Investors who sold out of retailers during the Covid pandemic should consider buying back in now as they are being priced for recession.
That is the view of Nick Clay, manager of the TM Redwheel Global Equity Income fund, who said these stocks have been “murdered” so far this year.
He owns two types of retailer: luxury and fast fashion, both of which have strong selling points.
Taking luxury first, the likes of Richemont (the firm behind Cartier), Kering (Gucci) and Tapestry (Coach) all appear in his portfolio.
“These have been hit really hard because for some reason people seem to think that the Russian oligarchs that have been sanctioned and their families are the only people shopping at Cartier,” he said.
This has been compounded by the continued net zero policy in China, which has kept the country in lockdown for much longer than the majority of the rest of the world.
“We have already been through a pandemic and lockdowns in China and found out that people were comfortable buying all of this online. I think it is ridiculous,” said Clay.
Equally, people are worried about inflation, which has ramped up around the world, hitting 9% in the UK last month. This should have an effect on consumer spending with people tightening their purse strings.
“But ironically in these businesses the more they put the prices up the more people want them. Therefore they have pricing power and can certainly survive in an inflationary environment,” he noted.
Turning to fast fashion, the global fund manager said he also owns Inditex, which is the firm behind Zara.
“What I find amazing is that the market has its knickers in a twist about a potential recession and has marked the company down to the same share price that it was on in March 2020 at the bottom of the pandemic,” said Clay.
Back then, all of the firm’s 6,000 stores were shut while the online business accounted for just 10% of sales. Even if investors believe a recession will take hold in Europe, he said that it is unlikely to be as severe as the one in 2020.
“Equally, the business would be going into it in more robust shape anyway because the one thing the pandemic did was drag forward its online business,” he said.
Zara’s online business now accounts for 35% of revenue and has gone from being a cost to something that is contributing to the margin, the TM Redwheel Global Equity Income manager noted.
Calum Bruce, manager of the Ediston Property Investment Company, is also backing retail to make a recovery.
The real estate investment trust is 98% invested in retail warehouses with just 2% in leisure centres, with the likes of B&Q, B&M and Marks & Spencer among its largest tenants. This retail allocation is up from 75% before the pandemic.
“At the start of that pandemic, all retail valuations were being battered equally hard and we were trying at great pains to let people know that it was not the case for all retailers equally, especially in the out-of-town market where we've got most our retail exposure,” said Bruce.
While much of the sales moved online, he noted that it is no longer about stores and online being against one another, but rather complementing one another.
“They’ve realised that physical stores have an extremely important function for their business. While the pandemic accelerated online sales quicker than forecast, we're now seeing those levels of sales beginning to drop off as people have more choice and go can go back physical stores,” he said.