Investors' eyes are firmly on the retail sector in the run-up to this year's festive shopping frenzy. More than half of Barclays stockbrokers' clients polled said the UK retail sector is on their radar: 39 per cent said they already hold retail stocks, while 15 per cent are monitoring the sector for opportunities.
Bargain-hunting Britons and the rise of the Asian consumer are changing the way people shop, according to investment experts.
Rahul Sharma, managing director of Neev Capital, the investment manager with offices in London and New Delhi, told The Independent that retailers tapping into the trend for "two-speed shopping" – the wealthy versus the squeezed mainstream – would be the main beneficiaries.
"Things have never been better for the rich," he says. "Stock markets and prime property have rebounded, increasing the wealth of many significantly. In the 2008-9 crisis, confidence plunged the most among wealthy shoppers. Now that the world didn't end after all, they are back, consuming with gusto.
"Luxury goods companies are well positioned to capture this, but there are winners outside luxury."
So what should you buy? We look at fund managers' and brokers' recommendations:
The Barclays research shows that almost half (47 per cent) of investors believe supermarket giant Tesco has the best prospects, despite it recently revealing its first set of negative results in 20 years.
With inflation running at more than 5 per cent and negligible wage rises, British consumers' real income is dwindling at an "alarming rate", says Juliet Schooling Latter, head of research at broker Chelsea Financial Services.
"In the UK, we tend to see a greater increase in spending for Christmas, as it's an extended holiday, and the outlook for consumer spending is so dismal overall that it's quite possible that it will surprise on the upside, which should be reflected in a boost to share prices," she says.
"We may see some stocks benefit from shoppers economising: Tesco is hoping to take market share in toy sales and is being quite proactive with special Christmas offers. Other food retailers might also benefit, such as Sainsbury's, Morrisons and Booker."
Tesco remains The Share Centre's preferred play in the retail sector, largely due to its international arm. "A large player during the Christmas period for food, clothing and gifts, we expect Tesco to benefit from a one-stop-shop style of consumer spending," says investment research analyst Nick Raynor.
He also likes Associated British Foods, which owns Primark. "We expect it to benefit during the Christmas period as the weaker UK economy forces consumers to search for cheaper alternatives," adds Raynor.
On the high street, retailers that stand to benefit from a sharp fall in key commodity inputs, such as cotton, could fare well. Schooling Latter likes Debenhams, Marks & Spencer and Next for their strong dividend yields of 5.5 per cent, 5 per cent and 3.9 per cent respectively.
Ben Yearsley, an investment manager at Hargreaves Lansdown, the adviser, likes Richard Buxton's Schroder UK Alpha Plus fund, which holds Next, Debenhams and Home Retail.
"I can't get too excited by the prospects for UK retail, though many have been predicting doom and gloom for the sector for five years or so and specific retailers might prosper due to having the latest product or fashion," says Yearsley.
Inditex, the fashion group which owns Zara, is one of them, according to Sharma. "When shoppers are feeling blue, it's paramount for retailers to offer something unique, be it service, product or experience. Zara creates tremendous excitement with frequent range changes at a much lower price point."
Conversely, those that offer little by way of differentiation will suffer. "That's why we've seen brands like Habitat, Moben and Focus collapse recently," adds Sharma.
Shoppers are increasingly using the web to hunt for value. Figures from the Office for National Statistics show that the internet already accounts for 10 per cent of UK sales. In September alone, web sales were up 30 per cent compared with a 5 per cent rise overall.
Sharma says: "It will be an online Christmas; Amazon is the most visible beneficiary."
Meanwhile, Fidelity likes Ocado, the online supermarket, as a growing number of British consumers get their groceries online, while stockbrokers Killik & Co and The Share Centre favour ASOS, the online fashion retailer. It recently reported a 60 per cent jump in first-half sales, mainly driven by international operations. UK sales grew just 8 per cent, below broker expectations.
Raynor says: "The economic pressures are causing a significant headwind, but we expect the increasing trend of shopping online will see ASOS benefit during the festive period."
