Consumer retail sector remains in deep trouble

The growth market faces a tough year as UK fund managers decide whether to put their faith back in old economy stocks or ride out the volatility and high valuations of tech firms.

Retailer Tesco is one firm that is trying to bridge the gap between the two economies. The company, which announced full-year figures last week, has been busy expounding the success of its internet home shopping service, TescoDirect. The online grocery now has estimated annual sales of £125m, making it one of the world's largest. The online venture has been so successful that Tesco is expected to float its e-commerce arm and plans to invest around £35m on developing its business to business and business to consumer division this year.

However, fund managers are sceptical over whether these statistics indicate an expanding customer base for UK retailers or if they are creating more competition in a sector already operating under cutthroat margins.

Robert Moss, fund manager of Invesco's UK Growth Fund, says: "When a company like Tesco trumpets its results you have to look at factors like whether they are genuinely getting new sales or if it is the same customer using a different method of transaction."

Moss also points out that Tesco is a best case scenario, having been a growth stock in a non-growing sector.

Other companies that have been slower on the uptake, such as Marks & Spencer, may not fare as well and could find that simply going online is not the answer, especially now as internet fever wanes.

Old economy stocks, such as retailers, are increasingly playing catch-up in the internet stakes. This reflects the dilemma facing fund managers this year. While many accept that volatility is inevitable in a post-exuberant market, there is still hesitation on whether to favour value or growth.

Moss says: "Until now it has been hard to discern the winners from losers in a market that seemed to decide that everyone was a winner in the tech sector." He adds that he has been watching companies on the business to business level, who develop software and technology for the internet.

"If you look at the fundamentals, these are the companies that will be around long after the faddish business to consumer companies have run out of steam," he says.

Moss was upbeat about the long-term prospects of software and technology firms such as the Easdaq-listed Autonomy and Arm Holdings. Arm, the microchip manufacturer, announced quarterly profits that were significantly ahead of City expectations last week and Moss believes its strength is in licensing to other companies. This provides a far more tangible picture of the kind of client base and strategy a firm like Arm is building.

But Moss also feels stock valuations are generally stretched, a view echoed by Flemings' Global Strategist, Chris Tracey, who believes the market has "lost its way completely."

He says: "The second half of 1999 was easy - it was growth, growth, growth. The last three months has seen the market swinging from tech to value stocks and back again. This indicates a market that is in need of clear leadership."

Ali Bernat

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