The retail sector is set to continue outperforming over the remainder of the year, consensus suggest...
The retail sector is set to continue outperforming over the remainder of the year, consensus suggests, although potentially dark clouds could be gathering on the horizon.
The FTSE All-Share General Retailers Index is up 5.174% over the calendar year to 29 April and 13.336% over the 12 months to the same date.
By comparison, the wider FTSE All-Share is down 4.69% over the calendar year to date and is down further still over the 12 months to 29 April, by some 12.433%.
The UK consumer has largely been credited with staving off a recession in the UK but concerns have been mounting that the level of consumer spending is unsustainable.
Chris Tracey, investment director at JP Morgan Fleming, warns the recent Budget may adversely affect the sector, although short-term price swings are more likely to have been knee-jerk reactions. Tracey notes: 'In the UK, the Government's Budget announcement provoked some weakness in retail stocks after taxes were raised for individuals and businesses. Although somewhat contradictorily, the tax increase was seen as insufficient to reign in the overheating UK consumer, thereby lifting expectations that UK interest rates would soon be on the rise.'
The March inflation report added to UK rates fears, revealing the Retail Price Index had risen to 2.3%, Tracey says. Despite this apparent confusion over the tax implications of the Budget and gradually rising prices, it is generally taken as a given the Budget will spark interest rate rises over the latter part of the year. Whether they will have sufficient impact to drag the sector down remains unclear. Ian McLeish, manager of the Scottish Investment Trust, says: 'Housebuilders still seem reasonably confident of how things are going and believe that even if interest rates rise a bit, it should not choke off consumer spending and retailers should benefit from that.'
McLeish's main concern is that the National Insurance hikes introduced in the Budget could hit the sector in terms of cost to retailers and less cash in many consumers' pockets.
He says: 'The National Insurance surcharge comes in next year and retailers will be affected because they are very large employers.'
While decreasing consumer expenditure is very likely over the coming quarters, changing patterns in what consumers are buying may keep many areas of the retail sector buoyant, says Paul Mumford, manager of the Cavendish Opportunities fund.
Mumford says: 'Over the past two or three years, a lot of money has gone into the mobile telephone market but most people have now got mobiles and PCs. Some will be upgrading but consumers in general have more money left over for things like clothing.'
Mumford has recently moved overweight retail but is preferring to gain exposure through smaller and medium-sized clothing stocks, such as New Look and Austin Reed. He says large caps may prove less resilient to any slowdown and are generally trading on less attractive valuations.
McLeish has exposure to both William Morrison and Tesco, believing them the best value supermarket stocks around and relatively immune from any slowing in consumer spending.
Consumer spending remains strong.
Attractive valuations in small and mid caps.
Number of recovery plays open.
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