by Chris St John, Portfolio Manager of the AXA Framlington UK Mid Cap Fund and AXA World Funds – Framlington UK
To benefit from the power of compounding profit and dividend growth takes time and we must invest through the transitory noise of political and macroeconomic ‘events’. Intellectual and financial capital allocation decisions take time to impact, and patience is required to realise these gains as equity investors. One such ‘event’ is Brexit and this must inevitably get a mention in this report.
Brexit however will not stop people growing older, more consumers becoming ‘connected’, the advancement of Artificial Intelligence, Robotics, automation, battery technology or the El Nino-Southern Oscillation!
It is easy to assume that uncertainty always discourages investment but this is simply not the case. Brexit-related uncertainty regarding the surety of supply chains, together with a weaker currency, is encouraging suppliers to move closer to their customers and this has resulted in some businesses to increase investment in productive capacity in the UK. For example, a French bakery in Milton Keynes recently increased both its UK capacity and locally sourced ingredients as the costs of importing raw materials rose. “Post-Brexit investment has also been announced by others, including Boeing (building an actuator manufacturing plant), Muller Dairies (investing £100m in 3 sites in Shropshire), Toyota (to invest £240m in its car plant in Burnaston). Also Apple, Facebook and Amazon have announced plans to increase UK headcount.
Global economic growth remains robust and UK exporters are benefiting. This is in stark contrast to the newsflow generated by the UK high street, where several restaurant chains and retailers are facing severe financial difficulties. Recent casualties include Byron Burger, Jamie Oliver’s Barbecoa, Prezzo and Strada. In addition, retailers Toys’R’Us and Maplin have both called in administrators. Brexit may be a contributing factor, but the disruptive effects of internet retailing, increasing minimum wage, business rate changes, auto enrolment, inappropriate financing structures and oversupply have been far more influential. Buying goods at wholesale prices and selling at retail prices, without offering value, brand, service or ‘experience’ is no longer good enough.
Those that embrace multi-channel, innovate, have strong branding, offer ‘experience’ and are deemed good value will thrive, those that are encumbered by long duration leases and do not offer these qualities will perish.
The proliferation of economic data, artificial intelligence (AI), the ubiquity of the internet, the development of 3D printing, advanced robotics and ever increasing price transparency is contributing to the acceleration of supply in many areas of life. “The rapid expansion of the new economy – characterised by exponential growth, increasing returns to scale, zero marginal costs and negative depreciation rates” is having profound effects.
Via the internet, the supply of retail capacity is constrained by the shelf space in the sector’s distribution warehouses, rather than the ability to take on physical leases in the high street or on retail parks. Capacity to supply is constrained only by the economics of logistics and with price transparency available online, traders must differentiate through brand, choice and service. This is disinflationary.
Technological disruption offers both threats and opportunities and although retailers are enduring short-term input cost inflation as a result in the fall in the value of sterling, they are reacting via the adoption of technology. Dunelm, for example, are using driverless fork lift trucks to relocate pallets from the ‘Goods In’ area to the warehouse racks – they work 24 hours a day, are never ill and are not susceptible to increasing wages. This reduces the marginal cost of fulfilment, releasing margin that can be passed on to the stake holders in the company – including customers and employees.
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Investments involve risks, including loss of capital
