Benji Dawes
Premier Miton UK Growth Fund co-manager
Imagine squeezing a balloon
Imagine squeezing a balloon. When you start to apply pressure on one side of the balloon, the air within it shifts to another part of the balloon. This continues until the overall force you are putting on the balloon, by squeezing it, causes it to pop.
If the UK consumer in 2023 is a balloon and inflation is the hand gripping it and applying pressure, what clear shifts are occurring and is the balloon about to go pop?
A perception of value and necessity
While predicting the outturn for the UK economy in 2023 is far from easy, we can look at some of the trends we saw building in 2022 and have built our forward-looking view on how these may play out.
While January can be a bleak month, with darker days and the Christmas credit card bill to look forward to, a trend we are seeing is that despite the squeeze on inflationary pressures, consumers are not stopping spending altogether, but carefully prioritizing.
There are some key areas of spend that consumers are ring-fencing, one of which is holidays. Early January 2023 holiday bookings have been very strong, which can benefit value for money package holiday providers like Jet2. With package holidays, the cost of a get-away is clear during the purchase process, helping cost aware consumers with budgeting. So, while the UK may be facing its longest recession since records began, consumers are not forgoing a summer getaway, just planning this ‘necessity’ carefully.
Sourcing the essentials
Typically, the stocks that do well in a recession tend to be those that offer consumers a perception of value. The nice to haves will invariably give way to the must haves, so household consumer goods (toothpaste and washing up liquid) are non-negotiables. Clear beneficiaries of this have been Aldi and Lidl who had record Christmas trading periods.
Lidl for example gained 1.3 million British shoppers in the Christmas period compared with a year earlier. This was as the supermarket saw consumers switch to their cheaper priced products due to both food price inflation and a squeeze on household finances from energy bills.
While looking for lower priced consumer staples is a clear retail trend, this has been in parallel to a reduction in spending on DIY and home improvements, with furniture and homeware sales also trending down – likely a result of a slowing housing market. Essentials are trumping discretionary items.
Revisiting an old friend
High street retail is re-establishing itself post Covid as consumers go in search of a bargain, and retailers with a physical presence are benefitting doubly because of recent Royal Mail strikes. With consumers showing an unwillingness to pay higher charges online for shipping, this could benefit retailers Next and Primark to the detriment of online players such as Asos.
Market share data % – clothing retail
Source: Euromonitor. Please note 2018 and 2019 datapoints for Asos and Boohoo are not available.
Online retailers are recalibrating their business models to compensate for weaker sales growth post pandemic period strength, and now charge higher fees for both delivery and for returns (which were often free). This plays into the hands of Primark in particular, which doesn’t trade online. Marks and Spencer and Next also stand to benefit on a relative basis, with the former demonstrating its confidence by announcing plans recently to open 20 new stores in the UK.
Putting to one side the online v high street retail debate, in our view during recessionary periods it is the strongest, best capitalised operators that tend to get even stronger. In clothing retail we’ve seen Arcadia and Debenhams going bust in recent years, along with several struggling smaller players such as Joules and Coast, providing runway for Next and Primark to gain share.
Focusing on defence
While we are incredibly aware of the vice like grip of inflation for consumers in the UK, our job as fund managers is to spot the potential winners because of a pressurised consumer. Investing in defensive companies is key for us. If you look at some of our largest investment holdings, they are resilient companies whose demand is unlikely to fluctuate significantly even in a tough recession; they lean into trends that will support them through and beyond a cyclical downturn in our view.
Looking at the factsheet for the Premier Miton UK Growth Fund you will see holdings in healthcare and pharmaceutical companies. An ageing population in the UK and in Europe has a higher healthcare requirement. There are many companies in the UK addressing the range of medical solutions demanded, with global companies such as orthopaedics specialist Smith & Nephew, analgesic drug developer Hikma and the newly separated pharmaceuticals division of GSK, which is a leader in vaccines, respiratory conditions and cancer treatment.
In addition, we invest in Spirent, which provides the technology required to install and manage telecoms networks and to test 5G systems. These are a major pillar of government infrastructure plans in developing and more developed market countries alike as they seek to support mega-trends such as industrial automation, telemedicine, and artificial intelligence use, all of which require higher fidelity communications networks. Finally, given ongoing supply constraints in global energy markets, combined with recovering demand from China, the eye-watering cost of gas and electricity is unlikely to evaporate quickly, so profits may not either at Shell. That’s good for investors.
Going pop?
So, while, we don’t see the UK consumer going ‘pop’ anytime soon due to inflationary pressures, we are aware there is only so much give in the proverbial household spending balloon to work with and have carefully factored this into our investment strategy.
