Every little helps? How consumers feeling the squeeze creates a trend shift for UK companies

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.

How would you rate the information in this article?

Click on a star to rate it.

We are sorry that this post was not useful for you.

Write your comments here:

Tell us how we can improve this post?

Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

The share price of companies (equities) can experience high levels of price fluctuation.

Future forecasts are not reliable indictors of future returns.

Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on the information provided.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

A free, English language copy of the Prospectus, Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or copies can be requested by calling 0333 456 4560 or emailing [email protected]

Financial promotion issued by Premier Portfolio Managers Limited (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

008713/200123

Stay up to date

Sign up to receive the latest articles straight to your inbox

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

The content you are trying to access is intended for investment professionals only.

Please use the button below to return to the hompage.

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >