Murray Asset Management's CIO, Simon Lloyd explains how they are adjusting their asset allocation in response to consumers spending their hard earned cash.
The UK high street has, in general terms, had a good summer. A warm June had shoppers enthusiastically seeking summer clothes, while August brought more rainfall than normal, just in time for autumn wardrobes. When this is set against the backdrop of rising prices in many areas, driven by the impact of the weak pound on imports, the resilience of the consumer has been remarkable.
So, where has the money been coming from? Wages have generally failed to keep pace with inflation, and with CPI already at the upper end of the MPC’s comfort zone, that trend looks unlikely to reverse any time soon. In general, the signs are that shoppers have been running down savings or running up debts in order to carry on consuming.
The combined effect of a slightly stronger than expected rise in UK GDP of 0.4% in the third quarter of the year and the stubbornly high inflation data leaves the majority of observers looking for a rise in base rates from the MPC in the November meeting.
However, as has already been stated, the rising prices that are causing inflation have not been caused directly by overheated demand, so the need for the cooling effect of higher borrowing costs is perhaps not as self-evident as one might think. The MPC needs to tread carefully, not only to take the right steps with its actions on base rates, but also in the all-important rhetoric surrounding such a move.
Lending to consumers needs to be supportive and at the same time offer a degree of stability – that being the case, high street banks must have a clear signal from the centre of the nature of the risks they should take.
So, where does this leave an investment asset allocator?
Certainly, we would not want to be relying on increasingly unruly unsecured borrowing for future performance. Exposure to the retailers should focus more towards essential rather than discretionary purchase decisions. Significantly, one of the major components of consumer credit which has been drifting down in 2017 is dealership car finance; the reports from the forecourts confirm that registrations have been declining, pointing to pressures both on new and used car sales and margins.
Clothing retailers, at the same time, are seeing a mixed picture, despite the relatively weak comparative period from a year ago against which their performance is being measured. September looked relatively healthy, but the signals for October show greater cause for concern. Perhaps most significantly, the market share gains are coming from the discount retailers, while the likes of Marks & Spencer and Next continue to see their market share eroded.
Therefore the overall picture for the Bank of England is of a consumer who, though reasonably healthy, is not minded to stretch the household balance sheet any further than is absolutely necessary. The signals from the MPC will need to be more carefully nuanced than ever in the coming days and weeks to maintain a degree of stability in the high street.