I am increasingly concerned that this year’s sell-off in sterling – the currency is down 14 per cent against the US dollar – could accelerate in the coming months.
First, UK inflation expectations continue to rise. Citi’s latest forecast suggests that the UK CPI could hit 22 percent in January 2023 if wholesale energy prices remain at current elevated levels. This increases the pressure on the Bank of England (BoE) to tighten further aggressively, which is why the two-year government bond yield rose by one percentage point to 2.84 percent in August and futures markets are pricing in an increase in the BoE interest rate to 4 by May 2023 Percent.
Higher interest rates are driving up interest bills on Britain’s debt mountain, a quarter of which is index-linked, while an urgent fiscal response is needed to address the deepening cost-of-living crisis millions of households are now facing. It will be costly, worsen the budget deficit and increase debt issuance. The situation is made worse by continued weakness in sterling, which is exacerbating UK inflation and the current account deficit. Sterling could be hammered. It is right to increase exposure to foreign-profit companies, but be careful.
A year with two halves
- Interim pretax profit after biological movement increased 49 percent to $89.5 million on revenue of $249 million, up 26 percent
- First half EPS up 44 percent to 145 cents
Bad weather in Central Kalimantan and replanting of mature acreage in Bengkulu may have impacted production Anglo-Eastern Plantations (AEP:906p), but the crude palm oil (CPO) and rubber producer from 16 plantations in Indonesia and Malaysia still reported striking first-half results.
Overall, production of salable CPO and palm kernels fell five percent to 227,800 tonnes (mt) and 54,400 tonnes, respectively. However, this was more than mitigated by higher prices, with the CPO price (ex Rotterdam) averaging $1,640 per tonne and the ex-factory price about 1,035 tonnes, both 46 percent higher than the same half-year period in 2021. Average palm kernel prices as well were up 66 percent at $808 per tonne.
The rally in CPO prices in the first three months of 2022 was based on three factors: speculation about unfavorable weather conditions in the main soybean producing countries (has adversely affected the supply of soybean oil, for which CPO is the best substitute); the gradual reopening of the global economy following the ravages of Covid-19; and the supply disruption due to the Russia-Ukraine conflict. The price has been volatile, going from $1,350 a ton earlier in the year to a high of $2,000 a ton in March before settling around $1,500 in late June. The Indonesian government’s move to ban the export of CPO and refined palm oil from April 28 to May 22, 2022 also added further volatility to global cooking oil prices. It also meant that Anglo’s CPO sales of 200,000 tonnes fell well short of production volumes due to inventory build-up during the export ban.
CPO prices are expected to weaken in the second half as the industry enters peak production season. Additionally, the Indonesian government’s decision to waive the export levy until the end of August (in its effort to flush out and reduce its palm oil stocks) could push prices even lower. A deal between Ukraine and Russia to reopen Black Sea ports to allow exports of commodities, including sunflower oil, from the region is also likely to weigh on palm oil prices. There is also a possibility that higher commodity prices could create inflationary pressures, triggering a global recession and dampening demand for CPO.
Given these factors, it’s becoming increasingly likely that 2022 will be a two-half year, with record CPO prices in the first half followed by much lower prices in the second half. Granted, as Anglo’s shares trade at a 12-month price-to-earnings (P/E) multiple of four, 29 per cent below book value per share of 1,274p and net liquidity of 537p, which supports more than half the share price , then the weaker background for CPO prices is largely priced in.
However, the earnings cycle has clearly peaked and with Anglo shares trading close to last month’s all-time closing high (952p), now seems like the right time to cash in that 59 per cent paper gain if you follow me are 2020 bargain stock portfolio. take profits.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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