Robert Stephens, CFA, discusses the uncertain future for the UK economy and the recovery potential of three stocks that have been impacted hard by Covid-19.
Lockdown measures that have caused vast swathes of the UK economy to close may now be coming to an end, but a quick return to normality may be some way off. Consumer confidence is currently at its lowest level in over a decade, with GfK reporting a figure of minus 34 for the first half of May. To put this into perspective, it was minus 9 in January 2020.
Barring a sudden turnaround in confidence, consumers appear to be unwilling to quickly return to pre-coronavirus spending levels owing to fears such as job security. Therefore, the UK’s economic challenges could persist for some time following the lifting of containment measures.
In spite of what could be a gradual economic recovery, rather than a fast-paced comeback, stocks such as JD Sports (LON:JD), Taylor Wimpey (LON:TW) and Great Portland Estates (LON:GPOR) may experience improving financial performance that lifts investor sentiment over the long run, in my opinion.
JD Sports Fashion
Retailers such as JD Sports Fashion have experienced major disruption over the past few months. The company’s stores in the UK, Europe and USA have been closed since March, which means that its sales and profitability will be materially lower in the current year.
However, JD has a solid balance sheet that means it could emerge in a better position from a period of weak performance than its peers. For instance, it had a net cash position of £118 million at the halfway point of its 2020 financial year. Moreover, its net interest payments were covered 55 times by operating profit in the 2019 financial year.
With a growing online presence and exclusive products that serve a loyal customer base, the firm could outperform many of its retail peers.
Housebuilders such as Taylor Wimpey have been hit by the closure of construction sites and sales offices. They have now largely reopened, but this does not necessarily mean that demand for new homes will quickly return to pre-coronavirus levels. For instance, would-be homebuyers may postpone their decisions until there is greater economic certainty.
Taylor Wimpey’s £836 million cash position is likely to provide the financial support it requires during what could be a sluggish period for sales. Over the long run, an accommodative monetary policy is likely to further reduce the proportion of income spent by homeowners on mortgage payments. This could make homes more affordable, while government stimulus for the sector, such as Help to Buy, now seems more likely to be extended beyond its provisional end date.
Therefore, a tough period may be ahead for Taylor Wimpey. However, the long-term fundamentals of the housing market may continue to be attractive.
Great Portland Estates
An uncertain future for retailers, leisure companies and a range of other firms means that commercial property landlords such as Great Portland Estates are likely to suffer. Its latest results highlighted the prospect of falling demand across its portfolio that could lead to declining rents and falling capital values.
Still, Great Portland Estates has an enviable portfolio. It is focused in and around the West End of London, which has previously fared much better than the rest of the UK during economic downturns. A decrease in tourism may hurt its financial prospects, but its net gearing of 16% and substantial headroom above its debt covenants mean that it is likely to successfully emerge from the current crisis.
Its share price has matched the FTSE 250’s 23% fall in 2020. It could offer value for money on a long-term basis due to the potential for a gradual economic recovery.