Market Update 13th January 2025

Retail’s Travails

2025 has been brimming with headlines. We’ve had alarming reports that global warming is happening faster than previously feared, the outbreak of devastating fires in California, Elon Musk’s intervention in UK politics and some characteristically punchy views from President-elect Donald Trump. So far, he’s not ruled out an invasion of Greenland and demanded NATO members pump 5% of GDP into defence budgets. Imagine what it’ll be like after he is sworn in…

The Donald will be pleased to see that the economy he’s about to inherit appears strong. The latest US jobs data showed job creation has been a fair way ahead of expectations. That has, however, served to push government bond yields up. The net effect on equity markets has been negative too as the effect of a stronger economy is more than outweighed by the higher discount rate.

News emanating directly from the equity markets has been relatively thin on the ground, as one might expect given we are still a couple of weeks away from the deluge of full year numbers. The few updates that have surfaced have, however, revealed a theme.

That theme is negative share price movements in the UK’s retail sector following the release of their numbers. Taken in isolation, this implies Christmas has not been the most wonderful time of the year. But if we dig a little deeper, this interpretation may be a little unfair. Take Marks and Spencer, for instance. For the record, this is not a share we follow closely, or hold widely in client accounts. However, it is useful in that it rather neatly sums up the dynamics in the UK retail space, which in turn is a good barometer for the strength of the UK consumer.

The Christmas period saw Marks and Spencer sales rise 5.9% in the UK, well ahead of the rate of inflation. How that can be consistent with the 8.5% share price decline on the day of the news is a very reasonable question. The answer lies in the fact that trading over most of 2024 had been positive enough to inflate expectations to a higher level. A figure in excess of 6% was baked into forecasts. Of course, undershooting  expectations is never a good thing, but to assume the UK consumer is in a perilous state because Marks and Spencer didn’t clear that lofty bar is just not correct.

Unfortunately, to accurately assess where we are in retail is difficult. I’m not sure what the seasonally appropriate version of one swallow doesn’t make a summer is (maybe that one snivel doesn’t make a cold?) but that adage certainly applies. Retail sales in any one period are influenced by all sorts of factors, the weather to name just one. We’re also seeing a sharp change in purchasing patterns, with a greater percentage of sales shifting online, and shoppers, egged on by Black Friday discounts, ever more active earlier in the Christmas period.

This is before considering what the impact of the budget will be. Labour are adamant they delivered a budget for growth, but the national insurance increase is a significant burden for many in the labour-intensive retail sector. Forecasts have come down in response and we’ve started to hear some lament weaker consumer confidence. At this stage it is not clear if that is caused by the tax hikes, or it is actually just management creating excuses for a poor performance.

With so many moving parts and such little certainty, surprises, both positive and negative, are common in the sector. We prefer higher margin, more predictable investments.

As we head into 2025, valuation remains challenging in places, but we continue to believe that there are still plenty of good options available. The tech sector’s potential supports analyst optimism for corporate earnings growth, and balance sheets are generally strong. That said, we can’t ignore that we are in an increasingly uncertain and unstable world. That macro backdrop could increase the risk of volatility. In that context, grounded and considered investment selection becomes all the more important. This is where our focus remains.

George Salmon – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.