Our nation of shoppers is not about to quit the habit yet
SINCE the onset of the recession, the pressure has increased to turn the UK economy into a manufacturing centre of excellence and at the same time become a nation of savers. But has the nation really turned its back on its former favourite pastime, shopping?
Well, the hard data would suggest no. According to the British Retail Consortium (BRC) retail sales rose by a very decent 3.4 per cent on an annual basis in June (see chart.) So it seems that, fuelled by the hot weather, we sought refuge in our cool, air conditioned malls.
But whether this spree can last is questionable. After all, the UK consumer is heavily indebted, a VAT hike to 20 per cent is on the way and the government is planning to slay hundreds of thousands of public sector jobs in the next four years. This has all weighed on consumer confidence, which has not followed retail sales higher and instead has trended downwards since the start of the year.
UK CONSUMPTION TO HOLD UP
But some analysts believe that the UK consumer, while still concerned about not racking up the credit card bills of the past, won’t turn her back on the shops altogether. Sam Hart, retail analyst at Charles Stanley, the stockbroker, says that he is not particularly concerned about the outlook for consumption: “The most important factor (for consumption) is the outlook for interest rates. In the last 18 months as interest rates have been close to zero, any consumer with a mortgage has benefited from record low interest rates and as long as you’ve managed to hold onto your job then you have seen your disposable income and consumption power rise.”
So the key to strong consumption will be employment. Although data released yesterday showed that the unemployment rate had fallen by 0.2 per cent between April and May to 7.8 per cent, the axe has yet to be taken to the public sector, which could put upward pressure on unemployment. Not a worry, says Hart: “The 600,000 jobs forecast to be cut by the public sector might not actually materialise. Employees may well decide to take reduced working hours and pay cuts like they did in the private sector, which will keep a lid on unemployment and help consumption.”
But will the VAT rise topple the UK’s mighty consumer? David Jones from IG Index doesn’t think so. However, he thinks some retailers will be more protected than others: “Everyone needs pants and socks at the end of the day, so a company like Marks & Spencer should do okay.” It’s the big-ticket sellers that could have the worst time, he says, as people avoid buying these items once the tax hike comes into effect on 1 January.
But does a robust consumer offer investment opportunities? Hart picks Next and Halfords as the top performers in 2010. He says that Next is considered the best-run company in the retail sector. It’s currently embarked on a share buyback programme and has a strong balance sheet. Likewise, he believes that Halfords cycling business is tapping into a structural trend: “It’s a high growth market. Not only are people more concerned about health, but they are also concerned about the environment.”
In contrast, he says that Home Retail Group, the owner of Argos and Homebase, could come under pressure. IG’s Jones favours Tesco. Its share price has been under pressure in recent months and is now at levels last reached in November 2009.
Jones believes that a lot of bad news has already been priced in already: “The retail index of the FTSE 350 has been quite depressed for most of the year, but some retail stocks are good dividend payers and should remain stable in a volatile market.” The retail index is still hovering around its six-month lows. This compares with the banking sector. The FTSE 350 banking index has risen by 30 per cent in the same time period.
For listed product traders who prefer not to own single shares, Jones recommends the FTSE 250 index since it’s a better reflection of the UK economy compared to its big brother, the FTSE 100, which is more internationally focussed. Exchange-traded fund (ETF) providers iShares and db x-trackers both offer ETFs on the FTSE 250. The smaller UK index should do well as long as the UK consumer doesn’t flag.
If you believe that the UK will continue to practice its favourite pastime, then buying the FTSE 250 on dips could pay off quicker than we pay our credit card bills.