Richard Buxton: some consumer stocks look oversold

Richard Buxton, Schroders head of UK equities, has bought shares in Taylor Wimpey and Debenhams  in the belief that consumer stocks have been oversold as a result of growing pessimism about the economy.

Companies can cope

In the last few days Buxton has added to positions in the housebuilder and retailer for the Schroder UK Alpha Plus  fund, which is a member of our Citywire Selection list of recommended investments.

The Citywire A-rated fund manager, who was a fierce critic of the flotation of Ocado, the online grocery delivery service, said investors may have become too pessimistic about the outlook for UK consumers, who face a tough time from tax rises and job losses from imminent cuts in public spending.

He said the second quarter results season had been pretty good in the UK. 'Most companies have beaten expectations but what was noticeable was that people are still sufficiently cautious on some companies at the consumer sharp end such as travel companies and retailers.'  

'Taylor Wimpey is losing a little as house prices soften but on a three-year view it looks great. We all know it is tough out there but companies like Debenhams have levers they can pull. They don't have to maintain current levels of investment and can keep producing double digit growth with strong cash flow yield.'

FTSE 'range bound'

Looking further ahead, Buxton says clarity on the US economy will be critical in the third and fourth quarter of the year.

'We would expect at some point that the Chinese will take their foot off the break and most markets will take comfort from that.'

Buxton is also awaiting further details of the UK public sector cuts. 'People may be a little surprised by how aggressive the cuts are, but that may mean further opportunities to buy selective stocks.'  

Buxton thinks the most likely scenario for the FTSE 100 is for range-bound trading to continue for now but could re-test the 4,800 point recent low in the next few weeks.

'We are likely to remain stuck in range-bound trading and may well revisit 4,800 points but to go much below that on a sustained basis would mean things would have to be materially worse than they are at present.

'What we are seeing is a sub par recovery accompanied by huge doubts on global trade. Like the UK, the US is seing sluggish growth but it is not going backwards.'