UK retailers are serving up higher high street prices

ACCORDING to a report issued by economic forecasting group Ernst and Young ITEM Club yesterday, UK retailers are in for a difficult time in the years ahead. The report points to rising inflation and energy bills – without corresponding wage increases – leaving households with less disposable income.

“World prices for food, fuel and fibres are still working through to the consumer inflation figures,” says the report. “In the bad old days, this would have triggered a vicious wage-price spiral. But today’s workforce seems to realise that it would be counter-productive to try to compensate for this by demanding higher wages.”

So is all lost for CFD traders hoping to profit in this sector?

“The UK retail sector is going to continue down this road until such times as we get a de-leveraging of household debt, irrespective of interest rates,” says Michael Hewson, market analyst at CMC Markets.

According to the report, disposable income will fall by 0.1 per cent this year. Consumer spending – a key driver of economic growth – will grow by a meagre 0.6 per cent this year and 1.3 per cent in 2012.

David Jones, chief market strategist for IG Markets, agrees with the report’s short term views, but in the long term feels that it was overly gloomy: “Although we have seen gradual economic recovery, consumer sentiment in the UK is still lagging behind. With the spectre of rate rises this year and government cutbacks threatening jobs, I can’t see this changing.”

So how should CFD traders approach the UK retail sector?

“The slowdown has split retailers down the middle,” says David Morrison, CFD market strategist for GFT. “Those that were over-leveraged and over-exposed are on one side and those who have a good mixture of high-street and online presence are on the other. Companies such as the clothing company Next have come out in a good position, with competent management and a strong online retailing business”

Jones advises that traders should be stock specific rather than taking a broad position on the sector as a whole: “One strategy could be a pairs trade – long one retailer/short another, eg long Sainsbury/short Tesco if you thought that Sainsbury would outperform Tesco share price. It is arguably a little bit less risky than just a straightforward long or short – but of course if you are wrong on both counts you lose twice.”

Though the outlook for the broad sector is looking gloomy for the next few years, there are some stocks that will shine through. If traders look carefully they will be able to profit in this sector. And with inflation at its current levels, they are going to have to make all the money they can.