According to figures published by the Office for National Statistics (ONS), the average Brit’s earnings have this year increased by a measly 0.7%, and continue to sit well behind the current 2.7% inflation rate.
But households may be feeling wealthier than statisticians think, largely thanks to changes to taxable allowances that have not been taken into account by the ONS.
Wages are on the rise
Jupiter’s Steve Davies, manager of the UK Growth and Undervalued Assets Funds, thinks that while it is undeniable that UK workers have been squeezed in recent years, there are encouraging signs that the trend has finally started to reverse.
“In our view this data is being distorted as it does not factor in the increase in personal tax-free allowances or the cut in the top-rate of income tax in 2013,” he said. Davies also pointed to numbers from payment systems firm Vocalink, which in contrast to the UK’s official data, indicate that take-home pay has started to climb.
Continued boost
Within the Vocalink numbers, over the three months to September it appears that post-tax wages in Britain climbed by 2.4%, and drilling down into the figures it seems that Jupiter’s Davies has a point.
The services sector, which accounts for 70% of UK GDP, has seen the pace of growth in take-home earnings shoot up by 2.&% over the three-month stretch examined by Vocalink, indicating that real wages in this crucial sector are no longer in decline.
There are also further changes to tax in the pipeline that could maintain this trend, given that going into next year George Osborne, the chancellor, has pledged to increase the tax-free allowance to £10,000 and to appease voters in the run up to the next election this could be lifted even further, potentially beyond £12,000, if reports are correct.
Despite the motivations for this – likely a response to Labour’ pledge to enforce a 20-month energy price hike freeze – it is a drive aimed at putting money back into householders’ pockets, and a move that will be felt by stocks.
Top picks
Against a backdrop of improving wages, the outlook is bright for companies exposed to the UK’s domestic market. Jupiter’s Davies said his holdings such as Lloyds, retailers Dixons, Howden Joinery and WH Smith should do well in this environment, along with stocks like Countrywide and Taylor Wimpey in the housing space, and ITV, in the media sector.
But Alan Clifford, who runs Lazard’s UK Income fund, is more cautious. He said that while there are some positive signs for the UK as well as Europe more broadly, he believes that there is still too much part-time work in Britain despite gross employment being at an all-time high, and warned there is still a huge gulf between London and the rest of Britain.
Don’t get carried away!
Despite this, Clifford acknowledged that stock specific opportunities do exist and that UK equities should continue to consolidate throughout the remainder of 2013, buoyed by a recovering Europe, slightly more stable data from China and potentially further quantitative easing in the US.
“We will continue to focus on stock specifics, particularly where we see stocks with substantial cashflows and valuations that do not reflect the business reality,” he said.
