Inflation: a blip, or a horror show to come?
There’s only one question vexing stock markets today: inflation. Is it, as the Bank of England wants us to believe, a blip which can be safely ignored as one-off price rises sweep through the economy? Or is it a sign that, like a sleeping dragon, if you poke it often and hard enough, it will wake up and bite you?
In truth, nobody knows, and there is plenty of (weak) evidence to support both theses. The arguments are being rehearsed endlessly. Will wage growth somehow turn into better use of the UK’s notably unproductive workforce? Are the supply shortages simply an example of the old adage that today’s shortage is tomorrow’s glut? Will the gains from global supply chains and digitising the economy continue to bear down on company costs as they have for the last decade?
The latest jump is dramatic enough to force the Bank governor to write to the chancellor to explain why he’s doing nothing about it. This will exercise his facility with the language, since central bankers are supposed to be prudent above all, so he and the Monetary Policy Committee are taking quite a gamble.
Asset prices are afloat on a sea of near-free money, which the Bank is continuing to manufacture. Not only are interest rates almost too small to measure, the programme of buying in government debt continues apace. This may turn out to be the right thing to do as the economy recovers, but it is self-delusion to deny that this is a high risk strategy, and measured by any conventional means, is asking for trouble. We can only hope the dragon isn’t paying attention.
No takeover: please stump up £1.2bn instead
As a defence against an unwanted bid approach, it at least had the advantage of novelty. Rather than invite the shareholders in easyJet to consider whether they might like to be taken over by Wizz Air, the management hit them with an offer they couldn’t refuse: to put up £1.2bn or see their holding diluted out of sight.
The price went down like a stricken jet, from 630p to 560p. By the end of this week, the shares had pulled out of their nosedive, but at around 600p the business is valued at £2bn less than it had been before the rights issue struck – so a loss of value of £2bn to raise £1.2bn in new equity. Such proportions are usually a clear indication of a corporate rescue. The prospectus, complete with its 27 pages of risk factors to make shareholders’ blood run cold, is a splendid example of the investment banker’s art. It details the offer to shareholders of 31 new shares for every 47 they own at 410p, a price which ensures that they must either put up or cut their losses.
Just to make sure the company gets the money, the issue is underwritten. The clutch of banks cannot have taken much persuading to sign up, since they receive most of the £39m in fees for the issue. With unconscious irony, the prospectus states that “Shareholders will not be charged expenses by the Company” (but they will pay them anyway). The banks’ risk is that the share price plunges again, but it needs another 30 per cent collapse before there are too few buyers at 410p apiece.
Well, banks are there to make money, and moments of crisis provide their best opportunities. EasyJet really is all over the place. The initial announcement of the issue was stuffed with corporate boilerplate about recovery from Covid, prospects for growth and expansion and uplifting rhetoric, but was noticeably short of actual numbers. It read more like a desperate attempt to fix the company’s unique problem.
That problem is called Stelios Ioannau, the airline’s founder and 25.34 per cent shareholder, who has been at war with the board for years. The rights issue will cost him £315m to maintain his stake. If he fails to find it, he becomes merely another shareholder, a nuisance value the board can ignore. It seems likely that John Lundgren, the airline’s CEO, saw the approach from Wizz Air as the chance to solve easyJet’s financial problems and to rid him of this turbulent priest. If so, he may be right, but his shareholders are paying a ruinous cost to preserve the independence of an airline that they might prefer to become part of a more successful group. He has forced them on board, but they are paying an eye-watering fare to indulge the captain.
A small step in the right direction
Good news, up to a point: house prices fell last month, making them slightly less unaffordable to the next generation of home-buyers. Well, up to a point indeed. The prices fell a bit because of the end of the wretched stamp duty holiday, a ruinously expensive government policy where essentially all the benefit went to the sellers, who raised their prices to compensate for the cut in transaction costs. Today’s buyers may see a lower sticker price, but their total cost will not change.
This effect was predictable (and widely predicted) as was that from the other misguided policy, of Help to Buy. That too stimulated demand, allowing housebuilders to bump up their prices, in some cases leading to a doubling of profit margins. This week’s proposal from the Centre for Policy Studies of “Homes for Heroes“, to encourage the building of 250,000 homes, many for rent for key workers, at least has the merit of acting on the supply side of the equation.
Finding the workforce to build these homes is something else. The cartel of big house building companies effectively controls the supply of new properties, and the last thing they want to see is a sustained fall in prices (and thus profit margins) to allow wider home ownership. Recent surveys have shown there are plenty of sites with planning permission if the builders really wanted to raise their output to tackle the shortage. They don’t.