17 April 2018 - The news today that wage growth is starting to overtake inflation is important for investors. Business margins in the UK have been relatively strong over the past five to 10 years. However, it's important to remember that the labour market is tight at the moment, and one of the biggest costs for businesses tends to be labour. If the cost of employment rises, this could hurt these margins.
Juliet Schooling Latter, Chelsea's research director, gives her view on what this means for UK investments:
“Wage growth is most likely to bruise the retail and hospitality sectors because they often have higher staff numbers and wage bills. Let's not also forget that the introduction of the National Living Wage has already squeezed the sector. On the flipside, they could also benefit from increased consumer spending. Another sector with a significant wage bill that could be negatively impacted is social care.
“Longer term, should wages remain higher, robotics companies could do well as a tighter labour market could encourage companies to turn to automation to boost productivity.
“In essence, we need to see whether this trend continues. Let's not forget that wage growth was outpacing inflation just one year ago. This move is simply redressing the wage/inflation balance.
“It's also worth noting that household consumption accounts for about 60% of the UK economy and that, while retail sales volumes were up by 0.8% last month according to the Office for National Statistics, it was not enough to make up for the lack of consumer spending during December 2017 and January – the sector's two most crucial months. Given that the UK is the only developed market economy to have had its growth estimate lowered, a wage rise and an increase in consumer spending power could be seen as a net positive.
“It's early days yet, but worth keeping an eye on wages and inflation as a whole, just in case the growth rate accelerates. For now, it's a case of keeping calm and carrying on.
“Depending on your view, funds we like which are overweight consumer products relative to the FTSE All Share index include Evenlode Income at 28.9%*, and Threadneedle UK Extended Alpha, which has a 20.5%* long position in consumer goods.
“On the other hand, funds we like which are underweight consumer goods include the Elite Rated Jupiter UK Special Situations at 5.5%* and F&C UK Mid Cap at 5.3%*.”
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. Juliet's views are her own and do not constitute financial advice.
*Source: FE Analytics factsheets, March 2018