With consumer services providing the main thrust behind UK GDP returning to pre-financial crisis levels – contributing 0.5 percentage points of overall GDP growth of 0.7% in Q2 – it appears that exposure to the sector is not such a bad idea.
However, while things seem rosy now, Boucher, manager of the Smith & Williamson Enterprise Fund, advised that with an interest rate rise on the horizon a portfolio appraisal will soon be in order.
“Consumer spending is obviously very strong at the moment and consumer confidence is at a 15-year high, which bodes well for businesses exposed to that area,” he warned.
“That said, we are going to get an interest rate increase in the UK, and there are a lot of people with mortgages who were probably still in short trousers when we had the last rate increase in 2004.
“How the consumer reacts to the rate rise is a worry, but it depends on how good a job the Bank of England does of making it understood that the rise will be slow and not very far. That is our base case, but it depends on how that message gets across.”
Boucher’s portfolio carries long exposure of 24% and 5% to the consumer services and discretionary sectors respectively, alongside a 9% short position in consumer services.
He believes that while services have done well on a macro level – all four of the main aggregates experienced Q2 growth – current stock valuations and the recent announcement of a UK ‘living wage’ warrant looking at the sector from a short standpoint.
“The UK economy remains extremely strong and there are a few companies that will benefit from that, but the stock market as a whole can really only go down from here,” Boucher expanded.
“We have added some short exposure into a pub company, and are looking at adding more in that area. Considering that consumer spending has been so strong, the way that pubs in general have been performing is quite disappointing, and they are also going to be affected by the wage increase when they have to start having to pay their staff more.
He continued: “There has been a wave of eating-out space being opened recently, making that area more competitive, and consumers are ‘trading up’ a bit so they are not really looking for a pub meal anymore.
“We are looking at ways of hedging our consumer exposure and are aware that things can change once rates go up. We are preparing the portfolio for the interest rate rise and could see some more movement next year, but I do not think that we are that point quite yet.”
