Join our community of smart investors
OPINION

High-street politics

High-street politics
April 8, 2015
High-street politics

As this magazine outlined at length last week, some companies do face threats associated with specific political agendas - utilities and outsourcers perhaps foremost among them. But in most sectors business will surely plough on regardless of Westminster posturing. In particular, the consumer recovery that has dominated the investment case for so many UK-listed small- and mid-cap companies for the past two years seems unlikely to be blown off course. I would view any share-price weakness in the consumer sectors induced by election jitters as a buying opportunity.

Topps Tiles (TPT) is a recent example. The shares fell 4 per cent on the day of its March trading update and have since fallen marginally further. Year to date the shares are up 1.5 per cent, compared with 6 per cent for the FTSE All-Share index. Benjamin May and Sam England at brokerage Berenberg attribute this underperformance to worries about the UK election first articulated by chief executive Matthew Williams in a Bloomberg interview in January and repeated in the latest statement. Certainly it's hard to pin the blame on trading. Like-for-like sales growth was 5.2 per cent for the 26 weeks ending 28 March - down from 10.2 per cent the previous year, admittedly, but still much faster than most retailers are seeing.

The recovery so far has been built largely on a falling savings ratio as rising house prices have buoyed consumer confidence. Wage increases have scarcely come into the equation, not least because they have been running below inflation for nearly seven years. Yet with inflation now at zero, pay rises should at last start to feed into consumer spending.

The plunge in petrol prices should be particularly beneficial. Of the 41m residents of England and Wales aged 16-74, 37 per cent still commute to work by car, according to the 2011 census. They will be materially better off with petrol at 112p per litre. Meanwhile, there's no sign that confidence is dissipating - quite the opposite. A popular barometer of UK consumer confidence by research outfit GfK rose to its highest level in almost 13 years in March.

It is hard to see how politics would derail this trend. True, an increase in VAT would hit spending, but both Labour and the Conservatives have explicitly ruled it out. It is feasible that uncertainty over the new regime will cause consumers to put off some larger purchases - homes and cars and the like - but this effect should defer spending rather than cancelling it. Politicians of all stripes must realise that maintaining the UK recovery is key to their success, and that consumer spending is key to that recovery.

Another reason to invest in consumer-facing stocks is that they often have store roll-out programmes that give investors an unusual level of visibility over their earnings growth, whatever the like-for-like growth figures. We recently tipped Restaurant Group (RTN: Buy, 728p, 5 Mar 2015) on the basis that this reliable model justified the shares' premium rating. Slightly less well established - and less expensive - variations on the same theme include Pets at Home (PETS), which is the Berenberg analysts' top pick, and Howden Joinery (HWDN).

Car dealers such as Inchcape (INCH) and Pendragon (PDG) are the bargain options. They have always traded at a discount to other retailers on the basis of their cyclicality, but this discount may no longer be warranted: Messrs May and England argue that most cars are now bought on contracts with monthly payments - a bit like mobile phones - so profits are more predictable than they used to be.

The real risk when investing in consumer-facing stocks is rising interest rates. By increasing mortgage costs and expected mortgage costs, these would choke off both the renascent growth in disposable income and confidence. Investors sold off consumer shares last year in response to these worries, but then commodity prices plunged, easing the pressure on the Bank of England to act. Somewhat worryingly, the market now seems to have forgotten the risk altogether. This, rather than politics, remains the key story to watch for those who hold shares in housebuilders, retailers or leisure groups.

That said, it's still too early to worry, in my view. Just now, it feels more sensible to take on the longer-term risk of modestly rising UK interest rates than the currency, commodity and global macro-economic risks of investing in Britain's multi-nationals.