Stock Take

After more than a year of inflation dominating market performance in Western markets, the past week saw the emergence of deflation, raising its unwelcome head.

The causes of inflation in the West are relatively well known by now. Coming out of COVID-19, pent up demand exploded, and it took longer for supply chains harmed by the pandemic to catch up. At the same time, the war in Ukraine caused a number of commodities, including fuel and food, to go up in price.

However, the Chinese market has had a slightly different timeline. It only left its version of lockdown (known as the zero-COVID policy) at the end of 2022. While some hoped this would lead to an economic bounce, instead it emerged into a weak global market, with cooling demand in many cases. China’s property market, which had been struggling for some time, failed to revitalise, and youth unemployment ramped up. In fact, China recently suspended reporting this last figure.

Official figures show China slipped into deflation in July, as consumer prices fell by 0.3%. While the high inflation in the West might pose problems, deflation can also create its own issues. Prolonged deflation can cause consumers and companies to cut back on spending and production, which in turn can lead to increased unemployment and reduced growth.

Given the current weak sentiment surrounding the Chinese economy, it is perhaps unsurprising that the Chinese market has struggled for much of this year. However, Martin Hennecke, Head of Asia & Middle East Investment Advisory & Comms at SJP warns against making a knee-jerk reaction when looking at the market.

He notes: “Very often when sentiment is at its most negative for any particular market due to negative headlines and poor past returns, it can also imply a significant valuation opportunity.”

“Whilst a recovery may take longer than anticipated, research by London Business School has shown that there is hardly a correlation between macro-economic growth and stock market movements given that markets are anticipatory in nature, and just like during prior general market crises (for example the 2008 financial crisis and the COVID-19 crisis) could rally back well before a normalisation of the economy. And it is not actually all only negative, with Starbucks, Yum brands and Apple all reported strong China earnings rebounds in Q2. However, positive news is being mostly drowned out, for now.”

Outside of China, markets continued to struggle last week, partly out of fear that the weak Chinese data could spread to other economies. In the US, the S&P 500 fell by 2.1%, while the NASDAQ fell by 2.6%.

Part of this decline can also be explained by an uptick in US treasury yields. These tend to have an inverse relationship with equities, so move in the opposite direction. Yields were helped by some better-than-expected economic data, notably industrial production and retail sales which added to growing hopes that the US economy would avoid a recession despite the pace of the Federal Reserve’s (Fed) rate hiking cycle.

The UK’s FTSE 100 lagged behind its global peers, falling 3.5%. Headlines last week pointing to falling headline inflation obscured the fact that core inflation – which removes more volatile areas like fuel – remained flat. This increases the likelihood that the Bank of England will again increase interest rates in the future.

While Chinese woes might have caused some of these market struggles, Neil Shearing, Group Chief Economist at Capital Economics, warns that some may be over estimating the impact a Chinese slow down could have on the global economy: “Markets are again getting worried about what a downturn in China means for global growth. But these concerns are based on fundamental misunderstandings about how much influence China’s economy has over the global cycle. Absent a crash, China’s slowdown is more a problem for those multinationals and emerging markets that do most business with it than a threat to the global economic outlook.”

Wealth Check

Entrepreneur Steve Witt has started and grown several businesses during his career, including his current venture, The Travel Franchise. In 2008, he sold UKDomains, a company offering web domain services, which he’d built from scratch, for several million pounds. Yet despite his newfound wealth and freedom, Steve felt “nothing but grief”.

“I thought it would be all champagne and fireworks. Instead, it was the most depressing day of my life,” says Steve. “I went through a grieving process – I felt I’d suddenly lost everything I’d worked so hard for.”

Steve realised the truth in the old cliché that “it’s not all about the money” when he handed over his passion project to UKDomains’ buyers. Here are some of the lessons Steve learnt about how to exit a business:

  • Be aware of your obligations under the terms of the sale

One of the terms of the sale was that Steve couldn’t work in the web-hosting sector for a year after the sale. “That’s not so easy when your sector is all you know,” says Steve.

  • Work with an invested partner

Steve worked with an agent for the sale of UKDomains – something he says, in hindsight, he wouldn’t do again. The cost of the agent’s fees from the sale didn’t reflect the value of the work, Steve says, and an agent tends to be less invested in the future of the company than its exiting founder.

  • Understand your company’s true value

You may not feel you have a good understanding of your business’s financial value – particularly if you have no prior experience of selling a company. Look at past sales of companies in your sector to see how much they were sold for and what made them valuable.

  • Have a post-sale plan

The saying goes: “Every athlete dies twice. Once when they take their last breath, and the other when they hang it up.” And that is true for business owners selling their company, says Steve, who recommends thinking about your ‘afterlife’.

  • Find your purpose

Decide how to fill the void that was left after selling your company, identify what motivates you and makes you happy.

  • Create a wealth management plan

The sale of your business may leave you with more liquid cash than you’ve ever had before. Saving and investing that money wisely is vital if you are to make the most of it.

In The Picture

You may not notice its effects in the short term, but as time marches on you may start to feel the squeeze. We can see from the example below that if left to gather dust, the real value of cash kept saved under the mattress of £10,000 can drop to under £5,000 in just twenty years due to a steady rate of inflation of 4%.

Learn more with our power of investing to beat inflation article here.

The Last Word

With tournaments like this and the great and professional organisation, we can all continue to build on the further development of women’s football across the world.

Sarina Wiegman, Manager of the England Women’s Football team, reflects on the World Cup after reaching the final.

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SJP Approved 21/08/2023