Britain’s consumer economy has had a tumultuous few years and people are seriously feeling the pinch.
Hot on the heels of the pandemic, the Russian invasion of the Ukraine saw inflation rise to a surge and the annual increase in the cost of living jump into double digits.
In return, interest rates have skyrocketed and mortgage costs have skyrocketed, hitting a portion of homeowners by hundreds of pounds a month.
The subsequent impact on the economy has been significant and consumers are feeling it, taking advantage of the savings accumulated during the lockdown.
Some fund managers are bullish on UK consumer stocks given rising consumer confidence
The UK may have dodged a recession for now, but the outlook remains bleak. However, there could be some winners from the crisis.
UK consumer stocks, most of which are naturally defensive companies in a recession, have held up relatively well in the face of the cost of living crisis.
We spoke to a handful of fund managers about why they’re betting big on the UK consumer, despite all the trouble.
Confident consumers are sitting on excess savings
Consumer staples companies can add value to a portfolio in a period of market volatility. This is because these companies sell goods that people tend to buy out of necessity, regardless of the economic climate, and include things like food, drinks, and hygiene products.
These companies with pricing power may offer protection against inflation, but some argue that Britain’s consumer economy is doing better than many think.
Supermarkets have held up well despite grocery inflation approaching 20 percent in recent months, but there are signs that many Britons are spending more on non-essential items.
Last month, Tesco boss Ken Murphy said sales of products in its premium range rose 15 percent during the 13 weeks ending May 27.
All of this points to a more resilient consumer than the central bank and other economists might have considered, and a more encouraging outlook. That’s why some fund managers are bullish on consumer stocks.
David Kneale, head of UK equities at Mirabaud Asset Management, said: ‘It comes as no surprise to anyone that UK households are going through a difficult period.
“However, many entered this period with higher levels of savings, or lower levels of credit card use, and significant pent-up demand to get on with life. The net effect, to quote a recent conversation with the CFO of a large homebuilder: “How bad is it?” “Not as bad as it could have been.”
“The last comment is crucial: it’s not as bad as it could have been, and not as bad as almost everyone expected.”
Inflation and interest rate hikes may have put the average Briton in a tough spot, but retail sales have proven resilient. Figures from the ONS show that retail sales volumes grew 0.3 percent in May, beating economists’ expectations for a 0.2 percent drop.
While warmer weather and holidays may have helped boost sales, consumer confidence also appears to have been rising since the start of the year.
GfK’s long-running consumer confidence index rose three points to -27 in May, the fourth monthly increase since January’s score of -45.
Mark Barnett, manager of TM Tellworth UK Income and Growth, said: “The UK consumer has continued to spend and is actually fundamentally in very good shape with strong cash balances, low debt levels and high employment levels. “.
“These mattresses have provided a cushion against recent impacts and will act as a springboard for eventual recovery.”
However, this resilience and optimism cannot be due only to consumers turning to their savings.
Simon Murphy, manager of the VT Tyndall Real Income fund, said: ‘The pressures on the UK consumer, particularly those in the lower income groups, are undeniable. However, we found several factors that support a less serious immediate outlook.”
The UK consumer has continued to spend and actually is fundamentally in very good shape.
Mark Barnett, TM Tellworth UK Revenue and Growth
He points to low unemployment rates, currently at 3.8 percent, along with a record rate of wage growth.
“While this continues to lag inflation, there is good reason to believe that inflation will fall reasonably quickly in the coming months, and if wage growth remains healthy, real incomes will start to rise once more.”
Falling energy prices, as well as a slight decline in food inflation, will also theoretically put more cash in their pockets for consumers. However, it has coincided with a rise in mortgage rates that will begin to be felt in millions of homes in the coming years.
Savings accumulated during the lockdown may soon start to wane. Data from the Bank of England shows that households withdrew money from their savings in May, suggesting that many consumers could soon start to struggle.
Where are the investment opportunities?
Despite sticky inflation and financial market prices for the base rate to rise above 6 percent, some fund managers remain optimistic.
Murphy said that while life remains difficult for many people, an enormous amount of negativity is already being reflected in the share prices of many strong consumer-facing franchises in the UK. Many have already seen significant share price weakness in anticipation of more difficult times ahead.
“We strongly believe that this is creating excellent midsize investment opportunities today.”
The VT Tyndall Real Income fund owns a number of UK consumer exposed companies including Dunelm, Vestry, Howden Joinery, Wickes, Taylor Wimpey, WH Smith and EasyJet. Stock prices are down between -21 percent and -57 percent from recent highs.
He says, “We believe these businesses represent strong franchises that will thrive well into the future.”
Barnett has been increasing its exposure to consumer stocks since September last year as valuations came under pressure.
“I took a more constructive view of UK consumer persistence accompanied by PE multiples looking too low.”
Since the beginning of the year, Barnett has been incorporating Whitbread and has started a new stake in Premier Foods, for the TM Tellworth UK Income and Growth fund.
Ken Wotton, managing director of public capital at Gresham House, has also found “attractive investment opportunities in certain areas of the UK consumer sector.”
“Worries about the UK economy and understandable concerns about the prospects for consumer discretionary spending in the face of inflation and rising interest rates have driven consumer stocks to near record lows.
“The downgrade has been widespread across consumer stocks without seeming to differentiate enough between cyclical and more resilient companies.”
Wotton said low-value-for-money experimental entertainment and some areas of e-commerce seem to have particular value.
He singled out bowling operator Ten Entertainment Group, which continues to experience “very strong trade” and Angling Direct, which benefits from a loyal fan customer base.
Murphy added: ‘We typically see liquidations in strong commercial franchises as fantastic buying opportunities in the medium term, regardless of potential short-term difficulties.
‘We are not smart enough to predict the exact bottom, or indeed when the stock price will begin to anticipate better times ahead. However, we are sure that if you wait for the news headlines to look good again, you will miss out on an important part of the opportunity.’
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