This post was taken from our January 22nd weekly report.
In line with the global rebound, UK equities have regained considerable ground in January following the fourth-quarter sell-off. However, consumer staples have underperformed, creating a sharp divergence with discretionary stocks. Discretionary stocks should outperform on a relative basis when the economy is doing well. So far, the UK macro data has fared much better than the doom-laden narrative around Brexit would suggest (notwithstanding the soft December retail sales print).
However, the risks to the economy have shifted materially to the downside as Brexit nears and negotiations are stuck in stalemate. The economy can only defy gravity for so long. The household sector is particularly vulnerable given the low stock of savings and reliance on credit to support spending in the face of still weak real wage growth. At this point in the cycle (and given the risks around Brexit) the upside for consumers is limited and suggests that there is catch-up potential for consumer staples.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception