Are we nearly there yet?

VT Tyndall Unconstrained UK Income Fund

Are we nearly there yet?

Stock markets, as we know, are forward looking in nature and frequently move to price in events yet to happen. The phrase ‘travelling and arriving’ is a common one in relation to share price movements, essentially saying that by the time much anticipated ‘news’ hits the screen the share price has already factored it in ahead of time.

With this in mind, we are having more and more discussions lately concerning whether or not the market has already fully priced the ‘reopening’ of the UK economy post lockdown. We will, of course, only know the answer for sure as time goes by. As it stands today though, our inclination is to think that is not currently the case and there is still plenty to go for in UK reopening opportunities, particularly consumer exposed stocks.

There are several issues to think about when framing this debate and it starts with the scale of the economic hit the UK suffered in 2020. As we have mentioned previously, GDP growth of -9.9% was the worst yearly outturn for over 300 years. As such, the potential for an equally vigorous upside surprise to economic activity clearly exists as we exit our third and, hopefully, final national lockdown.

Whilst the economic contraction was incredibly sharp in 2020 it was also extremely unusual, being driven as it was, by the enforced closure of much of the economy. The quid pro quo for enforced closure was truly unprecedented support from the government for businesses and individuals alike, and one of the consequences of this support has been a quite exceptional build-up of corporate and household excess savings, as the chart below clearly demonstrates.

Those excess savings, particularly on the household side, are a key reason why we think there is still plenty more scope for UK consumer related stocks to perform strongly as we emerge from lockdown. There are numerous anecdotal signs of significant ‘pent up’ demand after over a year of rolling lockdowns and households, generally, have the financial capacity to fulfil that demand.

Another reason we remain so optimistic is the underlying strength of the UK housing market, a key indicator if ever there was one, for the financial health of UK consumers. Not only did UK housing surprise positively with its resilience in 2020 but, as the chart below from Rightmove of month-on-month national asking price changes demonstrates, the market appears to be accelerating strongly in early 2021.

Finally, the actual evidence on the ground also appears highly encouraging, as the latest UK retail sales volume data from the Office for National Statistics (below) indicates. Very strong +5.4% volume growth was seen in March, before non-essential physical stores had even reopened on 12th April.

So, we feel pretty optimistic that a sustained period of consumer strength, probably surpassing current positive expectations, is likely still to come in the UK. Furthermore, when we drill down into individual stocks in the area, we still find plenty of valuation appeal.

Three of our favourite stocks in the consumer space are JD Wetherspoon (pubs), DFS Furniture (sofas) and Next (clothing and homeware). All three have incredibly strong franchises and all, in our opinion, will emerge from the pandemic in a stronger position relative to their competition than when they went in. DFS, for example, estimate they have taken an additional 2% market share nationally over the last year as weaker players have exited the industry. They now have an estimated 34% market share, over 3 times bigger than their nearest competitor.

The charts below, from Redburn Ideas, show all 3 companies’ profiles in terms of relative estimates momentum (left chart) and return on capital (right chart). From an estimate perspective both DFS and Next have already been surprising positively, reflecting the strength of their online propositions during lockdown. JD Wetherspoon, clearly, has not yet started surprising positively as their pubs have remained largely closed along with the rest of the hospitality industry.

What’s most interesting to us though, in each case, is the far right column of the right hand chart. For each company the market is not yet, in our opinion, pricing future returns on capital in any way excessively optimistically. In fact, we fully expect those return on capital ‘blue bars’ to continue rising back towards levels more akin to historical performance in due course. On that basis there would appear to be plenty of scope for further substantial share price recovery from here.

Our answer therefore is that, no, we aren’t nearly there yet. The UK consumer space still offers plenty of alpha opportunities as the economy reopens, and our fund is really well positioned to take full advantage.

30th April 2021
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This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
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WARNING: All information about the VT Tyndall Unconstrained UK Income Fund (‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free
of charge (in English) from Valu-Trac Investment Management Limited ( Any investment in the fund should be made on the basis of the terms governing the fund