The expectations game
How the short term can kill you whilst you wait for the long term
If you are an investor in UK housebuilders, the last month has been a good one. Their share prices have risen by anywhere from 10-15% over that period, which for large public companies is a simply huge shift. Even odder, it comes at a time when both house prices and UK house-building volumes continue to look pretty anaemic.
What could possibly have happened over the last month to drive such a big reappraisal of the sector? You guessed it, there was a general election that brought in a new government with a more energetic approach to planning reform and driving housebuilding.
When you step back and think about it, though, there are a couple of reasons why that event should not have driven this share price reaction.
One the one hand even if you do believe that the new government increases your view of the valuation of housebuilders, why would you wait for the election result to buy more shares when it was blindingly obvious what the result was going to be months in advance?
What that tells us, of course, is that markets (and by extension people) are not the clinically rational creatures that an economics textbook might indicate. We are herd animals, and markets can be moved by that herd instinct as everyone looks at everyone else and tries to second-guess what they are thinking.
More important to our topic today, though, is a question about timing - a new government will inevitably take some time to get changes into effect, and even once they do the nature of the planning process (even after reform) is such that the direct impact on the revenue and profitability of housebuilders must be some time away.
So why buy into the shares now? The obvious answer to that is that investors are looking to the future value of those businesses, not just their current trading performance - and the two are giving very different signals.
As someone who spends more time looking at retail and consumer share prices than housebuilding ones, it is this timing issue that I see time and again and which represents the sometimes yawning gap between “investor reality” and “retailer reality”. Consider this set of observations, all of which are true right now:
UK consumer confidence is rising, according to both PWC and Deloitte surveys
Real incomes are rising
GDP is performing slightly better than everyone expected
Interest rates are likely to come down 4 or 5 times over the next 12 months according to market forecasts
and yet:
Next reports UK Retail sales down 4.7% yoy for the last quarter (offset by strong wholesale and international online sales)
Pets at Home reports sales also down in the last quarter, by 0.8%
As I’ve written about here in recent months, many retail sectors are now experiencing deflation as they chase weak demand with discounts and promotions - just this week the BRC highlighted deflation in the fashion sector.
And of course, over the last couple of weeks we have seen the tragic administration of Carpetright and the decision by Cineworld to close some cinemas as part of a major restructuring.
So the reality is that there is quite a gulf between a set of fairly strong macro-economic indicators and the daily lived experience of consumer businesses across our High Streets and Retail Parks. That creates the dichotomy that many retailers I speak to are experiencing where investors, taking a long term view, are pretty excited about the sector just at the same time that achieving daily and weekly sales targets seems harder than ever.
Why is that? 2 reasons, I think.
The first is the point from our housebuilder story about timescales. It will simply take a while for good macroeconomic indicators to filter into the daily choices that we all make as consumers. Higher confidence is great and might make you more inclined to replace your old fridge, but after the bruising of the last couple of years you’ll probably be a bit more careful about making sure you have a couple of pay packets under your belt before you actually make the purchase.
And the second is that we need to remember that macroeconomic statistics are averages, and as such can tell a very misleading story. Just consider one split, for example, between older consumers who are usually more economically secure and often own their houses outright, and younger consumers who are struggling to get on the property ladder.
Consumer confidence might be up on average, but if that increase is concentrated in the older and more secure group then anyone selling products to those younger consumers will struggle to see the benefit.
What does that mean for any of us running retail and consumer businesses? It will feel for a while like you are living in an odd twilight zone where the newspapers tell one story about the consumer whilst you are wrestling to meet your targets from day to day. Indeed, the many retailers I talk to are living this right now, with no-one having a particularly easy time trading.
It also means that you have some careful judgements to make. If it is true that better economic times are on the way then you might choose to invest now, expanding your business to take advantage of those opportunities. Indeed, strong investor sentiment might make it easier to raise the money to do that. But at the same time, you have to survive through at least a summer of weak trading before you arrive at those sunlit uplands, and so as ever careful cash management remains the watchword.
It is often at the very end of a long period of weak economic performance when businesses fail, just before the point where their markets would have picked up. Avoiding that fate, whilst also getting ready for different times ahead, will be a key topic for us all to wrestle with this summer.