It might be time for investors to position their portfolios to take advantage of a comeback for some of the stocks hit hardest by the Covid-19 pandemic over the last 14 months. Last week markets started to bet on the return of the high street, with non-essential shops reopening today, providing a much-needed share price boost for bricks-and-mortar retailers. Pub and restaurant groups were another sector investors started to look on more favourably.
The clearest indicator of the shift in sentiment was the FTSE 350 General Retailers Index, which is largely comprised of high street and shopping centre chains, hitting its highest level in 5 years as markets closed on Friday. It’s now gained more than 48% over the 12 months since it started its recovery from the deep market sell-off that struck between mid-February and March last year when the full extent of the pandemic became apparent.
Another clear indicator markets are confident retailers will see their valuations improve again over coming months is hedge funds unwinding short positions taken on retailers. Short positions on a stock see investors profit if it declines in value and many were built up against struggling high street names by hedge funds during lockdown periods over the last 12 months.
But with almost half of the UK population now vaccinated, lockdown restrictions around non-essential shopping eased from today and consumers itching to spend the £140 billion in savings they have built up, there are high hopes for a strong bounceback. The extent of the boost returning shoppers will provide at the end of this 3-month lockdown is expected to be more significant than those at the end of previous lockdown periods.
Last June a YouGov survey showed just 40% of consumers felt comfortable with a return to bricks-and-mortar shopping. A similar survey last week showed that number had soared to 72%.
Quoted in The Times newspaper, Jonathan Pritchard, a retail analyst with the investment bank Peel Hunt comments:
“There’s an expectation [among investors] that we’re in for a good summer. The glass is three-quarters full.”
The spring reopening of public life is expected to demonstrate perfect timing from the point of view of fashion retailers launching their spring/summer collections. The football European Championship event kicking off on June 11th is also expected to provide a shot in the arm for retailers selling merchandise like football shirts and pubs that will hope to welcome a rush of fans for games.
There is, however, caution around how long the strength of the recovery can be maintained. John Lewis director Pippa Wicks last week commented:
“There will be a fillip [in demand] and it could be busy for the next couple of months, but we’ve got to be quite measured about how long it will last. It will depend on the economic fallout from the pandemic and that’s very difficult to judge.”
Unemployment figures are expected to peak in June at 7.75%, a significant increase on the 5% who were out of work over the last three months of 2020. Unless those numbers recede quickly, there could be a harsh economic winter to come which would hit consumer spending power and appetite.
There’s also caution on how profitable this week’s opening of al fresco dining and drinks will actually be for pubs and restaurants. Trade body UKHospitality estimates only 48% of pubs and 33% of restaurants have enough outdoor capacity to make it worth opening. And for those that do at limited capacity, breaking even will be the first and most important target.
But the fact short positions on non-essential retail, leisure and hospitality stocks have now dropped to 1.1% compared to 2.7% a year ago does suggest conservative optimism, even if companies in these sectors are still far from out of the woods. But many have raised enough cash, another £1.5 billion was secured from investors over the first quarter, that they should be in a strong enough position to see out the recovery period and return to an even keel. JD Sports and The Restaurant Group are among the high street groups to have raised significant new financing this year.