View from the City: Hopes that sky-high inflation has now peaked

The regional casinos and gaming sector performed very well on an absolute and relative basis through the first quarter of 2023, continuing the outperformance that began in the final quarter of 2022. The UK and Continental European sectors both provided local currency returns of 18%, ahead of their regional benchmark returns of 2% and 9%, respectively. The North American companies also outperformed, with a local currency return of 14% versus the regional index of 7%.

The wider markets started the year well; the strong rally through February demonstrated that, following a period of pessimism, proving the mere absence of negative news can be sufficient to drive a powerful rally. However, the strong initial returns were dampened by the banking mini-crisis in March. The broad outperformance of the so-called ‘discretionary’ sectors during the start of the year highlights that investors continued to look through the current challenging macroeconomic backdrop, with consumer confidence very low in most regions, but the hope that inflation is likely to have peaked and that interest rates are near their peak.

There was no clear trend in consensus profit expectations for 2023 during the first quarter, with upgrades to estimates for the Continental European and North American companies in aggregate, but downgrades for UK-listed companies, with the only major upgrade being for Playtech. More broadly, we believe that profit expectations for other sectors are on a downward trend and that valuations are less attractive than they were at the height of the pessimism in September.

Moving on to more recent events, while much remains unresolved by the publication of the long-awaited white paper into the Gambling Act 2005 review, the share prices of UK-listed companies have generally improved since its release, suggesting investor expectations were more cautious and the companies have fared relatively well against them.