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15 February 2021

Bank of England Predicts Consumer Spending Spree

The FTSE 100 consolidated for most of last week, up 0.43%, after receiving a boost on Friday from the Office for National Statistics (ONS) economic report for 2020. The report highlighted that the UK suffered its worst economic slump since 1709, as the economy retracted 9.9% for the whole of 2020 for reasons we are all too familiar with. However, the report shone a positive light on the outlook for the coming year. The Bank of England’s Chief Economist, Anthony Haldane, stated that the UK economy is like a “coiled spring” waiting to release large volumes of “pent-up financial energy”, with consumers expected to spend an estimated £250bn that households have saved since the start of the pandemic. The lift in consumer spending will be a relief to many businesses whose revenue has been hit due to low levels of demand, and with Haldane’s prediction that annual economic growth will be in the double digits next year, the rotation into consumer cyclical stocks seems to be a consensus trade with strong performance expected towards the end of 2021 and into 2022.

Around the rest of the world, the Hang Seng index was up 1.89%, while US markets finished the week up across the board. The Dow Jones posted the strongest performance out of the three main indices, rising 0.98% over the week. The Nasdaq was closely behind, up 0.66%, and the US S&P 500 posted a gain of 0.6%.

Markets have been nowhere near as manic compared to previous weeks, but one US equity has sparked interest with its Initial Public Offering (IPO). Bumble, the online dating company, gave investors something to chirp about as the shares listed at US$76 on the Nasdaq last Thursday, a 77% increase on the price at which it had sold shares to public investors the previous day. The premium investors are willing to pay could stem from the hype surrounding Bumble as a potential competitor to industry leader Match Group - which owns the likes of Tinder, OkCupid and Match.com. Despite that, Bumble still needs to see exceptional levels of growth to compete with the industry leader. Revenue for 2019 was US$489m, in contrast to a staggering US$2.051bn in yearly revenue for Match Group. Match Group clearly did not take the IPO well, announcing a US$1.7bn acquisition of South-Korean social media platform ‘Hyper Connect’ the next day, which will diversify its revenue stream away from pure dating platforms.

Yorkshire-based supermarket giant Asda was also in the news last week as the private-equity backed billionaire brothers purchasing the firm have offloaded £2.5bn of debt in the largest ever Sterling junk bond sale. The bond was issued as the Blackburn-based brothers, along with TDR capital, attempt to fund their acquisition of Asda. The company has relatively low levels of debt and, with £9bn worth of property involved in the takeover, it was no surprise that investors snapped up the bond issue, investing a total of around £8bn. The two brothers have transformed EuroGarages (EG) into one of the world’s largest petrol pump businesses through a number of debt-funded acquisitions in recent years, and with their expertise it will be interesting to see how Asda will develop under new British ownership. Walmart will still hold a £500m stake in the business, however, Asda will benefit from the purchasing power of the US company but at the cost of a 5% fee linked to the purchase of any goods it secures for the company.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Bank of England Predicts Consumer Spending Spree
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