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Toy story tells investors to take care on retail

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Summary

Profit warnings and closures abound in retail but there are opportunities elsewhere for investors.

2 min read

Beware the risks of retail investing

The fall of Toys R Us and Maplin into administration this week is the latest reminder of the headwinds facing the UK high street.

The UK's biggest toy retailer and the major electronics chain both failed to find buyers for their struggling businesses – not the first sign of trouble in the industry. About a third of companies in the “general retailer” category of the FTSE issued profit warnings last year, according to Ernst & Young. And more retailers issued warnings in the first two weeks of this year than in the whole first quarter of 2017. In recent years well-known names like Woolworths, BHS and Austin Reed have vanished from the high street.

Store chains are finding it hard to cope with a weaker pound and diminished consumer confidence – with higher inflation and limited wage growth changing people’s spending habits.

We are therefore extremely cautious on UK retail and hold very little exposure. We see some selective investment opportunities available, though, when the focus is on a value-based business model and the products appeal to those feeling the pinch.

 

“At Coutts we use specialist managers to identify value in internet retailers, leveraging the expertise they have developed through their careers.”

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A key long-term driver of consumer behaviour is technology, as people increasingly choose the internet over the high street. While most purchases currently still happen in a store, the share of total retail sales taking place online rose from almost 3% to over 18% in the ten years from 2006, according to Deloitte. Some forecasters expect the number to reach over 30% by 2030.

At Coutts we use specialist managers to identify value in internet retailers, leveraging the expertise they have developed through their careers. We also have broader exposure to the technology sector, where we continue to see value. Innovative trends such as artificial intelligence and driverless cars have supported earnings growth expectations and it remains a preferred theme for us.
 

Powell praises US economy and Trump talks tariffs

Market volatility returned last week as new US Federal Reserve (Fed) chair Jerome Powell outlined his positive outlook for the US economy and President Trump announced tariffs on imported steel and aluminium.

This hasn’t detracted from our view of the US economy which continues to be a major driver of global growth.

We have been positioned for rising interest rates for some time with a low allocation to government bonds, which tend to weaken, and higher allocations to financial credit where yields are more attractive. A potential trade war with China was one of the risks we identified during the American election in 2016, but it had not materialised before now. It looks like President Trump is preparing to follow through on his campaign rhetoric which is spooking markets.

Emerging markets added to our investment performance in 2017 and this announcement has the potential to detract from the sector this year. Tariffs can also act as a drag on world trade generally, but we think it’s unlikely this alone could put a break on global growth.

The devil will be in the detail, however, and we will keep a careful eye on announcements going forward.

 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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