Langton Capital – 2015-08-21 – Daily Wrap: Oil prices, China fears, lower costs & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
Oil prices & inflation:
• At $46 per barrel, the price of oil is back at early-2015 lows and these lows, in turn, were the lowest levels for nearly 7yrs
• Prices don’t have to drop much further before we’ll have to be going back a bit further to illustrate the drop. Brent was last below $40 in 2004 for example.
• This has an impact on consumers directly (cheaper petrol, other fuels move in tandem) and on companies via lower delivery and other costs.
• For some operators, for example the holiday companies, the impact is much more direct.
• There are no leisure companies that we’re aware of, that would benefit from higher oil prices – all are beneficiaries when the price of oil falls
o Tour operators lock in the price of their aviation fuel in the same way as they fix currencies etc. Hence any lower oil prices (whilst they impact the company’s customers immediately) will have a delayed impact on profitability.
• Re the consumer, lower oil prices will help to offset the costs implied by higher interest rates.
o Of course interest rates are zero sum. Somebody is better off even if the majority of us are not.
o The banks will somehow manage to put themselves in the former category, of course, and the government will benefit as it charges taxes on interest received and doesn’t allow relief (exc. Mortgages) on interest paid.
• But interest rate rises may be delayed (see below).
Interest rate rise fears versus China slowdown concerns:
• Just as the Fed and the Bank of England feel that they’ve done their job by pre-warning their various populaces that interest rates were going to go up, China slows down.
• And China is a big deal.
• Hence today we have a slight uptick in US jobless numbers and sluggish UK retail sales numbers leading observers to question whether interest rates will rise as quickly or as soon as previously supposed
• And further oil and commodity price declines will further dampen inflation and reduce the need for a rate rise
• This will be particularly keenly felt by non-US$ countries should the American currency begin to weaken
• Inflationary pressures in China may also abate
• Hence we’ve got the choice, the frying pan or the fire. Markets are understandably concerned. However, we would suggest 1) a bounce is due (even in a down market) and 2) a China slowdown (an unknown quantity) is probably more of a concern than is a series of interest rate rises (a somewhat delayed but previously regular occurrence).
The housing market & leisure demand:
• Housebuilding is booming & mortgage approvals are at 7yr highs – see earlier email.
• Housebuilding is a source of a large number of jobs.
• The industry puts money in would-be consumers’ pockets very quickly.
• But it can turn on and off like a tap.
• Property booms can decay quickly. They don’t leave anything (that’s not fair, they do leave houses & occasional other white elephants) but they don’t permanently change the ability of an economy to produce things in the way that a capex boom or clearing a forest or reclaiming a few thousand acres from the North Sea would.
• I mean come on, it’s not like we haven’t been here before.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Markets a little less bad than they might have been.
• So most people want to drink less, do they? Or do they think that they should say they do because, if the choice posed is whether you think you should be drinking more or less than you presently are, it may be an easy choice. However, whatever the faults implied by the question posed above, alcohol consumption is likely to remain on a downward trend for the foreseeable future.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Jamie’s Italian to open in India this autumn. Reports suggest the group will open 2 units in Delhi with a roll out thereafter
2. Mintel has suggested that 17% of UK adults intend to reduce their consumption of alcohol over the next 12mths.
a. Mintel suggests 80% of UK adults currently drink alcohol, 72% imbibe at least once a week
3. Big Hospitality has reported that 15-strong Pizza operator Franca Manca has signed on a site in Wimbledon, London
4. Living Social has reported that diners will pay an average of £12.04 for a main course in the UK and Ireland
5. M+C reports US burger operator Five Guys is to accelerate its UK opening programme and is to open its 30th UK site next week
6. UK retail sales volumes +0.1% in July m-o-m per ONS. Reverses fall in June with sales growth strong in household goods.
7. Kuoni H1, has achieved ‘organic growth above market’ and re re-positioning says ‘all tour operating activities sold faster than planned’
a. Kuoni H1: Revenues +6.8% organically at 1.5bn CHF. Strong franc held back reported sales growth. Made 5.9m CHF net.
b. Kuoni H1: Says FY ‘operating earnings from continuing operations expected to be in the range of CHF 40 to CHF 50 million’.
8. Sterling down on slow retail sales numbers. Interest rate rise hopes in forex market put on hold
9. China factory activity slows at fastest rate in 6yrs. Markit PMI of 47.1 (47.8 in July) where a no < 50 implies contraction
a. Oil price down overnight, Brent $46.10 per barrel. US seasonally adj. jobless up to 277k w. to 15 Aug. Dampen interest rate rise talk?
b. ECB member Ewald Nowotny says inflation is not likely to resurface in Eurozone any time soon. ECB looking for1.5% in 2016
c. Mortgage lending in UK in July highest for 7yrs. Some £22bn lent in July. No. of homes built in England up sharply over last 12mths
d. Greek PM Alexis Tsipras Thurs resigned in order to call an early election on 20 Sept. Capitalise on popularity, give himself slap on back?