Dunelm reveals record profit despite tough outlook and Fundsmith to shut EM trust

“Despite some of the key factors behind surging inflation easing slightly, many prices continue to go up and markets are not happy. Yesterday’s slump on Wall Street was triggered by a mixture of investor jitters and the fact that food, house and medical costs continue to rise,”says Russ Mould, investment director at AJ Bell.

“The Vix measure of equity market volatility triggered a warning sign before the latest US inflation numbers, as it had been rising at the same time the market had been going up. Typically, the Vix would be flat or in decline during a rising market.

“That showed investors were already on edge before the US inflation numbers came out. With the 8.3% number for August higher than the 8.1% expected by economists, investors took fright and we saw an almighty sell-off on the markets, including a 5% decline in the tech-heavy Nasdaq index.

“One might look at the headline rate and say it’s a positive, being lower than July’s 8.5%. Furthermore, petrol prices have been falling which will benefit consumers and businesses with large transport costs. However, there are still plenty of price pressures elsewhere that are causing stress.

“There is a similar story with the latest UK inflation figures – the headline 9.9% rate for August is below July’s 10.1% figure, thanks to falling petrol prices. But other prices, including food, keep going up.

“The current situation means interest rates are likely to keep climbing as central banks try to tame inflation. It also means there remains a lot of uncertainty over corporate profits. We’ve seen quite a few companies disappoint the market with downgraded earnings guidance, and if there is more bad news to come on this front then share prices will stay under pressure.

“The FTSE 100 fell 0.7% to 7,332, with only four stocks in positive territory: Pershing Square, B&M, Kingfisher and Meggitt. Asset managers, utilities and energy companies were the key culprits for dragging the market down.”

Dunelm

“Looking in the rear-view mirror Dunelm can only see sunny skies as it reports another record profit. But a glance through the windshield reveals a massive consumer cloud about to break over the business.

“Dunelm hasn’t faced a heavy shower yet. Sales have remained ‘robust’, albeit modestly lower year-on-year in the first 10 weeks since the year end on 2 July, and that is testament to the company’s skills as a retailer.

“Over recent years Dunelm has been one of those names in the retail sector which has got the basics right. It has products people want to buy, at a price they want to pay, and it puts them in front of shoppers at the right times.

“It has also steadily improved its online offering to take advantage of this channel – a significant boon during the pandemic.

“For now, the company is sticking with full-year forecasts. But even Dunelm can’t change the economic weather and it seems likely sales will eventually suffer as people wait a bit longer to replace that duvet set or pair of curtains.

“As the retailer desperately tries to make ‘every pound count’, to use the language of chief executive Nick Wilkinson, doing what it can to keep a lid on costs and offer customers value, there may be some confidence that it can emerge from the storm a stronger business.

“Like other survivors in the retail space, Dunelm should benefit from market share gains as smaller and weaker rivals fall by the wayside.”

Fundsmith Equity Fund

“Terry Smith is arguably one of the country’s most famous fund managers thanks to the success of his Fundsmith Equity Fund, which has returned 487% since inception in November 2010 versus 270% from the MSCI World index, a key benchmark for global equities. However, not everything he touches turns to gold.

“The Fundsmith Emerging Equities Trust has long been the black sheep of the Fundsmith family, failing to deliver the type of returns enjoyed by the asset manager’s flagship product. Now it is time to bring the trust to a close, with a proposal to liquidate it.

“Affectionately known as ‘FEET’, the trust invested in quite a few emerging market subsidiaries of well-known Western companies, including Unilever and Nestle. It followed the same investment process of its sister fund. Unfortunately, performance has been sluggish.

“It’s probably better to consign this experience to history and not have the trust tarnish the reputation of Fundsmith as an asset manager, rather than let it limp along in the hope things will eventually come good.”

These articles are for information purposes only and are not a personal recommendation or advice.