US Edition
Sticky inflation is bad news for the shares in our Wealth Preserver portfolio. It increases the chances of further interest rate rises in the coming months, despite the Bank of England’s decision to sit on its hands on Thursday, which would almost inevitably weigh on the economy’s performance and investor sentiment over the short run.
However, while inflation was unchanged at 6.7pc on an annual basis in September, it has nevertheless fallen by 4.4 percentage points since it reached a 41-year high 11 months ago. And since the full impact of interest rate rises always takes time to be felt, the Bank expects inflation to fall to its 2pc target by the end of 2025.
Moreover, interest rates are forecast to rise only modestly in the near-term before falling to 4.2pc over the next three years.
Alongside improving growth prospects for the economy, this means that the medium-term outlook for our stocks is upbeat.
Therefore, even though the share prices of our eight share holdings have declined by 32pc on average since their addition to the portfolio in mid-2021, we remain bullish on their capacity to deliver significant positive real returns over the coming years.
Diageo, for example, is on track to meet its full-year financial guidance. Its latest trading update, released in late September, reiterated that it expected organic net sales to grow by 5pc-7pc and organic operating profits to rise by 6pc-9pc both this year and next.
This is encouraging given that several global consumer companies, notably French rival Pernod Ricard, have reported laboured growth in regions such as China and the United States.
Diageo’s shares have fallen in sympathy in recent months and have lost 12pc since the start of the year. They are 7pc lower than when the stock was added to our portfolio, although dividends that amount to 6pc of our purchase price largely offset this.
The company’s appointment of a new boss may also be weighing on its share price. However, any shift in strategy from an internally appointed chief executive is always likely to be evolutionary rather than revolutionary.
The company is likely to persist with its tried-and-tested practice of using a solid balance sheet to make acquisitions as part of a “premiumisation” strategy that targets consumers who spend more on fewer alcoholic drinks.
Given that US interest rates seem to be nearing their peak and are expected to fall to less than 4pc by the end of 2025, while China’s economy is expected to grow by 4.6pc next year, the company’s prospects in its key markets remain upbeat.
And with an enviable stable of brands that command exceptional customer loyalty, the company’s long-term prospects in a more positive global economic environment remain sound.
Following its share price fall, Diageo trades at 19.4 times earnings. In Questor’s view this represents good value for money given its solid financial position, growth potential and distinct competitive advantage.
While sticky inflation may hinder its performance in the short run, an improving economic outlook should boost its corporate and investment performance over the coming years. Hold.
Questor says: hold
Ticker: DGE
Share price at close: £31.85
Update: Admiral
We covered Admiral, the insurer, on Tuesday for the general readership but will briefly recap now for the purposes of the Wealth Preserver portfolio.
Admiral has been a disappointment thus far: the shares have declined by 22pc since their addition to our portfolio in June 2021. When dividends equal to 15pc of our purchase price are factored in, our total return stands at minus 7pc.
The company’s latest half-year results highlighted the difficulties it is experiencing as a result of high, and sticky, inflation.
Vehicle repair costs have surged, which has prompted it to increase premiums to protect margins. Although its total customer numbers rose by 4pc versus the same period of the previous year, this was largely because of its continued expansion in non-core areas such as loans.
Motor insurance customer numbers declined by 3pc in Britain in the first half of the year.
Overall, though, pre-tax profits increased by 4pc in the first half of the year. As inflation subsides and economic growth improves, its operating environment should get markedly better.
At 21 times forecast earnings the shares are not cheap. But Admiral’s strong market position and improving prospects make a share price recovery highly likely. Hold.
Questor says: hold
Ticker: ADM
Share price at close: £24.97
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