The Week Ahead (28 Sept - 2 Oct): big picture bond yields, Likewise, JD Wetherspoon & Nike

Welcome back to The Week Ahead.

In the years after the 2008 financial crisis, UK bank stocks often looked temptingly cheap, but their results (and share price performance) kept on disappointing.

At the time, I remember reading commentary from an experienced investor who noted that the banking crisis had taken a decade to build and would probably take a decade to unwind.

This turned out to be broadly correct and was a useful lesson for me on the importance of a long-term perspective:

Of course, one factor behind the banks’ eventual recovery was the return to more normal interest rates, after a decade of near-zero rates.

Interest rates – and their close cousins, government bond yields – have been the topic of many newspaper column inches recently. The suggestion often seems to be that bond yields are soaring to historically high levels:

That’s true on a 10-year horizon, but taking a broader view suggests that rates are well within historical norms. While government borrowing levels in the UK and elsewhere may indeed be a concern, I wonder if what we’re seeing in yields is simply the final stage of post-2008 normalisation.

Using the Bank of England base rate as an approximate proxy for long-term bond yields suggests that the current situation is in line with pre-2008 norms:

Source: Bank of England

Indeed, official BoE bank rate data stretching back to 1694 suggests that borrowing costs have been at similar levels for most of the last three hundred years:

Source: Bank of England

In my view, it’s probably a sensible working assumption to assume that governments, businesses and consumers need to adapt to current borrowing costs.

The process of adjustment may prove to be painful, which is one reason why I am more keen than ever on owning shares in companies with net cash. I have to confess to a certain geekish pleasure in seeing some of my companies report pre-tax profit that’s higher than operating profit, due to the benefit of interest income!

Economic news

Higher bond yields are pushing up fixed mortgage rates for UK homeowners seeking new deals. Next week we’ll see if this is having any early impact on house prices or transaction volumes. The Bank of England publishes the latest mortgage data on Tuesday, while Nationwide updates its House Price Index on Wednesday.

Across the Atlantic, US homeowners do things differently and often secure 30-year fixed rate mortgages. The headline 30-year rate is now hovering around 7%, so next week’s update could grab headlines, as it’s done this week.

US job numbers may also be of interest, but the data points that are most likely to be of interest are the price of oil, gasoline and especially diesel. The latter is currently at long-term highs in the US, causing pain for the influential farming lobby (and others). 

Rumours are swirling about the possibility of a US export ban on diesel, but the way refineries work suggests to me that this could have some undesirable knock-on effects. There’s no schedule for this, but any news on Hormuz shipping or US refinery exports could move markets.

Company news

It’s the end of the third quarter next week, which means there will be a rush of small and mid-sized companies publishing results on Tuesday and Wednesday (the final day of the month).

Of likely interest for UK private investors will be the latest numbers from highly-rated flooring distributor, Likewise (LON:LIKE). This business is led by CEO Tony Brewer. He was previously very successful at Headlam (LON:HEAD), but his current venture now appears to be profiting from Headlam’s failure:

Flooring sales are suffering from weaker housing market activity, but Likewise’s success makes it clear that there is still some demand out there. For a different take on flooring, leading vinyl flooring manufacturer James Halstead (LON:JHD) will report its full-year results on Thursday.

Housing is a headwind for another of next week’s reportees: building supplies firm Lords Trading (LON:LORD) will share its half-year results on Wednesday.

Lord’s share price has fallen by nearly 90% since its 2021 IPO as its profits have withered. The last 12 months have seen a series of profit warnings, leading Mark cut our view to RED in July due to debt concerns.

Other results of interest during the first half of the week are likely to include Card Factory (LON:CARD), specialist lender S&U (LON:SUS) and soft drinks firm A.G. Barr (LON:BAG). All of these may provide some insight into the health of the UK consumer.

Although the latter part of the week is expected to be much quieter, one honourable exception will be pub group J D Wetherspoon (LON:JDW), which is due to report full-year results on Friday 2 October. Founder Tim Martin’s comments on the health of the UK consumer and the wisdom (or not) of government policy may make interesting reading on Friday.

Finally, JD Sports Fashion (LON:JD.) shareholders may want to check out the latest results from NIKE (NYQ:NKE) on Thursday. 40% of JD’s sales come from this leading US sportswear brand, which is going through a protracted turnaround.

Have a good weekend!

Here’s a summary of what’s expected next week.

---

Economic Calendar

---

Companies Reporting

Disclosure: at the time of publication, Roland owned shares in James Halstead.