RJH writes...

(17 October Update: Oh dear.)

Recently instructed politely to stop smoking carpet after suggesting that the bombed-out UK consumer discretionary spending sector had at least two potentially lucrative quoted companies, the scribe decided to take a closer look at the macro-data.

Exhibit 1: Last 24 months retail, GDP (by quarter) & house price data

Exhibit 1 shows the sad trend for retail, housing and GDP over the last two years. And within the slowing retail data lurks the collapse of bigger ticket items such as furniture sales. Thus a company like MFI can suffer 15% like-for-like sales drop and breach its banking covenants. Yet it is in that sub-sector one of the scribe's potential interests lies. On the one hand, short of an accounting fraud, it is hard to deny said firm's attractions; on the other, its numbers are beginning to look too good to be true in the greater context.

But what precisely is the greater context? Over the last decade GDP and retail sales have been about 70% correlated; house prices and retail sales about 69% correlated; and, for the benefit of the Chronicle's resident cynic, GDP and new car registrations about 73% correlated (car retailing being where the other potential investment is parked). Exhibit 2 illustrates.

Exhibit 2: Retail, GDP and housing data 1985-2005 (plus GDP forecasts)

Accepting as valid a 2006 GDP forecast of 2.2% growth alongside these correlations suggests aggregate house prices increase in the single digits; and that a modest pick-up in retail sales occurs. But if either development were other than patchy it would be surprising.

There are risks, of which: the UK is becoming a net importer of oil again; Government borrowing plans are at risk from fewer than forecast corporation tax receipts (to mention but one problem); and housing appears to be at the downward inflexion point in its 7 year cycle (if the existence of this cycle is accepted).

Conclusion: ease up on the carpet. Contrarianism is one thing, but at current equity prices retail investments still carry too much risk. However promising individual companies in the sector may appear, keep a watching brief for now.

Sources: Nationwide's house price index; Her Majesty's Treasury; UK Department of Transport. The 2006 GDP forecast is based on the average of 26 City of London firms and 13 non-City forecasts made in September 2005. HMT's own forecast of 2.5%-3% is excluded; and it is notable that one forecaster is predicting a contraction of -0.2%.

Bookmark and Share

0 comments

Related Posts with Thumbnails