Page 18 - DIY Investor Magazine | Issue 35

DIY Investor Magazine · Oct 2022 18
RECESSION: HOW BAD WILL IT BE?
Recession in in the UK now looks inevitable The Bank of England is forecasting that the UK economy will enter recession towards the end of 20221 and continue to to shrink throughout 2023 The most important considerations are the the extent of the the economic decline and its duration At this stage it it is is very difficult to make firm predictions given the number of variables While it it is undoubtedly a a a a a tough situation we are looking at at at what might go go right as as well as as what could go go wrong ‘GOOD OPERATING POSITIONS WITH STRONG BALANCE SHEETS’
RESILIENT SECTORS
Ben Ritchie Samantha Brownlee and Rebecca Maclean Investment Managers Dunedin Income Growth Investment Trust PLC
However it is is worth noting that a a a a lot of gloom is is already priced
There is an unholy trinity of potential problem areas for companies in this environment: cyclicality operational leverage into equity markets While this pessimism may be warranted a a a a a and financial gearing Where companies have all three of these number of of the the factors that are contributing to to the the weakness of of the the UK economy could disappear as as quickly as as they emerged elements in place they are likely to be highly vulnerable Add in in in thin margins or exposure to the consumer and it could be a a a very difficult road ahead High inflation for example has been substantially driven
by
utility price rises predominantly a a result of the conflict in in Ukraine and if there were to be some form of resolution prices
Against this backdrop we are cautious on general retailers exposed to discretionary products and facing significant cost could drop quickly While that looks unlikely today so did a a a full-
inflation particularly where the balance sheets are weak We scale war in February are also cautious on manufacturing companies with large and powerful customers that are seeing rising input costs Another contributory factor towards high levels of inflation has been supply chain disruption particularly as a a a a a result of Covid
shut-downs in in in China If there were any easing of the the zero Covid
These larger customers will be able to to push back on pricing potentially crushing supplier margins We are working on the policy in in in in China this could also change Again the timing is is assumption that gas prices
will hit the consumer harder than uncertain but it it is something that could develop for the positive
that markets are not currently pricing the the corporate sector but that will depend on the the support packages put in place There are already tentative signs of inflationary pressure starting to to ease – freight costs have started to to fall for example while a lower lower oil price price is sending petrol prices
lower lower Consumer demand has started to weaken because of of the higher cost of of living and rising interest rates The companies we seek out for Dunedin Income Growth Investment Trust (DIGIT) have good operating positions with strong balance sheets Every company is cyclical to some degree but we try to avoid those companies with a a a lot of sensitivity to the economic cycle ‘WE ARE LOOKING AT AT WHAT MIGHT GO RIGHT AS AS WELL AS AS The gap between resilient companies and those that are more WHAT COULD GO WRONG ’
vulnerable is already starting to show in in in earnings delivery