While Greggs and its peers grappled with tax uncertainty, the announcement this week that Game Group had gone into administration followed the latest ONS figures which showed a bigger than expected 0.8% fall in UK retail sales for February.
It is a saddening thought that, in our Olympic year, visitors to our shores may find it hard to avoid the boarded up shop fronts across towns and cities throughout the country. Yesterday’s headline stories on the OECD’s predictions of recession are unlikely to stop consumers from tightening their belts.
Further to this, ONS figures also showed that UK household income suffered the biggest drop in more than three decades last year, with real disposable income falling by 1.2%.
Inflation easing
However, that’s not to say this trend will continue and, according to contrarian investor James Lowen, co-manager on the JOHCM UK Equity Income fund, data for 2012 and into 2013 will show a reversal with much stronger growth in the household free cashflow aggregate.
“Last year we had food price inflation, petrol price inflation and other commodities rising, while clothes prices also went up 8%,” he says.
“What we have seen in the last five or six months is all of that deflating, except oil. Inflation has come out of the system, while utility bills have come down. The pressure that the average household had on its aggregate spending is dissipating.”
In reality, the general retail sector has, according to Lowen, reached a three-year high to the extent that he and co-manager Clive Beagles have been selling one of their favourite stocks, Debenhams, which has gone from trading at 55p per share up to 82p. A 1.7% position has been reduced to 1.3% in the fund.
Structural headwinds
Of course, there remain significant structural headwinds in the sector, not least the rise of e-commerce with the success of specialists such as Amazon impacting the bottom line of traditional retailers that have been slow to embrace internet sales.
“On general retail you do have to be very careful that you do not get seduced into valuations which may look low but they are not because of these structural threats,” adds Lowen.
“But stocks that are not exposed to this could be beneficiaries, like Debenhams, where the valuations were distressed. When you look forward, bearing in mind the household free cashflows, we are actually in quite a positive situation and that has been what has driven the stocks up to where they are.”