* Consumer-facing UK shares to suffer on rate hike concerns
* Sectors like travel & leisure, autos and retail vulnerable
* Strong rally in housebuilders is likely to slow down
By Atul Prakash
LONDON, Sept 5 With the Bank of England
preparing the ground for an increase in interest rates,
investors are questioning the durability of a long boom in cheap
credit which has driven consumer-focused British stocks to
Although the timing and scale of any rate rise remains
uncertain, some investors are pulling back from the UK consumer
goods sector on perceptions that credit-fuelled demand will be
squeezed in the short term.
Data shows that shares in consumer stocks have risen in
tandem with borrowing levels. The MSCI UK consumer discretionary
index hit a record high in July, at the same
time as consumer credit rose to a four-year high.
UK consumer credit vs retail stocks: link.reuters.com/zyk72w
A pull-back since July, even accounting for other factors
hitting markets such geopolitical tensions, points to an
increasingly bearish backdrop for sectors like travel & leisure,
autos and some retail firms.
The consumer discretionary index has fallen more than 4
percent from its July peak, while the blue-chip FTSE 100 index
"The impact of a UK rate hike would indeed be negative on
consumer-facing sectors, especially after a good run and
stretched absolute valuation metrics," said Jeremy
Batstone-Carr, head of private client research at Charles
"They could suffer disproportionately."
The latest Reuters poll shows that the Bank of England will
raise its key Bank Rate by 25 basis points in the first quarter
of 2015 from a record low of 0.5 percent.
According to a recent study by independent firm Verum
Financial Research, every 0.5 percent hike in the UK base rate
would cut 4.8 billion pounds ($7.96 billion) from household
spending, and a 3 percent rise would wipe off about 30 billion
pounds due to higher debt interest payments.
It estimates that the total amount of credit owed by UK
households has more than quadrupled to 1,437 billion pounds in
2013 from just 347 billion pounds in 1990. Significantly higher
debt levels, which have grown from 90 percent of household
disposable income in 1990 to 130 percent in 2013, mean that
households are much more vulnerable to marginal rate hikes.
"Household debt levels in the United Kingdom are much higher
due to significantly more home ownership, against countries like
Germany and the United States," said Adrian Fitzpatrick, head of
investment dealing at Aegon Asset management.
"Luxury-goods companies such as Burberry may suffer more
than others and some cheaper alternatives could benefit as
people switch from the high end to the low end. You may find
that companies specialising in DIY (do-it-yourself), such as
Homebase, could benefit in this kind of environment."
Burberry shares have fallen about 5 percent since
June, while Home Retail Group, which owns home
improvements chain Homebase, has gained about 1 percent during
the same period.
Analysts said general retailers are likely to suffer, while
discount retailers are expected to benefit. Travel and leisure
stocks would be among the worst hit as higher rates would lower
households' disposable income especially due to higher mortgage
payouts, they added.
Historically, some consumer-facing stocks have generally
underperformed in a rising rate environment. Shares in retailer
Next fell almost 30 percent from May to July 2007 when
rates rose 5.50 percent to 5.75 percent, while holiday operator
Thomas Cook and housebuilder Persimmon dropped
about 20 percent during the period.
"At the moment, I am avoiding UK retail and consumer related
stocks because the economic catalyst remains quite far away and
I don't see wage growth picking up anytime soon," Edmund Shing,
global equity fund manager at BCS Asset Management, said.
A rate hike will directly hit homeowners, who have seen low
mortgage payments due to low interest rates for several years.
The Thomson Reuters UK housebuilding index
is down about 9 percent since late February after spiking 67
percent in the previous 12 months on low rates, government
incentives for home buyers and a house price boom. Firms like
Barratt Developments, Persimmon and Bovis Homes
have fallen 6 to 15 percent during the same period.
"The main concern is that if you start raising rates,
mortgages will become unaffordable for many at a time when wages
are not rising in line with inflation," Oliver Wallin,
investment director at Octopus Investments, said.
"Consumers are likely to feel the pressure."
(Reporting by Atul Prakash; Editing by Jamie McGeever and Toby
Chopra; Graphics by Vikram Subhedar)