Yahoo Finance Falling inflation is poised to prompt interest rate cuts that deliver strong stock market gains
Annual inflation’s sharp decline from 6.7pc in September to 4.6pc in October prompted widespread joy among stock market investors. It means there is a reduced prospect of further interest rate rises and a greater chance that looser monetary policy will gradually emerge over the coming months.
Once time lags have worked their way through, interest rate cuts should have a positive impact on economic growth and the stock market. A similar situation in Europe and America, in terms of falling inflation and the likelihood of more accommodative monetary policy, should boost corporate profitability and share prices globally.
Questor therefore remains unashamedly upbeat about the prospects for its Wealth Preserver portfolio. Of our initial notional investment, 20pc was allocated to shares. So far our stock holdings have declined by 28pc on average, but now should benefit from an improving operating outlook as the era of high inflation and interest rate rises abates.
Several of our holdings are delivering sound financial performance even as their share prices suffer from weak market sentiment. WH Smith, for example, recently released full-year results that reported a 28pc rise in sales and a 96pc increase in pre-tax profits compared with the previous year.
Its travel segment, essentially stores located at airports and railway stations, was the catalyst for growth. It benefited from a continued rise in passenger numbers and should be further boosted by a forecast return to 2019 global passenger numbers in 2024, as well as their continued growth over the long run amid a more sanguine economic environment.
The company’s performance was further aided by the opening of 118 new travel stores during the year. Its current pipeline of 110 travel stores, alongside vast scope for additional openings beyond that figure, evidences its long-term growth potential.
Encouragingly, the company’s travel division posted double-digit sales growth in the first nine weeks of the new financial year. Its continued growth means that it will become an even more dominant part of WH Smith’s overall business; it contributed around 84pc of trading profits in the most recent financial year.
Indeed, the drag on the company’s overall growth from the underperforming legacy high street business is rapidly diminishing.
A growing bottom line will allow WH Smith to increase capital expenditure by 15pc to £140m in the current year. It also meant that finance costs were covered 3.4 times by operating profits in the 2023 financial year, a margin of safety that is likely to expand as trading conditions improve.
Despite a fall of 25pc since their addition to our Wealth Preserver portfolio in June 2021, the company’s shares trade on a relatively rich price-to-earnings ratio of 16.4. But thanks to its strong growth prospects, the stock’s multiple of forecast earnings stands at a more enticing 15.
Because the company was hit particularly hard by the pandemic and the cost-of-living crisis, it has been unable to fulfil its potential over recent years. But its sound strategy and scope to expand further mean that significant share price growth is now on the horizon.
Questor says: hold
Ticker: SMWH
Share price at close: £13.16
Update: Spirax-Sarco
Our holding in the engineering company Spirax-Sarco is also poised to deliver capital gains after a disappointing performance. Its shares have fallen by 34pc since they joined our portfolio in July 2021 and operating conditions remain highly challenging.
Indeed, the company’s recently released trading update highlighted slowing growth in global industrial production, a trend expected to persist over the short run. This has resulted in the company’s sales growth being below its previous guidance and full-year sales are now expected to be slightly lower than last year.
While this is clearly disappointing, Spirax-Sarco said it expected revenue to rise and its operating profit margin to improve in the 2024 financial year. In the meantime, the company is reducing overheads to strengthen its financial position amid a tough operating environment.
Trading at 27.4 times forecast earnings, the company’s market valuation remains relatively rich despite its recent share price slump. While further volatility in the shares cannot be ruled out in the short run, its cyclical status should make it a major beneficiary of impending improvements in the global economic outlook. Hold.
Questor says: hold
Ticker: SPX
Share price at close: £91.38
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