2017 was a bad year for UK consumers. Mediocre wage growth combined with resurgent inflation resulted in a reduction in real take-home pay for the average UK household, reversing the 2015/16 recovery we’d enjoyed. This drop in consumer spending power was reflected in the performance of the FTSE All-Share General Retailer’s index, which returned just 1% in 2017 (compared with 13% for the broader market).
But things could be about to change. In March, we saw two data releases that, in tandem, could provide a meaningful positive boost to the UK consumer.
First, CPI inflation for February, while still ahead of the Bank of England’s 2.0% target, fell from the 3.0% level reported in January and undershot estimates at 2.7% (vs. expectations of 2.8%). Second, wage growth for January increased to 2.6%.
Source: Bloomberg, Office for National Statistics (ONS), J.P. Morgan Asset Management as at 31 December 2017. *Nominal wages include bonuses.
The gap between wage growth and inflation may still be negative, but it is narrowing and there are some potential positives on the horizon.
The spike we saw in inflation through 2017 was primarily due to imported inflation – whereby the fall in sterling against the dollar meant that the cost of imported goods increased. However, sterling has now recovered much of this lost ground, softening the imported inflation headwind on a forward looking basis.
There are encouraging signs for nominal wage growth too. Through February and March we’ve met with over 60 management teams of UK-listed companies and one of the recurring themes has been wage inflation.
The question, then, is how to position portfolios to benefit from this trend. The woes of high street retailers go deeper than the recent spell of negative real wage growth – legacy leases dating back to the last cycle have resulted in high fixed cost bases that have not adjusted for the fact that consumers spend an increasing portion of their disposable income online or increasingly choose to purchase “experiences” over tangible things.
These negative long-term trends make it important to pick winners within the sector and our approach has been to shun the structurally challenged stocks in favour of stronger categories, such as discounters or businesses with a strong presence in travel hubs or more of a leisure-based offering.
The move towards positive wage growth may be at an early stage for now, but with sentiment towards the UK at an extreme low any small change in perception could have a material impact on valuations.