Is it time to ditch the screens and get out again?

Over the past two years, my credit card statement has been dominated by ‘Amazon’ and ‘Deliveroo’ entries – and the odd mention of ‘Dunelm’, ‘eBay’ and ‘Next’.

Forced to stay home for much of that time, our household expenditure has been funnelled towards ‘stuff’ – stuff for the garden, stuff for the house, and stuff… well, stuff for the sake of it, if I’m honest. Our pandemic spending was very much on goods.

But as schools and the economy reopened, I’ve noticed that the Amazon entries have been gradually reducing (there only so many soft furnishings even I can buy), and other things are starting to dominate: services.

We’ve splashed out on family bowling nights, kids’ clubs, dinner out and even a holiday. Our money is now being spent differently, as we embrace our new-found freedom.

And this is something that Alexandra Jackson, manager of Rathbone UK Opportunities, picked up on earlier this year, when she spoke on FundCalibre’s Investing on the Go podcast.

“We have better things to do with our discretionary spending money than just to buy more stuff,” she said. “Our attention is going to be more on services.”

“The pandemic led to a lot of demand being pulled forward for some companies and potentially the market has then been a bit lazy in extrapolating that demand level as the new normal from here,” she continued.

“I think any slight slip in numbers for home furnishings companies or consumer electronics for example, could be taken negatively [by the market]. And then, even on a very short-
term view, while we don't own those home furnishings or consumer electronics names, even areas like pet products or gaming could be vulnerable to the same dynamic.”

Services rebound around the globe

AXA Investment Management has also pointed out that services were in fact the main contributor to March’s economic expansion in the UK.

Accommodation and food services were the main contributor to services growth (up 8.6% month on month), reflecting a continued bounce back for the sectors which was heavily impacted by the Omicron variant. The easing of restrictions also led to increases in both travel agency, tour operator and other reservation services and related activities (growing 33.1% on the month).

And it’s not just a UK phenomenon. Alistair Wittet, manager of Comgest Growth Europe ex UK fund, believes that spending on services will increase in Europe too.

“In 2021, locked-down consumers spent a greater share of their income on goods, best demonstrated by the strong rebound of luxury goods sales, while travel and eating out suffered,” he said.

“This year, we expect a revival of experience spending, with companies like Ryanair forecasting summer traffic to potentially be above pre-Covid-19 levels, and Heineken pointing to increased consumption ‘on premises’.”

His colleague Richard Kaye, manager of Comgest Japan Growth, agrees. “Japanese consumers’ behaviour in 2022 should in our view echo that of Western consumers three quarters earlier, as Japan started relaxing Covid-19 restrictions later than other countries, fuelled by the need to return to normal life,” he commented.

“We have already seen the start of economic recovery at restaurants, brick and mortar stores, domestic travel and theme parks. Stocks like Sushiro, Japan’s largest rotating sushi restaurant chain; Japan Airport Terminal, which operates passenger terminals in Japanese airports; and Oriental Land Corporation, the operator of Tokyo Disneyland – all tell the same story: consumers are ditching their screens and going out again.”

Will Awful April derail our activities?

However, with ‘Awful April’ now upon us in the UK, will this spending be curtailed by rapidly rising prices?

Both businesses and consumers are really starting to feel the pinch of the escalating cost of living squeeze, after months of rising prices. And, in the UK, daily costs will increase more this month as gas and electricity has risen by a whopping 54%, national insurance contributions go up, and it looks like the Bank of England will increase interest rates further making mortgages more expensive.

Not only that, but government pandemic support for businesses will also be withdrawn – including the cut in the VAT rate for most goods and services in the hospitality industry, meaning the cost of buying a pub meal or a hotel stay could get more expensive. 

According to Rathbones, it’s estimated that price rises and tax hikes will cost the average family more than £130 each month. UK inflation overall is running at more than 6% and is expected to rise above 8% - way ahead of the rate at which people’s wages and social security benefits are increasing. 

So, it is possible that UK consumers will start to rein in spending - but where they are spending, it may well continue to be on services rather than goods. As the weather improves and the mood lifts, I for one will be concentrating what spare cash we do have on enjoying life to the full.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice. Reference to specific securities is for illustration purposes only and should not be taken as a recommendation to buy or to sell.

Published on 12/04/2022