Consumer discretionary spending has been a key theme which many UK equities managers have hung their hats on of late due to a strengthening pound, low inflation and the emergence of real wage rises.
Can this be relied upon though when there are a number of factors both domestically and abroad which have the potential to pull the rug from under it?
According to the Thomson Reuters/Ipsos Primary Consumer Sentiment Index, British consumer confidence has actually fallen by 0.7% in October.
Perhaps more concerning than the headline fall are the main reasons for it, which the survey compilers said were consumers’ expectations about the future of the economy and job security.
“Despite many good news stories this month around low inflation, low interest rates and a strong labour market, consumer confidence still seems fairly fragile,” said Bobby Duffy, MD of public affairs at Ipsos MORI. “This may be a result of regular news coverage of the challenges facing the global economy more than domestic or personal concerns. It is worth noting however that in spite of this small drop, consumer confidence remains higher than one year ago.”
Certainly, UK consumer discretionary companies which draw a lot of revenue from China and elsewhere in emerging markets are facing tougher times.
Clothing and apparel company Burberry is a prime example. Shares in the company fell 8% today as the market digested news that sales have slumped due largely to a drop-off in China.
Even consumer goods companies which sell significantly in commodities-backed economies like Australia may have reason to worry, given how miners and oil companies have been slumping due to low global prices.
There are good counters to such concerns however. According to Tineke Frikkee, manager of Smith & Williamson’s UK Equity Income fund, the UK consumer discretionary play has time to run still.