Inflation news boosts miners and weighs on retailers, while Tesco’s results are overshadowed by earnings warning

“The latest UK inflation figure makes for ugly reading, but it shouldn’t really be a shock to the markets. If anything, inflation could get even worse from here,” says Danni Hewson, Financial Analyst at AJ Bell.

“When investors see high inflation figures, they typically look to put money into companies that thrive in an inflationary environment. That includes miners, which might explain why the likes of Antofagasta, Glencore and Anglo American were among the top risers on the FTSE 100.

“Equally, investors also look to avoid companies that could lose out from high inflation which includes consumer-facing businesses. Tesco’s warning that profits could dip cast a chill across the supermarket sector.

“JD Sports and Next also saw their shares fall no doubt as investors speculated their sales could be weaker near-term if people have a lot less money to buy new trainers and clothes once they’ve paid their ever-increasing bills.

“Housebuilders were also in negative territory. The higher cost of living means anyone trying to save up for a property deposit may find it harder to put away as much each month. Rising inflation also strengthens the argument for interest rates to keep going up, and that will make mortgages more expensive and potentially cause a ripple effect in the property market if fewer people are able to buy a house or flat which might lead to lower prices.

“Also weighing on the housebuilding sector is an announcement from the Government that more than £2 billion has been committed by over 35 developers to make buildings safe. That’s the right thing to do, but it means an outflow of cash that might otherwise have been used to buy more land, buy back shares or top up shareholder dividends.”

Tesco

“There is a lot to like about Tesco’s results even though the company is guiding for profit to dip in its new financial year.

“The supermarket has been working incredibly hard on a plan to fight off competition from discounters Aldi and Lidl, make its business run more efficiently, be more environmentally friendly and move with the times such as launching superfast delivery services.

“The fruits of its labour are now shining through, with the business ticking many of the right boxes.

“Sales and profit are up, net debt is down, free cash flow is better than expected, there is a big jump in the dividend to please shareholders, and the company continues to increase its market share.

“Interestingly the supermarket experienced sales deflation for the year, which might come as a surprise given everyone is talking about the cost of living going up. That’s because Tesco has been working effortlessly to cut prices and it also participated in more promotions to encourage people to shop at its stores.

“Inflation is an issue for the business, nonetheless. The coming months will be challenging for Tesco as it faces higher cost inflation and a potential shift in how consumers spend their money. That explains why its share price has fallen nearly 5% on the results, and why Ocado and Sainsbury’s shares are also weak.

“There is a real risk that cash-strapped families will cut back on their shopping. Even though we all need to eat and drink, there is a high chance that shopping baskets may not contain as many treats as households have been consuming of late. If everyone cuts back on a few items each week, this loss of income for Tesco will certainly add up.

“If this trend does play out as expected, it won’t just be Tesco feeling the pain. On a two-year basis, Asda, Morrisons, Sainsbury’s and Co-op have all lost market share and these businesses will certainly not want to see further bad news in the form of customers tightening their belts.

“In fact, if supermarkets suffers from people deciding to buy fewer chocolate biscuits or a nice bottle of wine, you can almost be certain that other consumer-facing companies such as fashion sellers and electronics retailers will also be experiencing a shift in how their customers are spending.”

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