If I were acquiring companies on the corporate side or covering stocks, I would be concerned about Europe – the U.K. in particular – headed into winter as Energy prices are expected to spike. Higher inflation and higher interest rates will have a negative impact on many of the former FinTech, Enterprise Software and Business Services names I used to cover and acquire as consumer discretionary spending and corporate investment will slow further in response to higher costs. Valuation becomes a greater concern in recessionary times as revenue growth and operating profitability become far less predictable.
Let’s look at the U.K. where the Bank of England believes that inflation will rise to approximately 13% from around 9% over the next few months primarily as a result of higher energy prices. This is what negative real rate monetary policy and partnering with Putin for Energy gets you. Now, the U.K. – similar to the U.S. – finds itself in the undesirable position of tightening monetary policy in the midst of an economic downturn in an effort to curb inflation. I believe that the U.K. recession has a real chance of evolving into an economic depression. When was the last time the Bank of England instituted record rate hikes into a slowing economy? The answer is never.
Central Banks are not known for being accurate economic predictors. Further, Central Bankers are usually quite optimistic. Therefore, there is at least a 50% probability in our view that the Bank of England’s forecast for essentially zero percent GDP over the next few years (see chart below), could in fact be wildly optimistic. Perhaps GDP in the U.K. will range from 0% to negative 10% over the next 5 years. It seems that everyone talks about the BOE’s zero percent baseline case as the worst case scenario without ever acknowledging that the worst case scenario could be far more severe.
To read the Bank of England’s Monetary Policy Report Click HERE.
It will be more difficult for Central Banks to come to the rescue in 2023 or 2024 as compared to the COVID bailout of 2020 and 2021 given where global inflation and global debt stands today.