I am becoming increasingly concerned that this year’s sell-off in sterling – the currency has slumped 14 per cent against the US dollar – could accelerate in the coming months.
For starters, peak UK inflation expectations after factoring in the government's support energy package are still more than five times the Bank of England's (BoE) target of 2 per cent. This is ratcheting up pressure on the central bank rate setters to continue aggressively tightening monetary policy, hence why the yield on two-year government bonds spiked one percentage point to 2.84 per cent in August, and futures markets are pricing in a rise in BoE base rate to 4 per cent by May 2023.
Higher interest rates are driving up the interest bill on the UK debt mountain, a quarter of which is index-linked, at a time when an urgent fiscal response is needed to address the deepening cost of living crisis millions of households now face. It’s going to be costly, worsening the budget deficit and increasing debt issuance. The situation is compounded by ongoing sterling weakness that is exacerbating UK inflation and the current account deficit. Sterling could get hammered. Increasing exposure to companies with overseas earnings is the right call, but be careful.
A year of two halves
- Interim pre-tax profit after biological movement up 49 per cent to $89.5mn on 26 per cent higher revenue of $249mn
- First half EPS surges 44 per cent to 145¢
Bad weather in Central Kalimantan and replanting of mature acreage in Bengkulu may have hit production at Anglo-Eastern Plantations (AEP:906p), but the producer of crude palm oil (CPO) and rubber from 16 plantations in Indonesia and Malaysia still reported eye-catching first half results.
Overall, saleable CPO and palm kernels production both declined five per cent to 227,800 metric tonnes (mt) and 54,400 mt, respectively. However, this was more than mitigated by higher prices with the CPO price (ex-Rotterdam) averaging $1,640 per mt and the ex-mill price around $1,035 mt, both 46 per cent higher than in the same six-month period of 2021. Average palm kernel prices of $808 per mt were 66 per cent higher, too.
The rally in CPO prices in the first three months of 2022 was built upon three drivers: speculation of unfavourable weather conditions in prime soybean-producing countries (adversely impacted the supply of soybean oil, of which CPO is the closest substitute); the gradual re-opening of the world economy after the ravages of Covid-19; and the disruption to supplies due to the Russia-Ukraine conflict. The price has been volatile, rising from $1,350 per mt at the start of the year, peaking at $2,000 per mt in March before settling around $1,500 at the end of June. The move by the Indonesian government to ban the export of CPO and refined palm oil from 28 April to 22 May 2022 added further volatility to global edible oil prices, too. It also meant that Anglo’s CPO sales of 200,000 mt lagged well behind production volumes due to inventory build during the export ban.
CPO prices are expected to weaken in the second half as the industry enters the high production season. In addition, the Indonesian government's decision to waive the export levy until the end of August (in its effort to flush out and reduce its stockpile of palm oil) could push prices even lower. An agreement between Ukraine and Russia to reopen the ports in the Black Sea to allow the export of commodities, including sunflower oil, from the region is likely to weigh on palm oil prices, too. There is also potential for inflationary pressures arising from higher commodity prices to trigger a global recession and dampen demand for CPO.
Given these factors, it looks increasingly likely that 2022 will be a year of two very different halves, with record CPO prices in the first half followed by much lower prices in the second half. Admittedly, with Anglo’s shares trading on a 12-month trailing price/earnings (PE) ratio of four, 29 per cent below book value per share of 1,274p and net cash of 537p backing up more than half the share price, then the weaker backdrop for CPO prices is largely priced in.
That said, the earnings cycle has clearly peaked and with Anglo’s shares trading close to last month’s all-time closing high (952p), it now feels the right time to bank the 59 per cent paper profit if you have been following my 2020 Bargain Shares Portfolio. Take profits.
This article was first published on Thursday, 1 September 2022 and updated on Wednesday, 7 September 2022 to incorporate the inflation implications of the new energy price cap.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
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