Sales of technology products tend to spike over Christmas.
The Share Centre's preferred telecoms play is Vodafone. "The increasing demand for smartphones has been reflected in a rise in data sales and we expect this trend to continue during the festive period," says Raynor.
"Vodafone continues to maintain its leadership in this area through investment in the quality of its network. This is one for investors to buy for long-term growth and a stable and increasingly attractive yield."
Meanwhile, electronic components manufacturer Laird was the top contributor to the performance of Fidelity Special Value, managed by Sanjeev Shah, during the first half of 2011. Laird's shares jumped after it rejected a takeover proposal from US rival Cooper Industries and announced plans to exit its underperforming mobile handset antenna business.
Shah also holds Ericsson, in his Fidelity Special Situations fund, in the belief that it has the strongest franchise and technology in telecoms equipment. "It stands to benefit strongly from the growth of smartphones and mobile data, but is unloved and under-owned, with low a valuation," says Shah.
Dixons is also trading cheaply, at five times earnings, but could struggle amid a growth in internet purchasing of technology, says Schooling Latter.
Sharma believes companies selling electrical goods easily bought at several retailers, such as Best Buy, Argos, Currys and HMV, will struggle the most this Christmas.
Luxury goods "stand out in a stock market grappling with concerns over future growth and margin pressure", according to Neev Capital's Sharma. "They are rare, have pricing power and enjoy strong entry barriers: therein lies their appeal," he says. "The star attraction is their exposure to the phenomenal wealth creation in the emerging world, where they are gaining hugely aspirational shoppers. Already, for many brands, nearly half of sales come from the new world.
"China, well on its way to becoming the largest luxury goods market in the world, has captured the imagination of most companies and investors. However, the industry is not even scratching the surface of India's potential, where conspicuous consumption rules."
Sharma's favourite stocks are Richemont, which owns Cartier and Montblanc, US designer brand Ralph Lauren and cosmetics giant Estée Lauder.
Killik & Co also likes Richemont, while Fidelity tips LVMH, the world's largest luxury goods group, which owns Moët & Chandon, Hennessy and Louis Vuitton, as beneficiaries of rapid consumption growth in emerging markets.
Meanwhile, Britain's Burberry – a top 10 holding in the Schroder UK Alpha Plus fund – should also benefit from Asian consumers adopting expensive Western tastes. Its revenues jumped 30 per cent to $1.3bn in the six months to 31 September, fuelled by increased demand from Asia. However, its shares have been dragged down by the wider market, dropping around 20 per cent since July.
'There will be winners and losers'
With rising unemployment and the eurozone debt crisis putting a recession back on the cards, the backdrop to Christmas is not exactly rosy – and there will inevitably be losers.
"In such a climate, there will be winners and losers; the risks of backing the loser could be more damaging than usual," says Adrian Lowcock, a senior investment adviser at Bestinvest, the broker. "A weak Christmas could push some retailers over the edge, while picking a winner might not be as rewarding if sales disappoint across the board."
Juliet Schooling Latter, of Chelsea Financial Services, says cyclical retailers are out of favour for a reason. "Investing with a view to a spike in spending at Christmas is a little risky," she warns.
"A short-term boost to retailers from Christmas is unlikely to alter their prospects over the next few years. It's a highly competitive environment, with discounts very much in evidence and likely to remain in place for some time."
Lowcock recommends buying into funds with exposure to consumer stocks that aren't pure retail plays. He tips First State Asia Pacific, Artemis Income and Threadneedle UK Equity Income, which holds Unilever. "Companies like these, which have strong brands and international focus, will also benefit from the growth of the Asian consumer," he says.
JOHCM UK Opportunities, managed by John Wood, is another fund placed to take advantage of a re-rating of consumer stocks, adds Schooling Latter. The fund invests in consumer goods (17 per cent versus an 11.7 per cent FTSE All-Share weighting) and services (22 per cent versus 9.6 per cent).Reuse content