While last week’s sunny weather may have temporarily lifted the spirits and loosened the purse strings, the UK consumer is feeling the pinch. A recent poll by YouGov and the Centre for Economics and Business Research has found British households are more pessimistic about their personal finances than they have been at any time since December 2014.
The big culprit here is inflation. Prices are rising rapidly, while wage growth is glacial. That means we’re getting progressively poorer as each month rolls by, and as a consequence we’re opting to spend less.
With consumer spending the backbone of the UK economy, it doesn’t take much for a tightening of the purse strings to lead to a broader slowdown with weaker consumer spending already contributing to a sharp slowdown in Britain’s economy in early 2017.
Despite the rising level of pessimism, analysts believe now is as good a time as any to ‘Buy British’. Last week, there was a chorus of support for domestically-focused UK stocks. Analysts at Barclays Research said this part of the market was unloved and underpriced, but unjustifiably so, pointing out that valuations were factoring in a drop in UK consumer spend typical of a recession environment.
Meanwhile, fund manager Neil Woodford loaded up on shares in housebuilders and property companies, saying “people were too downbeat about the UK economy”, and that the bearish mood has resulted in attractive buying opportunities in some domestic cyclical sectors including housebuilders, banks, construction and property.
But not everyone agrees. Deutsche’s analysts prefer the FTSE 100, saying that disappointing economic data will push the pound down again before the end of the year. And with 60% of FTSE 100 revenues generated abroad - that’s good news for the country’s biggest companies, whose sales will be worth more in sterling terms. However, a weaker currency isn’t so helpful for the more domestically-focused companies on the mid-cap FTSE 250 index, which will be more vulnerable to any economic slowdown.
Arguably the best approach is to follow the sage advice of renowned investor, Peter Lynch who, in his book ‘One Up On Wall Street’ says just analysing our own behaviours will give us all the investment ideas we need in a lifetime.
That’s certainly true if we look at how our collective behaviours as consumers have changed. We’re no longer spending our Saturday’s browsing in shopping centres or wondering down the high street, instead preferring to ‘browse’ online. Then there’s the rise of the so-called ‘experience economy’ - the shift away from buying things to doing things like dining out, booking holidays and discovering new experiences.
Many clothing retailers have felt the full impact of these changes, while others have powered on. Take JD Sports as an example. By tapping into the so-called ‘athleisure’ trend where people choose to wear sportswear as leisure wear, has seen the retailer’s profits soar, while its main competitor Sports Direct continues to struggle.
Changing consumer behaviour can also have a ‘domino effect’ and as Fidelity fund manager Amit Lodha points out, in the investment world dominos almost always fall unpredictably.
He takes Amazon as a case in point. The success of Amazon is well-documented and analysed but the knock-on failures of the rise of the online retailer has caused, less so. The first domino to fall as a consequence of consumers shopping more online was the book store retailers. The second was departmental stores. The third looks like it could be coffee consumption. This is because you went to a Starbucks store to buy your coffee while you were shopping - now if you are going to the shopping centre less often, it follows that you’re probably also going to Starbucks less often.
A fall in high street footfall may be one of a number of factors weighing on Starbucks’s fortunes, but in the so-called ‘experience economy’, we shouldn’t discount the importance of a good cup of coffee to the consumer just yet.
Recently, JAB the German investment firm announced plans to sell its stake in the high end shoemaker Jimmy Choo as it looks to get out of the luxury business and deeper into the coffee business. JAB’s move has been dubbed a sign that investors are looking to capitalise on the shift in consumer spending toward experiences rather than goods. Even if that experience is nothing more than a good cup of coffee…
Maike Currie is an investment director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments. She acts as a spokesperson and commentator on investments and consumer finance with a special focus on income, interest rates and inflation. Prior to joining Fidelity, Maike worked as a financial journalist across a number of titles in the Financial Times Group. She continues to write a regular column for the FT.
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