One of the latest trends to make the crossover from the US to the UK is ‘doomsday prepping’, in which ‘survivalists’ stockpile everything they need to see them through the breakdown of civilisation.
Justin Jones, who runs the online UK Prepping Shop, recently told the Guardian he received a huge bump in sales when Russia invaded Ukraine, selling out “like mad on gas masks, nuclear protection stuff and potassium tablets”.
“We did a month’s trade in a day and a half,” he enthused.
Another retailer interviewed for the same article memorably reported that “people were buying crossbows faster than I’d like” when the invasion started.
It is easy to laugh at the thought of someone living underground, eating beans straight out of a can, with only their crossbow for comfort. However, from the perspective of small-cap managers, it sometimes feels like everyone else in the UK is readying themselves for an impending economic apocalypse when things actually look okay.
Is UK debt really unsustainable?
Swedish physician Hans Rosling’s posthumously published 2018 book, Factfulness, describes human beings’ natural inclination towards pessimism and our habit of overlooking good news in favour of anything that confirms our negative bias.
The press undoubtedly contributes to this mindset, with the mantra of ‘if it bleeds, it leads’ setting the agenda.
This way of thinking appears to be behind the current focus on UK government debt, which is something of a red herring for investors. Released on 2 September, news that gilt yields had hit their highest levels since 1998 led to reports that UK borrowing could be out of control.
This narrative had little trouble gaining credibility and the FTSE SmallCap Index fell by 1.2% on the day. Yet it seemed to ignore the fact that, at 104%, our debt-to-GDP ratio is lower than those of France (116%), the US (123%) and Japan (235%). Gilts have since rallied.
We can expect an increase in negative headlines in the run-up to the Budget, which could affect confidence – and therefore consumer spending – in the short term. Ultimately, though, consumer spending is dictated by the fundamentals – and the fundamentals look solid.
Beating expectations
Just two weeks before the jump in gilt yields came the news that GDP had outpaced expectations in the second quarter, making the UK the fastest-growing G7 economy in the first half of the year. This correlates with what we are seeing at the individual company level.
Yes, some of the consumer holdings in the UK-focused trust I co-manage – such as Halfords, Wickes (which sells garden furniture) and pub operators – have benefited from the warmer weather. But how do you explain strong trading at DFS? What have sofas got to do with sunshine?
Meanwhile, household debt as a percentage of gross disposable income is at its lowest since the late 1990s. In addition, at about 11%, the savings ratio is more than twice its pre-COVID level.
The key figure
That savings ratio is the key figure, as a rainy-day fund of this size should help limit the impact of any downturn. But more interesting to us is what happens if we see an increase in confidence and people start spending money rather than saving it.
Consumer spending accounts for 60% of GDP. Every 1 percentage point decrease in the savings rate could translate into an increase in spending of £15bn. The impact of even a return to normal levels of saving would be enormous.
So what could cause confidence to increase? It is difficult to pinpoint a single reason, but what has tended to happen in the past is that people just get bored. Even the most pessimistic prepper eventually climbs out of their hole.
The ‘each-way bet’ on UK small-caps
Even if this fails to happen and economic growth remains moribund, low valuations in UK smaller companies mean takeovers and share buybacks will continue to drive returns – just as they have over the past decade.
This each-way bet helps explain why there could be a pre-Budget buying opportunity in the sector. It also underlines why my fellow manager and I have substantially increased our personal stakes in the Artemis UK Future Leaders Trust.
Despite the negative narrative surrounding the UK, we think it is a much better bet than a crossbow.
William Tamworth is co-manager of the Artemis UK Future Leaders investment trust and Artemis UK Smaller Companies fund. The views expressed above should not be taken as investment advice.