The Investment Column: Picking up windfalls on the high street

With most retailers having reported their Christmas trading statements - Marks & Spencer and Burton, which report next week, are the notable exceptions - the high street book on 1996 is gradually closing. Though there were clearly exceptions, it was generally a good year for retailers with Dixons even pinpointing the start of the recovery to a specific week in the spring. This was when the Tessa money started to flow and tax cuts from the previous Budget came into effect.

As the chart shows, it was around that time that the retail chain store sector started to outperform the rest of the market. The sector continued its outperformance until last autumn when it started to decline. The reason then was fears that interest rates had bottomed out and that increases were on the horizon.

Investors will now be focusing on the prospects for the sector in 1997 and which stocks will prove the pick of the crop.

Most analysts are saying that 1997 will prove another good year for retailers thanks to rising consumer spending and the added factor of building society windfalls. Set against this is the prospect of rising interest rates which could dampen the celebrations considerably.

Sectors that should reap the most handsome rewards from 1997's windfall gains are likely to be the same ones which came top of the pile last year: DIY retailers, electricals and furnishings.

These will be boosted not just by consumers' propensity to buy big- ticket items after their building society windfalls but also the improvements in the housing market.

On that basis Dixons looks good value as the dominant player in electrical retailing. It should also benefit from the March launch of the new Nintendo machine, which is set to become the "must have" computer hardware of the year.

In furniture MFI has already performed strongly but could enjoy a further rerating in 1997. Other stocks with exposure to the housing market should also benefit. That means Kingfisher, which owns B&Q as well as Comet. Items such as carpets and beds should also do well, though shares in some retailers in this market, such as Carpetright, are already expensive.

But as the stock market typically looks around 18 months ahead, investors need to be aware of the trends not just for 1997 but for 1998 as well. That year is likely to prove much tougher for retailers as the building society windfalls fade away. And even if more societies do take the flotation route, the largest players such as Halifax and Woolwich will have been and gone. Add to this the prospect of yet higher interest rates.

All this could mean a switch to more defensive stocks at some stage this year. Top of the list here is Marks & Spencer, the Steady Eddie of UK retailing. A further move into mail order is expected following its housewares catalogue and this could prove a promising area.

Another candidate is Burton, where John Hoerner has overseen a dramatic improvement in fortunes. Though the Debenhams group has been the star performer in recent years, the long tail of fashion stores such as Burton, Top Man and Dorothy Perkins still has considerable room for improvement. It too has made a concerted move into mail order.

Another sector that could enjoy much better fortunes in 1997 than it did last year is food retailing because of its defensive characteristics. Forecasts point to real growth in year-on-year income, an expansion in like-for-like sales income and a recovery in petrol margins.

Nick Bubb of brokers MeesPierson has chosen Somerfield as his share of the year and analysts are predicting good things from other supermarket groups. We will learn more from the supermarkets next week with results from Budgens and Somerfield and trading statements from Tesco and Sainsbury.

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral