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Lifting the lid on the UK consumer

Leigh Himsworth

Leigh Himsworth - Portfolio Manager, Fidelity UK Opportunities Fund

The British rarely get over-excited, but even taking into account this natural gloom, a UK consumer confidence reading of -13 in March is decidedly weak! Such a low reading is normally found in recessions.

Lifting the lid on the UK consumer

Perhaps it is just the uncertainty of Brexit that is hanging over us like some unwanted cloud, and if this is the case then how could the consumer react if such uncertainty was lifted?

Numbers pertinent to the consumer suggest a rather different tale to this pessimism - employment levels are near record highs, with a labour pool larger than ever. Unemployment is currently running at 3.9% with the optionality of this number decreasing further as EU workers may choose to drift back home post-Brexit.

Monetarily the consumer is in an improving position with wage growth currently running at 3.4% and the National Living Wage having just risen by 4.9% from the 1st of April. It is likely that such a step feeds through to businesses, in addition to Auto-Enrolment contributions rising. Such inflationary numbers are attractive when considering that interest rates are likely to stay low, short rates at 0.75% and the UK 10 year yield near 1%.

More bang for your buck

One could argue that the fall in spending on larger ticket items confirms these worries with car sales, in particular, suffering. This, though, may well be a structural issue as consumers are simply uncertain on the outlook for the internal combustion engine vs. electric vehicles, in addition to a decline in youth seeking to own vehicles.

It would also seem that, in addition to the obvious move to online shopping, customers are looking for “more bang for their buck”, seeking a longer replacement cycle.

So how can we as investors benefit from this, whilst avoiding some of the traps? Our strategy in the Fidelity UK Opportunities Fund is to combine quality longer-term plays with some ‘self-help’ stories - the recent turbulence in markets has allowed us to emphasise this bet, adding to some of our favoured positions.

For me, a couple of strong longer-term play examples are Morrisons and Cranswick. Morrisons should be ideally placed to benefit from the longer-term trends of general population growth and gentle inflation, with the nearer-term support in wages and living standards, boosting typical customer living standards. Food producer Cranswick is a great way to play the consumer desire to purchase better quality products.

For self-help in the consumer space we have Cineworld, WH Smith and EI Group. The fortunes of each are being driven by management actions as opposed to relying on the vagaries of the economy to bail them out, each having been active on a corporate front with significant restructuring and acquisitions.

Two stocks that are proving more volatile in the near-term due to either general consumer worries or management share sales are Wizz Air and gaming company GVC.

More on Fidelity UK Opportunities Fund

Important information

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