Retailers, UK Centric Stock and the FTSE 100
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Fears over price hike squeezes on spending are beginning to surface through the markets. With pressure on companies to reduce costs to compensate for the increasing expenditure caused by the rise of commodities and the weakness in sterling it is not difficult to speculate on a double whammy on discretionary expenditure.
This is starting to cut deeply into share prices of the big high street beasts as non-food retailers take it on the chin. It is not hard to speculate on some very tough times ahead across the retail sector with the possibility that some of the more highly geared members going to the wall.
Investors will be looking to focus on those whose underlying costs are below the norm and the biggest differential must be on the ownership of the actual retail outlets themselves. Retailers such as M&S, Tesco and Sainsbury are all holders of not just the deeds on much of their existing floor space but also have substantial land banks besides. Internal accounting procedures obviously charge between units but the overall position is one of strength not weakness.
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This was one of the major arguments against Sainsbury splitting away their property into a separate vehicle as such a move would have left the actual retail arm in a difficult situation in their never ending competition with Tesco. P/E expectations of many high street names make little recognition of the underlying strength of one business model versus another, as in times of growth both variations work just as well with the short term leasing based model having a slight cost advantage. In times of dearth, the tables turn.
As many have commented recently the performance of UK centric stock has been pretty abysmal over the past year or so with many frontline stock virtually halving (RBS, Barclays, Marks etc etc) whilst the actual senior index has held up quite well. The problem with this is that it gives a woefully incorrect view of the performance of the UK’s economy. Mining companies not only earn all of their revenue in far flung parts of the globe but they also employ minimal
numbers on these shores. Anto Fagasta, Kazakhmys and Xstrata for example do not even have head offices in the UK. The value of your company’s capital base affects the money that you are able to employ in growing operations, banks are far more likely to lend to a company with a healthy valuation than to one looking a bit sick. This reduction in growth potential will become an ever increasing factor in coming months and years and, unfortunately, it appears that UK plc is not well positioned.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Retailers, UK Centric Stock and the FTSE 100' edited by SD, updated 23-Apr-08
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