Keep calm and carry on: the UK consumer in the face of Brexit

It’s almost three years since the UK’s decision to leave the European Union plunged the UK into economic uncertainty.

Jobs losses, marked falls in growth and sterling, rising inflation and a host of UK companies moving their bases overseas were just some of the expert predictions ahead of the ‘Armageddon scenario’ of divorce.

The UK consumer was expected to be one of the hardest hit from the impact of Brexit: inflation was expected to result in an annual (and potentially permanent) cost of £404* a year for the average British household.

However, fast forward to 2019 and it appears the UK consumer has been resilient in the face of uncertainty. Consultancy PriceWaterHouseCoopers (PwC) says UK consumer spending has “driven the economy since the referendum and has itself been supported by recent increases in real income growth.”

This is supported by other figures showing that total household expenditure has risen by £106 billion (an increase of 8.6%) between 2016 and 2018**.

Where the money is spent

Brexit has not stopped UK consumers from dining out and having weekends away: spending on restaurants and hotels increased by £8.7 billion** between 2016 and 2018, while spending on furniture (£6 billion), clothing and footwear (£5.9 billion) and pet products and services (£2.2 billion) also increased. One area where the UK consumer has cut spending is on vehicles, with a fall £3.4 billion** (from £51.1 billion to £47.7 billion) over the same timeframe.

In terms of the future outlook for consumer spending, PwC warns that the housing market has cooled, further rises in household borrowing may be hard to sustain, and continued uncertainties regarding Brexit could combine to see consumer spending growth slow to around 1.4% this year, but expects it to start picking up again in 2020 (to 1.7%).

PwC also believes households will spend a larger share of their budgets on housing and utilities, with the proportion set to reach 30% by 2030 (27% in 2018), while spending on financial services and personal care is set to increase at the expense of clothing and food.

Online purchases

Online is also set to play a significant role in the future of consumer spending, with the proportion of sales conducted online doubling on food, furnishing and clothing between 2010 and 2018**.

“Assuming no structural change that accelerates the rate of growth from current levels, the online share of total retail spending could rise between 2018 and 2030 from 5% to 8% for food, from 10% to 22% for furnishings and from 18% to 32% for clothing,” according to the PwC.

Threadneedle UK Extended Alpha fund, managed by Chris Kinder, currently has 41.4%*** of its underlying holdings in either consumer goods or consumer services. The fund has a slightly different approach to its peers by aiming to extend investors’ potential returns by buying stocks Chris expects to do well, but he can also make money on stocks he expects to do badly.

Standard Life Investments UK Ethical also has over a third (35.5%^) of its underlying portfolio in consumer goods and services. Manager Leslie Duncan typically holds between 50-100 stocks in her portfolio over a three to five year holding period.

For investors looking for an income generating vehicle, we would point to the Rathbone Income fund, managed by Carl Stick, which currently has 34.9%*** in consumer goods and services. The fund holds a concentrated portfolio of 30 to 50 companies, all of which are chosen for their high quality and visibility of earning. The fund also has one of the best records in its sector for increasing its dividend payouts.

*Source: VOX CEPRs policy portal, The consequences of the Brexit vote for UK inflation and living standards: First evidence. 20 November 2017
**Source: Schroder, Lazarus, February 2019
***Source: Fund factsheets to 31 March 2019
^Source: 30 April 2019