The fall in oil, other commodities prices and the slowdown in China has been dragging down UK equities as an asset class for some time already, but the strength of consumer confidence and resulting performance of retail stocks has been propping up UK equities funds to some extent.
The “robustness of the consumer sectors” as described in a recent research report from Fidelity is something many investing hopes are pinned on this year and beyond.
Over the past couple of weeks however as a succession of the big high street names such as Next have reported poor figures, or in the case of the unlisted BHS gone bust, it looks like that resilience has its limits.
While there is more to the consumer sector than retailers, their troubles will undoubtedly have implications for UK equities funds of all stripes. The passives will have another major headwind to add to the commodities related falls while active managers will have their options further limited.
It is not just clothing and homeware chains which appear to be struggling, it is also the supermarkets like Sainsbury’s, which had until recently been showing some signs of coming to terms with the increased competition in the sector which had knocked them for six over the past several years.
"While there is more to the consumer sector than retailers, their troubles will undoubtedly have implications for UK equities funds of all stripes"
As Seven Investment Management’s Justin Urquhart Stewart pointed out in his podcast, the retailers' struggles seem to fly against logic, given the relatively healthy employment level, low petrol price and wage growth coming through.
“Not a good week for the high street I think most would agree,” said Urquhart Stewart. “It hasn’t just been BHS or the once highly regarded Austin Reed. It’s a tale of decline and failure in the UK retail world that makes for rather tortuous reading. It may seem rather strange given the economy is doing quite well and wages are running ahead of inflation for the first time in some years. People might actually be better off, but the question is do they actually feel it?”