UK retailers may blame the weather for poor sales but the excuse is wearing thin
UK retailers may blame the weather for poor sales but the excuse is wearing thin © Bloomberg

Predicting where the UK stock market will go next is as hazardous as forecasting the weather. Few would have prophesied that a cold snap dubbed Beast from the East would show up in retailer results as the primary culprit for poor sales.

Likewise, with economic growth near standstill, together with the ongoing Brexit shambles and carnage on the high street, no one expected the FTSE 100 to be marching towards 8,000 when just a few weeks ago it passed 7,000 going in the opposite direction.

Investor sentiment is as fickle as the weather — from optimism in January to negativity in February and March and back again.

Take a look at a graph of the FTSE All-Share and the yo-yoing is clear. The turning point came on March 26. Since then, and until mid-May, the FTSE All Share rose 445 points, about 12 per cent.

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Here’s the rub, though: just 10 stocks accounted for more than half of that rise (229 points of the 445) and I list these below.

Ten stocks powering the rise in the FTSE All-Share

CompanyPoints increase since March 26
Royal Dutch Shell (A and B shares)76
Rio Tinto13
BHP Billiton11

Investors seem to be turning defensive, which some will say shows the bull market is maturing. Higher quality defensive stocks such as pharmaceuticals and big-brand consumer staples tend to do well in the latter stages of a cycle.

Others argue that this rotation to quality is premature, noting that bond yields are going up — a sign that the economy is improving while monetary policy remains supportive.

With domestic stocks in the bargain bin and large-cap defensives accounting for the bulk of the FTSE’s rise, rushing to safety too soon could be costly. This is a tale of two markets: expensive international earners and cheap domestic equities. There couldn’t be a worse time to settle for a UK tracker or exchange traded fund, which by design will be weighted with the largest companies in the index. In the UK, this means piling into expensive consumer staples and the commodity giants.

Put differently, it is a stock picker’s paradise. Managers such as Sue Round and Ketan Patel, of the EdenTree Amity UK Fund, find value in unloved small and mid-cap companies. It is often mentioned that about 80 per cent of combined FTSE 100 revenues is generated overseas. What can surprise investors is that half of FTSE 250 revenues also comes from outside the UK.

One example in the Amity UK Fund is John Menzies, which will become the only listed global aviation services company when it disposes of its distribution arm this summer. Eighty per cent of the company’s revenues come from outside the UK. The shares look cheap, trading on 10x forward earnings with a dividend yield of more than 3 per cent.

Competitively priced mid-cap cyclicals with international exposure may provide a reprieve if the UK’s political situation is pushing you towards pricey defensive growth stocks. Nearly two years after the referendum, a government at war with itself has led to a lack of visibility and certainty for consumers and businesses. As one investor put it to me: “Brexit worries aren’t going away, so cheap on its own isn’t good enough.”

Britain’s FTSE 100, the benchmark index of oil companies and dollar earners, has been carried ever higher by oil hitting $80 a barrel and sterling weakness. Elevated oil prices, however, hurt the consumer and the risk is that the rise becomes a tax on growth, undermining the market rally. A slump in oil prices last Friday has already taken its toll, limiting the gains of Britain’s blue-chip index.

Back to the weather. Many UK retailers and leisure groups might blame the Beast from the East for poor results, but Next has been immune to the chill, enjoying a website boost.

Snowed-in shoppers did not stop spending: they simply hunted for bargains from the sofa. This underscores the weakness of the “blame the weather” argument. Yes, it affects footfall but it also shows why online propositions need to be watertight.

While screamingly cheap valuations are appealing, Alexandra Jackson of the Rathbone UK Opportunities Fund notes the “irreversible structural changes” faced by UK plc, stressing that these will not be erased by a short-term improvement in data.

To find value, investors need to consider the effect of these changes. Nowhere is this more evident than retail, where rumours of the death of the UK consumer have been greatly exaggerated. Granted, we are more cost-conscious but we’re spending differently, not necessarily less.

This shift may be obvious in your bank statements. Home telecoms and entertainment bills have gone up — look at the subscriptions to Sky, Netflix and Amazon Prime, topped up with the odd movie and, perhaps, another season of Peppa Pig.

The temptation for me to buy on digital platforms is never far away — and let’s not even start on the cost of my mobile phone, various app subscriptions and my Uber bill. Many friends have Deliveroo, JustEat and online gaming as part of their monthly household budgets.

The new online retailers, tech companies and online gaming names are not the only investment possibility — look at the logistics companies supporting the changes.

Political storms and inclement weather are not the biggest driver of success or failure for UK-listed businesses. It is their ability to adapt, survive or push change. Seek out the companies that can face down technological tidal waves, regulatory ill winds and the changing tides of consumer behaviour.

Maike Currie is investment director at Fidelity International. The views expressed are personal. Twitter: @MaikeCurrie

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