But they have their supporters and a number of fund managers are now talking up the UK consumer as an investment opportunity, given the performance of certain companies on the high street.
Corporate reporting figures for the past few quarters have proved surprisingly strong, in the UK and the US, with the likes of Next and WH Smith showing greater profits on lower sales.
The problems facing such firms have been well documented, but their results indicate a degree of resilience that may be surprising to some.
In the first six months to the end of February 2011, WH Smith’s chief executive Kate Swann was able to report a 3% increase in profits, to £64m, while sales went down by 4%, to £686m. The news of a subsequent rise in its share price was described in the Evening Standard as being down to the fact that “…in contrast to many retailers recently it avoided issuing a profit warning”.
Cash rich
And this is the point. According to Standard Life Investments’ investment director Edward Legget, speaking at the Portfolio Adviser UK Equity Expert Investor event last week, the performance of the traditional UK consumer-related companies may “shocking” but they are awash with cash.
In his UK Equity Unconstrained Fund he is overweight consumer cyclicals.
Moving away from the high street, Newton’s Tineke Frikkee is also bullish about consumer goods, food and drink in particular. Earlier this year she spoke favourably about supermarket brands such as Sainsbury’s and Morrisons, and Britvic’s increasing market share on both sides of the Atlantic.
Yesterday, Schroders’ Richard Buxton said: “I am persistently adding to UK consumer stocks, and it is interesting to note that they are starting to outperform”. He is another fan of Next and added in the same breath that it, Debenhams, Home Retail Group and Taylor Wimpey are trading at as low as 6x earnings in expectation of downgrades that he believe will not materialise.
Outlook
This not to say all is rosy with consumers themselves, of course. Taking an interest in such stocks remains very much a contrarian position, and numerous headwinds remain. The more conservative Neil Woodford is among those talking down the chance of interest rate rises this year because “to do so would crush the consumer”.
So what next?
As individuals, UK consumers are seeing their spending power reduced thanks to upwardly mobile inflation and flat interest rates. Wages are growing by ever smaller measures; the Office for National Statistics figures show average earnings growth fell for the year to February 2011 from 2.3% in January to 2%.
Another comment by Buxton gives pause for thought, however. His suggestion that it is the fear of unemployment, rather than its extent, that drives consumer spending – or rather causes it to be scaled back. As we move through the early period of the austerity era, and consumers learn their fates, retailers may find themselves beating expectations once again – particularly if rate rises do not materialise this year after all.
