That caused a surge in inflation for a while, before it came back down again. It's no wonder that the British manufacturing sector was hollowed out, with sterling having been overvalued for so long.

A burst of inflation could be seen as a good thing, as it will scrub off some of the national debt, and private sector debt.

I think smaller retailers will feel the pain most, as their larger competitors will be cushioned from the impact of higher prices through their currency hedging. Also the bigger companies have more leverage to resist price rises from suppliers.


Breaking news! The Government has apparently just lost a court case over invoking Article 50. This apparently could delay Brexit, which has given sterling a boost - it's bounced a little in recent days to about $1.24.



Victoria (LON:VCP)

I had a fascinating meeting yesterday with Geoff Wilding, the former investment banker who has been instrumental in Victoria Carpet's remarkable renaissance over the last 4 years. He gave me a masterclass in how to do a successful buy & build (he's done 6 of them, in various sectors, including Victoria, so is worth listening to).

His 4 key points were;

1) Don't buy turnaround situations. Target companies must already be well run, and profitable.

2) Retain existing management - lock them in with earn outs over 3-4 years, to keep them motivated & involved.

3) Buy companies which have modern factories & equipment - this minimises capex requirements in future.

4) Management have to be honest & trustworthy. If in any doubt, walk away.

He pointed out that many private companies have very inefficient balance sheets, as owners often focus on profitability, but not ROCE. So there…

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