Christmas is cancelled, says The Share Centre

Although many thought valuations in the consumer sector were approaching appealing levels back in May, the increasingly uncertain global economic outlook has once again put the high street back into the doldrums.

"Going into the Christmas period, market conditions remain poor and consumers are likely to be chasing bargains," said Sheridan Admans, investment research manager at The Share Centre. "This may favour retailers with a good online presence, although it may also see some Christmas shopping getting put off until January."

Christmas shopping tends to lift companies in the fourth quartile of every calendar year, but even if shoppers do head for the high street in December, they won’t spend much.

Phil Duffy, partner at corporate restructuring company MCR, said: "British consumers remain under pressure, with inflation outpacing wage growth, and rising unemployment."

"With reports of declining spending by consumers already and fears of a poor Christmas, retailers are under real pressure to maintain positive cashflow at a time when there are so many financial demands on their resources."

"If proof were needed, the news that Alexon is seeking a pre-pack sale to Sun Capital due to the fact that it can't pay its suppliers for Christmas stock evidences this."

The popularity of the retail sector with fund managers and private investors has been hit harder than most in the last 12 months. Research carried out by The Share Centre last month revealed that only 6 per cent of investors consider retail as one of their preferred sectors.

According to FE Analytics data, only 13 funds across the UK All Companies and UK Equity Income sectors have more than 5 per cent of their portfolio invested in the UK retail sector. The FF&P UK Equity Income fund has the biggest position, with a 10.3 per cent weighting.

However, Admans thinks retail companies that don’t rely on UK sales are still a good option for investors.

"Economic factors are currently having the greatest impact on the sector," he explained. "This is likely to prove sensitive for some time as austerity starts to take effect in the UK and other countries in which companies in this sector operate."

"However, Tesco has defensive qualities exhibited in its food and drug retailing. The supermarket giant continues to expand and build its presence both in the UK and overseas."

"Overseas operations have held up well for the company, reflecting the growth opportunities in a number of regions in which it trades. It's the power of diversification of revenue streams that still makes Tesco attractive for investors over many of its UK-centric rivals, and it remains our preferred play in the sector."

Admans also points to the overseas growth of online fashion retailer ASOS, which he believes is showing no signs of slowing.

The company has performed very poorly recently, with losses of more than 30 per cent in the last six months.

"At the moment we would suggest investors drip-feed in companies like these, which have shown some resilience and have demonstrated a diverse business strategy," he added.

According to FE Analytics data, ASOS appears in the top-10 holdings of 12 funds, including FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies fund.

Forty three funds hold Tesco in their top-10.