If you want to invest in the High Street, check out Primark's queue

Two weeks on from the latest step taken in lockdown easing and it seems the country has acquired an insatiable appetite for consuming pints of beer outside and queuing patiently to get into Primark. 

While our enthusiasm for alfresco drinking may be dependent upon the weather, investment analysts are busy assessing whether people’s adoration of Primark will continue once a trip to non-essential shops becomes less of a novelty. 

Primark’s fortunes matter because the clothing store is a bellwether for the health of the nation’s high street. With so much shopping done online during the pandemic, as bricks-and-mortar stores have been inaccessible, its success or otherwise in the months ahead will show whether shopping habits have changed forever or not. 

Demand: Queues outside High Street favourite Primark in hunt for store’s fashions, right

‘Lockdown made us a hostage to our computers and mobile phones – and we might now seek our revenge in the high street,’ says Danni Hewson, financial analyst at investment platform AJ Bell. 

‘But the fact remains that most of us have become even more enamoured with our online captors than before the pandemic struck.’ 

Alasdair McKinnon, manager of Scottish Investment Trust, believes lockdown ‘has accelerated change that was already happening in retail’. He adds: ‘This is not necessarily bad, but it has hastened the restructuring of the sector which has meant that some weaker players have closed, never to reopen.’ 

While Miss Selfridge, Debenhams, Cath Kidston, Topshop and others have disappeared from our high street, McKinnon believes there are opportunities for those stores that remain. As a result, he has been increasing his trust’s holdings in retailers that he believes will benefit. 

‘When restrictions are fully eased, a huge release of pent-up demand is anticipated,’ he says. ‘It will be spread around fewer competitors.’ 

Stockbrokers are also positive on retail stocks, with Liberum issuing a note in recent days suggesting that the sector is ‘now in an upgrade cycle’ on a one to two-year view. 

In other words, there are share returns to be made. 

How retail has been performing 

Buying retail shares, even before lockdown eased, was not a bad investment call. The FTSE350 General Retailers Index gives a good representation of the equity fortunes of UK retailers. It includes Dunelm, Halfords, Next and M&S among its constituents. 

Since the start of last year, this index has risen 19 per cent compared with a loss of 2.7 per cent for the FTSE350 Index as a whole. 

Sam Dickens, portfolio manager at financial spread-betting firm IG Index, says: ‘There has been mixed performance across these retail companies where those with a solid online offering have clearly reaped the rewards.’ But now the tables may turn. 

Rory Bateman, manager of Schroder British Opportunities Trust, calls this a ‘moment of clarity’. He says: ‘This is when we find out the extent of pandemic fatigue and the degree to which consumers are willing to get out and spend. The pandemic has created severe short-term challenges for the economy but in doing so it has tested business models and allowed those with the strongest long-term potential to shine through. Investors can take advantage.’ 

Jason Baggaley, manager of investment fund Standard Life Investments Property Income, says, as ever, savvy shoppers will pick and choose the best-placed companies rather than looking at retail as a whole. ‘We have returned to a time of stock selection in retail,’ he adds.

Picking winners in the sector 

Investment expert Danni Hewson says those retailers that are ready for a hybrid world where we mix online shopping with high street browsing will do best. 

Callum Abbot, co-manager of investment trust JPMorgan Claverhouse, rates Next because of its fusion of online and high street shopping, which he says will continue to be successful as retail develops post-pandemic. He says: ‘To survive and thrive as a retailer it is essential to have good logistics, good customer data and embrace technology. In this regard, Next is an example of a company which, in our opinion, continues to stand apart from its competitors.’ 

He adds: ‘Through the pandemic, Next has consistently outperformed expectations. It has continued to generate cash and has been one of the few high street retailers to fulfil its rent obligations. This should put them in good stead when selecting the best sites for any new stores and give it increased leverage when negotiating rent renewals.’ 

Next shares have had a stunning year, rising from just over £45 to £78 in 12 months. 

Scottish Investment Trust’s McKinnon has just bought into Swedish-listed high street retailer H&M, believing that the demise of other high street stores will be to the fashion store’s advantage. 

He explains: ‘With many big UK brands such as Debenhams, Topshop, Miss Selfridge, Burton and Dorothy Perkins all moving to online-only operations, H&M will have far less competition when shoppers return to the high street. 

‘With better cost control and online presence, we anticipate H&M will be a better business emerging from the pandemic.’ The managers of investment trust Temple Bar have bought into Marks & Spencer on the back of its strong food retail business and its tie-up with Ocado which means it now benefits from growth in food deliveries. M&S shares have risen from 91p to 155p in the past year. 

Primark is owned by FTSE100 company Associated British Foods. Analysts at Liberum have upgraded their view on the firm to a ‘buy’, with a share price target of £27 – the shares are currently priced at just over £23. Liberum’s Adam Tomlinson describes Primark’s online competition as a ‘manageable threat’.

Investment funds for the shopping basket

Plenty of investment funds have exposure to retail stocks. Jason Hollands, a director of wealth manager Tilney, likes AXA Framlington UK Mid Cap. Its top ten holdings include stakes in Dunelm and Pets at Home. 

Hollands also rates Jupiter Income, a fund focused on identifying cheap shares with recovery potential. Among its key holdings is retailer Kingfisher, owner of brands such as Screwfix and B&Q. Investment fund Fidelity Special Situations has stakes in Inchcape, Halfords and Kingfisher – all bought last year – and also has a holding in Dixons Carphone. 

For those who prefer online retail. Hollands suggests Jupiter UK Mid Cap, which has big stakes in Boohoo and Asos.

RETAIL PARKS ARE BACK IN FAVOUR 

With social distancing in, and crowded stores out, retail parks located out-of-town have enjoyed an unexpected resurgence. 

Callum Bruce, who runs investment trust Ediston Property, says these parks were ‘unjustifiably written off’ when the pandemic began to bite. 

He says: ‘We believe the potential of retail parks remains under-appreciated and demand will soon pick up.’ 

Retail parks are handy for several reasons – they are easy to drive to, so there is no concern about distancing on public transport and they are also great for click-and-collect, which has become an increasingly popular way to shop in the last year. 

‘The retail park is well suited to the post-Covid world,’ adds Bruce. ‘Such sites allow shopping to be done in a safe and socially distanced way, and there is plenty of room for parking.’ 

Richard Williams, an analyst at investment trust research company QuotedData, agrees that retail parks should flourish. 

He likes the Ediston fund as well as real estate trust NewRiver. Teodor Dilov, fund analyst at wealth manager Interactive Investor, says investment trust BMO Commercial Property is a solid way of gaining exposure to recovering out-of-town shopping sites. 

He adds: ‘The trust’s share price suffered during the pandemic. 

‘But with rent levels on the properties it owns improving and the board having reintroduced dividend payments, the trust is well positioned to benefit from economic recovery.’

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