UK Private Consumption has averaged 63.5% of Nominal GDP since 1955. It matters!

VT Tyndall Unconstrained UK Income Fund

UK Private Consumption has averaged 63.5% of Nominal GDP since 1955. It matters!

Notwithstanding the importance of consumer spending to the overall economy, it remains hard work investing in UK consumer discretionary related companies, with seemingly relentless negative headlines. Following years of tortuous Brexit wrangling, the first global pandemic in over 100 years, a war induced inflationary shock, with an associated rolling ‘cost of living’ crisis, there seem to be a great many reasons to steer clear. Indeed, the latest headlines are filled with an impending ‘mortgage crisis,’ given interest rates have risen so sharply over the last 12 months and look likely to continue doing so in the immediate future, given stickier than expected rates of inflation. Yet despite this near universal negativity, we find several reasons to be more optimistic about potential investment opportunities in the consumer discretionary areas of the UK market.

Most importantly, many companies have already seen significant share price weakness in anticipation of more difficult times ahead. For example, Vistry Group, our preferred UK house building stock, has already seen a share price decline of -49% since June 2021 in anticipation of a more difficult housing market (chart below and we could show many similar charts as well).

https://tyndallim.co.uk/wp-content/uploads/2023/06/wk-210623-1.png

That is what stock markets do, they look ahead. We typically see these sell offs in strong business franchises as fantastic buying opportunities for the medium term, irrespective of potential near term difficulties. We are not clever enough to predict the exact bottom, or indeed when the share price will start to anticipate better times ahead. However, we are certain that if you wait for the news headlines to look great again, you will miss a significant chunk of the opportunity.

Whilst not wishing to underestimate the very real pressures on the UK consumer, and particularly lower income groups, we find several factors supporting a less dire immediate outlook than most fear. These include very low rates of unemployment, currently just 3.8%, and still very strong wage growth, with the latest weekly earnings growth (excluding bonuses) coming in at +7.2%, the fastest growth rate since current records began. Whilst this latter figure is still not quite keeping up with inflation (current CPI is 8.7%), there remain good reasons to believe inflation will fall reasonably quickly over the months ahead, and should wage growth remain healthy, real incomes will start rising once again. In addition, the level of support provided by the government during the Covid pandemic meant that a substantial level of excess savings was accumulated by many, which are now being used to help offset the significant cost of living increases.

Furthermore, we do not think this is just ‘wishful thinking’ on our part, as the chart below, showing the GFK UK Consumer Confidence Index over the past 30 years, hopefully illustrates. Clearly, in late 2022, confidence hit the lowest level in the past 30 years. Since then, confidence has been gradually recovering. Whilst still negative of course, we believe it is the direction of travel that matters and we find this highly encouraging, particularly in the face of the relentless negative headlines!

https://tyndallim.co.uk/wp-content/uploads/2023/06/wk-210623-2.png

Finally, we place tremendous emphasis on talking to company management teams we respect, to get a sense of how things are on the ground in real time. A summary of our most recent conversations would probably be that, generally, life is ok. It is not great, but it is not terrible either. Interestingly, one of the ‘bellwethers’ of the UK consumer space, Next Plc, issued an unscheduled, but very positive, trading statement this week. To quote,

“Trading in the last seven weeks has been materially better than the guidance we issued in May. Full price sales were +9.3% versus last year, compared to our guidance of -5%. We are upgrading our full year sales guidance by +£137m and full year profit guidance by +£40m”.

To be clear, we are not arguing that life isn’t difficult for a great many people – it clearly is, but equally, a tremendous amount of negativity is already reflected in the share prices of numerous strong UK consumer facing franchises. We strongly believe this is creating outstanding medium term investment opportunities today.

In our portfolio we own several companies in this area of the market including Vistry, Howden Joinery, Wickes, Taylor Wimpey, WH Smith, EasyJet, Dunelm, and others. We believe these businesses represent strong franchises that will thrive in the future. The share prices of all these companies are down between -21% to -57% from recent high points over the last couple of years.

Of course, we cannot promise they won’t have difficult trading periods and/or still lower share prices in the immediate future. We are simply not clever enough to spell ‘bottom’, but we can certainly spell ‘opportunity’.

27th June 2023
Read time : 6  mins

This content is intended for professional clients only.

*Data source (unless otherwise stated): Bloomberg.
Not for retail distribution – this document is intended for professional clients only
Disclaimer

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 (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund