The fact the decade-long dominance of the financials sector has ended and consumer groups are now the largest constituent in the FTSE 100 has shone a spotlight on the recent reporting season. While many consumer stocks, and specifically food retailers, have yet to report 2015 figures, a better than expected Christmas for the UK's supermarkets was followed by what can only be described as a mixed bag of annual numbers from the banks.
The question is, can consumer-focused groups hold on to their newfound glory? Bear in mind, the margin between the two sectors in terms of their make-up of the market remains extremely narrow and the outlook for 2016 includes a number of potential threats. These include, but aren't limited to, the introduction of the new living wage, the ongoing deflationary environment and a possible slowdown in discretionary spending. That doesn't even include the possibility of a Brexit.
Clive Black at Shore Capital explains it quite simply. In short, many of the UK's largest supermarkets, including Tesco (TSCO) and Morrisons (MRW), appear to be firmly in recovery and extreme cutbacks in capital expenditure mean the potential for free cash flow is pretty high. On the flip side, many of the largest banks are still busy rebuilding their balance sheets, while global banks such as HSBC (HSBA) and Standard Chartered (STAN) have nerves over a macroeconomic slowdown to deal with.
James Sullivan, director at Coram Asset Management, said the financials sector had suffered a number of "false dawns".
"The anticipated pick-up in inflation and subsequent steepening of the yield curve has failed to materialise, and therefore there are growing concerns over where earnings are going to be generated," he said. "This is before we even explore the implications of a negative interest rate policy."
But the potential for growth among UK retailers remains reliant on a number of factors. The new living wage could mean discretionary income will rise, but it's actually down to how companies choose to offset these rising staff costs. If they raise prices, it could stem the wider deflationary trend most retailers are battling. Of course, they could just cut jobs instead, especially as much of the labour involved is low-skilled. In the current economic cycle, there's an argument for saying things are as good as they're going to get for UK retailers right now.
Mr Sullivan added that the sector had benefited from low energy prices and mortgage costs feeding into consumer confidence but that, given there was "very little pressure on wages outside the US", the disinflationary trend may be difficult to buck.
Leigh Himsworth, a UK equity fund manager at Fidelity, said one barometer he watched was the Asda income tracker, which recently showed families enjoyed a double-digit year-on-year increase in spending power in January - up £12 to £197 per week. He added that the strength of discretionary spending since the trough in 2012-13 had "massively improved" and thus helped the consumer sector rise in dominance.
But he acknowledged that consumer-focused businesses that relied on high-street footfall had "struggled with the changing landscape" as the popularity of internet shopping continued unabated.
He also noted an individual consumer-focused company's dominance could now be more shortlived, meaning there was the potential for businesses to come and go more quickly, making investment in the sector tougher.
"Our shopping habits are changing massively and, as far as investing is concerned, that's a problem," he said.
