Taking Stock: UK Companies and the Inflationary Landscape

UK Economy

Cheeseburgers. What is happening across the UK economy can be well illustrated by the humble McDonald’s cheeseburger. For the first time in 14 years cheeseburgers are going up in price, from 99p to £1.19.

 

The ingredients that go into them, the cost of the fuel used to transport them to the stores, the energy used to the cook them and the wages of the people that flip them are all going up, with the inflationary pressures that we are all seeing all around us. If McDonalds had held their prices, they would have seen their profit margins reduced. The risk they run now is that in the face of higher prices, consumers buy fewer cheeseburgers.

 

This is the dynamic we see playing out across the current wave of corporate reporting in the UK. Putting up prices can give good revenue growth for businesses and keep margins relatively stable, provided that volumes are not overly impacted (as an example, that is what we saw in consumer goods company Unilever’s most recent reporting). Other businesses have decided to hold prices steady and accept lower profitability, for example the premium soft drink manufacturer Fever-Tree,  and have seen share prices come under pressure.

 

There are already signs in company results that consumers are feeling the strain from higher prices, prioritising what they spend their money on and cutting back on non-essentials. There have already been trading statements that flag weakening trends in the likes of food deliveries, DIY projects and spending on big ticket items.

 

This is undoubtedly a very difficult economic environment, and we have not seen the last of companies reporting bad news. However, those businesses which can control their own costs and have enough pricing power can not only survive but thrive as they take more market share from weaker competitors. The backdrop may be cloudy, but the UK market does look attractively valued. UK equities offer a dividend yield of around 4%, many companies have strong enough balance sheets to buy back their own shares and we continue to see UK companies picked off by takeover bids.

 

Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

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