Inflation is Inching Up & Excellent Equity Opportunities

Morningstar columnist Rodney Hobson discusses the inflationary environment in the UK and gives his opinions on the latest quarterly results from Sainsbury and Vodafone

Rodney Hobson 16 November, 2012 | 2:51PM
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Inflation is Inching Up

Inflation has gone back to its old habit of topping expectations. Hopes will have to be put on hold that wage earners will soon be seeing their living standards edging higher.

Most if not all commentators expected a rise from September's low of 2.2% in retail price inflation, so the consensus was for 2.5% in October. Therefore, 2.7% was a nasty surprise. As so often has happened over the past few inflationary years, it was partly the Government’s fault, on this occasion because of the rise in university tuition fees.

University tuition hikes do not affect everyone, however, the rise in the price of food certainly does. That effect will not abate for several months. It takes a super optimist to suggest that RPI will hold below 3.5%, especially if George Osborne sticks to the planned rise in fuel tax in January.

Bank of England Governor Sir Mervyn King, who along with his colleagues has consistently underestimated the persistence of inflation, now admits that prices will continue to rise at above the 2% target until the middle of 2014, a statement that still underplays what is actually happening.

The important point about inflation is that it makes shares more attractive and fixed interest investments less attractive. With banks still unwilling to pay realistic rates of interest to savers while charging above-inflation rates to borrowers, the most sensible thing to do is to clear any debts, then buy equities.

News that more people were at work in the UK  in October is encouraging, even though many jobs are part-time. But half a job is better than none and I am pleased that so many people would rather work than sponge off the taxpayers.

In terms of my own personal strategy at this point, I intend to remain debt free and fully invested.

So-So Sainsbury

The difficulties of surviving on the High Street are amply demonstrated by J Sainsbury (SBRY) in its latest results covering the six months to the end of September. Given that supermarkets have been so successful in taking sales from everywhere else – corner shops, book stores, electrical retailers, etc – and given that we have to eat, this is the least horrendous area of UK retailing.

Sainsbury now has its largest share of the market in nearly 10 years at 16.7% and it continues to catch up in terms of online sales and convenience stores after Tesco had a head start. Total sales are up 4% and like-for-like sales, which are becoming increasingly irrelevant in these days of growing online and convenience store sales, are 1.7% ahead.

The downside is that profits are a mere £10 million higher at £405 million, a gain of only 2.5%. The interim dividend provides comfort with a 6.7% increase to 4.8p.

I originally bought into Sainsbury at 311p and have topped up my holdings at a lower level  – in fact I was showing a loss on paper for many months before other investors saw the light. That means I am enjoying an excellent yield.

However, I feel that the shares now at around 340p are well up with events and I would not be tempted to buy more at this stage.

Wrong Numbers

My recent comments about Vodafone (VOD) were rapidly overtaken by news of a £429 million first-half loss that spooked investors. Let us get this in perspective: the deficit was entirely down to a £5.9 billion write-off against the businesses in Spain and Italy, where revenue tumbled 19.3% and 18.4% respectively. Otherwise there would have been a healthy, though lower, profit.

These are clearly difficult days but it is worth remembering that Vodafone actually made an operating profit and it expects operating profit for the full year to be at the top end of the previous estimate of £11.1-£11.9 billion.

Emerging markets now account for about one third of revenue and rising, with strong growth in Turkey, India and Ghana. Meanwhile the Verizon Wireless operation in the US, where Vodafone owns 45%, is paying another bumper dividend.

I still feel that there are enough positives at Vodafone to offset the negatives. After all, we already knew that Southern Europe was in trouble.

Before the figures I rated Vodafone a buy at any level below 170p. Shares are now down around 160p, making the shares even more attractive. The interim dividend was raised by 7.2%, and although the prospective yield couldn't be called huge, this is a solid company with a good geographic spread.

To read Morningstar's analyst opinions about the latest results from Sainsbury and Vodafone, read "Analysis: Sainsbury, Vodafone & Aviva".

Market Performance (November 12 - 16)

FTSE 100: -2.84%
FTSE 250: -2.24%
FTSE All Share: -2.73%
FTSE Small-Cap: -1.21%
FTSE AIM 100: -2.21%
FTSE Fledgling: -1.18%

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Sainsbury (J) PLC261.20 GBX-1.51Rating
Vodafone Group PLC69.70 GBX-1.16Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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