Inflation spike damages UK retail sales
According to the Office for National Statistics (ONS) UK retail sales fell 1.2% in May compared with last month. Meanwhile the annual rate of retail sales growth slowed to its lowest level since April 2013, coming in at just 0.9%.
The ONS announced this week that UK inflation had jumped to a four year high of 2.9%, the effect of which is hurting UK consumers.
Nathan Sweeney, a senior investment manager at Architas, said: “Following the ever higher inflation figure out this week, consumers are undoubtedly being squeezed and this will have an impact on the next GDP figures, which have been heavily reliant on consumer credit in the past 12 months.”
So why has inflation been rising? Tilney’s managing director Jason Hollands explains a significant factor has been the rising cost of imports as a result of the slide in sterling over the last year in the aftermath of the EU referendum and an additional round of money printing by the Bank of England.
“In the near term this will further compound market anxiety towards domestically-focused stocks that have already borne the brunt of political uncertainty in the aftermath of the General Election,” Hollands said.
“Vulnerable sectors include retailers and leisure as well as the domestically-focused banks such as Lloyds and RBS. But the UK stock market and UK economy are not one and the same thing, so despite concerns about the UK domestic economic outlook, the international companies in the FTSE 100 should prove much more resilient given over 70% of their aggregate earnings exposure is outside of the UK.”
For Hollands the pick-up in inflation at a time of ultra-low interest rates certainly serves as a reminder for savers not to hold too much of their long-term assets in cash or in currently very low-yielding fixed income securities. Instead he argues the focus needs to be on real-assets and equities.
“In particular, the current environment lends itself to quality growth stocks with global diversified revenues, that have strong cash flow generation and business models that can deliver sustainable growth through the economic cycle,” he said. “Funds that specifically target such companies include Evenlode Income, Lindsell Train UK Equity and Liontrust Special Situations.”
Sweeney however said Architas is maintaining an underweight position in UK equities and is increasing exposure to defensive large caps at the expense of cyclicals and mid-cap stocks.
“Overall the UK stock market has seen a strong run since the referendum vote driven by a weaker pound and rebound in commodity stocks,” he said. “Much of that is now factored into markets and after such a strong rally valuations look expensive, especially given the inflationary impact on consumer confidence.”