Although warnings of difficult times ahead have been well signposted and warned of, it took the dreadful sales figures from some of the retailers and builders to ram home the effect of what has been developing over the past few months.
Hyperbole has been cast around with gay abandon over the past few months, with dire warnings of depression and recession. However, like most similar issues we have to actually feel the real effect before we take any real notice. After all a “slowdown” is when it is reported in the newspapers, a recession is when the neighbour loses his job, and a depression is when you finally lose yours. Thus you can travel around the UK and find areas completely unaffected by any talk of slowdown. Last week I was in the Lake District and such worrying talk was met with raised eyebrows “Crisis? What Crisis?” Shops still busy, hotels fully booked and a holiday season looking quite positive (presumably with a weaker Pound keeping more of us at home).
Is there just a delay as the ripple effect of the slowdown hasn’t spread out far enough from London yet? Or are we really just talking ourselves into gloom?
The answer was perfectly illustrated in the figures from Marks & Spencer and Taylor Wimpey. It’s tough and likely to get tougher.
It is, though, easy to generalise. Not everyone is affected the same way. Take a look down the high street and there are some notable resistors and even beneficiaries to this air of despondency. Take some of the supermarket and food shops for example, where the likes of Iceland (no, not the National hedge fund) along with Aldi and Lidl are all winning customers looking for cheaper prices away from the main supermarkets and M&S. Even the local fruit and veg markets have seen a pick up – and that can only be a good thing.
The same applies to clothes, where the discounters such as Matalan and Primark are similarly winning ahead of the middle ground outlets such as (again) M&S and Next. Some may rile at such cheap clothes being sold at rock bottom prices and quite valid concerns of exploitation have been aired more recently – but here is where a slowdown puts our conscience to the test – do we want more expensive goods made in an ethical manner, or when it comes to the wallet do we just want the best deal?
Equally at the top and international end of the retailing market, it is quite likely that the premium and “aspirational” brands will remain initially unaffected. The demand for the Burberry brand around the globe is still strong and still growing in the East, although closer to home it is having to continue to shrug off the faux Burberry Chav association which it certainly did not want.
One surpassing success has been HMV - best known as a CD store – so on that basis surely a business typically cannibalised by internet sales. But not so – in fact the company has reinvented itself as a games and entertainment chain with downloading facilities. This turnaround has been all the more remarkable not just because of the new trendy games coming on stream but also a new, older customer base wanting a different style of games and download facilities. So it can be done – unlike, I fear, Woolworths.
So all is not lost in this slowdown but rather the economy is changing shape - and with it so are your investments.
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The other area of fear last week was yet again the banking sector. The large capital injections for HBOS and Barclays have attracted more attention to the sector. By one way or another, these banks will get their rescue packages together and, along with RBS after their huge rights issue, will now look more secure in this uncertain world. They seem to be priced for bad news – the question is how much more?
Banks hate cutting their dividends as that is the quickest way to upset your most senior shareholders – the pension funds and life companies. These companies hold huge shareholder voting power and can decide who runs those banks, so few bank boards will want to stir up their angst and ire. The real area of potential bad news is much more likely to come from lower profit figures, along with a percentage being allowed for the unknown and unexpected financial explosion that will most likely occur at most banks, especially in the latter phase of a slowdown.
So it is a question of trust. If you feel that the big banks have revealed all their losses then maybe they are past the worst; if however you if you still can’t trust them, then keep your powder dry and your wallet shut.
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And finally…… good to hear that in the build up to the Olympics the British can excel with another world record. With wonderful shades of Wallace and Gromit, a British man has built a pop up toaster that can shoot a slice of bread 8ft 6ins into the air. Brilliant, but I bet it is still burnt.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited