The Telegraph tells us that the 10% fall in the Diageo (DEO) share price so far this year could be an opportunity to buy into an interesting company. This could be true so it's worth examining their thesis.

At the start we should put aside all thoughts of who the management is, how well they're working and so on. This really isn't about the internal to Diageo matters at all. A reasonable assumption is that the management is sensible and efficient and will continue growing the business, slowly, as they have been. Maybe that's not a wholly realistic assumption but it's one worth making for the model purposes here. 

The big thing is that as the macroeconomy turns then so too should our valuations of different types of companies. It seems pretty obvious that we're about to see rising interest rates for the first time in a decade and a bit. We've certainly got inflation right here right now and it's anyone's guess how long that is going to last. My assumption is longer than most think by the way.

OK, but that means that the time value of money is changing. This has its importance. For what it means is that operations that consume capital now for some future gain are worth less than they used to be. The price of that gap between spending now and recovering from profits has increased. Another way to say the same thing is that a rising interest rate (and rising inflation works the same way) increases the discount rate on those future revenue streams from the project itself. We might gain exactly the same amount of money in the end, sure we might, but the value today of that future cash is reduced by the rise in interest rates inbetween.

This also works the other way around. Mature businesses are worth more now than they used to be. For they are throwing off cash - whether internally or through dividends now - and more money now is worth more in higher interest rate (and inflation) times.

So, a dividend paying stock like Diageo should be worth more, relative to some high tech wonder stock than it used to be, We should see relative prices change.

There is also another issue with inflation. Which is that only those with pricing power can keep up with it. This is why fast moving consumer goods - FMCG - stocks have traditionally been held to be stocks to hold in inflationary times. Well, those and utilities where the law allows them to raise prices with inflation.

So, we've got two reasons to think that Diageo might do well - or better than many others - in the coming times. Which is pretty much the Telegraph's case.

There's also one more issue which I've mentioned elsewhere about Diageo:

There’s also something called “The Lippy Effect” which is derived, of all things, from female behaviour in recessions. This is that often enough lipstick sales actually go up as those of fashion, handbags and so on go down. The observation being that we all desire a little luxury, a little pampering, and if we can’t have it on big and major things then we’ll take a little bit of it by buying smaller yet premium items. It’s easy enough to see how this could happen with spirits. That luxury of better whisky for a few pounds more when the tens or hundreds of pounds to spend aren’t available.

Now it has to be said that this "Lippy Effect" is a little speculative. There are those who swear it's true and also those who think it isn't. The distinction between the two views being that sure, we know that it happens for some people, some of the time. But does it happen enough times to enough of the people to actually beat the sales decline of a recession? 

But if it is true, is it also true of premium booze brands? Could well be as long as folk are drinking for enjoyment, not simply for the booze. 

There are arguments that Diageo could - even should - do well in the coming macroeconomic times. However, there's also that current share price decline to think about. So, is this an opportunity to buy into that future? Or are folks already dismissing it which is why the decline?

Which is sorta the difficulty with trading really, we don't know, do we?