Strong headwinds might face UK retail, but those same forces have also pushed down market expectations, argues Majedie’s James de Uphaugh.
Given some of the apocalyptic prophesies made in the run-up to June 23 last year, the consequences thus far of the 2016 referendum result look fairly tame. The economy has continued to grow, unemployment has continued to fall and both the UK’s leading equity indices have performed admirably.
One immediate result of the referendum, however, was the sharp fall in sterling, and it is yet to be unwound. While some economists believed the dip was a blessing in disguise, since the currency was overvalued, consumers and retailers tend to think the disguise has been a very good one. Inflation reached a four-year high of 2.9% in June, while wage growth lagged far behind. Moreover, spending power had already been on the decline, even before the vote.
“Central bank policy since the global financial crisis has inflated asset prices but not wages, and led to intergenerational issues in the UK – and also in the US,” says James de Uphaugh of Majedie Asset Management, manager of the UK Growth fund and co-manager of the UK & General Progressive fund.
The fall in sterling only added to this disparity, and de Uphaugh believes that this provides equity markets with compelling opportunities among UK retailers.
“If you think of what the UK has faced recently, there has been an aggressive squeeze on real disposable income, while rollout of fast broadband has got internet retail levels above that of other countries,” de Uphaugh says. “This has made it very hard for retailers. Those retail companies that have coped with this structual change are faced with very low expectations from the market.”
He believes that one such company is Marks & Spencer, which has benefited in part from its business model, and in part from some important recent hires.
“It has a differentiated food business with lots of same-day and next-day consumption,” he says. “Its clothing business, on the other hand, has reported disappointing sales for a while, but Steve Rowe has recently come in to head up the business and is making good initiatives in clothing, which is helping full-price sales rates. The trick with retailers is to increase at full price and minimise markdown percentage.”
Indeed, M&S’s quarterly results showed an improvement in sales rates for clothing. De Uphaugh sees other challenges ahead for the retailer, but has been impressed by how its hiring policy is seeking to address them.
“Logistics are still pretty inefficient but they’ve now hired someone formerly at Halfords and McDonalds to take overall charge of breaking down fiefdoms in clothing, and running it more coherently and efficiently,” he says. “Importantly, forecasts were pummelled, expectations were low, but this is a cash-generative business with a reasonable dividend. Moreover, M&S announced the appointment of Archie Norman as chairman in May, which will help. The icing on the cake would be if sterling were to regain some poise.”
Sterling’s fate has, of course, become much more closely tied to political development in the past 14 months or so; de Uphaugh believes that, despite some significant attacks on globalisation in the last year or so, there have nonetheless been recent signs that the UK is unlikely to close itself off economically.
“A hard Brexit would lead to the possibility of quite a big speed bump in the growth path for the UK economy, since we’d prioritise issues like immigration and legal sovereignty,” he says. “But politics has recently been moving more to the centre and the probability of a hard Brexit has fallen dramatically – the probability of a soft Brexit has increased.”
In line with this growing confidence in the domestic environment, de Uphaugh has been turning away from some of the big international miners, oil majors and Asian banks listed on the FTSE 100 and turning instead to domestic names like Centrica, which owns British Gas.
“The Asian credit cycle looks a bit extended,” he says. “Balance sheet expansion in China has risen substantially in the past ten years and debt-to-GDP is much higher than it was before the crisis.”
Majedie Asset Management is a fund manager for St. James’s Place.
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The opinions expressed are those of James de Uphaugh of Majedie Asset Management and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.
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