As Covid vaccinations roll out across the country and government restrictions start to ease, many investors may be looking for domestic UK stocks poised for a surge in earnings as the economy opens.
However, the stock market is forward looking and therefore many of the UK stocks may already be pricing in any future benefit from the economic reopening.
Indeed, after the conclusion of Brexit and steadily progressing vaccine rollout, the FTSE All Share has gradually risen upwards over the last three months.
Performance of FTSE All Share over 3 months
Source: FE Analytics
However despite this rise, VT Tyndall Real Income manager Simon Murphy said: “There is still plenty to go for in UK reopening opportunities, particularly consumer exposed stocks.”
Although last year’s UK GDP fall of 9.9 per cent was the worst yearly figure for 300 years, Murphy said this provides the potential for an “equally vigorous upside surprise to economic activity” as the country exits lockdown.
Additionally, because of the forced lockdown and the government’s financial support that followed, there has been a large build up of corporate and household excess savings.
“These excess savings, particularly on the consumer side, are a key reason why we think there is still plenty more scope for UK consumer related stocks to perform strongly as we emerge from lockdown,” Murphy added.
“There are numerous anecdotal signs of significant ‘pent up’ demand after over a year of rolling lockdowns and households, generally, have the financial capacity to fulfil that demand.”
He also cited the underlying strength of the UK housing market, which appears to be accelerating in early 2021. Murphy sees this as a key indicator of financial health of UK consumers.
“Finally, the actual evidence on the ground also appears highly encouraging,” he said.
UK retail sales volume data from the Office for National Statistics indicates a “strong” 5.4 per cent volume growth in March - before non-essential physical stores had reopened on 12 April.
“So, we feel pretty optimistic that a sustained period of consumer strength, probably surpassing current positive expectations, is likely still to come in the UK,” Murphy said. “Furthermore, when we drill down into individual stocks in the area, we still find plenty of valuation appeal.”
As such, the manager highlighted three of his favourite UK stocks in the consumer space. The three stocks are JD Wetherspoon (pubs), DFS Furniture (sofas) and Next (clothing and homeware).
“All three have incredibly strong franchises and all, in our opinion, will emerge from the pandemic in a stronger position relative to their competition than when they went in,” he argued.
Share price performance of JD Wetherspoon, DFS Furniture and Next year-to-date
Source: FE Analytics
Murphy said: “DFS, for example, estimate they have taken an additional 2 per cent market share nationally over the last year as weaker players have exited the industry.
“They now have an estimated 34 per cent market share, over three times bigger than their nearest competitor.”
He highlighted charts from the equity research firm Redburn Ideas that show the three companies’ relative estimates momentum (left charts) and return on capital (right charts).
Source: Tyndall Investment Management, Redburn
Murphy continued: “From an estimate perspective both DFS and Next have already been surprising positively, reflecting the strength of their online propositions during lockdown.
“JD Wetherspoon, clearly, has not yet started surprising positively as their pubs have remained largely closed along with the rest of the hospitality industry.”
However, he highlighted the far-right column of the right-hand chart for each of the three companies.
“For each company the market is not yet, in our opinion, pricing future returns on capital in any way excessively optimistically,” he said.
“In fact, we fully expect those return on capital ‘blue bars’ to continue rising back towards levels more akin to historical performance in due course.
“On that basis there would appear to be plenty of scope for further substantial share price recovery from here.”