Most investors put money into the markets with the goal of making financial gains through capital growth and dividends. They need companies in their portfolio to do well both strategically and financially.

Many people are using these investments to fund their retirement and are fighting their way through their own cost-of-living crisis.

Strong companies create jobs, they invest in crucial infrastructure, and they pay vast amounts of tax to the exchequer.

We could leave it there, but the current inflation situation has raised fundamental questions that investors and businesses would be wise to consider for their future financial wellbeing.

REGULATION RISKS

Politicians, particularly those staring down the barrel of an impending election, are feeling under pressure to do something to help inflation-weary voters.

The big energy providers have already felt the sting of windfall taxes and supermarkets have been under the uncomfortable glare of the UK competition watchdog.

From a purely self-interested perspective companies want to avoid greater regulatory scrutiny in their sector if they can avoid it.

Energy companies have been warned by Ofgem not to pay dividends until they can demonstrate they have the financial resilience to deal with future price shocks.

Banks are facing difficult conversations with the financial regulator, the FCA, about why interest rates on savings accounts have not followed the same trajectory as mortgage rates and supermarkets have become politicians’ favourite ‘bad guys’, coming under fire for increased margins on fuel and continued pressure on shoppers at the tills.

The possibility of price controls on food have elicited a strident negative response from supermarket bosses and it is no surprise that days after four food retailing giants were grilled by members of the Business and Trade Committee, Tesco (TSCO) unveiled yet another package of price cuts on everyday essentials.

The term ‘essentials’ seems to be the most key factor in all this; businesses involved in supplying the consumer with the essentials needed to live are facing greater pressure than those offering up discretionary treats.

Holiday companies might get a raised
eyebrow over the massive price increase in a two-week trip to the Mediterranean and JD Sports (JD.) might enjoy positive headlines about its push to top £1 billion in profits next year, but that’s because people are perceived to have choice as to whether they take a holiday or splash out on a pair of expensive trainers.

DIFFERENT RULES FOR ESSENTIALS

Because stories about people struggling to pay for food, fuel, housing and water frankly do not belong in a modern Western democracy, and allegations that defending margins is making things worse for the most vulnerable in society, there is a nasty taste in even the most capitalist of mouths.

What is an acceptable margin? Looking at newspaper headlines following the Competition and Markets Authority’s report into petrol pricing by supermarkets you might be forgiven for thinking any profit at all is unacceptable in today’s climate.

And looking at widely different net margins that some of our biggest listed companies have generated over the years it is clear there is not a simple story to tell.

But the decision to increase margins by the new owners of Asda and Morrisons at the peak of the fuel crisis is exactly the kind of action that puts businesses and shareholders in a bad light and consumers do not differentiate between the actions of private equity or publicly-owned companies.

THE LONG GAME

That is another big risk to ponder. Businesses might have a duty to deliver for shareholders, but they also face a moral obligation to treat their customers fairly.

The ‘S’ in ESG (‘social’) might not ordinarily get the same amount of attention as its two bookends – ‘environmental’ and ‘governance’ – but consumers have long memories, and they will vote with their feet.

That is why there has been so much scrutiny on chief executive pay deals and why shareholders are now prepared to vote against measures they feel are inappropriate when average real wages are failing to keep up with inflation.

There is also a further consideration. Is the practice of even defending margins helping to keep the fire burning under the inflation pyre?

Inflation means higher interest rates – and higher interest rates make servicing debt carried by households and businesses more expensive.

It also makes the ability to raise additional funds for expansion or diversification more difficult and in turn makes UK PLC an ever-ripe target for foreign takeovers.

Yes, investors want the companies that make up their portfolios to make profits but not at any price.

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