Leading fund managers have clashed over the outlook for UK retailers.
Schroders head of UK equities Richard Buxton (pictured) and M&G fixed income manager James Tomlins both see the potential of UK retailers, whereas Premier’s Simon King has been steering away from them.
Premier UK equities senior investment manager Simon King, who runs £220m of UK equities, warns that for the UK consumer the squeeze on disposable income will continue into 2012 and for that reason he has “resolved to steer clear of UK retail and leisure”.
He says he expects three to four years of no real wage growth and late 2012 for growth in the UK market in general. He sold out of Tesco, Sainsburys and Vodafone at the end of last year. Retailers are being squeezed by cost input inflation and less consumer discretionary income.
However, Schroders head of UK equities Richard Buxton sees the opportunity now to invest in UK retailers, as he believes that the current squeeze on UK consumers is about as bad as it is likely to get.
Buxton says: “If as a UK retailer you have a strong balance sheet, experienced and cautious management and a sustainable franchise, then you will survive the current tough times. Eventually, as the economy emerges from its current straitjacket, you will benefit from the reduction in capacity as others around you fail or shrink. It will be a long and difficult road, but current share valuations offer considerable protection against the shorter-term trading risks. For the patient investor, there will be great opportunities on the High Street in the coming years.”
M&G fixed income manager James Tomlins says: “The increased credit risk is reflected in higher bond yields. Add to this the fun and games surrounding the European sovereign crisis and it is easy to see why these names have suffered from the “sell first, ask questions later” knee jerk response of the market when risk appetite wanes.”
He adds that if they can find a company that can weather the current storm on the UK high street with its capital structure intact and buy some of their bonds at double digit yields, then this could be a great opportunity.
Legal and General UK equity income fund manager Richard Black urges caution over UK retailers ahead of the retail sales monitor from the British Retail Consortium tomorrow.
He says: “The British high street, and by extension the British retail sector has experienced a tough few weeks with Jane Norman and Habitat amongst the high profile casualties. We believe that with household debt at a high and real income under significant pressure, there is limited opportunity profit growth across the UK sector as a whole. A further contributing factor is consumers’ migration online, eroding the profitability of the physical store bases and pressurising returns.”
Black says there is some attraction for global luxury brands, which he believes will continue to grow robustly.
He adds: “We have a preference for companies like Burberry, a well managed and revitalised global brand with strong organic sales growth which has the ability to deliver attractive levels of profit growth. Ultimately current market conditions will see stock selection approach becoming ever more important. To that end we favour companies that can benefit from strong growth overseas as well as companies able to grow their business organically.”