Robert Walters and the dizzying impact of wage inflation

This year wages have been growing at their fastest clip in decades. UK payroll numbers have hit their highest level since the start of the pandemic and the Consumer Price Index (CPI) hit a three-year high in June.

A buoyant jobs market, specialist staff shortages and growing inflationary pressure from rising wages threatens to dampen corporate net earnings – and, by extension, absolute and real distribution rates. It used to be held that a brief inflationary interlude was deemed favourable for the stock market, whereas prolonged inflationary pressure would invariably destroy value. If we have learnt anything since central banks initiated the ‘greatest monetary experiment in history’, it is that the safe, old assumptions don’t always apply.

We are now around 16 months on from the commencement of the first lockdown in the UK, but it doesn’t mean that we can draw too many assumptions about the medium- to long-term jobs market in the UK and elsewhere. As global economies creak back into life and industry utilisation increases, we are bound to witness a seemingly rapid turnaround in economic growth rates, but how long the bounce-back will last is another matter. A surge in aggregate demand is a given, but if inflationary pressures keep building, then corporate profits and investment levels could eventually falter.

The febrile nature of the global jobs market was certainly reflected in interim figures for Robert Walters (RWA). With demand for workers far outstripping supply, the recruiter revealed that salary uplifts of 20-30 per cent are “now commonplace for hard-to-source roles and talent”. And it should be remembered that we are still early in the recovery cycle, with many firms only recently engaged in reinitiating recruitment drives – the dynamic should be far more evident over the second half of 2021.

Robert Walters’ domestic market might be deemed something of a laggard by comparison to other locales, so the turnaround is likely to be more pronounced. UK net fee income shrunk by 3 per cent to £35.2m, but the recruiter swung to a UK pre-tax profit of £3.3m from a breakeven position a year earlier. 

Profitability in the group’s European markets increased fourfold but it was surging fee income from the the Asia-Pacific region – the group’s largest geographical segment – that was the principal driver of profits. It’s perhaps instructive to note that overall profitability for the period was 10 per cent in advance of the 2019 comparator at constant currencies.

With trading "comfortably ahead of current market expectations for the full year”, it seems as if the recruiter is set fair for for the foreseeable future, but there seems to be divergence among economic forecasters over the probable duration of the inflation surge. Shares in Robert Walters have retraced strongly since the market sell-off in the early part of 2020, but a forward rating of 25 times forecast earnings suggests that expectations of gathering fee income are already bound-up in the share price. Hold. 

Last IC view: Hold, 400p, 30 Jul 2020