FTSE dips after UK inflation comes in below expectations, Fed decision in view, demand still high for Watches of Switzerland’s products and TUI returns to profit

“We may not be out of the woods yet but there will have been an audible sigh of relief on Threadneedle Street this morning as UK inflation figures followed the trend set in the US on Tuesday and came in below expectations,” says AJ Bell Investment Director Russ Mould.

“Prices are still seeing double-digit increases and, in some areas, inflationary pressures are proving worryingly sticky – notably food.

“However, we seem to be past the peak or at least close to that point and this probably confirms there won’t need to be a repeat of November’s record-breaking 75 basis point rise when the Bank of England meets tomorrow.

“Tonight’s rates decision from the US Federal Reserve remains finely poised but a less aggressive rate hike seems likely – the FTSE 100 dipped a little this morning as investors remain in ‘wait and see’ mode ahead of the decision.

“Housebuilders acted as a drag on the index, suggesting worries about the housing market and the impact of higher borrowing costs on demand persist.”

Watches of Switzerland

“While some people may only be able to afford small Christmas presents this year, there is also a large group of individuals who still have the means to splash the cash. That might explain why demand remains very strong for luxury goods such as Rolex watches.

“Many people are on waiting lists for watches, such is the demand, and a lot of these won’t even put the product on their wrist once obtained. It’s about prestige – either displaying the watch in a cabinet at home or storing it safely in the hope that it appreciates in value. Often shelling out tens of thousands of pounds, watches are serious purchases and history suggests they can significantly rise in value.

“Watches of Switzerland is investing heavily for the future by opening new showrooms and expanding geographically as it can see big opportunities. This isn’t a one-off craze, investing in watches is a trend that’s been in motion for decades.

“Its latest results show a business in perfectly decent health. Prices and volumes are up, and management has reiterated 2023 guidance which is becoming a rarity in a world where earnings forecasts are being downgraded across multiple industry sectors.

“The market focus remains short term, however, and investors have given the thumbs-down to the results. There’s been a slight dip in margins and a big drop in cash flow. The latter can partly be explained by having a big working capital outflow versus an inflow a year earlier.

“The company has increased its inventories, partially down to opening new showrooms. But unlike many retailers, Watches of Switzerland is not worried about being left with surplus stock. It is confident these watches will be shifted in no time at all.”

TUI

“There were things to celebrate in travel operator TUI’s full year numbers – notably a return to profit and a massive rebound in revenue as it benefited from a lifting of Covid restrictions.

“Bookings are up on pre-pandemic levels and a big increase in prices will help cushion the impact on TUI of rising input costs.

“The question is whether this pricing power lasts. In 2022 holidaymakers have been willing to pay what it takes to get away for the first time in what feels like an age. However, if prices move too high then affordability becomes an issue.

“This could be a key test for TUI in 2023 and, given people have shifted to booking their holiday at shorter notice to avoid the risk of being caught off guard by disruption, the company has limited visibility on its future business.

“Given the still somewhat perilous state of TUI’s balance sheet, it can ill-afford any negative surprises in the coming 12 months.”

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