Heavy spending won’t help retailers

Strong consumer spending statistics for January came as a surprise to fund managers, but they do not believe it changes the outlook for retailers.
Last week’s figures from the Office of National Statistics show that retail sales in January rose by 0.6%, following a 0.9% increase in December. Expectations were for a rise of about 0.1%. The figures represent a rise of 5.6% over the same period last year, confounding widespread expectations of a consumer slowdown and raising the spectre of further interest-rate rises.
Patrick Evershed, manager of the New Star Select Opportunities fund, says that price cuts and technology changes have brought about these surprise figures: “Retailers have cut prices quite strongly and this has given a short-term boost to retail demand. Also, technical advances have helped. Digital TVs and cameras have been very popular, as well as new mobile phones with built-in cameras.”
Evershed believes there will be a continued squeeze on retail sales from rising interest rates, higher utility and council tax bills, and increased savings. He continues to be underweight in retailers, especially furniture: “It is going to get tougher. Overall, there is quite a bit of pressure on profit margins.”
However, he believes that China is having a positive influence, enabling some retailers to manufacture goods more cheaply and therefore increase profit margins.
John Chatfeild-Roberts, head of Jupiter’s fund of funds team, says the figures represent only one month’s data and do not change the overall outlook: “UK interest rates are going up, though how much and how fast, we’re not quite sure. The key thing is that at some stage there will be a slowing effect. In the US, they are predicting 5% economic growth. Over here, people are getting worried about 2.5% growth. They should be happy.”
Leigh Harrison, manager of the Credit Suisse Income fund, says: “Retailers will soften as interest rates rise. One month does not give us any reason to change our view. However, there are still pockets of value in the retail sector.”