There’s been a vague hope in some quarters that the collapse in the pound would be good news for Britain, in that it would boost exports and help us rebalance our economy. It’s early days yet – but so far the signs on this front aren’t encouraging.
In November, exports took a dive. The value of British goods sold abroad fell by 5.8% during the month, pushing the trade deficit on goods to a record £5.8bn, despite the weak pound. Hoping for an export boom is fine if you’re the only economy in trouble – unfortunately, with belts tightening around the world, no one else wants to buy anything either.
So where does this leave investors? Well, oddly enough, it means that some of the best companies in the UK to be in at the moment are the ones catering to falling domestic demand, rather than collapsing global demand…
The collapse in the pound isn’t helping British manufacturers
Exports and imports are falling across the globe – trade flows are shrinking rapidly. There are plenty of reasons for this. Consumers aren’t buying as much, so companies have got unshifted stock that they need to get rid of before they buy any more. There have also been problems with securing trade credit – for more on this, see: Is international trade grinding to a halt?
So it’s perhaps no surprise that the weak pound hasn’t done much for British exports. As Hetal Mehta of the Ernst & Young Item Club put it, “the impact of weak sterling is being completely dwarfed by a collapse in world demand.”
This is all bad news for manufacturers of course. With domestic companies also suffering falling demand, you could be forgiven for wondering if there’s anything worth buying out there. But there are some consumer-facing stocks which are worth a look. People still need to buy stuff, and they still need money to do it.
Pawnbrokers are profiting from bankers’ woes
Of course, you can’t buy just any consumer-facing stock. One group doing well out of the downturn is the pawnbrokers. There are two listed pawnbroking groups in the UK, H&T (LSE:HAT) and Albemarle & Bond (LSE:ABM), both of which we’ve tipped several times over the past couple of years.
Yesterday, one of the two – H&T – said that its profits would beat expectations. The credit crunch has been good for the company. With bank lending drying up, the group’s branches are kitted out like building societies, says The Times. As chief executive John Nichols tells the paper, “We are trying to provide the sort of environment that we and others do so that people see us as an alternative for short-term financing.”
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Canny lenders should be able to do well out of a situation where banks are shutting off credit to everyone possible, regardless of their merits. And because of the large proportion of jewellery used as collateral, pawnbroking is also a play on the gold price.
You can read more about the sector here: Boom times for the world’s econd-oldest profession.
The other group that should be able to tough out the recession, regardless of how hard things get, is the one that supplies the essentials – the ‘needs’, rather than the ‘wants’. People still have to eat and wash and buy medicines after all. You could invest in a consumer staples producer (such as Unilever or Reckitt Benckiser) and there’s nothing wrong in doing so, though these stocks now look rather expensive for my liking.
The other option is simply to buy the companies who sell those goods – the supermarkets, in other words. Pile it high, sell it cheap works just fine in a recession, particularly as suppliers’ costs should be coming down along with raw material prices. With less pressure on margins from the supply side, supermarkets can afford to draw customers in with pricing promotions.
Why Tesco is our favourite supermarket
For some time our favourite in the sector has been Tesco (LSE:TSCO). Yesterday’s results were solid enough for the group. A lot of newspaper reports described the 2.5% rise in like-for-like sales as the weakest Christmas since 1993, but adjusting for the VAT cut, true like-for-like growth was in fact 3.5%, the worst figure since – well, last Christmas.
There’s a lot of talk of Tesco’s rivals catching up with the group and certainly other supermarkets have been performing well. But in this economic climate, I’d always be inclined to back the dominant player over its rivals, simply because it should have more room for manoeuvre. Also, its international units are doing very well, with total sales growth of more than 30%. So at least Tesco is one British export that’s doing pretty well for itself overseas.
We mentioned in MoneyWeek that Tesco looked like a ‘survivor stock’ a few months ago, and more recently, my colleague David Stevenson said it was worth a nibble: Is it time to buy Tesco?). The share price has risen a fair way since then (more than 15%), so if you bought it then you might want to take some profits. However, the stock still yields more than 3% and as long as you can accept that it might go down again along with the rest of the market when the next slump comes around, I’d feel comfortable holding onto Tesco.
Of course, if it’s income you’re most interested in, you can get a yield of more than 5% on Tesco – by buying its corporate bonds. We’ll be looking into this, and corporate bonds in general in more detail in this week’s issue of MoneyWeek, out on Friday. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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