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Markets Today: Fevertree loses some fizz, stagflation concerns grow & more

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Markets Today: Fevertree loses some fizz, stagflation concerns grow & more
  • Sumo becomes latest British takeover target 
  • Fevertree margins take pandemic hit 
  • Central banks struggle to get a grip on inflation 

Tencent gobbles up Sumo as Chinese companies look for more growth

With Beijing tightening its grip on big business in China, the country’s giants are having to look overseas for expansion opportunities. Just two weeks after Chinese regulators blocked the merger of two of Tencent’s (HKG: 0700) video game units, the company has come fishing in Britain where it has hooked video game developer Sumo (SUMO). 

The deal values the company at a 43 per cent premium to its closing price on the last business day before the announcement. 

Sumo has been a storming success since it joined the London stock market in 2017 and investors who bought in at the beginning will have made an almost five-fold return if the Tencent deal goes through. But is that really what they will have wanted? 

This is a well managed, quality company operating in a fast growing market. At the financial results in March, we wrote that we were confident that the company could keep up its momentum. But now it is now Tencent, rather than British investors who will benefit from that continued growth. Foreign interest in British companies is rife in the wake of the pandemic and Brexit and questions must now be asked of the London Stock Exchange: should it be making it more enticing for companies to stay. 

Read more about Tencent’s main rival in China, Alibaba in our recent review of Duncan Clark’s popular book, The House that Jack Ma Built.

Fevertree suffers margin wobble 

Restrictions might have lifted in the UK, but the fallout from the pandemic is still stifling British businesses. Fevertree (FEVR) has this morning announced that turbulence in global logistics channels has significantly elevated costs, meaning gross margins are expected at 44 per cent in the first half of 2021, compared to 52 per cent pre-pandemic. 

But despite the hit to profits, management at Fevertree hasn’t shied away from continued investment in product and geographical expansion. The 39 per cent increase in off-trade revenues is testament to the company’s commitment to its marketing strategy “if three quarters of your drink is the mixer, mix with the best.” It’s a mantra that consumers have taken with them into their homes. 

Stagflation concerns dent markets

The Fed was always going to struggle to get a grip on inflation as it let the economy run hot – average inflation targeting (AIT) was developed before the vaccines had their effect and the Fed has been slow to respond. In a nutshell, if inflation expectations lose their anchors, then we are faced with a stagflationary environment like nothing we have seen for 50 years. High inflation, low growth for years to come is the unwanted child of a global pandemic meeting massive government intervention. 

The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle. Are we going to see another Volcker? I doubt it very much, I doubt central bankers have the bottle or mandate even (full employment, remember) to engineer a recession to get everything back on an even keel.

Read more from Neil Wilson, chief markets analyst at Markets.com in this morning’s trader comment. And find out more about investing in stagnant markets from our resident economist, Chris Dillow.